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October 18, 2008
The System of the World (Part One)By Greyhawk
...or "Dude, where's my economy, stupid?" In which your humble scribe begins to explain the current financial crisis while attempting not to overwhelm or bore you with economic jargon or political double-speak, as he is neither an economist or a politician and honestly doesn't care a whit whether or not you are impressed with his knowledge or vocabulary.
Welcome to Yortown, USA. It's a growing community. We've got our share of issues, but life is simple and prosperous with good schools, plenty of stores, a couple of small factories and a well run bank with a great sense of civic responsibility serving as the economic center. People deposit their money there and are offered an interest on those deposits. By loaning that money at a higher interest rate to qualified borrowers the bank is able to meet that obligation and turn a profit that keeps the bank operating.
Joe wants to open a widget factory. He lacks the funds needed, but Joe is a widget expert and the demand for widgets exceeds supply. He's been a member of the community for some time, has been diligent in repaying some smaller loans over the years, will be investing some of his own funds in the enterprise, and can secure the loan with the property and equipment he will purchase with it. There is still risk involved, but the bank determines that risk is low enough to make the loan. They do, Joe starts the business, it succeeds, and he makes scheduled payments as required.
Joe also creates ten new jobs. The people he hires work hard to help make the company grow. Their pay increases with the success of the factory. They spend money in the local community, other businesses benefit. They deposit money in the bank. They - like Joe - establish themselves as worthy of credit. They each accumulate sufficient funds for a down payment on a house. One by one they apply and are approved - in addition to good jobs and credit history that down payment represents a willingness to reduce the risk borne by the bank. Since the property serves as collateral for the loan, the bank is assured of receiving something worth more than the amount they've risked if the borrower fails to pay them back. (The bank doesn't want that to happen, however, because if the loans are repaid as scheduled they're going to make a lot more.) Money circulates, builders are paid to build houses (and they use some of their profit to buy widgets), Fred sells his house to Ernie and buys a larger one, furniture and appliances are purchased, the store hires new workers, etc. etc. etc. Times are good, and everybody is happy.
Except for Steve. Steve was the tenth of Joe's widget makers to go to the bank and apply for a loan. When he got there he was told, "Gosh, Steve, we'd love to help you, you're exactly the sort of person we want to loan money to and we're confident we'd profit from the transaction but nine other folks just got approved and we've exhausted our supply. But come back in a few months and try again."
Steve contacts Bob the Builder, with whom he'd been discussing building a house. "Sorry Bob, I won't be buying a house after all. The bank has no more money to lend."
"Uh oh," thinks Bob. "I'd better cancel that order for 5,000 widgets if people aren't going to be buying houses." He does. Joe realizes he in turn will have to cut back on hours at the factory. "Oh no", reply nine of his best workers, "we just bought houses!"
"I'll be okay," thinks Tom, "my wife works at the appliance store. So we'll get by."
But "I can make my mortgage payment," thinks Bill, "but I won't be able to buy Helen that new washer and dryer I promised her..."
Etc., etc. etc...
Fortunately, there are reasons that Steve's experience at the bank doesn't actually happen here in Yortown. One of the main reasons is that the bank doesn't actually keep all those mortgages and wait all those years to re-acquire the funds - they can sell them. In fact, they sell most of them to this big company up in Washington D.C. called Fannie Mae. And then they can take the money from Fannie and loan it to Steve.
And Bob the Builder doesn't have to cancel his widget order, and instead of cutting hours Joe has to hire another guy.
Etc., etc., etc...
"What's this Fannie Mae?" You ask. Well, back during the Great Depression times were tough. Money wasn't circulating, and the Federal Government took a lot of steps to try and fix the problems. Lots of folks here in Yortown had differing opinions on how much of that was right and how much was wrong, but one thing is for certain - Franklin D. Roosevelt kept getting re-elected.
Anyhow, one of those New Deals was the creation of The Federal National Mortgage Association, which folks shortened to Fannie May.
Early HistoryWe'll look into what secondary markets are later. Most of that information above is just background for now anyway. The bottom line for now is that Fannie Mae had been purchasing and guaranteeing FHA loans since 1938 and VA mortgages since 1948. Then in 1968 it got out of the guarantee business and just purchased and sold FHA and VA guaranteed home loans. But that relatively limited role didn't last long. The next big change came in 1970...
Emergency Home Finance Act of 1970So by then Fannie and Freddy could purchase conventional mortgages - those that were not guaranteed by the FHA or VA. But Fannie and Freddy had to adhere to very strict standards, which meant they would require any bank that wanted to sell them mortgages to do the same.
Anyhow, here's part of the reason for the changes made in 1970:
The inflation of the late 1960s brought about a new crisis in mortgage lending, second only to the Great Depression in the 1930s. Interest rates to borrowers increased while government regulations limited the interest payable on investments in depository institutions. As a result, investors, seeking a higher return, moved funds out of savings institutions when mortgage money was at a premium.So...
A mortgage credit crunch ensued, and the emergency brought about congressional action. The Senate Committee on Banking and Currency examined one proposal that contemplated expanding the purchasing power of FNMA to include conventional mortgages in addition to its power to purchase FHA and VA insured loans, thus expanding the secondary market. An investment revolution flowed from this simple proposal. Within twenty years, mortgages became marketable commodities, and mortgage financing became a multi-trillion dollar international industry.And that kept things pretty nice here in Yortown, USA. Steve got his house, and so did a lot of other folks. Bill bought Helen that washer and dryer, and Tom's wife not only stayed on at the appliance store, she eventually became the manager.
