Inside Luci's Head: The Beginning of the End

So last week we discuss the distribution of wealth in the US, how inequitable it is, and how damaging it is to our economy.  I briefly spoke of our healthy economy that was made up of 70% of consumer spending.  So what happened?  How did we go from that, which was pre 2008, to the economy we are seeing today?  And who is to blame?  Like the old saying says, follow the money.  So let's do that, but the easiest way will be to start at the beginning.  This is a long story that will take several posts to explain, so today let's just focus on how this started.

It goes back to before 2008.  The tech bubble had just burst, and then 9/11 happened.  We were in a perilous economic time in our history.  We all remember President Bush (W) making his special appearance to tell us that we were in danger of an economic crash.  He may not have used those exact words, but that is what he meant.  So what happened after that?

We created another bubble.  This bubble was a mortgage and credit bubble.  How did this bubble form?  It started with mortgage companies, Countrywide is a good example, but not the only guilty mortgage company.  They were making something called liars loans.  Liars loans are loans that are given with no documentation of income or ability to repay the loan.  There were waitresses reporting incomes of $12,000.00 a month; Janitors reporting $10,000.00 a month!  No way were waitresses and janitors making that kind of money.  If that was true, you would see a lot more people wanting those jobs.  I was a bartender at the Sturgis motorcycle rally when I was in college.  I did it for years, and that is some serious money, and even with all of that money being thrown around I never would have made $12K in a month.  The idea of it is just ridiculous on its face.

Now I know what you are thinking.  Why would these mortgage companies give loans to people that wouldn't be able to repay them?  Because they weren't keeping the loans.  Since they weren't keeping the loans, they didn't care if they could be repaid.  They would make their money by bundling the loans together and selling them to Wall Street banks.  Now Wall Street banks have criteria that must be met in order for a loan to be held by them.  A man by the name of Richard Bowen, who was the Business, Chief Underwriter of Citibank, noticed that 60% of the loans they had purchased from these mortgage companies did not meet their credit criteria.  He reported this to several people, all high ranking executives including the CEO, but to no avail.  They were not worried because they were also bundling and selling these loans.  Some went to Freddie Mac and Fannie Mae, others went to countries like Iceland, who ended up bankrupt when it all crashed.  Yep, we bankrupted a country!  We'll talk about that more in future posts.

This bundling of loans is called CDOs, Collateralized Debt Obligations.  It is a bundling of loans, also bonds and other assets, that are then divided into different risk assessments.  Financial services companies like Standard and Poors, Moody's,  and Finch were grading these loans.  The grading these companies gives lets investors know how risky these investments are.  Now these loans were junk.  60% of them at least were going to fail.  But that didn't stop these agencies from giving them a AAA rating, the highest rating.  This meant to investors that this was a safe investment, even though it wasn't.  Why did these agencies give the highest credit rating to these junk loans?  Because the banks were paying them to rate them.  If they gave high ratings, the banks would keep bring them more business and they would make more money too.

This was just the beginning of the crash.  This led up to it.  Once those loans started failing, the you know what hit the fan!  Everyday a large corporation was failing.  Bear Stearns, Lehman Brothers, AIG, Freddie Mac, Fannie Mae.  Watching the news was terrifying because you didn't know who was gong to fail next.  Bear Stearns went  under in 7 days!  It was all unraveling so fast!

So next week we are going to talk about these companies.  We will also talk about Henry Paulson and Ben Bernanke, and the decisions they made.  I'll also speculate (educated guesses) at why they did what they did.

Until then much love to you all and (((HIPPPIE HUGS)))

Luci