As much as I would hate to admit it politics effects our economy in many ways. The $700 Billion Bailout was passed today much to my dismay. I now realize I have to brush up on my politics.

If you aren’t exactly sure of what happened. Our economy is a mess. Many people wanted to buy homes during the housing boom. (Many argue that) after the Clinton administration, America was instilled with an “everyone has the right to” attitude. Remember, no child left behind? Ring a bell? Unfortunately, many say this ideology seeped into the housing market, thus leading to the mess we are in now. Everyone had the right to own a home. Last clause left out, even if they cannot afford it.

I just think people got greedy.

Brokers and future homeowners got greedy. Brokers wanted the commissions off home loans. Homeowners wanted too much home with not enough money. Then banks and Wall Street wanted in, they too wanted to get rich quick. Traditionally, banks were liable for any defaults in home loans, but Wall Street (aka The Fat Cats) got innovative. They wrapped all of these loans (that were pretty much junk) and started to slang them on the market, as mortgaged back securities (MBS) and collateralized debt obligations (CDO). AKA just fancy dancy names to confuse us common folk.

Anyways after people started to default on their home loans, the market realized these MBS and CDO’s are worthless and toxic. Banks and even other countries, bought in on the hype and bought them. Everyone was buying them. Now, many banks and even countries are dealing with their losses. Many banks are either selling off assets to cover their toxic debt or they have closed shop. At least government jobs are up. Yay!

Recession Ahead?

The surplus of money that the Clinton era left behind is now gone. We have trillions in deficit and now we have to foot Wall Street $700 Billion. Pensions are now down, unemployment is creeping up, Dow Jones is down, and no money for our children and elderly.

We can expect to pay more for taxes too. We are also paying for:wooden arrows, auto- racing tracks, rum production and of course toxic MBS and CDO’s. Don’t believe me? Check out Chicago Tribune or OpenCongress.org.

Bear with me as I educate myself on what a bill is.

taking the 5 south

• Illegal immigrants stop coming to the US. Yahoo!
• Playboy then swoops in to pick up the pieces… Yahoo!
• The bailout bill is back… Voting will most likely take place tomorrow (Friday). In case you did not know, this bailout will cover “consulting” fees to companies that are owned by many famous politicos… * Cough, Rudy Giuliani. Forbes.
• In pictures. 7 better uses for $700 Billion that will benefit Main Street (us regular folk). Try private health care for all. Who hates traffic? We could build us some roads! What about education? Forbes.

• The Dow Jones Industrial is down 700+ points because the $700 Billion bailout did not pass. Taxpayers do not have to foot the bill directly in taxes but will pay for it by losses are evident in retirement plans across the world. MSN.
• Those living in America aren’t the only ones affected. Banks across the world picked up subprime packages as they were inflating and the world will now start to feel the pinch as these banks scramble for cash. Heard of the term buy high, sell low (which is totally wrong). Finance lesson number one: buy low, sell high). Sigh. Yahoo Finance.
• How the House voted to reject the $700 billion bailout. Politico.
• Uh, if Sweden had a problem similar to the subprime crisis in America, why didn’t we learn from Sweden’s mistakes? At least provide the US with equity from the failing banks! NYT.

You should not lend anyone money, especially if you know they can’t afford to pay you back. That’s just bad business. If you do lend someone money and they can’t pay you back, don’t expect a third party to bail you out. Well, unless you live in America… And you are financial institution… Well, until Congress votes yes on Monday to bail out failing companies, the price tag: $700 billion dollars.

The Unites States economy has been in turmoil since the housing bubble popped. Once lofty home prices began to drop at an exceedingly fast pace, it revealed a very flawed subprime lending practice. The bad bets made by many of Wall Street giants and Financial Institutions alike froze liquidity in the market. The once blooming stock market is now riddled with bad bets and investors are fleeing the market, opting to keep cash instead. It is hard to get approved for credit, even for the most prime of clients, because banks now realize it’s not smart to lend to overextended individuals. Home prices and portfolios continue to shrink causing anxiety across the world. Senior citizens, currently living off their retirement plans feel the need to rejoin the workforce because their shrinking retirement accounts no longer yield an amount suitable for survival.

Ok, who was the drunk leader? Who ran the US economy into the ground?

I am sure many of you are asking what exactly happened in the subprime housing crisis… The subprime crisis first became evident when home prices stopped moving on and upward. The bank’s (probably realized long before the public) that lending to people that couldn’t afford to pay was a bad idea. The housing bubble much like the dot.com bubble popped.

People got greedy. Joe Blow, the carnival hand that makes $29,000 a year, got greedy. Joe wanted that big nice house but he didn’t have a down payment and he only had a credit score of 500, yet he was qualified for a home loan of $600,000. Joe Blow figured he couldn’t afford it but it didn’t matter because he only had to pay the interest (well, until the interest rates reset) aka Adjustable Rate Mortgage (ARM). Joe Blow wasn’t the only greedy one; there was also the mortgage broker (they like commissions). Oh, and let’s not forget the lending bank (they like commissions too). Anyways, applications were fibbed and over exaggerated so that many less than desirable clients were approved for home loans.

Banks (lenders) that were once responsible for defaults on home loans were no longer responsible. These banks were able to sell the rights to the mortgage payments made by Joe Blow under a process called “securitization”. The banks no longer cared who they approved because they were not liable for default on loans. The securitization process unleashed, Joe Blow and other unqualified buyer’s, mortgage loans bundled together into a “mortgaged backed securities” or “collateralized debt obligations” onto the laps of investors around the world. In the end, the bundled home loans were chopped and diced so much that every investor (both big and small) thought they had the best apples of the bunch. While in actuality, all the apples were bad. Wall Street got greedy, bet the farm and lost. In a few hours we get to see if we, as taxpayers will pick up the Street’s tab.

The following banks have gone under because these bad bets put a cramp in their cash flow. Lacking cash on hand (liquidity), these banks were not able to ease the pain their huge debts were causing them (mortgages gone bad). Bear Stearns was acquired earlier this year. Lehman Brothers filed for Chapter 11 bankruptcy. Washington Mutual’s ran out of cash as their commercial banking customers withdrew cash to switch another bank. If JP Morgan Chase has not bailed out WaMu, the Federal Deposit Insurance Fund would have been depleted.

Eh?

You know when you go into the bank to make a deposit? Remember seeing a little plaque that says All Deposits Are Federally Insured up to $100,000? If Washington Mutual was not sold in pieces to JP Morgan Chase, WaMu’s banking depositors would have had to been paid out from that FDIC insurance fund, and that fund would have been depleted. Luckily for us, JP Morgan Chase bought them and we still have our Federal Deposit Insurance fund, well until we find out what’s going to happen Wachovia…

Anyways, the bottom line is. If I lend someone money, knowing they can’t pay me back. Since I made my own bed, I should be responsible and lie in it. I should not expect a wad of cash to miraculously fall from the sky. Likewise, if my friend knows they can’t afford to pay me back, they probably shouldn’t ask to borrow such a lofty amount.

These executives (compensated in the millions), should be responsible for their actions, and return their compensation to their companies. Why is it that they are getting rewarded for risking everything, losing everything, running our deficit further into the ground and running companies that survived through the Depression into the ground?!? Why should we have pay for the Street’s mistakes? Makes no sense.