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Unpopular Ideas

Ramblings and Digressions from out of left field, and beyond....

Location: Piedmont of Virginia, United States

All human history, and just about everything else as well, consists of a never-ending struggle against ignorance.

Saturday, March 28, 2009

A Simple Loan

The social conservatives, ever eager to denigrate the descendants of the recent slaves, have jumped at the chance to blame even the current economic crashes on them. (And, in the grand scheme of things, slavery was quite recent, despite all the efforts to put it far behind, though I admit it's pretty wild to think that when I was born, there must've been at least a few people still alive who remembered hearing A. Lincoln give his little address at Gettysburg in honor of the newly fallen dead, when the Civil War still had a year or more to run, or at least they remembered seeing him there.) The Right Wingers argue that the crisis was brought on by "these people" taking out loans that they knew they couldn't really repay, at least in the time stipulated, just so that they could jump at the chance to live in a house of their very own, as unseemly as that was.

But that's been shown to hold no water.

A man, an ordinary citizen far removed from the phallic tip of downtown Manhattan, takes out a mortgage loan to buy a house. As far as he is concerned it is a loan little different from the borrowings in which he has indulged from his friends for much of his life, except that this time the amount is much larger, and for this reason there's paperwork, a lot of it, and there's interest involved, a lot of it, and also he'll have to remember to pay back a small part of what he owes every month, so that generally the house won't really be his till 30 long years later.

All that is not generally good, but he figures it's still generally bearable, and he signs all the papers and moves into his nice new house, though usually it is not really new, and it was rarely built with him in mind. But thereafter, except when time for the monthly payment rears its ugly head, he doesn't think much about it. He thinks he has merely made a simple transaction between him and a lender, in much the same way as with a 20 dollar loan from a friend. And if he tries, as with those friends he can even put a face on that lender

But then things happen with his loan, after which he can't put a face on anything at all even if he tried, but he doesn't know this -- until social conservatives blame him and people like him for bringing the whole world economy to its knees, the first time he is a month or two late in paying.

It turns out that in the attempt to make two dollars out of one, the original lender literally sells this guy's loan to somebody else -- which ought to be illegal right there -- and to someone in a foreign country even, and at that point some of the guy's safeguards start to slip. But that's not all. The person who bought the mortgage then proceeds to make a bet as to whether the borrower will pay it back or not. He makes the bet in a form of insurance called credit default swaps. But that's still not all. He can take out other credit default swaps on the same loan, a lot of them. And that's still not all. The persons with whom the bets are made can then turn around and take out insurance on their side of the wager in the form of a second tier of credit default swaps, and the whole thing goes on and on, until pretty soon, as Sen. Dirksen so memorably said, you're talking about real money, not the billions of his paltry age but in trillions nowadays, which no one could live long enough to count if it was possible to hand it to him in one-dollar bills. For all I know, even 100-dollar bills.

And when all this nonsense gets noticed and the whole house of default swaps starts to fall, people expect their noxious bets to be paid off in their entirety, and that's the hardest part of all to understand -- unless a way has been found to make high dollar notes out of a few grains of sand.


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