Thursday, November 13, 2008


Change. President elect Obama campaigned on it. The day after he was elected his tone changed. Obama stated the changes he would make would not be overnight. The changes might take a year...or two...or three...or maybe past 4 years. What?!?!?! Why so long? Well I began some deep thinking and research on the subject and finally figured out why.

Presidents can only influence the economy. Very little can be done to directly change it. Many of the policies and procedures put in place during a term won't come into fruition until after the term is expired. Think about President Clinton's 8 year term. His first term was right after Desert Storm and the senior Bush. Times were not so great. Clinton began to work on the state of the country and by the end of his first term things were OK. During his second term he helped put into place several programs, policies and procedures that really helped the nation and the economy. Times were great! Then Bush came into office.

The mortgage crisis of today started in 1995 when President Bill Clinton's pressured Fannie and Freddie Mac to expand the number of loans given to low and middle income people. These people previously had not qualified for conventional loans due to credit or income requirements. Suddenly millions of people could afford a house. Great right? Well there is a reason they didn't qualify for a normal mortgage. Although it is the American dream to own a's a dream....not a right!

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called sub-prime market.'' - New York Times article printed September 30, 1999.

From the same article, ''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Now all of these families are living in homes they could not otherwise afford. Times are good. For a while.

Fannie Mae doesn't give loans out directly. They do buy loans from banks however. Banks were all too happy to give a loan to a sub-prime borrower and then quickly sell it to Fannie Mae. All the risk was on Fannie Mae...not the bank. Fannie Mae became the largest holder of sub-prime mortgages in the country! Some, not a majority, of the loans were poorly written with low starting interest rates that racked up higher later on. The majority of the loans however were 30 year fixed rate loans averaging in the 7% range that would drop a percentage point once two years of payments had been made. Seems like everything should work right?

A ticking time bomb was silently ticking away over the United States. As other parts of the economy weakened (9/11 had a big part in it) these low and middle income households could no longer make mortgage payments. The houses went into foreclosure and Fannie Mae got less than what was owed on the Mortgage. Remember the extreme majority of the low and middle income borrowers put NOTHING down. When the housing market got hot.....prices went up. Many bought at the top of the market. As the market cooled...prices dropped....below what the houses were purchased for initially.

The housing market plays a huge role in the economy (consumer confidence is also a large factor). When all these families were losing their homes the economy began tanking faster. This huge buyout is not the direct cause of President Bush. This ball got rolling....this bomb was put in place by President Clinton. The economy is at a low point. President elect-Obama really only has one direction he can go...which is up. He does have an uphill battle. His own party is trying to increase the amount of money and the number of companies involved in this bailout.

Speaking of the bailout. I think the Big 3 should be allowed to fail. The writing has been on the wall for years. They kept building big SUV's, car and trucks while overseas car companies were investing in small cars, hybrids and fuel efficiency. GM for one is saddled with the huge weight of the UAW pensions. More than $2K of EVERY car sold goes to pensions. They can't make money with that kinda of debt. Bankruptcy will allow them to reorganize and come out stronger.

That's enough of my soapbox.

Oh..I am getting a new cable for our XBOX 360. A HD VGA cable. Should allow for a better picture over composite cables as well as allow regular DVDs to be up-scaled to HD. I feel better now...some kind of technology mentioned in this post.

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