Complicating matters, there are adjustable-rate mortgages (ARMs). When prime rate is 1%, the payments are very low, but when the prime rate goes up, the payment goes up with it. They were selling these loans to these people with not much verifiable income who would never be able to make the payment once the payment doubled or tripled. ARMs are terrible terrible terrible.

When the prime rate went up, foreclosures started to increase as people couldn’t make the higher payments.

Then some assholes came along and told the banks they had a solution: repackage all these loans as mortgage securities. Like they take 100 mortgages, wrap it all up, and turn it into a bond, and investors on the market can buy it. Then as people pay their mortgages this money is sent out to people that own that security. These securities get rated with regard to how safe they are. The assholes got their asshole buddies at the rating agencies to adjust the ratings, so mortgage securities full of deadbeat mortgages were rated AAA, the best possible rating (I think).

Now here’s where innocent people start getting hit: AAA bonds are considered very low-risk. So now you’ve got low risk mutual funds and state pension plans and AIG-RS (AIG Retirement Services) and Wells Fargo and Washington Mutual and Bear Stearns and Lehman Brothers and all kinds of investors looking for a safe investment buying these AAA securities that are supposed to be really safe but are in fact doomed because its full of people that have no business getting a mortgage. This is basically the part where teachers lost their retirement money. Everyone’s buying them because even though they’re supposedly a really safe investment, the sellers (the assholes) are offering a really high rate of return on them, much higher than typical for mortgage securities.

The foreclosures skyrocket and everyone gets hosed. The mortgage securities are basically trash now. The real problem is that we have no idea how bad things really are, because the foreclosures still have not leveled off. The government is now allowing everyone to sell the loans to the government (by transferring all this trash to Fannie Mae [Fannie Mae now owns 50% of all mortgages in the United States]).

Now on top of that, they want to drop a trillion dollar bailout on all the assholes that made this mess possible. The asshole CEOs get to float off in their yachts with a multi-million dollar severance package at the taxpayer’s expense. This is justified by saying that these entities are “too big to fail” and all kinds of shit. Meanwhile, all the companies that own the media outlets are owned by corporations with a stake in this. GE owns NBC, for example, and GE is heavily damaged in the mortgage mess, so you can expect all the NBC family of channels to carry the “too big to fail” line.

- george orwell

2) The other side of that is with consumer spending. Our economy has been propped up for the last decade by those soaring home values. People borrowed zillions of dollars out of their home equity and pumped it into consumption. How do you think people were able to afford all those SUVs and HDTVs and iPhones in an environment where real wages were flat or declining? They were pre-spending the sale price of their homes. Well, the values of the homes have collapsed and that money spigot is shut off. So suddenly car dealers are seeing their sales collapse. So are chain restaurants. So is Starbucks. There’s been a big shift in spending from national brands to blue-label store brands. And so on. Consumers have suddenly tightened their purse strings.

3) The fall off in consumer spending, along with the collapse in multiple sectors (see 1 above), leads to a shitty job market. Starbucks closes stores, GM lays off workers and closes plants, Indymac lets half its workers go. Hours are cut, benefits are cut, and nobody complains because they’re just happy to have a job.

Can you see the magnifying feedback loops here? The value of houses goes down, so consumers stop spending money like they used to, so jobs are lost, and those unemployed people can’t make their house payments, so they default on their house, so the bank has even more bad debt, which makes the market stagger some more and tightens lending, so there’s no new investment or jobs being created, so sales forecasts are flat, so business lay off workers and cancel plans to expand, and round and round and round and round. Usually, Uncle Sam steps in to clear out bad debt, restore confidence, and prime the pump to keep the economy humming. But…

4) Through bad policy, the government and the Fed don’t have a lot of options. Interest rates are so low, they can’t be cut any more. We’ve been running $300 billion/year deficits for the last 6 years to pay for Bush’s war and “stimulus” tax cuts, so there’s not much more economic stimulus to be pumped into the system. We’ve run up an enormous amount of debt under Bush, which we’ve financed by selling promisory notes overseas (China mostly), which has led to a collapse in the dollar, which is making the price of government borrowing rise even higher. And states are reeling from the loss of property tax revenues, so they’re going to be cutting spending and payments and new projects just when they need to start spending on that stuff to stimulate their economies and deal with increased welfare loads.

