Root Cause

We hear a lot of discussion on the “Root Cause” of the current financial crisis. The common conclusion is that a large number of home foreclosures, funded primarily by sub-prime loans, caused a massive collapse of our banking and lending systems. People were buying houses they could not afford, but were coerced into high mortgages by low ‘teaser’ rates that were set to increase at a later date. Everyone involved knew the loans could not be repaid. The banks were counting on it. With home values increasing in leaps and bounds it didn’t matter. Once the period of the teaser rates was over, the value of the home would have increased substantially, allowing the owner to turn it over, pay off any bank fees, and still pocket a profit. Win-Win.

But the fact that buyers were purchasing homes they could not afford was not the real problem. Well, let me put it in a different way. The homes they were buying were drastically overpriced. THIS is the problem. While wages for the middle class have remained stagnant over the past 8 years, prices have been steadily increasing. But how is that possible? It undermines the basic concept of money and the financial system. In order for things to cost more, someone out there must be getting paid more. It wasn't me, and I'm pretty sure it wasn't you.

See, rather than pay the middle-class workers more of the company profits, the elites were pocketing the cash themselves, then investing that money into financials (and other markets) and lending it back to the middle-class so they could live with the standard of living they work for. Not only were the elites hauling in extra cash by failing to lift wages for workers, they were earning interest on the that money by lending it to the workers rather than actually paying them! And the middle-class bit. And here we are.

Oh, and it's a lot worse than you may think. See, you paid $300k for a house that was really only worth $150k. Someone at the top walked away with that extra $150k. That money did not dissappear. Now the foreclosed mortgages are causing the banks to take on massive losses, which are in turn being 'relieved' by the government. But the government is also broke. They get thier money by taxing the middle-class. So, not only are you out $150k on your house, but now, in addition to it, you're about to be forced to pay extra taxes to pay off the financial bailout of the very people who overcharged for your house in the first place.