Herman: John L. Herman Jr., Author

Where did all this debt come from?

In the last few decades there were things happening in the financial world that you had to be blind not to see…or you just weren’t looking. The latter is what happens almost all of the time.

When Jimmy Carter was the President people were actually borrowing money for twenty percent interest. Come on folks, how can you pay one-fifth of the debt every year without paying any of it off and expect to make ends meet? Now, at the same time Savings and Loans were offering nineteen percent interest to people who banked with them. Where did the bankers expect to get the nineteen percent to pay them with? When you see something this out of whack…it is out of whack and something has to change. People lost a fortune when the S and L’s couldn’t pay and there was a “run on the banks.” Now many of you are much younger and you think I am talking about the 1930’s. No, folks, this was the late 1970’s and early 1980’s.

Next, let’s go back to when houses were available, but you needed ten to twenty percent as a down payment. You know, because logically if the person couldn’t pay for the house anymore and the banker had to sell it, a quick sale would yield about eighty percent after expenses, exactly what the bank had at risk. Then some bankers decided to give loans for five percent down. Now, even with that small deposit, the home buyer had enough equity that they would pay off the mortgage so as not to lose their investment in the house. So, the bankers were somewhat protected by the “equity factor.” But also, back in the day, bankers kept their loans, they didn’t sell them to other banks to make a quick turnaround on their loan. That started a financial frenzy where new products were invented to bundle loans for mortgages and sell them back and forth.

Next, came complete craziness when banks gave out loans with over one hundred percent of the value of your home, with an interest only option to start you out, so long as they could put an adjustment to your payment within two years that would ride up with interest rates. Now what a surprise that when homeowners couldn’t pay and had no equity, they merely walked away from a deal where they owed more than the house was worth. And, oh by the way…let’s start giving credit cards away to college students who don’t even have a job, so that by the time they leave school and start their career they would owe over five thousand dollars to them.

The same can be said for the dot.com stock bubble of a few years ago. People were buying companies for billions of market cap without those companies ever making a penny of profit. BOOM. The bubble burst.

House prices are heading for shambles thanks to the greed of bankers and the naivety of borrowers. Families are watching their savings evaporate as they battle huge credit card and mortgage debt. And the economy is slowing because it has no choice. There is no more money to make it go.

Open your eyes and tell me what you see. This is what I have been seeing coming for the last few years. And it seemed so obvious to me.

• Posted: 7 March 2008
• Comments: 1
• Category: Business failure

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