Understanding the Financial Panic

By now even the dumbest amongst us are aware the stock market is in sufficient turmoil to impact their clueless existence. Significant financial entities have either gone belly up or require federal assistance to stay afloat. At the root of the problem is a massive collapse of the credit market as a result of defaulting mortages. To keep it simple, this is what happened. Since the mid-90's with the encouragement of politicians and the Federal Reserve, Americans have used their home equity as an ATM. Lenders and customers were equally at fault. People who had no business getting a mortgage, first or second, were given them at rates difficult to refuse. Everyone involved knew it was a sham and a good number of these loans would never be repaid but nobody cared. The assumption was the worst thing that could happen was foreclosure but the value of the property would have gone up and nobody would get hurt. In the interim, the big banks were repackaging this toxic paper and reselling it, theoretically spreading the risk or at least lessening the chance that they would get caught holding the black Queen if housing prices faltered. The game got so out of hand, everyone ended up with the black Queen and the housing and financial markets collapsed. We are now in the Humpty Dumpty period as we try putting the pieces back together. It has already become a political issue but in reality both parties are to blame. Bill Clinton and George Bush were delighted to allow the housing market to drive the economy. Shame on them all.