Subprime Mortgages and the Credit Crunch

Are money woes the reason for a weakening America… or is it George W. Bush and his administration?

Dec. 10, 2007 – Washington ( – There are few cultures that keep an eye on the U.S. economy as closely as Europeans and Middle Easterners.  One reason for this is that the United States dollar is what is called the “reserve currency” of the financial world.  Believe it not, despite what you hear or see on the radio of television news, the “greenback” remains the reserve currency, although there is significant pressure – especially among some Gulf nations – to scrap the dollar in exchange for the Euro. 

What has happened here? 

Well, let's round up, of course, the usual suspects – banks and financial institutions worldwide, but especially in the United States, who have delivered this “crisis” to America’s front doors. 

Whoever the government watchdogs are supposed to be were and are seemingly still are asleep in kennels.

People have been using their homes as cash machines – with gilded invitations from the banking industry for the past decade and as a result some are now paying the piper – or not paying him – which is more to the point. 

I am going to do into some detail further on, but for the low-density story let’s try this:

American mortgage banks and other mortgage lenders in general in the United States and elsewhere have been lending money to families who really could not afford to borrow as much as they were loaned. 

Most Americans have heard some of the newer loan jargon  – “interest-only” first mortgages, “low interest loans”,” no-interest loans”, and other more esoteric avenues to purchase a first, second or third home making it seemingly painless to stretch beyond our financial limits.

All the pitches were there – and at attention: 

“Why finance your car at 9% when you borrow on your house at 3.5% and pay for the car in cash?”
“Why finance that ski condo when you can mortgage your house at 4% and buy the condo for cash instead of paying 8% on a second home mortgage?”

The list is too long to regurgitate here – but it includes, swimming pools, vacations, even fur coats and diamonds.

However, home prices kept on moving steadily upwards and as long as they did, debtors felt safe. The banks felt comfortable too, one thought, in offering money to people who didn’t even have to prove they had a job, because these loans were :”securitized” – meaning the property – their house – was growing in value. 

This value growth was uncanny in many regions.  For instance, a 400 thousand house on the Jersey shore near New York that might have sold in 1997 was worth, in 2006 – about 1.5 million. 

Yet bankers are not that stupid.  They may be crafty – but they are not dumb enough to forget national and regional drops in housing prices in the 1950s, 1970s, 1980s and even later that were akin to the lightening-quick downward flight of a roller coaster. 

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