Esoteric Dissertations from a One-Track Mind

July 28, 2007

Economic Contraction Looming?

Filed under: economy — codesmithy @ 9:11 am

The Washington Post ran an article titled: “Easy Money, Lifeblood Of Economy, Is Drying Up.” The central thesis is that the subprime lending which later got packaged up as AAA rated securities were in fact, a fraud. Basically, the securities that involved subprime were not truly AAA securities because the the assumptions about how often people would default on the loans turned out to be much higher than projected. This is causing lenders to be more cautious in the future, but the fact of the matter is that people are defaulting on their loans. The homes that the loans were made for are now, in some cases worth less than the cost of the loan, meaning losses are being taken.  Added to the fact that the true money making proposition of the loan is people continuing to pay interest, we are seeing a drastic turn-around in the value of these securities.

How much capital was being moved in the name of these securities? According to Inside Mortgage Finance, $1.8 trillion.

This isn’t meant to be chicken little, but it is safe to say that energy prices will continue to rise and the dollar will continue to fall. How much of the U.S. economy’s value is based on projections of the status quo remains to be seen. But, much of what is happening now, are trends that have been in the works for a while. How much of the value of the U.S. economy been inflated and conflated by purchased dollars and bad credit? Only time will ultimately tell.

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1 Comment »

  1. […] The Credit Crisis Filed under: economy, politics — codesmithy @ 8:13 am I went over some key points in a post titled “Economic Contraction Looming?” So, the two questions we have to ask ourselves are: “how does it work?” and “is […]

    Pingback by Understanding The Credit Crisis « Esoteric Dissertations from a One-Track Mind — October 23, 2007 @ 8:13 am


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