Lately some of my American and Canadian friends have been agonizing about the economic meltdown. Unfortunately, many of them seem to have swallowed the official news media line that all the foreclosures are the result of no-account shiftless deadbeats lying to the banks and stealing money to buy houses they couldn’t afford. Some of them don’t believe that, but have other articles of faith that give them that same false sense of moral security. I don’t lay any claim to have more insight than the next person, but as I always say, “There’s some stuff I think I know.” I thought I’d put some of my responses to them up here.
One friend said, referring to continued government bailouts and attempts to circumvent mortgage laws in the U.S.: “I think they are just trying to prepare people for the fact that any solutions that are meaningful will not be painless.”
To which I replied:
I think they’re trying to prepare people to accept that we should give the bankers and stock market types hefty bonuses while everybody else goes down the toilet. The Eurozone protests (in France and elsewhere) are a little heartening, but we’ll never see that in the US, only slightly more likely in Canada. Which isn’t to say some ticked-off loners won’t try to shoot a few lawyers or bankers or a few houses won’t burn down or blow up before foreclosure. When you got nothin’ left to lose, takin’ a few people with you looks like a good option. In heavily foreclosed neighbourhoods and developments, the vandals and scavengers move in right away to break or steal whatever’s left. There’s simply no recovering the value.
My friends are scared and angry. Some of them wonder what all the “Fraudclosure” stuff is about. Part of what it’s about is that Republicans, with the collaboration of key Democrats are trying to legalize electronic mortgage records in the US. If that happens, all these forged and robo-signed mortgages are suddenly legal, which means the banks ducked the bullet and won’t have to face consequences of tens of thousands of mortgages they sold knowing they’d never get the money back. It’s a win for the banks, and if you think you’ll ever see a penny of that you’re dreaming in Technicolour.
Granted, the Canadian banking and mortgage system still relies on a good old-fashioned paper trail so we don’t have THAT to look forward to here, but as Garth Turner points out, Canada is on its way to its own problems.
It apparently shocked some people when I said banks were loaning money knowing they’d never get it back. So I explained:
How’s that? Who among us would lend money, even to a brother or sister, knowing we’d never get it back? We’d *give* money — as we have in many cases, but loan? What part of “repayment” don’t you understand? But wait, there’s a catch!
How about we make all these loans, which represent some collective responsibility to repay them, and then bundle up that *responsibility* and sell it to other people who think maybe they could collect some or all of the loan? Wow. Suddenly we can loan all the money to whomever we want — then bundle up the idea of repayment and sell it off for a profit.
Now let’s go one better. Imagine a bundle of loans, let’s say there’s 5,000 loans in the package. We offer it for sale, and some people look at it and say, “Looks like a deal to me. What could possibly go wrong?” They have a high tolerance for risk. To reward them we’ll offer them a juicy return on their investment, with the understanding that they only get that return if all the loans pay off, of course. Risk = gamble.
Some other folks look at this and say, “I dunno. If even ten percent of them default I could be hooped. I don’t want much risk.” So to get them to buy in we cover some of the risk, but offer lower returns on their investment. Certainty = less risk.
How are we gonna split up and sort out the high-risk and low-risk loans in this package of 5,000? Answer: we’re not. We’ll simply sell the package *with a low promised return* to the people who are risk averse, and sell THE SAME PACKAGE with a higher return, to the people who like to play with their money. We’ll sell it twice — more like four or five times. Are you seeing a problem with this?
It’s been goin’ on for years in the credit markets. Money doesn’t get created because people dig it outta the ground and put it in circulation. Money gets created by being loaned into existence (in a fiat currency system). The problem with loaning money into existence is that if you are going to have increasing growth all the time, which people seem to expect, then you have to keep creating more money. Do enough of that, and there aren’t enough physical resources or printed banknotes on the planet to repay the loans if for some reason they’re all called due. Looks like some parts of the world are there, now.
Likewise, if people quit borrowing and spending money in order to save it (or because they don’t have any more of it), then the economy slows down because there’s not as much in circulation. People who own businesses aren’t getting as much of it, and they’re having trouble meeting their responsibilities as a result. The ripples spread and we’re in a time where the economy has to somehow reset to a more sustainable position.
That’s where we are now. Banks are pressuring people to take out loans — even nations are feeling that pressure as witness events in Ireland, Portugal and Greece. (Update: looks like the Irish government coalition may be breaking down. If that happens, there’s no deal. Citizens in the streets, storming the parliament, and the papers are asking “Is this what the men of 1916 died for?” Places that have gone through one uprising find it easier to go through another one.) The banks benefit from the loans, but it puts the borrower in debt in ways they may not pay back. If they can’t pay back, the bank hits the government for the money, which comes outta your shrinking paycheque. If Ireland caves and takes a loan from the IMF, guess who are major players? The US and Canada — by extension every taxpayer will be on the hook to bail out the banks that loaned money to Ireland (and a lot of other countries) for the very reason that they knew default was a firm possibility.
So. How’s it feel to be put in the barrel? And OBTW, noticed your food and fuel bills going down lately?