Totally non-biking Q - about the economy!

[Eden]

So I'm hoping that some financial type (Mr. Silver?) can explain something to me....

So I understand the basics of why big investment banks are going down.... the sub-prime loan debacle, people repackaging and selling loans that were bad investments, etc. But my question is who got rich here???

Money can't just disappear so I'm wondering exactly where did it all go. Someone had to have made out in this whole scheme, but I'm having a hard time fathoming exactly who it was. The banks and investment firms are having problems, the homeowners certainly aren't coming out of this well off, homebuilders are not getting rich are they?? So who is it - who is at the top of this pyramid anyway?

[redrhodie]

I'm no expert-- but I sold my house at top price in 2006, which was right before housing prices began receding. I guess it's people like me, who bought low and sold high (I'm still not rich, though ;), it was a tiny house). I wasn't trying to play the market, just chance made me need to move right then. Jeez, I feel a little guilty, but it was pure luck.

I'm sure anyone in real estate (realtors, loan brokers, appraisers, lawyers) who got paid at the time of the transaction also made money.

[Eden]

That was one theory that my husband and I came up with - but it just seems like there couldn't possibly be enough of the little people making a bit of money to put a bunch huge investment banks in serious financial trouble could there? Maybe there could be.

Maybe I'm just expecting that some of the scammers have to have run away with the loot.... but I know that many of the middle men who were packaging the bad loans and reselling them were so leveraged themselves that even though they were making money hand over fist for a while, even they lost their shirts when the whole bubble collapsed. Maybe some were smart enough to get out before it happened.

I suppose I've been imagining is some unnoticed shadowy figure in the background counting the cash they made off of this whole mess and chuckling at the state that these big companies managed to get themselves into because they didn't do their homework....

Of course I was joking around and said to my husband that our government probably engineered the whole thing to get China to invest all their money and then crashed it all on purpose to bring the Chinese economy down.... I was totally joking, but he said that someone has already put forward that conspiracy theory.......

[Veronica]

The money was never really there.

The short answer is that the cost of borrowing money is supposed to be based on risk. If you are a low risk you pay less than somebody who is a high risk. As the value of mortgages moved through the financial system (see below), the risk was not being priced correctly. This means that investors at the far end of the process had not paid enough to cover the chance that their investments might go bad. Those investments are now going bad and investors now have to back fill their payments. They don't have enough reserves to do that and it is crushing some of them. Add to that the banks are looking at their reserves and getting worried, so they are not lending money cheaply anymore. This means that any company that lives on borrowed money (like an insurance company or poorly run investment firm) is at risk.

It started with the housing loans that people really couldn't afford. The loans get put into a pool bought by investment companies who issue bonds. The bonds would be paid back from the value of the pool of mortgages. The bonds get insured based on their risk rating. Some (many?) pools of these loans was rated by rating agencies as being good, but they were garbage. Since people were buying homes with no money down there was no reserve value in the house. The loans start to go bad. The overall value of the pool drops. Bond issuers need to pony up more money to insure the bonds. Money they do not have.

So, who owns these bonds? Banks, insurance companies, investment firms. All sorts of people indirectly. And that is why this is so bad.

NPR and This American Life did a great job of explaining it in their report A Giant Pool of Money (http://www.thislife.org/Radio_Episode.aspx?sched=1242). You can listen to the report at that link.

[redrhodie]

I'm totally out of my realm here...but I'm sure you're right. There are shadowy figures who made billions. The CEOs of Fanny and Freddie are walking away with a lot of loot. Nice!

Homeowners like me, who managed to not lose our shirts, are probably inconsequential compared to the big guys.

[jobob]

Thanks Veronica!

[gnat23]

NPR and This American Life did a great job of explaining it in their report A Giant Pool of Money (http://www.thislife.org/Radio_Episode.aspx?sched=1242). You can listen to the report at that link.

Seconded on this program. I caught it randomly on the radio on my way to the grocery store, and I just sat in the parking lot so I could listen to the rest of it. It's a great primer on how we got to where we are now.

-- gnat! (tho, not so much advice about how to how to get *out*)

[maillotpois]

Good answer, V. I doubt my economic book publisher father in law could have put it any more clearly.

[Bruno28]

I think this explains it pretty well.


http://www.youtube.com/watch?v=TD5JTPhBhJw

[Dogmama]

I heard some politicians blaming the banks for issuing home loans to people who could not afford them. Baloney. People need to be responsible for their own financial situation. Banks didn't force people into these houses.

Gawd, I sound like my parents! :eek:

I'm completely sympathetic to people who are having problems through no fault of their own. But, I see many people who couldn't afford the house, the SUV, the boat, etc., crying the blues. Just because the credit card company will lend you $10,000 doesn't mean you have to spend it. But many people do. (shaking head like dog getting water out of ears...)

[crazycanuck]

DM, I have to disagree. Banks will lend you the $$ no matter what. I blame the banks & folks who live beyond thier means.

An example, when we wanted to our bank would lend us $$$$$$$$$ & we thought..:eek: No freakin way, what would the re payments be like if interest rates went :eek:...

[Dogmama]

CC - I think we actually agree. Except I don't blame the banks - they're out to make money. People need to be responsible consumers.

My Visa has a $27,000 limit. No way would I charge that amount. I'd be paying on it for years. The goods I bought would be gone & I'd still be making payments. Bah!

BUT, if not Visa, Mastercard, AMEX, etc. would lend that same amount.

[bmccasland]

I think it's a bit of both. Some folks a gullible, then there's the "must have new toys" mindset. There's a hard sell for stuff, help to buy new homes, etc. We're now a few generations away from those that were adults during the Depression, and I think those lessons are mostly forgotten. I could be wrong, but most stores would much rather you buy on credit than use lay-away.

