Papa Government Will Take Care Of Everything

I don't know how many of you watched Bush's Presidential Address given last night, but it's pretty big. I'd recommend taking a look at it below.




I only caught the last few minutes of this address last night, so after it was over I called my grandfather, who is pretty up on this stuff. He definitely gave me some good insight and things to think about.

Here's a basic history of how we got here, as I understand it...

In the past the real estate companies and banks would require a sizable down payment when someone was buying a house, condo, mansion, shack in the woods, etc. Typically they had to put down around 20-25% of the total cost to buy. So if you're buying a $100,000 house, you would be required to give a down payment of $20-25 thousand, and the bank would loan you the rest.

Now what that did was allow the bank/lender to come out on top whether you could pay or not. If you are able to make all of your payments, then they are paid back all their money plus the interest included in the loan. If you are not able to pay and go into default, they can seize your house and sell it for its value. In that case they will have whatever money you have already paid them, and the value of your house, which as a general rule would increase in worth (appreciate in value) as time and inflation went on.

Things were going so well that companies got a little ahead of themselves. Reel estate was going well and people were buying houses, credit was becoming more and more popular, so they increased the credit you can get on a house. Where you used to give about 20% upfront, now they would give you a 100% loan... but wait, more. They wouldn't just give you 100% of what you needed for your house, but they'd give a 125% loan, which the purchaser could use to buy furniture, peanut butter, kittens, and whatnot. And this is the real problem.

With the banks and lenders giving so much money, like the white trash hick that gets approved for his first credit card, people felt like they had free money. They didn't even need to have anything saved up to buy a house. When a bank gives a crazy good loan like that, you can expect some crazy hard interest. Plus you have all these people who aren't financially intelligent celebrating in their free money and not looking down the road. After the first 6 months their loan payments tended to get much higher, to the point where often times people could not afford them. They would default on their payments and their house would be seized.

When the lenders seized the house, they would need to get 125% of the initial worth of it (or something around there depending) in order to break even. And that would be possible under the normal way of real estate, where it increases in value over time. But due to so many people buying houses, the supply went way up... lots of houses being built. But people who were initially excited started to not have the finances to afford them, or realize they wouldn't be able to make the payments. With a high supply and a small demand, the value goes down. Houses started losing value or staying the same with time, instead of gaining value. All of this left banks and lenders in a tough place where they couldn't get their money back because of the housing market.

This is a big reason you have heard recently about banks shutting down and all this stuff about real estate lenders. And when the banks don't have money, credit doesn't work. Credit depends on your bank/lender being able to pay your bill until you can pay them back, when the bank can't pay the bill, you can't have credit. If you can't have credit, people will stop buying things; if people don't buy things, others will lose jobs; if people lose their jobs they can buy even less; if no body is buying much of anything or working then we're in a bad bad place.

What the government has done, is decide to put $700 Billion into buying these properties that are mortgaged, but nobody is buying, so the bank can make back their money. If they didn't do this, the real estate market would crash, builders wouldn't build, electricians wouldn't install electric in houses, plumbers would plumb, realtors wouldn't sell houses, and millions of people would be out of work, which would cause basically the same chain reaction seen above.

The businesses that decided to up the credit so high are at fault here. It isn't the governments responsibility to act, as the president said, in a free-enterprise economy. But it's either give up some of what we believe in or face The Great Depression again. So the government is purchasing these mortgages, and in a sense acting as the lender, the one responsible for the financial essence of the property. They are hoping that as the economy picks up, and the housing market picks up, they will be able to get paid back (same as anyone who gives a loan) as the properties are sold, and will be able to get more return as the properties will be worth more than what they are buying them for. There's a good chance it'll work, but not 100%.

The government is taking some serious looks at socialistic control tactics to keep businesses from causing such a threat to American economics. The fact that the decisions of so few companies could impact the entire country in such a dire way blows my mind. It's also why I personally am not a fan of big business in most cases. The government is also going to potentially limit executive income in these businesses, to try to eliminate "bad" business decisions that will put the company in jeopardy, but reward the executives running it. Even in the situation we're in now, the executives could make a lot of money at the expense of others, by receiving/buying more stock once it goes down, and sitting on it until it goes up again, or a type of corporate bail-out getting paid tons in the collapse of the business.

So what is better... the integrity of the democratic system... or compromising ideals instead of compromising the American standard of living?

I am somewhat torn. I do not pledge my allegiance to the democratic system. I think it's worked fine, but that it will at some point fail or be replaced with something better. It's inherent greed will be our destruction (as it is about to destroy us already). The government is building safe-guards against such free-enterprise greed by stripping away some of our democracy. It seems all systems fail at a certain point, and new ones will emerge as we learn. Everyone is afraid of communism, mostly because they don't quite understand it... but here we have our own political officials, under a republican president, taking a big step toward communism, as our only foreseeable way of solving our crisis. It's just interesting.

See, this is why I don't have a credit card!


So some questions for discussion...

- Which is more important, the integrity of our government structure or the integrity of our financial means?

- What would you do if things aren't resolved in the next few days and everything crashes.

- Is this the beginning of more mixing of democracy with other systems? If so, how long will we continue to call it democracy? If not, how will democracy deal these emerging issues?