It has been calculated – I would prefer to use the word estimated, that in the 18 months to June 2009, one third of the world’s wealth disappeared.
When I say wealth, much of that wealth was really only perceived wealth. I well recall visiting folk in America. They were in their 60’s, had a nice home, a car and what the yanks call a truck and a RV (motor home) parked up their drive. To the casual observer, this was the home of a reasonably well-off couple. Yet chatting to the fellow over a BBQ, he admitted that they had about 25% equity in the lot. Such was, and I emphasise was, the way of life of the average American.
Now in the States, especially in the industrial belt, the place is virtually in ruins. In Detroit, the home of the car industry, it is estimated that there are between 30 and 40 thousand homes that have simply been abandoned. The local authority is bankrupt. It will take decades for some of these industrial cities to recover and most of them will never recover to what they were.
So how did all this come about and I suppose if we boil it all down to its most simple level, there is only one word for it – greed.
Since the late 30’s in America, if you took out a mortgage and couldn’t service it, you could walk away from your home with nothing. The bank would then get what they could for the home but they couldn’t pursue for any shortfall.
Because you had walked away from a mortgage you were regarded as being sub-prime. No one would lend to you – you were committed to a life of renting.
Then the greedy boys said – “We can lend to these sub-prime people and charge them plenty. We can make a fortune.” And to get the punters in, they gave them very low interest rates for the first two years. As soon as the mortgage was written they flogged it off to a merchant bank which subsequently securitised it.
Of course when the true interest rates kicked in, the borrowers could not service their loans and so the sub-prime crisis began to snowball.
We moan and groan about rules and regulations here in New Zealand but I guess it is better than living in the Wild West.
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