Subprime Mortgage Meltdown

I’m compelled to interrupt the “investing in retirement” theme momentarily to outline how I see the “subprime mortgage meltdown.”

1. Government lowers interest rates to 1% to spur economy
2. World is already awash in liquidity seeking investment
3. People start to borrow (against home equity, etc.) to buy nice things
4. Lenders are increasingly eager to lend
5. People borrow more to invest in higher return investments and pocket the difference
6. Lenders further relax lending standards (but still within government regs -- mostly)
7. People borrow even more to invest in real estate (nothing down, floating rate, minimal
payments)
8. Demand for loans finally pushes interest rates up a notch
9. Fear of even higher rates means less borrowing to buy real estate and some selling
10. Less buying and more selling means real estate prices quit rising and start falling
11. Declining real estate prices take down weaker borrowers (“subprime”) and their lenders, as
well as investors in bonds backed by loans generated by those lenders
12. Government steps in to save the day by tightening lending regulations, which takes down
the remaining weak borrowers, lenders, and bond holders.

All three parties – borrowers, lenders, and government – contributed to this situation essentially in the order listed. But, I’m most disappointed in the government. Just as it did with the S&L crisis of the 1980s, it created a situation that naturally leads to “war” (this is ONLY AN ANOLOGY), stood silently behind the lines as the battle raged, then combed the battlefield after it was over to identify the dead, shoot the wounded, and send the survivors off to fight the next war.