Date: Tue, 14 Aug 2007 07:20:46 -0500
From: RickyBobby 
Newsgroups: misc.invest.financial-plan
Subject: Re: what's the fuss about subprime crisis?
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On Aug 11, 12:59 am, Bucky  wrote:
> Obviously, the borrowers are affected by having their homes
> foreclosed, and the lenders are affected by having their loans
> defaulted. But why is this such a global crisis?

Securities are supposed to be somewhat secure.  When a significant
slice of the securities market turns out to be shaky, the vibrations
wobble the entire system.

It appears that the US economy "printed" a trillion USD with rapidly
inflating home prices and creative mortgages.  It turned out to be
this century's version of a Ponzi scheme of escalating value that was
supposed to be underwritten by future escalating value until everyone
realizes that it cannot work.

Here is a simple way to look at it....

Houses doubled in value in CA, AZ, NV, WA, and OR between 1995 and
2005.  Did the wage earners wages double?  No.  How do you expect them
to pay for the houses?  Answer: they really cannot after the first few
years of their exotic mortgages fade away and they have to pay for the
inflated cost of the house and for the money they borrowed.  The
entire industry, homebuilders, bankers, etc essentially printed a
trillion dollars based on the belief that people will always find a
way to pay their mortgage.  They convinced everyone that since the
housing stock in Detroit and Buffalo was actually losing value the
market must be doing its job.  But upon a little inspection you will
see that the "loss" in Buffalo was perhaps one-fiftieth of the "gain"
in Phoenix or Las Vegas or Seattle.

When a trillion dollars of US securities simply goes away it does
shake the worldwide faith in the financial system.

The idea that houses will always go up and up and up in value is sheer
nonsense.  The people who live in those houses have to be paid enough
to make the mortgage payment.  Right?

Two people gain their CEO positions.  One supresses wages and the
other inflates the cost of a house.  Does this seemable workable in
the long term?  The other CEO of the mortgage provider sharpens his or
her pencil and creates creative mortgages.  Eventually they all three
butt heads and the unfortunate result is the realization that a person
or persons earning 80K can afford a 200K house because that is 2.5
times their annual earnings.  They cannot afford a 400K house in a hot
area because of smoke and mirrors.