Uncooperative Crickets

Am I the only one?

This is debatable, but the single biggest problem that caused our recession is that people who couldn't afford homes were able to buy homes. Here is my reasoning/understanding of how the recession happened:

People all over the world suddenly had a lot more money than they had in the past through somewhat regular growth in economies. They wanted to invest it to make money, and probably preferred to invest it in US Bonds. Greenspan basically said, "Screw you, I'm going to lower the interest rate so low that we won't have to give you much of anything for the bonds." The people with the money decided to go elsewhere for a safe investment that would return a greater rate of interest: mortgages. By buying mortgages, they would have a pretty safe investment that returns 4-7%. Eventually, though, there weren't enough mortgages to satisfy the people with the money, but the money people kept demanding more mortgage-backed securities. The response was to start giving mortgages to people who were borderline (and soon after, "clearly not qualified for a mortgage"), thereby creating more mortgage-backed investments. When Wall Street noticed that some of these unqualified people started defaulting on their mortgages, they started essentially gambling on which loans would default via "credit default swaps." This ended up being a HUGE market, with maybe $40-50 trillion dollars in credit default swaps at one point (for comparison, the world stock market is only worth about $36.6 trillion).

Once a lot of people started defaulting on their mortgages, companies who had gambled a lot on the credit default market lost HUGE amounts of money, and some went under (I'm looking at you, Lehman Brothers). This created the nasty spiral from last fall.

The point is: if the unqualified didn't get their loans, the people who wanted the mortgage-backed securities would have had to go elsewhere, and the whole credit default swap market would not have been so huge.

So riddle me this: if the problem was that people were able to buy homes they couldn't afford, why would the government make it easier for people to buy homes? It would be different if these were gifts, but these tax credits must be paid over time (interest free, but they still have to pay them back). How is this different from mortgage companies giving people loans that they couldn't afford? At least they nominally vetted their clients - Uncle Sam just wants to give it away.

Also, it is true that the loans are interest free, but most of the people who defaulted on their loans didn't pay in enough to cover the original cost of the house without the interest (note the lack of source here: I just feel that this is probably true).

So it seems like this collapse could have been avoided by not giving loans to people who can't afford them. Now, our government is trying to give out loans, many of which will go to people who can't afford them (and if they can afford the loans, one might wonder why the government would pay them for something they can already afford). This seems like a bad strategy - "the hair of the dog" doesn't work for hangovers, and I doubt that it will work for the housing market.

Why are we trying to put people in homes they can't afford? And why are Republicans trying to double the amount of the loan?

posted by Dirk Awesome @ 2:41 PM