Personal - #501 - #78- Credit Generation vs. Pay as you go……

Where does this “bailout” start?

It's NOT Freddie Mac or Fanny Mae....

It’s the use of anything “now” but “pay later!
It’s the use of the “payment plan”!
Buy and use it now; but pay later!

A clever group of entrepreneurs began to see the use of “interest rates”. Then came the “credit card” bunch. Then a group created various ways to start a business of selling these items in “bunches” and calling them such names as “Mortgage Securities”, “Credit Rate Swaps”, “Interest only”, and “no docs”, etc.
If you had a debt which cost you $2 and you agreed to pay the basic item at 5% and someone agreed to this arrangement and along came a guy who was willing to pay you 3 years of interest rate at 5% and a special bonus payment of ,say, $4.00. Then he collected 10 of these arrangements and went to someone else with the proposition of selling 10 of these packages for a sum equal to 3 years of 5% interest rates plus $4.00 for a new total of $5.00 and he would throw in a kind of judgment from a “reliable” rating agency who said the loans were reliable and beside the collateral would go up in the next few years to the point where the increase in the collateral would be equal to the original interest cost of the 3 years. And the buyer of this new arrangement relied on the agency’s judgments. A sale was made. Bear in mind that the original makers of these arrangements had the collateral in their hands, but now the collateral was no longer in their hands and the new buyer felt that 5x the yearly interest was good enough as collateral for the 10 loans.
And this arrangement was made over and over again. Each new buyer held a decreasing amount as collateral for these loans. But the real estate market collapsed and the collateral for these loans no longer covered the cost of the then held “collateral”. The new owner was “over leveraged”! That is…. he did not have enough collateral!
This is where we are now!

Do we give the institutions enough money so they have enough collateral?

The banks don’t trust each other to know precisely how much they owe already. They don’t know what is “enough”!

Do we renogiate the piece of paper behind the loans even if we could locate the original which has been turned to “saleable pieces of paper” called everything from “negotiable instruments” to “Secondary loans”, “Credit swaps”, etc. This could mean that there was no instrument in writing that could not be “renogtiated”…..impossible!

Do we give enough credit money so the banks begin to trust each other? How much will that be?

Pay now, use later vs. Pay later, use now!

It all became US!