I am not an economics expert, I have no job training or experience making economic evaluations, but I am not a stupid person and can put 2 and 2 together to see what is going on. It all started with a bunch of greedy lenders thinking they can make a quick easy million dollars by taking advantage of poor people. Unfortunately, some of them made several million dollars -In my opinion, we start an economic correction by taking that money back from these immoral thieves. Unfortunately for us, they were somewhat successful for a few years, and that resulted in other more risk adverse people joining in the game. Didn't anyone ask themselves (or their companies), "How are people going to pay when the interest rates skyrocket?" If they would have asked themselves that question and been honest about the answer, they would have reasoned out that people WON'T be able to pay. Did they just think that people will somehow magically come up with the money? Or that perhaps they'll work an extra job to pay for the doubled or tripled mortgage payment? Did it not occur to them that people were going to default on their loans in MASS numbers? Were these people blind to all this?
Beginning: Give people loans that have low interest rates now, but are higher in 3-5 years. ("You mean I can get a loan for that much money?")
Result 1: Houses sell for MORE money (sometimes WAY MORE money) than they are worth. Sellers are VERY happy and move into bigger and better homes. ("I can make a killing if I sell my house right now!")
Result 1.5: Immediate housing market boom - can't built enough homes fast enough. Everyone moves "up" a housing bracket. ("Wow, I can finally afford my dream home!")Result 2: These new homes must be furnished - retail market boom. ("With all the money I have, now I can also afford that new HD LCD TV! And the new dining room set, and bedroom set... perhaps even a new car!")
Result 3: Unemployment goes down - Retailers and Construction Companies can't hire enough people to meet demand. Students and lower class people have more job opportunities - some people take second jobs. ("Now I can really afford that new cell phone - and maybe even a car!")
Result 4: Stock and Bond markets soar - it appears as if there is A LOT of money to be had. They are banking off future mortgage rate adjustments and a booming economy.
End result: A booming economy! (we had it for a few years)
Problem: As I stated earlier, the premise of this whole chain of events is faulty.
Result 1: When mortgage rates adjust, people have to stop spending in order to make house payments. Retail market suffers. ("No more eating out for me!")
Result 2: People start defaulting on their loans because they cannot pay. This is usually because they bought a home that was in reality out of their price range. ("Now where can I live?")
Result 3: People cannot sell their other home (The one they moved out of when they thought the market was good and they would get a high price for it.) In fact they can't sell EITHER home! So now they are stuck with 2 mortgages! ("How can I keep from defaulting and ruining my credit?")
Result 4: Housing market slows down (collapses in my opinion). Construction Companies lay-off 75% of work force. These people were hired at a really good wage rate, now they are jobless. Also, Retail sector slows down and they a let a large number of employees go. Unemployment skyrockets. ("I need a second job to pay for this mortgage, but there aren't any jobs to be had!")
Result 5: Banks foreclose on a lot of homes and try to recover their loan amounts. Unfortunately for them, the houses were overpriced when sold, so now they are sitting on overpriced homes in a flooded housing market. In order to recover their money, they artificially keep the cost of houses high. ("I just want to move beck into my old home, but it is too overpriced for me!")
Result 6: The Stock and Bond markets realize that the risk was too high and that they won't make money off this whole sub-prime thing anymore. They flee like rats off a burning ship. Stock market dips (mildly crashes). ("Oh great, now my retirement money is getting hosed too!")
Result 7: Most people reduce their spending in all areas. ("If I can just ride this one out, I'll be OK.")
Result 8: Businesses in most sectors downsize and try to increase efficiency (do more with less - or at least the same with less). They call their debts in and try to stabilize cash flow.
End Result: Economic Recession.
This is not anywhere close to a complete list of all the results of this whole mess-up. This is just the obvious stuff that comes to mind. We only need to open our eyes and look around to see that this is already happening and moving towards getting worse.
I think that the bigger problem is that our economy was/is still in a bubble. We are too inflated and this is a natural economic sequence of events. Our government has tried to "correct" the economic deflation, but have instead made things worse by drawing them out. A quick death leads to a sooner recovery. I think they should let this ride out to its natural end and THEN start rebuilding the economy. (And tax the hell out of the people who made millions in the process of ruining our economy).
I think that overall we as a country need to take a time out from being the Global Police and stop spending money like it is an endless source. We need to deal with some internal problems (like road infrastructure for instance) and get "our ducks in a row" before we can be fighting global wars. Just possibly, if we withdrew our troops from the dozens of countries we now are fighting in, people of other nations would be a little happier for it. I'm all for human justice and defense of the defenseless, but not when it is at the expense of our own well being as a nation. When the body gets sick, it needs rest and recuperation. Our nation has a sick body and needs some R&R right now.