5) All of that is bad enough, but we’re also going through a period of elevated supply costs, which makes everything more expensive. Energy costs have doubled, seemingly permanently, resulting in huge disruptions (and they can still go up!) and raising the price of everything. Food costs are skyrocketing, too – because of energy costs, environmental degradation, biofuel diversion, and shifting weather patterns (see 7 below). And lots of other basic commodities are running low – check out the price of copper, or even weird metals with critical industrial uses like tantalum or niobium.

6) Bad policy plus worthless dollars plus spiking commodity costs = inflation. Most of you aren’t old enough to remember pre-1982 America, when inflation was last a problem but I gotta tell ya: it sucked. The only worse was the cure, which was the early Reagan recession that had national unemployment at 10%. Also, this inflationary risk really constrains the Fed’s ability to act. Hope you like your economic slumps long-lasting!

7) And there are a whole bunch of long ignored but worsening problems that are coming due soon. The climate crisis is real, and it’s worsening faster than the consensus projections indicated. The peak oil people are being proven right. Water supplies are becoming a huge problem worldwide. We’ve underinvested in decades in infrastructure – public transit, sewage, water, electrical grid, schools, you name it. Medical costs keep skyrocketing 5-10% a year, every year, with no end in sight. Oh, and the boomers are going to start retiring in about 18 months. And the number of undropped shoes grows exponentially as you stare into the future. What are we gonna do if global fisheries collapse completely, or we can’t get this honeybee disease situation under control? What if a chain of hurricanes leaves Florida devastated? What if the long-predicted avian flu pandemic finally arrives? The problems are global, and economic and ecological crises will lead to all sorts of political and military and economic disruptions that will spell the end of the long peace we’ve had since the end of the Cold War. Think of the 1930s: unstable countries, masses of refugees, charismatic opportunists casting about for scapegoats, dwindling resources – fun!

Add it up, and it’s bad. Real bad. I get a distinct 1970s vibe from the whole thing – from the supply shocks of the early years to the stagflation of the Carter era. And I think it has a great possibility to get worse rather than better. It took Japan 15 years to dig itself out of the hole the 1989 collapse of their property bubble caused them, and their society was at least socialized enough to provide a safety net for people so they wouldn’t be pensionless or homeless or without medical treatment.

And what really has me depressed is the collapse in my faith in our institutions – political, economic, cultural, media – to deal with these problems. You think the American people are capable of making hard choices? You think the media is capable of presenting the problems and the solutions in a way that leads to the right options being supported? You think Wall Street and the GOP (and too many Democrats) won’t figure out a way to make money on this whole thing while sticking us with the bill? How long do you think it’s going to take for it to sink in – REALLY sink in – that people’s houses are never going to be worth what they were five years ago, that the price of gas is never going to go down below $4/gallon, that the stock market might be flat or declining for the next decade (again, like the 1970s)? When are we going to get policy decisions that aren’t just selling magic beans like increased offshore drilling or opening ANWR or coal liquifaction or hydrogen or one-shot stimulus checks or gas tax holidays or (lord help us) more capital gains tax cuts?

TL;DR: Yeah, we’re fucked.

p.s. I didn’t write this, I found it on LF but it’s true, blood. so true.

CHORUS:

Solidarity forever,

Solidarity forever,

Solidarity forever,

For the union makes us strong.

Is there aught we hold in common with the greedy parasite,

Who would lash us into serfdom and would crush us with his might?

Is there anything left to us but to organize and fight?

For the union makes us strong.

It is we who plowed the prairies; built the cities where they trade;

Dug the mines and built the workshops, endless miles of railroad laid;

Now we stand outcast and starving midst the wonders we have made;

But the union makes us strong.

All the world that’s owned by idle drones is ours and ours alone.

We have laid the wide foundations; built it skyward stone by stone.

It is ours, not to slave in, but to master and to own.

While the union makes us strong.

They have taken untold millions that they never toiled to earn,

But without our brain and muscle not a single wheel can turn.

We can break their haughty power, gain our freedom when we learn

That the union makes us strong.

In our hands is placed a power greater than their hoarded gold,

Greater than the might of armies, magnified a thousand-fold.

We can bring to birth a new world from the ashes of the old

For the union makes us strong.