An Arts Attempt at the Credit Crisis

Now all of you that know me will also know that I'm one who can't quite wrap my head around numbers, what more fathom what in the world is going on with the economic system.
So, for the financially-challenged such as myself, here is the first thing that has helped me understand the Subprime Housing Crisis, recently upgraded to the Credit Crisis. (it's a little bit long but engaging because it's a talk show transcript. There's an audio version here too)

For the lazy, and also because it's my habit, the problem in brief (i've colour coded the different actors, so to speak, 'cos it gets confusing):

• There is a giant pool of all the world's investable money. [If you must know, somewhere in the league of 70 trillion dollars] There are investor vampires whose sole purpose in life is to make more money. Doesn't matter who it's for. Even if it's for the giant pool of money's sake.
• There are only so many safe loans such as treasury bonds around and they're low-risk, low-return investments. (think around 1-2%)
• The hungry investor vampires found out that mortgages have an interest rate of 5-7% and this is a faster way to make money. (Generally quite safe too. Banks need to check that you're credit-worthy and, if all else fails, you have the house to fall back on. This in a climate where housing prices only go Up Up Up. So, you either get steady returns of 5-7% a month or an asset that's worth more than when you first assessed it)
• Hungry investor vampires start snapping up mortgages and brokers get in on the action by buying the mortgages off banks and bundling them into large balls of mortgage loans. The investor vampires then sell shares of these mortgage loan balls to investors like you and me (well, more like yours and my parents).
• These sell like hotcakes and soon they run out of good mortgages to buy (all the nice credit-worthy people have already been roped in). So, make the pie bigger! The banks lower their criteria for loans that they'll accept from mortgage companies so 'Steady Income and Credible Assets' devolved into 'No income No Assets' and anyone can get a housing loan. (No really,you say how much you have in the bank, they take your word for it, they give you a loan)
• Problem is, the loans become less reliable, right? But not to worry! If mortgage companies bundle awesome A++ loans (from the reliable payer-backers) with terrible E for Effort loans (from the people who needed cash but didn't need to be dangled a carrot they can't afford), then they'll even out into an A-okay loan. Which investor vampires will still sink their teeth into.
• This is the crisis bit. Now a few months down the line, the investor vampires realise that lots of people are defaulting and property prices are really going Down Down Down (there's prolly more to this but my arts mind understands so much). They and the banks realise to save their skins they'll pull Out Out Out by tightening the terms on which they'll approve mortgages. (Yes Income, Yes Assets)
• Which leaves the mortgage ball- bundling broker in a fix. 'Cos he's only the middle man that relies on the bank to snap up his mortgage ball quickly. Now he's stuck with a mortgage ball he can't afford and his own loan to buy that mortgage ball and noone to take either off his hands. Bring on the Death of the Mortgage Broker companies!
• Recap: Mortgage broker companies go bust. Banks are now stingy. Investor vampires are back to hedging safe low-interest bets (and have to figure out where half of the giant pool of money went). Investors are stuck with either bad loans or a piece of property worth less than what they invested. The homeowners are still paying hefty interest rates and at risk of losing their homes. And that, my dear friends, is what I would call a dilly of a pickle.
  

I accredit every word of this summary to be the result of reading the abovementioned transcript.

I quite like not having known about all this before. So now my hippie brain goes into overdrive. It asks:

What if?

What if some of the people currently holding mortgages got together and gave up some of their houses but kept the biggest, most convenient house so that they could, at least until they improve their earnings, live and spend communally?

What if people moved back in with their families?

What if investors take the properties that they unwittingly acquired (and i didn't even get into the complicated mess of 'there are lots of investors who bought percentages of different properties in a bundle so it's hard to trace and noone really knows who owns what') and decided, we can't sell the house, so let's rent it out instead. Affordably, might i add.

What if people took more ownership over their investments? So instead of a supposed safe ball of mortgages (and why are they allowed to determine who/what is safe, anyway?) , you actually find out if it's a valid business, or someone's car, or a dairy farmer who says he'll sell x amounts of milk to make your interest payment.

What if we took the giant pool of money and invested it into the environment? Value-adding, so to speak, to industries and existing enterprises so that they reduce emissions and toxic footprint. It's slower returns, but we'll have quality products, quality environment, longer lifespans all around! I don't think this will be an idea that will appeal to the capitalistic, though.

What if people invested in microcredit? The most resilient form of credit there is! A credit crisis isn't quite going to kill the business of the mamak man down the road, is it? Quite the contrary... It's actually leading on from that thought of knowing what you invest in and I found a US site called MicroPlace that allows the layman like you and me to invest in microloans. Unfortunately only open to US residents but i do so love the idea...

Right, anyway, ideas of a naive mind. How many of you commerce financial people are writhing in your seats?

I shall wax lyrical another day though.

One reference:

• The Money Meltdown