I’m old and slow and have to simplify things down to there lowest common denominator till I can understand exactly what went on. The mortgage crisis that none of the big wigs saw coming , was as easy to spot as lipstick on the wrong end of a pig. You only had to look at a few simple everyday facts most of which were yelled and screamed and touted ofter in the MSM. House prices never in history have gone up 15 to 20% a year. A quick look at a chart on the average price of a house clearly showed a deviation from the normal 3% average increase per year. The frosting on the cake was that nobody can afford a house that cost more than 3 times your average wage. So exactly how did they pull this off.

Keep in mind , this bubble was created to hide the effects of the Dot Com Crash. The Fed used their most popular took, they lowered interest rates to zero. Even though this is often touted as the cause it’s not. If everybody had stayed hones a lot of folks could have bought and kept a house because of the low rates but that’s not what happened.

1.The Mortgage brokers because of deregulation and the knowledge that the government wouldn’t interfere started making all kinds of loans most of which they knew would fail in the first few years. They didn’t care how long they lasted as long as it was longer than the 30 milliseconds they took to unload them to banks. Meantime they collected handsome fees.

2. The banks gladly took the loans off the brokers hands knowing they were bad, but didn’t care as they were going to package them and hawk them to the Investment Houses.

3. The Investment Houses sent the packages to the ratings agencies to be rated as to investment grade (AAA the preferred rating)

4.The Rating Houses would rate 80% of the packages AAA making them of the quality that Pension Funds and Retirement Accounts were looking for. It is known now they didn’t really look very hard at the quality of loans in the package they just gave them the required rating. They normally sent 20% back as low quality , which were repackaged with other dogs, with a few good ones thrown in for luck and 80% of this junk package was rated AAA. This process was repeated over and over till there contents could be properly labeled JUNK OF JUNK.

5.The Investment Houses then sold these packages world wide and essentially turned the mortgage packages (about 7 Trillion bucks worth) and there derivative packages into a 600 Trillion dollar bomb. That you now see blowing up.

6.But wait that’s not all . Eventually the banks and investment houses knew these were pieces of crap and were buying bets they would fail while selling them as AAA investment grade instruments. In the beginning of the bubble they were betting long and did this for several years and during this time almost nobody was betting that housing prices would ever go down so they were buying derivatives packages betting the market would continue up.

7.One loan guy sitting in a darkened office running a small fund and known for his ability to pick good stock buys by carefully reading the quarterly reports . Suddenly he realized that these mortgage packages were based on the incorrect idea that housing prices would never fall. He called some of the biggest banks to see if he could buy a bet they would fall. Almost nobody was interested but a couple took the bait and sold him his shorts. This is all detailed in his book “THE BIG SHORT” a fast reading tell all tale of what started the crash. No it wasn’t his fault that it crashed as no more than 20 people knew and took advantage of this vehicle. When it became apparent because of the high number of these mortgages inside a package were failing (it took about 8% failure rate) to make a package fall like a rock from a tower. Ok , for all you Newton fans (an apple from a tree).

The above is a simple version of what took the mortgage market to hell. Don’t be fooled, we are only about half way through the residential mortgage mess with 2010 and 2011 forecasted to be as bad as we have already seen.

Another big factor in the downsizing of America is the tactics of Hedge Funds and the lack of government interest in controlling them or for that matter enforcing the laws already on the books. Naked short selling by these funds have driven a lot of companies stock to prices that allow the funds to buy the company for pennies on the dollar. (Naked short selling is illegal because it allows companies to bet stock they don’t own or rent, which sometimes throws more stock on the market than actually exists.) After they own the company one of first acts is to downsize the work force (they don’t like to say fire) , then it’s bust the contracts that control wages and benefits (aided by the courts) which often takes away health care and pensions from not only current employees but retirees too.

In the every day market these huge funds because of their piles and piles of money can drive commodity prices anywhere they want. Take a look at a oil price chart, or money, or corn, or just about any damn thing and notice the prices swing widely. Most know now they are artificially swinging the prices so they can make huge profits up or down and exercise huge control of our economy itself by deciding where we would have to spend our money. Will it be on gas, or food, or health care, you got the picture by now I’m sure. The song and dance they do to explain all the price moves are wearing thin now days and most just scream bullshit , put have to pay the piper anyway.

70% of the market today is controlled by what they call “FAST TRACK TRADING” , just a fancy high priced bunch of computers and software that control the market. Did you like the 1000 point swing the other day, all started by a bet of 7.5 million that the DOW would fall, to buy a bet somebody has to be on the long side, they were , and realized they better cover their asses with a fall bet too, somebody had to be on the other side and on and on it went . When the first execute button was pushed (no fat finger mistake) a deliberate bet , the shit hit the fan. They jumped on the panic button and sent the market the other way…Somebody made a shitpot full of money and of course somebody lost. One thing for sure we didn’t have time to do a damn thing but watch and take an extra dose of heart medicine .

The bottom line is this, how can us commoners plan for investment vehicles to provide for college for our kids , or retirement funds for ourselves with this kind of bullshit taking place. Don’t think for a minute that the Financial Reform package will do anything for us, we ain’t got the bucks to buy that kind of deal. Did you notice the shit storm caused by Angela Merkel banning naked short selling in Germany caused, ever some of my favorite economic writers criticized her for it. It’s those kinds of sudden moves that can bust these hedge funds and this automatic trading nonsense overnight. Sounds like a hell of an idea to me. Don’t hold your breath for those kinds of changes happening here, it won’t.


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