There were some lean times, too, of course. But mostly it seemed like there was nowhere to go but up.
For a while.
More details to follow in our next installment, and we'll keep it simple as we can. (But it is the economy, stupid.)
Posted by Greyhawk / October 18, 2008 4:20 PM | Permalink
November 26, 2010
I think anyone who's ever pondered the "comment" option - once only available on blogs and bulletin boards, now ubiquitous on almost any web site - will appreciate this:
The so-called faculty of writing is not so much a faculty of writing as it is a faculty of thinking. When a man says, "I have an idea but I can't express it"; that man hasn't an idea but merely a vague feeling. If a man has a feeling of that kind, and will sit down for a half an hour and persistently try to put into writing what he feels, the probabilities are at least 90 percent that he will either be able to record it, or else realize that he has no idea at all. In either case, he will do himself a benefit.
That's wisdom from the past, captured for posterity at the US Naval Institute, shared via the web on the institute's 137th anniversary.
From their about page:
"The Naval Institute has three core activities," among them, History and Preservation:
The Naval Institute also has recently introduced Americans at War, a living history of Americans at war in their own words and from their own experiences. These 90-second vignettes convey powerful stories of inspiration, pride, and patriotism.
Take a look at the collection, and you'll see it's not limited to accounts from those who served on ships at sea, members of the other branches are well-represented.
I'm fortunate to have met USNI's Mary Ripley, she's responsible for the institute's oral history program (and she's the daughter of the late John Ripley, whose story is told here). She also deserves much credit for their blog. ("We're not the Navy nor any government agency. Blog and comment freely.") We met at a milblog conference - Mary knew (and I would come to realize) that milbloggers are the 21st-century version of exactly what the US Naval Institute is all about. Once that light bulb came on in my head, I mentioned a vague idea for a project to her - milblogs as the 21st century oral history that they are.
"Put that in writing," she said (of course - see first paragraph above!) - and here's part of the result.
Shortly after the first tent was pitched by the American military in Iraq a wire was connected to a computer therein, and the internet was available to a generation of Americans at war - many of whom had grown up online. From that point on, at any given moment, somewhere in Iraq a Soldier, Sailor, Airman or Marine was at a keyboard sharing the events of his or her day with the folks back home. While most would simply fire off an email, others took advantage of the (then) relatively new online blogging platforms to post their thoughts and experiences for the entire world to see. The milblog was born - and from that moment to this stories detailing everything from the most mundane aspects of camp life to intense combat action (often described within hours of the event) have been available on the web...
And et cetera - but since you're reading this on a milblog, you probably knew that. And you know that milblogs aren't just blogs written by troops at war, that many friends, family members, and supporters likewise documented their story of America at war online in near-real time, as those stories developed.
The diversity in membership of that group is broad, the one thing we all have in common is the impulse to make sense of the seemingly senseless, and communicate the tale - for each of us that impulse was strong enough to overcome whatever barriers prevent the vast majority of people from doing the same. Everyone at some point has some vague idea they believe should be shared - we were the people who, from some combination of internal and external urging, found and spent those many half hours persistently trying to write it down.
But where will all that be in another 137 years? Or five or ten, for that matter. That's something I've asked myself since at least 2004 - when I wrote this:
Membership in the ghost battalion has grown in the years since, and an ever growing majority of those abandoned-but-still-standing sites are vanishing. Have you checked out Lt Smash's site lately? How about Sgt Hook's? If you're a long-time milblog reader you know the first widely-read milblog from Operation Iraq Freedom and the first widely-read milblog from Afghanistan are both gone from the web. If you're a relative newcomer to this world you may never even have heard of them - or the dozens upon dozens of others who carried forth the standard they set down.
If you have a vague notion that something should be done about that, (a notion I've heard expressed more than once...) then you and I and the good folks at the US Naval Institute are in agreement. Preserving the history documented by the milbloggers is just one of the goals of the milblog project, the once-vague idea that we're now making real.
And it's a big idea, if I say so myself - too big to explain in one simple blog post, so stand by for more. Likewise, it's too big a task to be accomplished by just one person. So if you're a milblogger (and exactly what is a milblogger? is a topic for much further discussion on its own) I'm asking for your help. All I'll really need is just a little bit (maybe just one or two of those half hours...) of your time, and your willingness to tell the tale.
We've already made history, it's time to save it.
(More to follow...)
The Mudville Gazette is the on-line voice of an American warrior and his wife who stands by him. They prefer to see peaceful change render force of arms unnecessary. Until that day they stand fast with those who struggle for freedom, strike for reason, and pray for a better tomorrow.
Furthermore, I will occasionally use satire or parody herein. The bottom line: it's my house.
I like having visitors to my house. I hope you are entertained. I fight for your right to free speech, and am thrilled when you exercise said rights here. Comments and e-mails are welcome, but all such communication is to be assumed to be 1)the original work of any who initiate said communication and 2)the property of the Mudville Gazette, with free use granted thereto for publication in electronic or written form. If you do NOT wish to have your message posted, write "CONFIDENTIAL" in the subject line of your email.
Original content copyright © 2003 - 2011 by Greyhawk. Fair, not-for-profit use of said material by others is encouraged, as long as acknowledgement and credit is given, to include the url of the original source post. Other arrangements can be made as needed.
Contact: greyhawk at mudvillegazette dot com