Economics

I had a shitty economics class in college. Engineering econ, it was called. Textbook written by the prof; class was Sept 27 to Dec 17 or some such, book did not actually get printed and to the Univ until Thanksgiving.

and on top of that, what it covered was essentially useless. Only thing I got out of that class was the trivial knowledge of how to calculate compound interest. We're talking 1978 (or was it 79?), so this was before advanced math calculators could to that, and before Excel or 1-2-3.

Class *could* have covered real valuable content, like how to cost and budget a engineering proposal, estimate manpower needs for a project, how to manage costs over time. But no.

and now it's 2008. Dec 2008. The economy is in a slump. Big time. Well, the economy was in a slump when I graduated from college. So it will come back.

But what's the deal? There's a really simple explanation you won't ever hear.

Economics, the world economy, our capitalist model, is basically a pyramid scheme. It requires that there be new products and new customers ALL THE TIME.

ok, so as long as the population is growing, there are new customers. But businesses have to keep growing lest the competition take their customers away. Which leads to the need to borrow money--and if there's a hiccup in that, the pyramid turns out to be a house of cards, and starts to collapse.

In addition to the greed. This is the essential flaw in Greenspan's thinking: it doesn't account for criminal behavior by the participants. Like this: when someone thinks up the "derivative" idea of bundling mortgages into a package that can then be "securitized" and resold to investors, the thing you most want to do is resell quickly--i.e., fast turnaround, with a sliver of profit in the sale. You can claim that the risk is low, because the securities are backed by real estate, which always has solid value. But there isn't anyone in the chain, other than the homeowner, who actually *wants* to own the property. The problem there is that once you put enough distance between the homeowner and the ultimate holder of the securitized loan bundle, the investor doesn't know whether the homeowners can actually pay the loans. What's worst is that the mortgage maker who originated the loan doesn't care, ultimately. Said maker wants to make loans, and resell bundles of loans, the fast the better. So you make it as easy as possible to get a mortgage loan, which leads to more people bidding on houses, prices going up, and eventually people being unable to really afford their houses, but have them anyway. The mortgage maker makes a little money from originating the loan, and more when it is resold. The faster that can be done, the better--and they can make new loans as soon as previous ones have been sold. So much for needing due diligence on the buyer's being able to afford the thing, why do you care? You're going to pass the risk on to someone else, that someone isn't likely to investigate the buyer.

But there is going to be a sort of ceiling in prices on houses. They can only go so far upwards before people just can't buy.

As soon as there's a hiccup...those loans turn out to be non-performing. Then you have to wonder about the value of the thing. Housing prices being cyclic, at some point they will be going back down, and maybe then you have the value inversion.

Which is why the screwup in how Treasury and Congress are handling this is happening. They aren't dealing with the loans issue. Banks have asked for money, but are paying operating expenses with it.

And this happens this way because it's a pyramid scheme. As soon as there stop being new customers (or customers able to pay), things start back downward.

A way to solve this for the future: require that mortgage originators hold the loan for a minimum of three years before they can sell it. You know that if the originator knows it has to hold the loan, it is going to be very careful about knowing the buyer can pay. As opposed to recent years, where that absolutely did not matter.