Financial Crisis on Wall Street

By Chris Rytting   

Few people, especially high school students, know much about the current sub-prime mortgage crisis. Although the crisis as a whole goes deeper than perhaps anyone comprehends, the basics are relatively easy to understand. 

A sub-prime mortgage is a mortgage to a less than ideal client. Deregulation led to lower credit standards, so banks gave mortgages to very risky clients in the interest of profit. The rapidly improving housing market gave banks the idea to give out sub-prime mortgages en masse. While borrowers attempted to make their house payments, the houses would continue to rack up value. 

The banks depended on borrowers to either pay back the mortgage completely, or even better: The borrowers would have to default.

To explain what happened, let's consider a hypothetical example. A borrower takes out a 100 thousand dollar mortgage. Over the course of three years, the borrower would pay 30 thousand dollars towards the mortgage. If the borrower then defaults, the bank would then have the 30 thousand dollars that the borrower paid and also the house, which has become worth 200 thousand dollars because of rapidly increasing home values instead of the 100 thousand dollars it had been a year ago. When the banks sold the houses, they would have made 130 thousand dollars, making it well worth their time.

But if the housing market starts to decline, then the bank forecloses, and instead of the house doubling in price, it would decrease by half and the 30 thousand dollars combined with the 50 thousand that the house was now worth would add up to 80 thousand dollars, 20 thousand less than the 100 thousand that the banks invested originally.

Now back to reality. As a result of the housing market slump, foreclosure on properties went up to 1.3 million in 2007, 79 percent higher than 2006. The banks who lent money to these high risk customers have reported losses of approximately 435 billion dollars as of July 17 this year. 

Because of these events, the federal government has passed a plan that calls for 700 billion dollars of national funds to aid the recuperation of banks. "The private market has screwed itself up," said Democratic Representative Barney Frank (Massachusetts), "and they need the government to come help them unscrew it." Most citizens find it unjust to fund greedy business practices so willingly. 

    Already sour attitudes towards the bailout have since worsened because of the lack of results of the bailout and the effect it has had on main street, namely valuable tax funds supporting this gimp of a plan.

The scariest aspect of the financial crisis and this bailout is the very real possibility of foreign nations ceasing to buy up the United States' national debt, which now sums up to approximately 10 trillion dollars. 

Unfortunately, the bailout has so far proved to be, for the most part, a poor decision as the Dow Jones Industrial Average has sunken far below 10 thousand points for the first time in four years and the decline rate has been faster than ever. On the other hand, the stocks have recently improved at a relatively decent rate. Said democratic Senator Chris Dodd (Connecticut), "This proposal is stunning and unprecedented in its scope and lack of detail, I might add. It would allow the secretary of the Treasury to intervene in our economy by purchasing at least $700 billion of toxic assets. It would allow the secretary to hold onto those assets for years and to pay millions of dollars to hand-picked firms to manage those assets. It would do nothing, in my view, to help a single family save a home, at least not up front."

But most people are asking, how close will this hit to home? Uncomfortably close, in fact. Just a few minutes' drive from THS, The Music School has closed down because of this financial crisis. Because of inability to cover costs solely with revenue, The Music School has long depended on financial benefactors headquartered in Salt Lake City. However, the circumstances have forced the financial companies that The Music School has long relied upon to cease funding.

The nation's financial status is very unstable, and no one knows how far down this crisis will drag us as a nation. It remains to be seen how many institutions will be forced to close, or how many people will have to default. At least one of us is optimistic about the crisis. In the words of President George W. Bush, "We can solve this crisis, and we will."