Friday, December 7, 2007

Subprime And Proud Of It!

As with many interesting situations that HAVE for certain been created by both Bush and the previous Congress, the Subprime mortgage thingie can be traced way back to the fifties, when credit cards became available. As our banking and consumer systems have progressed, weird things keep happening.
  • You can no longer take interest payments on anything other than mortgages as a deduction from income off your taxes. This changed in the mid seventies.
  • Savings interest rates have gone from 5.5% (back when I was dropping a buck a week into a savings account) down to 2-3%.
  • Institutions like Money Tree (and other check-cashing places) have grown by leaps and bounds, and most are owned by large financial institutions, such as CitiBank and Wells Fargo. Generally patronized by poor and retired folks.
  • The Bankruptcy bill, passed in 2005, essentially says that if you're a corporation, you can declare bankruptcy, but if you're an individual, you pretty much can't, or if you do, you still have to pay back what you owe. So, if you can't pay, you can declare bankruptcy, and you still have to pay what you can't afford to pay. Makes sense, huh?
  • If you fall behind on credit card payments, most credit card companies will raise your interest rate, which will usually put the borrower further behind.
  • Banking deregulation started in the 1980s, under Reagan (remember the Savings and Loan Crisis?). It continued through Clinton. It has been enhanced during Bush II.
  • Alan Greenspan (former head of the Fed) was responsible (under Bush II) for influencing regulations by saying whether or not certain banking practices should (or should not) be regulated. He claims - now - that he saw the subprime crisis coming, but if you look at what he said about subprime lending while he was still at the Fed, he didn't seem to have a problem with it at the time.
Most house-flippers are set up as LLCs. If they can't sell a home and then go bankrupt, they will be forgiven some or all of their debt. Poor folks who were suckered into buying homes at low interest rates, when in the past they would never have qualified, will still have to pay off their houses even if they file for bankruptcy. Or else they will lose their homes and all the money they've put into them.

I have been offered a credit card (for example) that was sold to me at an APR of 12%. When I received the first statement, it turned out to be 12% over PRIME (which put it around 22% at the time). Many people have been lied to, snookered, hoodwinked, cheated. Because they believed that it is their right to imagine they could own a home in their lifetime. Places like Countrywide fed that dream with promises of homeownership, and because everything on TV says "you deserve" this or that, people believe they deserve it, and sign on the dotted line.

When people talk about economics, it sounds like they're trying to run with the Invisible Hand theory of Adam Smith (the orginal capitalist), and under normal circumstances, they're not wrong - the market can generally be pretty fair. However, when banking concerns and financiers have more of the lawmakers' ears than the general public, the game is rigged in their favor.

As Voltaire said long ago, "when bankers are jumping out the windows, follow them - there's probably money in it."

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