Gridlock

`The problem loans that are causing the "meltdown" are not loans made due to CRA motivation.

The loans that are going bad are suburban area loans. Not the type of loan that one would think of as being made under CRA. The loans that are currently causing the market to choke are loans that banks made in areas of rampant speculation. These loans were made for the purchase and re-finance of properties in areas that attracted "flip" type buyers. The "flip" buyer was looking to make a quick buck buying and then selling a house that he couldn't afford in the first place. The flip buyer was borrowing money with artificially low initial payment terms. At these low payment rates, if he was able to sell the house during that period of time, his profit would be maximized. (More rate of return if you lower the money invested).

The banks were motivated by the short term profit that would hit their bottom line by the recognition of yield spread premiums (Points) collected at time of closing and service release premiums collected when they sold the loans and the servicing of those loans. The long term effect of loading up the system with risky loans was not a consideration in their profit model. Corporate executives that were dictating lending policy were not concerned with the long term health of the Bank for whom they worked. Their compensation was based on bonuses they received based on quarterly profit numbers. As long as the bonus rewarded short term numbers the long term viability of the Bank was never given any consideration.

Yes, that is right, trillions of dollars of these loans were made and sold to foreign investors through the creation of Mortgage Backed Securities (MBS) As long as these foreign investors were able to place a realistic value on their investment, money continued to flow. The placement of a true value on ANY asset is mandatory for commerce to continue. There was a problem. These investors relied on Bond Rating Companies to tell them the current value of the MBS. United States bond rating companies were hired to value the MBS's that were being created. These SAME Bond Rating Agencies were receiving a commission when the MBS's were sold! - CONFLICT - It was beneficial to them if they gave high ratings to the MBS's. Once it became evident that their investments were of questionable value they stopped buying them. They began to realize losses on the ones that they had already purchased. The Bond Rating Companies started to collapse. Banks stopped lending because they had no one to buy their loans.

In order to continue to lend money, even though they had their money tied up in the MBS's that they couldn't sell, the Banks looked to each other to borrow money. The Banks that were in a position to lend money were not willing to lend to the Banks that needed the money, because they were concerned about the troubled Bank's ability to repay the loan.

Gridlock

Recently a European solution was announced. It places the government in guaranty of new loans being made to the Banks. Voila! The banks now have money to lend. Money flows. I am not as confident that the "bailout" or "rescue" legislation that was recently passed is as simple or easily put into play to assist Banks in raising Capital. We will see.

There are other problems in the United States that complicate our economic woes.

JOBS!

For any Capitalistic society to survive we must have consumers and motivated business owners to sell to them. When jobs started to flow overseas in search of cheap labor the fundamental soundness of the Economy faltered. Answers to the Jobs problem must be dealt with as a separate issue in solving our Recession.