The current economic situation is pretty scary. At the current rate, it looks like the Dow may lose 50% of its value over the course of 2008 and our legislative branch is making some incredibly risky moves in an attempt to turn things around. Most of the people I know are starting to feel the pressure, but it seems that there are very few articles that explain how the situation came about.

I’ve done some research and put together a timeline. I’ve tried to remain as unbiased as possible in this timeline, but I will warn you that I have some pretty strong opinions on the matter. Let me start off by saying that this crisis was not the fault of either political party. Both parties supported bills that led to this.

1. The first event in the current depression is the great depression. At the time, banks used money from savings accounts and other customer investments as a cash source for investments. This worked well when the market was moving up, but caused a domino effect when the market took a downturn.
2. As a result of this domino effect, laws separating banks and investment houses were established.
3. Over time, US banks were more frequently competing with foreign banks that weren’t impeded by this separation and during the 80’s and 90’s billions were invested in lobbying the government to repeal the laws. The Federal Reserve Chairman, Paul Vockler, warned against the repeal.
4. During the housing boom of the 90’s, Alan Greenspan felt it was safe to reduce these restrictions and helped the Clinton administration pass the Gramm-Leach-Bliley Act which allowed commercial and financial banks to work together.
5.  Around the same time, lower interest rates caused banks to reduce requirements for home loans. Additionally, there’s evidence that mortgage fraud by borrowers and brokers was skyrocketing .
6. These loans were bundled together into Mortgage-Backed Securities (MBS). This is where the problem really starts. The process of securitization causes several problems. The securities are often underwritten, insured and rated by agencies that stand to make money from the transaction, which resulted in MBS being rated very highly and were very difficult to investigate.

   CRITICAL FLAW: This sets up the whole crises. There are trillions of dollars invested in overrated and excessively risky securities.

7. Along each step of the securitization process, each party makes a substantial amount of money and each party believes that they are passing the risk onto the next party. Most of the MBS’s are very profitable because the housing boom is offsetting early foreclosures.
8. Over time, the housing market levels off and foreclosures start to rise. Banks become less willing to refinance high interest mortgages. This process becomes cyclical and foreclosure rates increase.
9. The Dow peaks at 14,164 in October 2007. Over the past year, the subprime mortgage problems result in MBS values to drop by nearly 2 trillion dollars. This causes 2 problems. Bank values drop reducing their ability to loan money and investor confidence drops making it more difficult for banks to get more money to cover the difference.
10. Shit hits the fan.
11. Banks relying on the mortgages fail.
12. Securities relying on the banks’ mortgages plummet.
13. Credit starts to freeze reducing the ability for banks and businesses to acquire the cash they need to function.
14. The commercial paper* system (short term loans between corporations) starts to collapse as business become less likely to loan money and expect higher interest rates and shorter terms. Companies that rely on corporate paper, which is almost everybody*, have a difficult time making ends meet.

That gets us to today. There’s a lot of finger-pointing going on, and unfortunately tons of people have been screwed. Millions of people have lost and will lose their homes and jobs.

END ATTEMPT AT BEING UNBIASED

The greedy pricks that caused this problem by lobbying for less regulation and abusing the new freedom they were given are making out like bandits. For example, Dick Fuld, the CEO of failed Lehman Brothers, has received over half a billion dollars in bonuses. To put that into perspective, his bonuses could probably prevent 5,000 families from losing their homes. In my opinion, these CEOs have destroyed 10 times as many lives as Al Qaeda and should all be treated to a lengthy vacation in Cuba.

* Commercial paper provides a means for companies with variable in revenue streams to stay in business. For example, retailers often use it to increase inventory before the holidays. The commercial paper market is cheaper and more efficient than traditional lines of credit.