... as I try to wrap my mind around this, in some concrete way I can understand.
We have a House (a real house), and a House Owner, and a House Buyer. The House Owner and the House Buyer work to find a Real Estate Agent to make a match. The House Buyers think they can afford a little house, but the Realtor finds them a big one s/he says they can afford, and matches them up with a Mortgage Broker. The Broker works up some numbers, and the House Buyers are concerned; the payment promises to increase over the next few years.
Not to worry, says the Broker, says the Realtor -- the value of your house will just go up and up and you can refinance later at a lower rate.
The House Buyers may have a little worried voice in the back of their heads, but little boy & little girl are excited about having their own rooms, and it's a good school district, and this is, after all, the American Dream, so House Buyers sign on the dotted line, and the dotted line, and the dotted line. They hand their IOU to the Mortgage Broker, and here, Real Money seems to change hands.
The big Real Money goes to the House Owner, with some taken out for closing costs (which seems to involve a bit of under-the-table paper pushing), the Appraiser, the Inspector, the Realtor's commission, the Broker's commission (the bigger the sale, the bigger the commission), taxes, insurance, & etc.
The Broker, never to be seen again, sells the IOU to another Lending Institution.
The Lending Institution has a vault full of IOU's, and, presumably, another vault full of real money -- though I'm not sure about this. The House Buyers will now write a check every month to this Lending Institution, with whom they have had no personal dealings.
The Lending Institution makes piles of its IOU's, and sells them on to Another Company.
Another Company sells them on again, but before doing so, it shreds all the IOU's, puts the confetti into separate boxes, and sells the boxes on to Yet Another Company, as something called 'Mortgage Securities'.
It is now very difficult to know who actually holds the IOU-mortgage on our House Buyers house. All that confetti would have to be sorted out. And at this point, while some of that confetti is gold, a large amount is flashing orange, and some is turning red.
In the meantime, our House Buyers hit a few bumps. Little girl needs an emergency appendectomy, and though they have insurance, not all of it is covered. Little boy is diagnosed with autism, and needs constant, expensive care. Parent one quits her job to take care of little boy. Parent two, whose job has provided the family health care, works for HP and is one of the thousands who loses his job in massive layoffs. And the house payment keeps going up and up.
(So does the HP CEO, up up up on her Golden Parachute of some $40 million, and then on up up up to the McCain campaign.)
Our House Buyers try to refinance, but no such luck. The actual value of their house is decreasing. Furthermore, they live in a neighborhood of other ex-HP employees, and several houses on the block have already been foreclosed, further bringing down property values. And everyone is living on credit cards -- for groceries, for medicine, for utilities and gasoline. (This is a whole other confetti party on the way.)
Now, some actual person in an actual company signed a piece of paper foreclosing on those houses, and actual law enforcement officers came and removed these people from their homes. Left behind was mother's china, grandmother's rocker, little ones' play gym. Left behind were friends and neighbors and (ex) coworkers. Actual things; actual people.
But, once foreclosed, no one seems to own the actual houses, which sit empty and boarded and vandalized, grass growing high and gardens gagging weeds. No actual person seems findable to take responsibility for maintenance and security. So we have communities with empty houses and people living in cars (if they still have them) or living with relatives (if they have them) or in one-bedroom rentals.
Some of the people living in cars, by this point, may be realtors and mortgage brokers. Meanwhile, Wall Street Big Shots and Corporate Executives are deciding on which house to stay in this weekend, and which car to drive to get there. Or perhaps the private jet.
By now, Yet Another Company has sold the confetti on, again, to an International Finance Institution, who has shaken the boxes up yet again, given them a new name, and sold them on to various funds and markets that are beyond the comprehension of you, me, or our House Buyers. But our House Buyers are still trying to make payments on their IOU, which is increasingly difficult as the interest (once called usury) continues to rise and finding an actual person with the authority to discuss it is a pipe dream.
Then one day last week, someone opened a vault and discovered that all that was in there was confetti! And most of the confetti had turned red! All the real money seems to have disappeared into Sales Commissions and Executive Golden Parachutes! Nothing left but confetti!
What to do? What to do!
Nobody had noticed the confetti, since anyone authorized to open the boxes had long since been put out of work, or bought off, or locked in a tiny corner office without the keys. This was, we were told, the only way the American Capitalist Free Market System could work.
Which it was, indeed, as people generally prefer Real Houses and Real Jobs and Real Money to confetti, and once they could no longer pretend there was Real Money in the vaults, Real Jobs in the U.S, or Real Houses that Real People could afford to live in, confetti would be flying everywhere.
Now the government says it will put Real Money in the vaults. But where will they get it? Not from the Wall Street Big Shots. Not from the CEO's, or their Parachutes.
Nobody suggests that putting Real People with real Health Care back into Real Jobs and Real Houses might help. That would be socialism. That would be welfare.
Can't do that.
Maybe we could just print up some confetti money, and that would solve the problem -- or at least bury it for awhile until we no longer notice the people living in cars, buried under all that confetti.
Wow! Very nice pictures! I really liked!
Congrats for the blog!
Posted by: Ronald Lewis | 22 September 2008 at 04:02 PM
this was so well written,, i had to read it twice... it asks so many of the same questions i am asking,, and reinforces my confusion as to why we the common man can see this and yet,, it just keeps on happening... there has to be a grander scheme to which we are not privy... i am just hoping police state is not the eventual outcome...
Posted by: paisley | 23 September 2008 at 05:08 AM
As clear a commentary as I've read on this fiasco! Thanks!
Posted by: Jarrett | 26 September 2008 at 07:18 AM
A great point you made here, which I've not seen articulated before. I keep hearing that people "should have known that they could not afford these deals", but that's not really true.
They bought into complex financial transactions that professionals told them made sense, specifically that the "amount they could afford" should be based on predicted appreciation. That isn't a "gamble" if there is a rational belief that this is how the whole system works.
Posted by: Barbara Saunders | 02 October 2008 at 09:23 PM
This is so very important, and your article so wise: May I add an example of the way banks handle mortgages, from some years ago. A young couple bought a farm, worked it, two jobs, a beautiful garden, small orchard, well-kept house, never once missed a payment but the price of land went down and the amount owing on the mortgage became higher than the sale price of the land: The bank foreclosed. The couple and their children left, the house became vacant, the garden grew weeds, the orchard died, the barn fell down. So much for de-regulation freedom for the community.
Posted by: Fran | 05 October 2008 at 10:06 PM
Thank you for this. It's the first time I've really been able to grasp what's caused the chaos in the financial system. Very frightening, isn't it?
Posted by: Elle | 06 October 2008 at 06:00 PM