tempest in a teacup

the pointless musings of a strange recluse

It's melting!

This article on the BBC website kind of jumped out at me today:
Starbucks to lay off staff in Seattle

When the coffee companies in Seattle start laying off people, you know we're in for some trouble.

Jokes aside, the US economy doesn't look too great right now. What started as the bursting of a housing bubble seemed to have locked the rest of the economy in a vise grip, causing other markets to freeze up and generally cause problems. Most worryingly it looks like the credit markets in general have tightened up, meaning money isn't as readily available – this will probably end up having a contractionary effect on the economy. A recession looks like an inevitability, not a possibility.

For those who have heard the word “subprime” tossed around by the talking heads on TV without a clue of what it meant, here's a quick summary. Subprime mortgages were housing loans (supposedly) offered to people who couldn't qualify for loans with better interest rates due to poor credit histories. Thanks to a perfect storm of low interest rates, weak financial regulation and “financial innovation,” many of these loans were offered to prospective homeowners, even those who could have qualified for loans with better terms. After this – and this is where the weirdness begins – the banks and financial institutions performed some financial wizardry on these loans and sold them to other parties, who then sold them to other people…and so on. In the meantime, people used the rising value of their properties (caused by the housing bubble) as collateral to fund a spending boom.

The bursting of the housing bubble ended up throwing a spanner into this mechanism. With the values of their properties falling, homeowners were faced with the prospect of losing their homes (Some statistics put the number at as high as a third of homeowners in the US). However, because of the financial engineering that had gone into this process, people and organizations who had bought mortgage backed financial instruments – like, say, the Michigan state board in charge of student loans, or the Florida state teachers' pension fund – found that their source of income had vanished in a puff of smoke. A major British lending institution, Northern Rock, was found to have invested heavily in such securities and needed to be bailed out by the British government. Here in the States, Countrywide Financial, one of the biggest subprime lenders, was devastated and eventually acquired by Bank of America. And the process still continues.

The government has been making all the wrong noises in the face of a recession; an economic stimulus package that does nothing for those who need it most (low-income households), and – this really made me laugh – persuading the private sector to provide relief. The last president who thought that was a good idea was Herbert Hoover.

This will probably be a major issue in the election campaign – for one, I'm hoping John McCain doesn't win, because he has openly admitted to not knowing anything about economics, which leads me to believe that he will continue to foist an economic policy that I can only describe as mistargeted, ineffective and self-serving on a beleaguered economy.

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