why some bad mortgage approvals = global economic meltdown?

[Darren Dirt]

Here's an interesting summary analysis/commentary, especially considering right now we've got further "bailouts" and "rescues". Whether or not the crisis will get far worse, or only "a little" worse, the impact on the GLOBAL economy will surely be recorded in vivid detail in the history books.

...with easy credit seemingly endlessly available, American consumers saved virtually nothing and bid up housing prices to record levels. Retailers expanded stores and China expanded factories to accommodate all the shopping. It was quite a party. We had banks in America giving mortgages to people whose only qualification "was that they could fog up a knife," one mortgage broker told me.

But when something seems too good to be true, it usually is. When these reckless mortgages eventually blew up, it led to a credit crisis. Banks stopped lending. That soon morphed into an equity crisis, as worried investors liquidated stock portfolios. The equity crisis made people feel poor and metastasized into a consumption crisis, which is why purchases of cars, appliances, electronics, homes and clothing have just fallen off a cliff. This, in turn, has sparked more company defaults, exacerbated the credit crisis and metastasized into an unemployment crisis, as companies rush to shed workers.


Governments are having a problem arresting this deflationary downward spiral -- maybe because this financial crisis combines four chemicals we have never seen combined to this degree before, and we don't fully grasp how damaging their interactions have been, and may still be.

Those chemicals are: 1) massive leverage -- by everyone from consumers who bought houses for nothing down to hedge funds that were betting $30 for every $1 they had in cash; 2) a world economy that is so much more intertwined than people realized, which is exemplified by British police departments that are financially strapped today because they put their savings in online Icelandic banks -- to get a little better yield -- that have gone bust; 3) globally intertwined financial instruments that are so complex that most of the C.E.O.'s dealing with them did not and do not understand how they work -- especially on the downside; 4) a financial crisis that started in America with our toxic mortgages. When a crisis starts in Mexico or Thailand, we can protect ourselves; when it starts in America, no one can.

- Thomas Friedman (NYT OpEd, 16Nov2008)

Such a complex, inter-connected house of cards so many ignorant greedy bastards built... So now I suppose the spirit of FDR will be forced to make an appearance January 21st...

[Lazybones]

That is just the top level stuff. The frightning part was how the debt was sold and then repackaged as part of investments with no requirment for anyone to have the funds to cover the debt.

Canada will be hit by the top level stuff due to trade but our banks will not need a bail out because they where required to have the means to cover thier debts.

[Thorin]

This makes me laugh at the stupidity of supposedly-knowledgeable government officials:

Take some people who have let their mortgage go into arrears (three or more months without a payment).
Tell them you'll let them pay less per month and reset their arrears counter.
Watch as they go and spend all their newfound cashflow on blackjack and hookers.
Wonder why they let their mortgage go into arrears again less than six months later.

http://ca.reuters.com/article/domesticNews/idUSN0847256620081208?pageNumber=2&virtualBrandChannel=0

Seriously, either these people cannot afford the mortgage no matter what (in which case re-negotiating the mortgage doesn't help), or these people don't consider paying their monthly mortgage payment a high priority (in which case re-negotiating the mortgage just costs the bank and/or government money).  Either way, having the government step in and force the bank to re-negotiate the terms is useless.

Now, if the banks were held personally accountable for the money lent out, and the borrowers were forced to get mortgage default insurance, then these same people wouldn't need help.  The bank would seriously pursue them, and the default insurance companies would pay back the banks when people don't (and the people would get evicted and learn there's no free ride).