The US financial crisis - How did we get here?

Hello,

Let us say you know a family with several kids, no savings and their only income is from social security and welfare payments of less than $20,000 per year. Would you personally lend them money to buy a $200,000 home at 6% interest over 30 years? Be honest now. It would seem completely ludicrous to do so.

However, this is what many of the banks who are now in trouble in the US actually did. They approved and made so many loans of this type because the restrictions on lending were made loose enough that almost anyone would qualify. Worse of all, the regulations specifically prevented "red-listing" of low income families. Despite sensible voices from sane individuals to tighten this up, the regulators let it continue out of control for the past 10 years.

The real tragedy here is it is the American people who are being asked to pay the bill for this absurd behavior. Not only is it to be the hard-working US taxpayer who is burdened to bail out the investment banks who were 'encouraged' to grant these kamikaze mortgages, but it is the same fiscally responsible taxpayers whose retirement funds and investments are being decimated by the fall out from the resulting crisis.

Yet again the lopsidedness of a system that punishes those who keep their expenses under control, pay their taxes and save for the future and rewards those who spend more then they earn and build large deficits needs to be called into question.

It remains to be seen what the long term outcome of this debacle is, but I sense that unless some very strong leadership is bought to bear, the next 2-3 years will be an extremely stormy time for the US economy.

Have a great week!

Malcolm

Comments

[Vanessa]

It's obvious we need to do a better job teaching people about money. I've done some work with Junior Achievement. They have a lot of programs in this area. Here's their site, for anyone who is interested www.ja.org.

[Malcolm Bugler]

Yes, I completely agree with Vanessa. The real problem lies with the basic literacy level of the consumers of financial products such as mortgages and credit instruments. Increasing financial literacy is my overall aim and this site and my books are vehicles to achieve that aim.

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