Matt’s Blog of Truth

Most of you know, first hand, how dreadful things are becoming for, not only the United States, but for the entire World, regarding the economy. This is a cut and dry, grass roots explanation, as to why the economy is shrinking. More importantly, why we need not go crazy with fear.

First, let’s look at how it all started. The Industrial Age has been with us for over 200 years now. But, I will begin at a more rationale point.

It begins with the creation of The Internet.

The Internet was adopted from a military network and put into public domain by Bill Clinton. This was done to stimulate and grow the economy. In 1995 the Internet was all the craze on Wall Street. Dreams of billions to be made from this new ‘virtual online shopping store’, to sell everything and anything, traditionally done with Brink and Mortar buildings. Well, the investors on Wall Street were told this was going to be HUGE, so they invested BILLIONS of dollars into Internet Start Up companies.

The problem was that these Wall Street traders and Investors were putting all their money on a hunch. The assumption was that the Internet would balloon their stocks and make them all Billions. The ballooning began around 1999 and finally crashed (burst) at around 2001. People over estimated the initial value of the Internet. Yes, some did win like; Amazon, Yahoo!, Ebay, PayPal and many more. But, over 95% of all the initial Internet start ups, which these over zealous investors had put all their stocks and bonds into, crashed. Losing them Billions. In fact, the Internet Bubble, was the biggest stock bubble in history.

So, what does this have to do with the current economic ‘crisis’, of 2008 to present day?

It is known, that when one ’stock bubble’ bursts, another bubble is formed, somewhere else in the stock market. This time in the Housing Market. Namely, Home Mortgages (big loans).

Starting in 2001 through 2004, or so, everyone noticed that if you wanted to buy a house, you could get a record low interest rate. Rates as low as 4.5% was common place around 2003-2004. The reason for this, was that all those investors, that had their stakes in the Internet Bubble, which made some millionaires and others bankrupt, moved their attention to the housing market. Some stock traders moved to avoid the Internet crash before it happened and moved all their Overly Ballooned stocks over in the Housing Market. These Internet stocks were moved in a panic, as the Housing Market has always been known to be a strong and solid sector of the Stock Exchange.

So, as a result of all this heavy Investment into the Housing Market, that sector of the market flourished. There was literally Trillions invested into Housing and Real Estate, which lowered Interest Rates, which got people to buy more and more homes. The formation of yet another Stock Bubble was beginning to take shape.

All was good and great. The situation was healthy. People were able to afford their dream home, while Stock Investors were making bank on their investments. This is what is known as a growing and healthy economy.

But, something happened.

Something called GREED.

Things were going so well for the Housing Sector, that major lenders (banks) began looking into ways to make even MORE money. The idea was that, since the market was doing so good, they could then begin to lend money (mortgages) to people that were previously off limits, or considered high risk. In other words, the banks began to give Home Mortgages to lower income families, with the risk that the borrowers may not be able to pay back the loan.

This high risk lending is known as Sub-Prime Mortgages, as I am sure you have now all heard about. Sub-prime, meaning a chance the loan could go sour and force the home buyer to go into foreclosure, which costs all parties involved, grief and wasted money.

The major banks, all at once and at a high rate of speed, sold these sub-prime mortgages in the TRILLIONS on dollars.

So, the drama was to begin.

It was not until 2007 that their were problems found in two major banking institution, known as Lehman Bros and Bear Sterns. They had what is known as TOXIC ASSESTS. Meaning that all their investments were bad, known to be lent to people that were on their way to foreclosure. TRILLIONS of dollars in Toxic Sub-Prime Mortgages were never going to be paid back to the banks that lent them out.

The problem then becomes a viral effect, because not only are the banks that sold these toxic loans are now in trouble, but all the Stock Share Traders on Wall Street ALSO put money into Sub-Prime Mortgages. So, now the banks and stock traders were in deep, deep sh**.

Once news of this was put out to the public, Wall Street went into a panic and pull out all their investments they had in these major banks. And well… here we are today.

If the banking system itself is full of Toxic Assets, then the Core Financial System is corrupted. This created a paranoia effect, where other banks were suddenly afraid to lend any money, to anyone! Banks that were not directly impacted by the Sub-Prime Toxic Money, froze all lending, which crashed the economy.

If money does not move (liquid), nothing happens, so the Stock Market begins to crash/stop. It stops breathing and slowly begins to die. All due to a couple bad banking moves and forcing everyone else to freeze all their money and stop the economy from breathing. I like to think of this as someone going through a panic attack and not able to breathe, for fear itself, has engulfed them.

So, what has been done to stop the situation from becoming worse?

Enter the US Federal Government Reserve Bank.

Before, the markets were free with NO government regulation. That is what everyone wanted, including the US Government! People do not like Big Government telling the free markets what to do. But, there was no choice. Money HAD to be injected into the Banking System or a collapse was to ensue, very very quickly.

So, that is what they did. The US Government passed the TARP Bill which gave the failing banking system Billions and now to date TRILLIONS of Federal Reserve money to the banks and told the CEO’s of all the major US banks to STOP the credit freeze and use this Federal money to start lending again, to get the economy breathing again.

President Obama took the ‘federal reserve money injection’ a step further by, not just bailing out those that cause this mess in the first place, but to use this opportunity to invigorate ‘green technology’ and jobs, restructure health care and fix the US infrustructure like bridges and roads. Obama is taking a major gamble, and hoping that HIS investments will pay off, in the long run.

I believe they will. Obama is a smart man. He even understands computers and the Internet age. Just take a look at his website. He was the first President to put all his policies on the table for all to read. He put it all out there on the Internet.

Now, let us pray what he has done with the additional TRILLIONS borrowed (mostly from China) and see if it does anything for the greater good. I think it will.

Thanks for reading.

This entry was posted on Wednesday, February 18th, 2009 at 8:50 pm and is filed under Internet, History, International. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.