So with today's FDIC-brokered takeover
of Washington Mutual by JPMorgan Chase
, 119 years of Washington Mutual history ends. But more than that happened, as far as I can tell.
First off, I think that - at this point - the bank failures are behind us. Of course, I also predicted $80/barrel oil (or lower)
before next July, so my record isn't yet proven
. (I still have my fingers crossed, though.)
Still, I've been working to wrap my brain about the causes of this crisis and the ripple effects. Here is my own simplification (hopefully correct):Late 1990s
: With Y2K looming and e-commerce on the rise, massive spending in the tech sector creates a boom of gigantic proportions.2000
: As Y2K passes with relatively few events and no apocalypse, companies start cutting back
on infrastructure spending, triggering a crash in the previously red-hot tech sector.2001
: As the economy melts down due to the tech crash, the Fed starts to lower interest rates
in an attempt to boost spending. Then some jerks fly planes into a couple buildings
, and the economy goes from bad to worse.
: With low interest rates and, I believe, less stringent rules on borrowing, money starts to flow. People in the margin who couldn't afford to buy a house now can, which increases demand on housing, which raises prices. Investors looking for a "safe bet" start putting their money into the housing market
, heating up prices even further in certain areas.
Investment banks also create a security backed by mortgage assets, which are rated highly (because of the "prices will always go up" assumption.) Certain financial institutions
bet heavily on these securities, and, since money's easy to 2005-2007
: The Fed starts raising interest rates
in an attempt to moderate the economy. Investors stop putting money into homes, which lowers demand (and prices).2006-2007
: People who started taking out interest-only start having that interest-only portion run out, only to find that demand has dropped considerably
with rising interest rates, prices have started to stabilize, and the promise that prices would always rise starts to look suspiciously false. Loan defaults and foreclosures start to rise. Banking institutions, realizing this, start to try to get rid of the mortgage-backed securities that are rapidly losing value
: Investment banks start to have asset issues and, ultimately, many start to fail as their highly leveraged loans and investments come due and they can't muster the liquidity needed. Then, as the investment banks start to fail, the normal banks - many of whom loaned the money for the investments - start to see their assets drop in value as they're not getting the money back that they loaned out.
So here's where we currently stand: Credit is an issue; no one really wants to loan money right now. That makes investment (of any kind) difficult, which slows down spending. At a corporate level, spending drops, income drops, and people start to lose their jobs.
But people are also starting to lose their homes. Some realize that it's easier to just walk away from a home
and let it get foreclosed on than trying to save it and pay for something that shouldn't have bought to begin with. This leaves empty, bank-owned homes with no one looking after them, which is leading to an increase in crime
and further strains law enforcement resources.
How do we solve this? I don't really have an answer to that right now. I'm not sure a $700 billion dollar bailout is the answer, but we'll see. (It sure is a really big number
Anyway, that's my understanding of how we got here. Any comments? Corrections?