Reply #12: That's correct.

[lapfog_1]

Like most bubbles for individuals, this was a global bubble.

Lets say you bought a house for $150,000 in 1990. By 2005 or 2006, it had a value of $350,000. You just "made" 200,000 in 15 years. Now you think, "that's cool" let's buy that big screen TV and that ski boat we've always wanted. Run down to the bank and take out a second for $50K, maybe $100K. Now you owe $230 or $240K. But the house is worth $350K so no problem. Never mind that you now have an adjustable rate mortgage.

2008/2009 and oops, your house is now only worth maybe the original $150K. Your underwater on your mortgage. You quit spending money like a drunken sailor. The economy, driven by consumer demand, starts contracting instead of expanding (they never realized just how much they depended on you feeling like you had money to burn). Layoffs happen, maybe YOU get laid off. Now there isn't anyway for you to make the mortgage payment. You try to sell the house, sell your ski boat, sell your big screen TV... along with everyone else... and, anyone who still has a job is worried about how THEY will make it, so no matter how cheap your stuff becomes as you try to raise cash, there isn't anyone to buy it. The bank forecloses and you are living at your brothers or moms or in a trailer or hotel.

Now the guys that gave you that second mortgage, they took both of your mortgages (back in 2005) and sold pieces of them (which wasn't allowed prior to some banking rule changes) to a lot of different investors from around to world ($2k in this portfolio, $4K in that one, and so on). Sold with other instruments like bonds. The entire package (Mortgage backed securities) was rated AAA which allowed even institutions to buy them. You default and it's not a big deal, after all, the package had $50K of securities in it and the piece of your mortgage might only be $2k. But what if EVERYONE (or a significant portion) defaults.

Ooops.

Now the investor (or institution) just lost billions of dollars. Dollars that never really existed.

They quit investing. Not only that, they try to remove their remaining investment (sell off the bad MBS thing for whatever they can get... but because SO many people are trying to sell, even the good performing mortgages are deemed to be almost worthless - oversupply of mortgages in the marketplace. Mortgages that NEVER should have been sold like this to start with.

Global recession sliding into global depression.

Nobody has your money. The money never really existed. Those homes were never worth $350K or $550K or whatever. That was all funny money. Trillions of dollars of funny money. To top it off, when the markets realized what was happening (the evaporation of consumers), the stock market lost value too, another few trillion in funny money. And when the world realizes that there isn't any possible way for Americans to repay the debt brought on by borrowing to pay for government programs and wars and such ($5T in the last 8 years), They will quit allowing the US to borrow money as well.

And therein lies the huge danger.

We have to have the government deficit spending like crazy right now (just like the 1930s). Doing big infrastructure projects. New green power, transportation, etc, etc. Government steps in to replace the consumer and primes the pump of the economy (hiring people, people get money coming in, they start spending again and off we go until the next bubble).

Only... how will the government pay for the spending. It's either tax (only the wealthy, the poor have no money), borrow (hmmm, we already OWE $10T, how will we borrow another $4T or so), or inflate (that has dangerous outcomes as well).

Tax cuts, as favored by the repukes and, apparently, some of Obama's economic team, won't prime the pump very much and will only serve to drive the government into more borrowing (and that may not be possible). Cut government spending and you remove the consumer of last resort... and the depression is even worse.

There isn't any good way out this time. Different than the 1930's.

Colored me scared.