With the looming economic crisis soon to splash down on the American and global financial systems, maybe normal citizens are concerned about how this will affect them. Will I lose my house? Is my 401(k) solid? Does this mean more news about FDIC and subprime loans and less about Lindsay Lohan’s hoo-ha? These are all very important questions, so perhaps it’s time to clarify a few things about what’s happening:
Q: So…am I up the creek or what?
A: Probably. But maybe not. The extent of the financial crisis had yet to be known. So far, few consumer banks—the kind that give away free toasters when your order checks with cows and puppies printed on them—have been adversely affected. It’s the financial banks that are getting tugged on the short ones. How bad the situation will get depends on how much of the financial bank crisis trickles down to the consumer side.
Q: Will the government be supplying me a paddle, then?
A: It depends. If the paddle companies made years of lousy mistakes compounded with excessive indifference to market conditions, then, yes, the government will probably reward them by giving them a boatload of cold cash.
Q: How did we get in this mess in the first place?
A: Well, it depends on your political philosophy. If you’re a liberal, then this is all part of George W. Bush’s plan from January 20th, 2001, to nationalize the United States economy, personally pilot the planes into the World Trade Center, monopolize the oil supply so he can freely drink a quart of it every day for breakfast, and spend the waning days of the American empire circle jerking with Dick Cheney, T. Boone Pickens, and Rupert Murdoch. If you are a conservative, you blame this on irresponsible consumers buying $500,000 houses with a steady income solely from the fry cook line at the local Jack in the Box and whining when it turns out they can’t make their mortgage payment on time. If you’re a libertarian, you shake your election-losing fist at Richard Nixon for ever getting us off the gold standard in the first place. If you’re religious, blame it on the gays.
Q: None of that involves any financial or economic rationale at all.
A: Your point? It’s an election year, you know.
Q: So what really happened?
A: You will probably sleep better at night if you don’t know.
Q: Try me.
A: Fair enough. While there are multitudes of reasons why—high commodity prices, a cyclical recession, declining value of the dollar, Ben Bernanke wore a blue tie instead of a red one last Monday—it all focuses on the housing market. For the past decade or so, easy credit—encouraged by the government for citizens (read: voters) to buy houses on the cheap—inflated housing prices well above the market price. Banks were even encouraged to loan to individuals whose credit rating was not exactly what one would call totally awesome. To compensate, many of these mortgages had triggers that would cause the interest rate to rise once payments were missed or even simply due to economic conditions. With more demand for housing, then, prices shot up. Since these were individuals who couldn’t normally buy a house in the first place, the rise in prices were artificially increased.
Q: OK. Tell me why I should care.
A: Economists have been sounding the property value bubble bell for around five or six years now, but no one listened. (Though, to be fair, this is mostly because economists have been ringing that particular bell every year since approximately 1776.) This was foolishly exacerbated solely by HGTV, whose entire program lineup consisted of reruns of “Flip This House,” where average, ordinary Americans would buy some shack, invest $2000 of paint and duct tape, and resell it for a cool million all within a matter of three or four business days. When some investors had an epiphany, or got knocked on the head, or simply got drunk enough to understand the current economic system, they finally realized the entire house of cards was about to tumble down quite ungracefully and make the Nigerian Treasury Department look like it had a comparatively solid foundation. When the bubble finally burst and the mortgage rates skyrocketed, maybe people found themselves paying mortgages for houses that were a fraction of their original value, and simply found it to be easier to chuck the house keys at the bank, tell them to sit and spin, and run away.
Q: So Johnny Lunchbucket and Jill Sensible Shoes overextended and have to buy generic Hot Pockets and crank their laundry for a while. Why do the banks care?
Because the mortgages they gave out were licenses to print money. At least they were, until the payments stopped coming in. Of course, that would be the case if the actual bank that gave you the actual loan was the one collecting the actual money. In most cases, these mortgages, once awarded, were immediately bundled up and sold to the highest bidder. These were originally thought to be nice, safe investments, since they involved solid assets largely guaranteed by the government.
Q: So they weren’t?
A: Kind of. The lending institutions responsible for all this—mostly Fannie Mae and Freddie Mac—were acting like a combination of Tom Cruise in Risky Business, Weekend At Bernie’s, and large portions of Caligula. In case you’re keeping score at home, they were effectively nationalized as well.
Q: Wait, what? I thought Fannie Mae and Freddie Mac weren’t owned by the government.
A: Right. And Vladimir Putin isn’t running Russia, soccer will take off in America any year now, and Clay Aiken is straight.
Q: Clay Aiken came out.
A: I know. Exactly.
A: And pretty much all of the bank and other financial institutions that have failed are related in some way to all this.
Q: None of this sounds illegal. Stupid, but not illegal.
A: Exactly. All of this was bad decision-making, encouraged by the government. No illegality at all.
Q: Wait. So why the bailout? It seems like the government is rewarding bad decision making.
A: It would seem that way, yes.
Q: Funny how that happens.
A: Funny is not the adjective I was thinking of.
Q: I need a drink.
A: I would not disagree.