Tuesday, November 13, 2007

What Happens When You Don't Know What They Don't Want To Tell You

There is a portion of a biblical passage that states: "My people are destroyed for lack of knowledge". Never has this statement been more true than when it applies to the American people and the financial system.

President Bush stated that many homeowners who now face foreclosure are doing so because of bad credit decisions and a failure to read the fine print on their sub-prime or variable rate mortgages. And as much as it pains me to say this, to some degree, he is right.

Ugh! I got that out without choking.

But -- and you know there is a big one ....

While it is true that many people tried to buy more home than they could afford and did not ask enough questions when they signed on the dotted line, there is much, much more to the story of the housing and credit crises. In many of these instances people were set up for failure by a system that does not have the interest of the consumer at heart.

This has been a hard lesson for millions of Americans, myself included.

But this is a lesson to learn from and not just cry over.

It's high time that we all become more knowledgeable about the way the financial system is structured. We not only need to manage our credit but we need to understand how and why the financial system fosters a debtor society.

We also need to guard ourselves against those in the financial industry who long ago sold their souls for 30 pieces of silver. There really are people
employed by "reputable" financial institutions who trick senior citizens into refinancing virtually paid for homes with new 30 year mortgages by using the hook that they are lowering their monthly mortgage payments. And despite what we want to believe, these people DO sleep at night.

The age of financial innocence is over.

By the way, it's no coincidence that six ministries which preach a message of prosperity without indebtedness are coming under investigation by the ranking republican on the Senate Finance Committee. Heaven forbid that people decide to give their money to their minister, feed the homeless, clothe the naked, support those who take the message of Christ's love around the world, and oh yeah, cut up their credit cards!

After all, what will happen to the American economy when women and minorities learn how to not pay high interest rates and punitive bank fees?

What will happen when Americans decide not to spend lavishly on items that depreciate and pay exorbitant interest for holiday gifts?

Think about it!


The following article by Dean Baker for " Truthout" discusses the little discussed truth behind the home foreclosure crisis.

excerpt from:
Homeownership: The Fast Path to Poverty
By Dean Baker
t r u t h o u t | Perspective

Monday 12 November 2007

In looking for scapegoats many people have focused on the mortgage and banking industry. Millions of loans were sold to moderate income borrowers with low teaser rates that reset to unaffordable fixed rates after two or three years. Undoubtedly many of the borrowers failed to appreciate the structure of these loans, which virtually guaranteed they would have trouble meeting their mortgage payments.

But deceptive loans were just part of the problem. The bigger problem was that millions of moderate-income families purchased homes at bubble-inflated prices. There was an unprecedented run-up in house prices in the years from 1995 to 2006, with house prices rising by 80 percent after adjusting for inflation. This increase is truly striking because house prices in the United States have typically just moved in step with the overall inflation rate. Over the hundred-year period from 1895 to 1995 there was no increase in inflation adjusted house prices.

No economist has been able to identify any changes in the fundamentals of supply or demand in the housing market in the mid-nineties that could explain such a huge run-up in prices. The one obvious explanation for this jump in prices is that the United States was experiencing a speculative bubble in its housing market that coincided with a speculative bubble in the stock market, just as had been the case in Japan a decade earlier. Of course the defining characteristic of a speculative bubble is that it cannot be sustained: bubbles burst, bubble inflated house prices fall.

The housing bubble was the underlying problem that created the current subprime mess. Lenders didn't care whether borrowers could make their mortgage payments because in a bubble market, every loan is a good loan. Homeowners who face problems making their payments can always borrow against the new equity created by rising house prices or simply sell their home and pocket the gain. The story is different once the bubble stops growing and prices start falling back to earth. That is when foreclosure rates soar and people get thrown out of their home.

* * * * *

9/2/07 -- President Bush gives Rose Garden press briefing on the state of the economy and more specifically the state of the mortgage market.

and one American's response

Related posts:

Insurance, Healthcare, Greed & the Corruption of the Capitalist Soul

America, Maxed Out

graphic courtesy of Tim Nyberg

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