Perfect Storm
A number of Economists and the like were talking about a "Perfect Storm" in regards to the Global Financial Rout.
There was a combination of things that started the sell off in world markets, but the one factor that stood out was the Sub Prime Fiasco. Oil just contributed to the pain, but I believe the price of oil was manipulated by speculators.
The Sub Prime crisis can be also be blamed on a number of things, the first of which was an Act called the Community Reinvestment Act dating back to Jimmy Carter's days in office where Financial Institutions were legally obligated to lend money for housing to higher risk clients. The downfall or set-up started back in 2002/3 when Greenspan and Co (FOMC) had set the
Federal Funds Rate to a low of 1%. This cheap money and the view that the prices of houses would just keep going up ad infinitum and if you bought a house you need not worry as you could sell it to the next Schmuck at a profit at a later date was quickly thrown out of the window when the Federal Reserve Bank steadily increased the Federal Funds Rate over the next 3 years to over 5%.
So it does not take a genius to put two and two together that these Mortgage Lenders who acquired cheap money were now in trouble as the new rate was not affordable, in actual fact 500% more than when they first lent the money. So people were defaulting left right and centre and due to foreclosures too many houses were put on the market which saw a reversal of the upward trend in house prices so much so that virtually nobody could sell their houses.
But during all of this, Financial Institutions who lent the money in the first place had through some imaginative way repackaged these mortgages into new paper and resold it all over the world with AAA ratings.
The first sign of the Sub Prime Chaos started when Freddie Mae and Freddie Mac suddenly declared Bankruptcy in June of 2007. The rest is now history as many other Financial Institutions followed like Lehman Brothers etc.
The Mortgages in the US are different to ours as here Banks watch their "investments". The US just repackaged the loans and people who sold these Mortgages grew fat from all the commissions and likely were incensed to sell as many Mortgages as possible to whoever just to make these commissions.
And here we are back where we started. The Federal Funds Rate is now back down to almost where it started at 1.5%, so who knows where we will be in a few years time again when the suckers that loan at these levels cannot afford to pay it back when it is over 5% again.
One can attribute these swings to Business Cycles, but I say the root cause of all the problems is the Federal Reserve Bank who create these interest rate traps that plays out the "Financial Musical Chairs" where someone has no place to sit and has to declare Bankruptcy. This is the world we live in at this moment.
I don't suspect this picture to change too soon as the mechanics of money creation is flawed and no matter how hard we work or pretend that things will get better we will continue to play Financial Musical Chairs and someone will get hurt along the way, it is just a matter of time.
