Financial Crisis! 世界金融危機

As I am sure you are aware, unless you’ve been living in a cave or were born with a silver spoon, the world’s financial situation has become dire in the past few months. In listening to the news about this, at the beginning, the US referred to it first as an ‘economic slowdown’, then recently the terminology has changed to a ‘recession’. The next step down, which is much scarier, is ‘depression’ and has not been used except for one interview I recently listened to and probably will not be officially used by the government for this situation. Historically, there was period called ‘The Great Depression’ which began in the US and spread worldwide from 1929 to the late 1930s and early 40s. More and more people are hinting at this historic time and comparing the current situation to that very dark time in the US. But how did it all begin? What caused this current US meltdown that, in turn, caused a depressing economic tsunami in the world’s markets? Perhaps several months ago, you heard the expression ‘sub-prime mortgage’ and that this crisis in the US, caused the potential failure of some ‘debt restructuring’ institutions called Fannie & Freddie. These huge financial institutions are the foundation of the housing market in the US and the reason why many people were able to buy and own homes in the first place. Established in 1932, but federalized during the Great Depression in 1938 by Franklin Delano Roosevelt, the Federal National Mortgage Association (FNMA), but more commonly known as Fannie Mae, does not directly sell mortgages, but buys debt from banks so that these banks remain liquid and can continue to lend money and carry on regular banking business as usual. The other large mortgage consolidation institution is the Federal Home Loan Mortgage Corporation (FHLMC), or commonly called Freddie Mac, does basically the same as Fannie Mae. As of 2008 these two institutions owned or guaranteed about $6 trillion dollars’ (that’s 6,000,000,000,000) worth of mortgages in the US, or roughly half of the total mortgages in the US. The problems for these giant institutions surfaced in 2006, when creative new mortgage instruments, called Option ARMs (adjustable rate mortgages) were offered to the general homeowner. Originally created for large real estate companies or wealthy developers, these mortgages offered a flexible payment scale beginning with a very small monthly payment which would increase after a period of time. But for the original target buyers, this was not a problem because they usually paid off the balance very quickly as the property was turned around quickly and sold to another. For the general homeowner, however, the low-, even NO-money down option and initially low monthly payments was very attractive, but the fine print about the recalculation of the payments was not made clear by the lenders. As more people purchased these ARMs, instead of fixed rate mortgages, more risk was put into the system. After a period of low payments, the loan is recalculated based on the remaining principle, and a payment that was originally $1600 a month could jump as high as $2600 per month. This is where the system broke down. Homeowners were at their limit with the original $1600 payment, much less when it almost doubled. Add on top of that rising gas and food prices, and a shrinking economy, (read- fewer jobs and more layoffs) and a recipe for disaster has been created. When homeowners realized they couldn’t make their mortgage payments, the banks started foreclosing (the owners are evicted and the house is taken back by the bank, then auctioned off) on house after house. As houses on streets were vacated, and left in disrepair, the adjacent houses were also effected- their value dropped. Now a home that was purchased by the owner at $500,000 was now valued at only $400,000 or $350,000, for example; however the homeowner is still responsible for the original principle on the $500,000 loan. As values dropped, more and more homeowners decided to cut their losses and just walk away from their debt, leaving more and more homes vacant, and more problems for the banks. This is when the domino effect of the subprime mortgages caused bank after bank to fail and eventually making its way all the way back to the backers of all these defaulted loans: Freddie and Fannie. At this point, the government decided it had to rescue and take over these now private institutions. This is just one of the many different issues causing the current economic crisis. Hopefully, the world economy will recover quickly, which might give Taiwan a chance to recover as well.

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