I've never understood banks. I work in banks, I'm a customer of banks, and I guess I have a fairly good understanding of the banking industry. Here's what I don't understand, though, with this mortgage crisis/banking crisis thing going on.
- Banks do stupid things, like lend money to people who can't possibly pay it back (By the way, it's not just mortgages. See "credit cards for illegal immigrants." now that many of them are packing up and going home voluntarily or otherwise.)
- Banks get surprised when they don't get paid back.
- Banks start worrying about the quarterly report and lay off workers to compensate. Bonus points for doing it during the holiday season.
- Banks raise interest rates on adjustable mortgages to try to compensate for their losses.
- Laid-off workers now can't pay their mortgages. Go to 2.
- Homeowners with massively higher-than-expected payments now can't pay them back, even if they weren't particularly "high risk" to begin with. Go to 2.
Maybe that's a little oversimplified, but seriously, WTF?
Is it just me, or are banks making a bad situation worse by pulling down people who were otherwise doing fine and making them part of the problem instead?
We've seen the ripple effects these bad mortgages have on the industry. Fixed income instruments like bonds and mortgage-backed securities are supposed to be the tree when you're going out on a limb. They've turned out to be a tree that's dead and rotting, and a lot of people find themselves out on that limb holding termite-ridden sawdust. The ripple effects happen when one party is legally (contractually) obligated to cover someone else's bad bets. Chances are in times like these that they will be obligated to cover a LOT of bad bets. If they're unable to pay, everyone starts losing money.
For the car analogy, think auto insurance. You fully insure your $80,000 car: liability, collision, comprehensive, act of God, the works. You go out driving and total it while doing 110 in a 35. You walk away without a scratch, thinking "Damn, I'm glad I'm fully insured." When you make your claim, you find out that, unbelievably, 25 million other careless, drunken bastards crashed their $80,000 car that very same day, and they all have the same insurance company. Your insurance company now needs to pay out $2,000,000,000,000 ($2 trillion) within the next month. They file for bankruptcy and refuse to pay.
You and 25 million others are now out $80,000 for that car, even though you thought you were paying to be covered against exactly this situation. Worse, because 25 million people are now out looking for that same $80,000 car, the price has gone up to $110,000. If you want to buy that car any time in the near future, you're out $30k more due to market forces. Some people are actually paying this premium, but to do so, they can no longer put in that heated pool they were planning. There's your ripple effect. The market for pools was affected by a bad car insurance company, AND the cost of fixing the original problem has also gone up.
To make matters worse, the banking industry is now selling significant stakes to China and the Arab countries (See Morgan Stanley, Citibank, Bear Stearns, Merrill Lynch, for example). Not only does this put the country's financial system at risk of foreign influence, it also means that larger percentages of profits will be flowing overseas to these countries. That means less money (investment, employment) here at home.
All of this has detrimental effects on the overall economy, and it causes itself to get worse. When will people who call the shots decide that they need to stop exacerbating these issues by looking short term? Laying people off by the thousands doesn't help medium or long term, nor does selling controlling stakes overseas. It only buys short-term solutions at the expense of creating future problems.
Some analysts are calling what's happening as the makings of another Great Depression, Dust Bowl style. Only time will tell if that's true. For now, it sounds a bit alarmist, but we haven't yet been treated to the sheer selfishness of modern Corporate America. If you think they're bad when times are good, or even just "okay", wait til you see 'em when the excrement really hits the ventilation device.