People need to understand that what the Banks did here was create a credit system where the lender technically earned a profit the moment the capital was married to a borrower.
Absorb that. The entire credit system was optically rigged to show on paper that the lender would immediately bank a profit from lending. They did it by chopping up the loan into so many different pieces of paper that they could be distributed throughout the PLANET as wealth-generating assets.
Guess what. Finance only generates the printing of more numbers in a situation like this, where computer digits are just recycled back into the financial sector, never ‘realized’ in the real world as some kind of real economic gain.
The sickest part of all this is that real estate is the hard asset that this is ultimately tied too. All this mortgage-backed mumbo jumbo this, bond that, derivitive and security that.
The same way the banking system and all the major financial istitutions, including big parts of the government, wired themselves together in a big risk-elimination web, they’ve also wired mortgages together into the web.
The formula at its most basic is this: COMMERCIAL BANK issues SECURITY based on MORTGAGE to FINANCIAL PLAYERS who sell Mortgage Backed Security to other players who turn the MBS into a million other mediums of paper-based exchange (if it sounds like money, this is why it is often referred to as the ‘shadow banking system’).
The capital generated by FINANCIAL PLAYERS along the way is transformed into CREDIT, which is fed back to the PEOPLE who are having the debt on their homes SOLD ON THE OPEN WORLD MARKET to raise the cash to up their CREDIT CARD LIMITS, finance the AUTO LOAN, etc.
Now, the housing bubble that helped trigger this mess has gone bust, Greenspan’s insane blowing of credit bubbles everywhere when he knew what the banks and the credit markets would do with the new liquidity with commercial banks now in play as securities dealers. The FED has access to every Bank’s full books, part of the FED’s job is to see the big picture and act on it, that’s why they have oversight, just FOR that.
With housing values tanking, the mortgage values serving as a basis of collateral for almost every part of the market that is used to accumulate and disburse credit is going down with the housing market.
Lovely cycle. How do we get out of this?
One interesting aspect of this mess is that courts are refusing to go along with many foreclosures, because the ownership of the mortgages cannot be accurately determined. The mortgage originator sold it the day after cutting the loan, and that loan has since been sliced and diced and resold in a thousand fragments. So who owns the house? It’s going to get VERY interesting, pulling apart this snake pit.