Well, I am not an economist. I'm just an ordinary people. But let me try to explain what happened in US in an ordinary way....
Here is the story :
Since before 1925, in United States of America there was Mortgage Bill. Which mean some kind of Home Owning Credit. Every US citizens, as long as they qualified, could get mortgage.
For example, if someone has income about US$ 10.000 annualy, he could take mortgage to buy a home with price about US$ 25.000. The monthly payment is cost low because mortgage have spread about 30 years with 6 percent rate per year.
When every people have their own home, it supposed to be there aren’t company that sell home anymore. Right ? But, because a company has to keep growing, there must be a way that keep people buy a home. If the person already have a home, then the cat or the car must a home too.
If there noone buy houses, then how is a company could grow bigger? How is the home equipment company grows? How could the bank grow ? Meanwhile, the doctrin is a company must grow bigger!
There was a new way. US Government who made that way. In 1980, the government made a decision which called “ Monetery Control Deregulation “. The point is real estate company could use rate variable in manner of home credit. Meaning : company allowed to take supplementary rate over usual rate that had been approved. This regulation rules two year later.
This is big opportunity for many sector : real esate, banking, insurance, broker, underwriter and so on. Banking industry is the one who take this opportunity greatly.
With ‘the new way’ in 1980, there was an opportunity to raise bank rate. Bussines that connected to house again become grows. Banks could have supplementary rate. Banks become more aggressive. Also the brokers and other connected bussines.
But, because every people already had house, there was still a barrier. So, there was ‘another new way’ that made by the government 6 years later. Which was in 1986.
In 1986, US Government launched tax reform. Which consist : house buyers get “holiday tax” . That ’holiday tax’ also given for people who buy the second or the third home. Meaning : even you already have a house, you could buy another house and will get that facility.
With that facility, home bussines grows faster and faster for the next 14 year. Credit which called mortgage usually only US$ 150 billion per year, suddenly become twice on the next year and grow faster in another next years. In 2004, it almost USS 700 billion per year.
Then, what is the connection with the bankcrupcy of investmen bank like Lehman Brothers ?
Home bussines euphoria beetwen 1990 to 2004, not only because that tax facility. That facility seen by ‘financial bussinesman’ as an advantage to make their company bigger and gain profit.
Citizens keep teasing by many kind of advertising and facility of mortgage. Home prices and land keep growing overcoming bank rates.
US citizens buy another house, even they already have house. People who is under qualified also could get credit with hopes that house price will keep grow. Even someday the house creditor could not pay the credit, the bank still have profit. So, there aren’t word “affaraid” about giving a house credit.
But, isn’t it the banks have tight limitation as ruled in Banking Bill ?
Once more, bussinesman always have a way out.
The way out is this : Bank can make a joint venture with ‘other kind of bank’, which called investment banking.
Is investment banking similar with bank?
NO. Invesment banking is financial company that only looklike a bank. Investmen bangking not ruled by banking regulation. They could do a lot of thing : receive deposite from money owners, loan money, buy company, buy stocks, membeli house, sell house, private placemen, and anything that people could do. Evenmore, do that people could ever think of ! Lehman Brothers, Bear Stern dan much more are that kind of investment bank.
With that “freedom”, investment banking could become more aggressive. They could give a loan without any limitation. Buy company and sell it in any time they want to. If they have not enough money, they could have loan from anyone or anything : to other bank or investment banking or to rich people that called “personal banking”.
I often meet people from investment banking that offered me a lot of facility. If I put my money there, I will receive better rate (with very complicated calculation that usually I couldn’t understand!!).
Now, I know. Basicly they are not offering you facility, but find loans to make cash-flow !!
With aggressively the investment banking encourage people who is under cualified (sub-prime) to get mortgage.
In US, everyone has rating. The rating calculated from income and lifestyle (cost of life). People who called ‘prime’ are people who have rating 600 up.
If one have reached 600, then he could have a home through mortgage. If one didn’t reach 600, he must make an effort to get 600. Maybe by raising income or lower cost of life.
BUT, because a company has to grow and gain profit. So the market has to grow too. People who has rating 500 is offered by company to get mortgage. Well, if that people fail to pay, the house still can be taken by bank. After taken by the bank, the bank could sell the house on higher prices. Never tought of long term.
So, less than 10 years, fail to pay on mortgage grow extremely. There are a lot of house that taken by the bank. Houses that have to sell grows too. There are many people that sell their house, it make the house prices fell. It means the house prices is below the house credit value. Then it makes a lot of other fail to pay.
Bank or investment banking that gives loan has already give the house to other bank or investment bank as a guarantee and so on, and so on …….. One bank has fell, its pull other bank to fell too. Domino Effect.
How many house that include in mortgage ? There was no data yet. There is only data about the value. It’s about US$ 5.000.000.000.000.
So, if President Bush is planning to give US$ 700 billion, it is questionable : what if that money could not resolve the problem ? Should the US government give another USS 700 billon ? and again and again ?
It was the question from US Representatives, so they didn’t agree with that government plan. Just for information that money is as much as Indonesia GDP.
So, we still have to wait what will the US government and people do.
Singapura and Hongkong affected deeply because those countries has become centre of the operation giant global fincancial institution. Meanwhile, China will affected because of the decrease of US people ability to buy, it means there will a massive product of China that cannot be export to US. Where will the product go ?
Can you imagine that ?
