A crisis in five acts:
Act I
A balding man in a light brown suit sits on a park bench, reading a newspaper. To his right sits a little girl holding a balloon. Que strong, quick-voiced narrator.
"The uncertainty of getting a home loan made Paul irritable." Paul pops the balloon.
"Then he went to Washington Mutual." Paul straightens and smiles widely. "Thanks to their flexible lending rules," a banker makes a motion with his hands as if he is bending a bar. "Paul got a quick approval. Now he's always in a great mood."
The mood didn't last long. Washington Mutual was seized on Sept. 25 by the federal government. JPMorgan Chase purchased most of the company. It was the largest bank failure in the history of the United States.
There were quite a number of Pauls out there in the world. The Pauls wanted to buy homes, but there was no way they could afford them. So the Pauls sat on park benches and popped children's balloons.
A rich man sat in a board room with other rich men and women. These people noticed the housing market was doing quite well. So they did what they were best at: making money. They bought mortgages, chopped them and diced them, twirled them around in a magic blender and came out with securities that spread the risk of mortgages over a wider number of people. Now banks and financial firms could be risky. Not risqué like the sex parties at the Interior Department, but perhaps even worse. These rich men and women of the financial sector were known as Wallstreets.
Act II
The Pauls received an answer to their prayers through unending streams of mail and television ads that seemed to be offering homes for ridiculously low prices. "Low rates!" "Small monthly payments!" "Get the home of your dreams!" So the Pauls bought homes. Low rates were locked for one, two or even three years. But when these years passed, the Pauls noticed the interest rates shooting up, their monthly payments increasing and their money depleting. But they had homes.
Families sat in their living rooms watching the television too. Unlike the Pauls, these families already owned homes and were paying off their mortgages. But they saw commercials telling them to refinance their homes-"get money out now," "consolidate bills"-all sorts of lovely goodies were promised to them if they would just refinance. The interest rates would be lower for a while, and even if the rates did go up later, housing prices were always increasing. Many of these families, the Mainstreets, "tapped" their home equity and refinanced.
And all was good.
Act III
But home values stopped going up. The Pauls couldn't pay the bills. The Wallstreets tried to squeeze out all the payments they could before foreclosing homes. The Mainstreets couldn't afford the new rates and approached default at an alarming pace. Companies that insured these mortgages, thinking that they would never default, couldn't pay out the money they owed. Unfortunately, unlike the Interior Department big shots, the Wallstreets spent their riches not on parties but on trying to make even more money. The Wallstreets borrowed a lot of money and put it to use in the market. When the market took even a small unexpected hit, this money began to disappear quickly. The Pauls, Mainstreets and Wallstreets were all tanking. But the Wallstreets were most famous, so they went to a group of other suited men and women to whom they had given money in the good old days. This other group was called the Lawmakers.
Act IV
The Lawmakers debated and argued and stayed up late. They voted once, and they voted again. They gave the Wallstreets more money and brought the failed Wallstreets in to scold them in front of television cameras so the Pauls and the Mainstreets could see the faces of greed.
Another group tuned in to watch too. They had neither tried to buy homes they couldn't afford, nor refinance their homes to make a quick buck. They didn't gamble on borrowed money and weren't broadcast on television. This group was known as the Middles. But when the Lawmakers gave money to the Wallstreets to buy the "bad" mortgages of the Pauls and the Mainstreets, the Lawmakers were actually giving away the Middles' money too.
The foreign relatives of the Wallstreets were suffering similar fates in their lands as well. It was a time of great fear.
The Lawmakers continue to bicker to this day.
Act V
Currently, several options are on the table: give the Wallstreets even more money; force the Wallstreets, Mainstreets and Pauls to suffer the market's wrath; give the Mainstreets money or knock down the Pauls' houses.
Either way, there's going to be a lot of kids with popped balloons.
Elad Gross is a Trinity junior. His column runs every other Thursday.
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