Sunday, June 8, 2008

Predatory Lending

Predatory lending is one of two major causes of economic distress in the United States today, the other of course being oil. It is the idea that mortgage companies have in the past decade given out unwise loans, particularly for mortgages, to people believing that they could assume the debt incurred if they client defaults on the mortgage. Simply put, these mortgage brokerages would take the house from their client, and since the value of the housing market had been increasingly seemingly without end, it was obvious that even if they were to temporarily assume a debt, that debt would be erased, with profit, when they next sell the house and possibly pick up another unstable mortgage loan.

They made money off of giving loans to people who could not feasibly pay them off. Many would default on those loans and the lenders would actually make money off the process, off the pain they generated.

The second type of predatory lending I wish to speak of is one in which lenders provide so called "variable rate" mortgages. These are mortgage loans in which the interest rate is not fixed at a certain percentage. Generally, they are given at a lower starting rate, thus enticing people who wouldn't normally qualify into the process. Then at some point in the foreseeable future, the interest rate will rise nationally and thereby the interest rate, not fixed, will rise on the mortgage, thus making monthly payments on said mortgage more expensive for the client. Of course, as this happens those who cannot any longer pay their mortgage will inevitably foreclose and the lender will own their house, which they can then sell again and perhaps pick up another mortgage, but in the very least profit on the booming price of the housing bubble as aforementioned.

The problem lies herein... that they knew that they were doing what they were doing. These companies knew that many people would not be able to pay their loans back, but offered them anyway. They knew that once the interest rates began to rise, which they inevitably would, that hundreds of thousands of people would begin to lose their houses. AND, so long as the housing market held strong, the mortgage lenders would continue to turn a profit off of this predatory lending process. However, because of the downturn in the economy and the soaring of unemployment, inflation, and the consumer price index, the housing bubble burst. Prices fell significantly for the first time in 30 years. And now, mortgage lenders, whose incurred debt was paid off by the resale of homes foreclosed upon is now not being paid off in full because they cannot turn a profit on housing sales, are turning belly up.

These lenders sought out the federal government to bail them out. The Federal Reserve lowered interest rates slightly to ease the burden on these companies. Doing so lowered the number of foreclosures, in theory (if the economy hadn't kept going south), and thus lowered the amount of debt still being incurred by lending firms that cannot resell their foreclosed properties for a profit or even to break even. As more foreclose, more debt racks up and companies need to be bailed out further. The US prints more money and gives it to federal banks that offered these predatory loans as a stop-gap measure to insure that the banks will not crash, causing essentially a national economic crisis leading to a new depression. The problem is that inflation is caused by the printing of more money. The consumer price index (how much things cost in relation to what they once did) rises and yet again people begin to foreclose on their homes because they cannot afford to pay their mortgages.

We're back to square one. It is a self-fulfilling prophecy. A bad economy causes foreclosures which lead to brokers looking for help which leads to the federal government printing more money which leads to inflation which leads to more people not being able to afford their houses leading to foreclosures. And the cycle continues.

It all began because lending firms were greedy. They believed that they could feed off of the American people (internationally as well, i.e. England specifically). But, as is a fundamental law of the universe, that with every action comes an equal but opposite reaction. Unfortunately, as everything is connected and everyone is connected, so too will the pain wrought by this greed continue to suffer itself upon everyone: lenders, regular Joe's, and the economy alike. We are in a period of deflation. Not economically so, yet this should too be watched intently for, but metaphorically. Our collective growth over the last decade or so in the housing market is checking itself. Greed is it's weight and suffering it's counterbalance.

What can we do? All we can do is remember not to overreact or to panic. There will be pain because of the housing market bubble bursting for much of the next decade. But, to overkill is to swing the pendulum to the same distance in the opposite direction. Squeezing credit stifles growth which in turn hurts the economy, which in turn stifles growth. It too is cyclical. We must find a happier medium whereby credit is still available but not carelessly given. Laws must be put in place to prevent predatory lending and they in turn must be enforced harshly. To counter the actions of greed we must use only the necessary counterbalance.

We must be watchful and not panic.

Monday, June 2, 2008

Passive Bigotry

I had an interesting conversation last night while playing free online poker that I would like to elaborate on.

Some people are only looking out for themselves. Some people don't care what happens to others because it's never happened to them. They don't care about the health or well-being of other people, because it doesn't "benefit" them. I bring this, albeit common occurrence of the sheeple class, up because of the impending presidential election. These people have a candidate too, oh yes they do. And his name is Ron Paul.

Government shouldn't care about whether people starve. It shouldn't be concerned of whether or not its people get a good education or health care, food or warmth, whether they are discriminated against or not. Why? Because it would give government power over people. Oh horrors. Surely this would be horrible. We cannot possibly give people a good education or health care. People don't deserve food or warmth.

Of course not.

Actually they do. It is our responsibility to care for all of those who cannot care for themselves. This is the meaning of civilized society. If you don't want to be part of civilized society then by all means move out of this country. If you are unwilling to help those in need, you don't deserve to live in a country that protects your rights, especially because you don't want them.

Life sucks and then you die or survival of the fittest. That's their motto. As if there's nothing that we sentient beings can do about it. Why should we let people live in pain and suffering through no fault of their own