Posted by
OldRelayer on Friday, March 27, 2009 6:26:13 PM
I took Economics in either my first or second year at Lowell Tech, I can't remember. I got a good grade basically because it had a lot of calculus, and that I understood, but frankly I didn't really understand Economics. To this day I struggle with it and now it is even more important than ever to understand it.
I struggled with what was in it for investors to buy the most terrible of mortgages, by people that were the bottom 25% of wage earners. I thought I got a little insight from Alan Greenspan's book, but of course you have to be careful because he does have an agenda of covering his behind. He described it simply as assets. That is, that even a bad loan is an asset that can be leveraged, that seems simple enough. But I didn't understand how they could cover their down side loss. The answer partial lied in the ever increasing value of properties and many of these people were speculators as well as poor people just wanting a nice place to live. So as long as the assets appreciated they could leverage even more. All the while I am thinking, what was the big mystery, how long can you build that kind of portfolio and not have it crash by default. In other words buying worthless mortgages to buy more worthless mortgage. I actually worked in the Mortgage sector in the early 80's for about 10 years as a consultant and designed programs to track the loans and at the time the prime rate could change 12 times in a month, so they were pretty sophisticated programs. Several of my clients were Second lenders which is very interesting in itself, a whole book on that one. All the second lenders went out of business during the recession in the early 90's. So even then it was pretty fragile.
I am left wanting much more detail and less pointed than Greenspan. A relatively new release "Meltdown" which is suppose to describe all of this according to a lot of people, including Ron Paul. I always go to Amazon and look at the reviews, I jump right to the 1 stars. Among them was one that said read Mike Lewis, which is a much better look at the Meltdown. It was right on line and actually was published last December, it is only 9 pages. I found it very interesting, but frankly I need to read it a few more times to digest it.
The whole reason for this post is to suggest you read it, and I would be interested in your comments, especially from those that understand Economics better than I do. I still haven't figured out what drives our Economy now that all the jobs have gone else where.
Mike Lewis' Article