Finance Basics, Part Two

So, we've got a real tailspin in housing sales, falling real estate prices, and an alarming rate of foreclosures. Banks with lots of "Collateralized Debt Obligations," aka CDOs, are struggling to stay afloat. The situation has gotten so bad with these CDOs, that banks have cut back on lending. Many will not even lend money to another bank!!! Banks typically borrow, usually short term, from one another for a variety of reasons to cover certain operating expenses. It seems that they had been using these CDOs as collateral, and now, talk about taboo! (Not Tab who; taboo!!!) It also seems that to offset losses from their investments, they are holding onto cash, unwilling to loan it out, as they don't know if there's another shoe to drop soon.

Now, why has all of this stuff happened? You have to go back to Ronald Reagan. You also have to put Reagan into the perspective of his time as president. Back then, there was a backlash against "liberalism" on many levels, including cultural issues, fiscal policy, and regulatory policy. The problem, in this case mainly for Democrats, was that the country saw programs that seemingly had outlived their usefulness, or that needed to be overhauled. At that point in time, Democrats in essence began to become a sort of "conservative party," in that they defended the old order, although at times, with public approval, like with Social Security. Reagan uttered what became a rallying cry to conservatives, "Government isn't the solution to the problem, government IS the problem." The problem for Reagan was, however, that resistance to many of the things he wanted to cut was so strong, that he couldn't achieve all that he wanted. (I might add, "THANK GOD!" That's not because I didn't like Reagan, I did, but in many ways, he wanted to take the country back to some idyllic age, pre-Depression, that really didn't exist, except for perhaps the wealthy.) Republicans since Reagan have all invoked his name and tried to wear his mantle, no matter how badly it fit. Let's face it, even Bill Clinton was not what many consider a "typical Democrat," as he took many ideas from the more conservative "Democratic Leadership Council."

Anyway, when George W. Bush took office, he and his administration chose to try more deregulation than had already been adopted prior to his taking office. During the Depression, Congress and President Franklin Roosevelt instituted measures to regulate banks. Now, they didn't put these measures into effect just because they felt like it. Congress investigated why so many banks had failed, and they found that many banks had "gambled" their customers' money in the stock market. When the "crash" came, guess what happened? As banks continually failed, it made the Depression worse, and many depositors lost everything. I'm not naive, and I'm sure the laws instituted during those times were not always perfect, but they were put in place for a purpose, including the FDIC, which insures deposits up to $100,000 (now it will be increased, with the passage of the new bailout measure). Since those times in the 1930s, there haven't been many bank failures in the country, until...ah...guess who was in office? BUSH! (But guess who was president when some crucial deregulation measures were passed by the Republican dominated Congress? CLINTON! Including the removal of regulation by the Securities and Exchange Commission of insurance for investors in mortgages.)

During the Bush Administration, government regulators chose not to enforce existing regulations. When mortgages were written and granted with little or no paperwork documenting the borrowers assets or types of income, they could have required more stringent documentation.

Part of the problem with many loans was this: I give you a loan for some amount and I have your signature on a note that you'll pay it back. I turn around and sell that note to someone else. Now, do I care if you pay back the money? HELL NO!!! That's now the buyer's problem. What happened too, was that I didn't check into your background or assets, because I knew that I wasn't potentially going to get stuck, as I was going to sell the loan to someone else!

Now, this is a part I don't quite understand in detail as yet, but I've heard it mentioned many times during the past several months, as foreclosures have mounted, and banks have gotten shakier and shakier. The banks didn't always insure the mortgages and CDOs to anywhere near the amount they should have. I've heard the term, "just pennies on the dollar" used in reference to this. Of course, less insurance, less money paid out for the insurance. If you have a home worth $100,000 and you insure it for $20,000, it will cost you a hell of a lot less than insuring it for 100 grand! Of course, if it burns down, guess what?