Monday, August 17, 2009

5 Sentences on the Economic Mess

I originally wrote this as a summary to my post about the roles of Fannie Mae and Freddie Mac in the mortgage marketplace. Though I didn't use it there, I was pretty tickled by it after I wrote it.  Sometimes a blog really is just an exercise in vanity. This is one of those times; bear with me.


From 1977 through 2004, Congress and various Presidents pushed The Two Fs (Fannie & Freddie) to lend more money to "the underserved", (i.e. folks who didn't qualify for mortgages) but The Two Fs wouldn't make loans to people who couldn't repay.


Private sector companies like Countrywide, Bear Stearns and Lehman Brothers parachuted into the marketplace and made loans to anyone with a pulse (and some without), shaming The Two Fs into making these subprime loans too by scaring The Two Fs with their favorite term, "market share".


The Privates didn't care about repayment because they made their money by immediately slicing & dicing the loans like confetti and selling the MortgageBits (otherwise known as MBSs or Mortgage Backed Securities) to everyone, everywhere, unlike The Two Fs which largely held the bad loans they made.


The easy availability of credit created a booming economy based on on illusory profits as homeowners used their 'equity' (which soon proved illusory) to buy everything they could get their grubby hands on.


When the never-shoulda-been-homeowners started missing loan payments, the whole Ponzified house of cards imploded, bodychecking the US economy into it's biggest decline since the Great Depression.