[Peace-discuss] The financial crisis explained in simple terms

[David Green]

While perhaps a satire shouldn't be taken too seriously, I don't think that this gets at how to understand the mortgage crisis/housing bubble. 

Home ownership, the symbol of American individual entrepreneurship and bourgeois independence in the age of wage labor, was consciously promoted to prospective homebuyers as a way to secure their future through predicted, virtually guaranteed increases in home values. That's different from the moral tone set by using the bar analogy. Drinks are gone forever, while homes should increase in value, and always have, generally speaking, until now.

Homeownership is promoted as responsible and patriotic, and they believe that they are behaving in that way. In our culture, homeownership is dignity. Many may have borrowed on their home equity in order to improve their homes--but even if they used if to consume, it isn't like they're not being bombarded with messages that they should do so. And who can blame them if they borrowed to pay for their children's education, which is an investment in their future productivity, so they say.

When interest rates on home mortgages are relatively low, and I assume when adjustable rates begin low, it increases the value of the home. That's one aspect of the bubble. We're talking $7 trillion that was borrowed to buy homes that is gone. Who lent that $7 trillion? What system alloweed that $7 trillion to be essentially printed?

I've read that many homebuyers, especially relatively poor ones, were sold adjustable rate mortgages even when their economic status would have justified a set rate. That's simply a scam, kind of like redlining.

Really, none of this whole thing can be blamed on individual homebuyers. When so many people behave in an "irresponsible" way, it's because social forces encourage it. It can't be reduced to bad choices and bad morals. This wasn't like a riot. It was millions of "rational" decisions that were exploited by a system for the benefit of a few--who are still benefitting, amazingly.

DG


________________________________
From: Morton K. Brussel <brussel at illinois.edu>
To: peace-discuss Discuss <peace-discuss at anti-war.net>
Sent: Friday, March 6, 2009 11:23:40 PM
Subject: [Peace-discuss] The financial crisis explained in simple terms

Economics 101. This is from another list, but I thought it illuminating, and amusing?



Begin forwarded message:

From: "Caroline Herzenberg" <carol at herzenberg.net>
Date: March 6, 2009 7:43:34 PM CST


.............................................

The financial crisis explained in simple terms:


Heidi is the proprietor of a bar in Berlin . In order to increase sales, she decides to allow her loyal customers - most of whom are unemployed alcoholics - to drink now but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).

Word gets around and as a result increasing numbers of customers flood into Heidi's bar.

Taking advantage of her customers' freedom from immediate payment constraints, Heidi increases her prices for wine and beer, the most-consumed beverages. Her sales volume increases massively.

A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases Heidi's borrowing limit.

He sees no reason for undue concern since he has the debts of the alcoholics as collateral.

At the bank's corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These securities are then traded on markets worldwide. No one really understands what these abbreviations mean and how the securities are guaranteed. Nevertheless, as their prices continuously climb, the securities become top-selling items.

One day, although the prices are still climbing, a risk manager (subsequently of course fired due his negativity) of the bank decides that slowly the time has come to demand payment of the debts incurred by the drinkers at Heidi's bar.

However they cannot pay back the debts.

Heidi cannot fulfil her loan obligations and claims bankruptcy.

DRINKBOND and ALKBOND drop in price by 95 %. PUKEBOND performs better, stabilizing in price after dropping by 80 %.

The suppliers of Heidi's bar, having granted her generous payment due dates and having invested in the securities are faced with a new situation. Her wine supplier claims bankruptcy, her beer supplier is taken over by a competitor.

The bank is saved by the Government following dramatic round-the-clock consultations by leaders from the governing political parties.

The funds required for this purpose are obtained by a tax levied on the non-drinkers.

Finally an explanation I understand ......


      
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