Credit Crisis

So what is the credit crisis?

It began with the housing market.
In the mid to late 90's the housing market was going up, the value of houses was rising.
So, everyone wanted to purchase one. However, not everyone could. Rates were too high on traditional mortgages and anyone with a credit score of under 600 couldn't take one out. To meet the demand, lending companies employed introductory interest rates and subprime mortgages. Subprime mortgages allowed people with low credit scores to take out large mortgages at insanely high interest rates, and then introductory rates were used to hide actuals for the first 6-24 months of the mortgage. This lead to people who can't afford a mortgage taking them out anyways.

The first problem was when people began realizing that they couldn't afford the houses. The introductory rates expired, or the interest rate was simply to high to begin with. So, people had to either refinance or foreclose and lose the house.

The second problem was the sheer amount of interest and the payment plan. I've been working at a financial institution and have actually seen the payments from these mortgages. What lenders would do is make 90% or more of the month payment go to the interest of the loan. That means the money is going directly to the bank and not actually lowering the amount you owe them for the house. So the 5-10 years of payments hadn't even dented the actual amount of money taken out for the house.

The third problem was the inability to refinance. Once the value of the housing market had peaked, it began to fall, just as people began realizing problems with their mortgages. That meant that not only had none of their payments done anything to lower the amount of money they owed on the house, but their house had decreased in value making it so they owe more than the house is actually worth. Having a mortgage less than that of the value of the house is actually a credential needed to refinance the home. So everyone who now has a mortgage higher than what their house is worth cannot refinance and are forced to foreclose.

That's the most basic description of the mortgage crisis. What that did was send a rippling affect through the economy. All the foreclosures sent interest rates up for the banks to take out loans from the fed. When you, or a business, wants to take out a loan, the bank may fund it with a loan from one of the 12 wholesaler banks. So if their rate is going up, so is yours. As a result, no one wanted to take out loans and businesses didn't expand because they didn't want to risk the debt it could put them in. So the economy is in a bit of a freeze.

Consumers lost trust in their banking systems. Much like the great depression. No one is spending anything anymore. It became a social psychological issue. The economic stimulus package, I think, was aiming for that. Maybe they thought that if they gave some money back to the consumers, they would spend it and increase consumption which could, in turn, generate revenue for businesses that can begin taking out loans and lowering the interest rates.

I think that the actual crisis we're in is that of social. No one is spending any money, and when demand goes up, price goes up, making people spend even less. Lending companies have started giving lower rates, but at higher prices. I heard in a class that Japan had the same issue. Rates went as low as possible and people still wouldn't borrow, because they had no where to go but up. This is a psychological issue that needs to be fixed by finding a way to develop consumer trust again, without destroying it.

http://mwhodges.home.att.net/nat-debt/debt-nat-a.htm
http://www.investopedia.com/terms/s/subprime_mortgage.asp
http://www.nytimes.com/2008/03/19/business/19leonhardt.html?_r=1&pagewanted=2&hp&oref=slogin

So the banks have joined the crisis. It isn't just consumers anymore. I still don't totally understand how this happened. How do these banks go out of business? How do they lose their money? What exactly happens? - Something I'll have to look into.

For now, the government is planning on taking drastic steps. I feel that this would be a bad idea. This would be a VERY bad idea. According to an article on U.S. News and World Report's website, the government is considering buying up the debt in the United States. I would like to know how this works. Does the government buy stocks? That wouldn't even get any money into the company, it would only give money to the investors. Does the government force the company to issue stocks? I'm pretty sure that's illegal. - once again, something I will have to look into.

What worries me... The $$$$$$
I think I might not understand "deficit"... I'm pretty sure we were in one, but we had the money to dish out to AIG... Where did that come from? They can't get enough money to support every financial institution just through taxes without killing us. The government's using tax money to fund institutions that are going to put tax payers in debt.
I guess if they're planning on doing this for say Investment banks who work with businesses, It might not be so bad. But if they're planning on giving this to banks who loan to consumers, that would be a problem. They would lower rates, and make it more attractive to buy. Then when the business would pick itself back up the government would back off, and they would raise interest rates and payments: BOOM another housing crisis.

I'm not too confident in giving money to bail out insurance agencies either. They don't really help people. I mean they do, and I can understand why it's important they don't go out of business, but they screw people over and over and over and over again. I don't want my money bailing them out because they screwed over so many Americans and now can't cover themselves. If the government is going to be using taxpayers' money to buy 80% of these companies to save them, there had better be some policy changes.
I'll say it: I would like to see insurance nationalized.
Maybe this is our cue to do so. Let AIG die out. Let the government pick up its clients and give them policies with half the loopholes . That would be great.

I don't think government money should be used for this. I am against it, pretty much 100%
The government should be clearing out their deficit before they fix anyone else's.

Bailout bailout bailout.

Bailout.

B-B-B-Bailout!!!!

Isn't America great? You spend too much money, but when you're about to go down, the government saves you!!!

The government is discussing buying up old mortgages, car loans, student loans, business loans, anything and everything they feel they need to. You know what that does? It rewards those who took out way more than they could afford and does nothing for those who managed their finances well.

How does that work?

We need to change our system. Bailouts are only going to open up more chances for people to take out more loans. It's not going to just clear them out. On top of that, all these lending companies are going to receive a crap load of money. If the government buys up your loan, they'll pay it to the business you owe it to. That means there will be a huge surge of cash flow into the financial lending sector, which means: more lending
Yay!!!




Really? come on. We need to totally change our system. We need to either get rid of lending or nationalize it so that it can actually be regulated. All loans should have the same intereste rate and the same amount of time to be paid back, no matter what size they are. This will keep payments high and keep people and businesses from taking out more than they can afford. It may even deter people from borrowing at all and turn people back to saving for future expanses. No more loans. No more lending agencies. End it. Fix it. Put it back up.

What the government is doing is showing people and businesses that they can do whatever they want to do. You want to take out $300,000 for a house making $25,000/year, go for it! When you can't pay it anymore, the government will save you! You want to deceive 500,000 people into taking out loans at 35% interest, go ahead! When they can't pay for it anymore they'll foreclose and the government will pay you for it! Yay profit!!!



Really? We need to totally chage the system. Buying a bunch of loans isn't going to solve the issue. There will still be loans left over, and those you just cleared will begin borrowing again because they have the credit to now! congratulations! You're debt free! The government paid your bill! What are you going to do now!?

Buy a house for $250,000 and completely furnish it with loans and my new credit score!!!

Come on. Change it. Fix it!!! PLEASE!!!