Learning from History in Economic Crisis

Buying a Home – How it used to be. . . Go to local bank for loan (mortgage) Bank reviews income, other debt, collateral, and the home to purchase Bank determines likelihood of borrower repaying debt; loan made only to good credit risk Over 30 years, borrower pays off loan with interest to local bank

Buying a Home – What it has become. . . 1990s – 2006 housing prices rose continually (good investment) Mortgages no longer by local banks; $$ loaned and mortgage sold as a mortgage backed security Many loans put together and sold to investors (profit from interest) Because lender was not holding loan, would make loans to poor credit risks (subprime loans) just to be able to sell to investors

Housing Crisis Poor credit risks cannot pay off loans (default) & banks foreclose With large number of bad loans, many foreclosures Banks try to sell foreclosed houses, but fewer possible buyers Supply of available homes increase, value of properties fall Banks, investors in properties, those seeking to sell homes to move, etc. lose money

Lesson Learned from Housing Crisis Banks must make loans to those who can afford them & not to poor credit risks Consumers must only seek loans that they can pay off Buying properties to invest with “guarantee” of increased price (flipping houses, etc.) is not good practice When prices rise significantly, prices may come down significantly (invest wisely)

Housing Crisis Leading to a Credit Crisis Modern economies rely upon credit to run Farmers (borrow for seed/pay off after harvest) Businesses (raw materials/pay off after sale) Consumers (autos, college, homes . . . ) Local & state governments (build schools, maintain infrastructure . . .) When banks begin to lose from bad loans, they become very conservative (afraid to loan & tight with money)

Credit Crisis Leads to Recession Without banks loaning, economy freezes Consumers not spending Businesses not producing Local governments hold off on projects All leads to lower production, layoff of workers, lower incomes, less spending, lower production . . . November 2008 (lost 533,000 jobs, 6.7% unemployment, consumer spending down So, now what?????

Current Attempts at Economic Recovery Stimulus checks issued by government during the summer of 2008 (increase consumption) $600 to single members; $1200 to families $700 Billion Bank Bailout Program Banks and mortgage companies loaned the money to relieve credit crisis (government regulations & to ensure change) Automotive Bailout Program??? GM, Ford, Chrysler requesting loans to keep from failure (government regulations & controls) “Cash for Clunkers” program

President Barack Obama’s Economic Recovery Plan Create jobs for working & middle class Infrastructure projects (highways, bridges, water & sewer systems, etc) Upgrade energy efficiency & technology of federal buildings, schools, etc. Renew & improve information superhighway making available to more people (US is currently ranked 15) Modernize hospitals (technology, electronic medical records, etc.)

American Recovery and Reinvestment Act – 2009 (“Stimulus Package”) $787 Billion Create millions of jobs by upgrading U.S. energy, technology, transportation, education, etc. Cut taxes Provide unemployment and other benefits to struggling families Includes many “Green” projects

Photo Credits FDR in car - weblogs.amny.com Obama Time cover – www.time.com