The Panic of 2007 +

So, here's my guess as to what is behind the current mortgage finance "panic" of 2007.

The system of borrowing and financing is not sufficiently based on cash reserves. Instead, we can borrow and finance based on hypothetical assets, instead of cash or "liquid" assets. This is the case at the individual, company and societal levels.

For example, at LERN we used to say our assets included $24,000 worth of furniture. But realistically there's no way we could sell the stuff for that.  Our computers were worth tens of thousands as well, but a 3 year old computer is worthless, regardless of what somebody tells you.

LERN started moving from accrual accounting to cash accounting several years ago. Our family started moving from credit to debit cards a couple of years ago as well.  Individuals, companies and nations will still borrow in the 21st century, but the collateral will be based more on cash, and less on desks and computers. Get ready for a rocky financial ride America.

What do you think the root cause of the current mortgage-financial-stock market crisis is?

Comments

[Rebel]

When we financed our new home in November of 2006 I insisted on an 80% loan 30 year fixed rate. The bankers thought I was insane & kept trying to talk me into a 125% ARM. All the 125% ARM mortgages are what's causing the mortgage crisis. People get in way over their heads in houses they can not afford to find out years down the road when they can't afford their payments anymore that they can't even sell their house because they still owe more then the house is worth, so they default on their loans. The day I signed my house loan, I had $50,000 in equity. Those poor people who sign 125% ARM's won't have that in 10 years! Mortgage interest rates are very low right now & I can't understand why anyone would sign an 125% ARM. History states rates WILL go up!

If you can't afford it - don't buy it!