I remember buying a house in the 90's and being pushed to get a "3,2,1 buy down" type loan. What stuck in my mind was that I'd owe more money at the end of 3 years than on day 1. I thought that was pretty stupid, and got a conventional loan. Did that stop the sales rep for the development, NOOOO.
"You'll be able to furnish your new house, decorate... Have it all now, don't wait! Refinance in 3 years!"
No thank you, I'll be conservative now, and not hate you in 3 years.

I could hear my Grandmother saying "make do or do without" "waste not, want not"

[Aggie_Ama]

The housing loans thing was a joke. When we applied we were approved for the largest house in our selected neighborhood- $20,000 more than ours. We bought the second smallest. We couldn't figure out why we needed a house 1,000 sq ft bigger than one we already wouldn't completely furnish. Plus we didn't want a mortgage $200 higher a month. Our house is too big at 1,600 square foot for us and two dogs, we don't ever use the guest bedroom. What would be do with with a 2,900 sq ft house with another bedroom and a game room? :confused: We are feeling kind of smart as our neighbors complain about not having money to re-do things around their houses they want to do. The houses on either side of us are bigger than ours and higher mortgages.

[TahoeDirtGirl]

I agree with you on the wanting the bigger and better and now...uh oh...how do you pay for it??

I'm now in the market for a house on the east coast (I can't believe I'm saying this!) and I'm watching the prices finally become "realistic" again. I'm sorry, I'm not paying 300K for a 2 bed 1 bath 1000 sq ft house in a suburban town with NO GARAGE? Back in the 90s Calif went through the same thing. The bubble burst. But I think here more than just one bubble burst, the whole interest only loan and just overspending in general.

I talked to an agent and when I say I don't want to pay over X dollars, I mean X dollars. She starts sending me ones that are 50K above. I'm hoping she thinks I can get it for X dollars because I'm not paying X+50!

I have seen some huge houses in Tahoe that are 5,000 sq ft. HUH?! And only two people live there. And only part time. I have no idea what they do with all that room, but you have to clean it and furnish and that's where I say...no thanks!

[tulip]

I'm so glad I bought my little house at the end of July. My mortgage payment is $400 less than my rent was. BUT, I still don't have a kitchen (made the house very reasonable). I have some cash and my parents have some to contribute, but now each of our nest eggs has gone down considerably and I'm having to rethink my kitchen. It's not an optional remodel--there's nothing there except my 25 year old dorm fridge and an old microwave.

I interviewed three contractors--the high end guy was out before he even gave me an estimate. The low guy is a handyman and carpenter, but not a licensed GC, so I'm a little wary of how much work it will take (coordinating plumbers, electricians, etc.). The middle guy is a GC and his estimate was reasonable. I've decided to go with custom cabinets because according to those in the know, they aren't that much more than stock cabinets, which will have to be special ordered anyways. I'm not getting soapstone counters or SubZero appliances--just basic but quality small kitchen.

So now I'm thinking I should go with the handyman guy and just get a cheap-o kitchen in there. Ugh! My parents may not be able to help me much after all. My little nest egg is not enough to do the whole job.

And now I'm worried about my job and work--I'm a consultant who depends on state and federal funding programs for my clients. If the budget gets frozen, those programs might be frozen, too, and then there's no work.

What to do? Sleep on it? Go with the middle guy? Go with the handyman guy? I'm getting tired of microwave mac&cheese.

Thanks for the opportunity to rant a bit.

[Blueberry]

Go with the middle man. At least in NC, the handyman wouldn't legally be able to do the whole job. Can you scale down the middle guy job (i.e. hold off on upper level cabinets)? I'd wait a week (I know, the food sucks and you want to get it done), and see what happens. It's a sucky time to have to make a decision, and I think a little more info will help. Definitely sleep on it. It's the biggest drop in history - not the best time to make a decision. Of course, there's always the possibility it will get worse:(

CA

[redrhodie]

I'd also go with the middle guy, and I'd really, really research the cabinets. Have you looked at Ikea?

I'd also look at second hand appliance dealers, and on craigslist. Think about the people who are being foreclosed on. They're stripping everything out that they put in the house. That stuff has got to be out there.

Be creative. The library is your friend. I'm convinced you can make a great kitchen without a lot of money, without going el cheapo on the finishes. Look at salvage companies. Look at yard sales. Think outside the (Home Depot) box!

[tulip]

Thanks, y'all. I spoke to my parents and they can still help me out, although not as much as they originally had planned. That's okay. I'm meeting the middle guy on Wednesday with his cabinet guy to see what we can do.

Believe it or not, the super high-priced guy had Ikea cabinets in his estimate. I'm pretty disappointed with Ikea stuff. Cheap construction and thin, thin laminates that don't last. Looks good, but not for long. I recently found a super cool mid-century modern dresser at the local Salvation Army. I painted it and changed the hardware and now I have very cool dresser for not much $ at all!

There's a Sears outlet in my city and they have closeouts and discontinued models, as well as dent-and-scratch. I'll also look at salvage, although I don't want old appliances, although slightly used would be okay. There's a Habitat Shop nearby that I'm going to check out. I think I'll be okay with this.

Thanks again.

[jesvetmed]

No advice here,... just wanted to wish you luck with the project. It can be so challenging to keep projects like this on your budge -- stand your ground! Send pics as it comes along!
Jes

[Dogmama]

Your GC should built everything to code. That means getting permits. Pain, I know, but if you ever sell there is a possibility that the buyer could make you rip everything out & bring it up to code.

I have a friend who is an inspector & she sees awful stuff. So, especially in a kitchen, you want to make sure everything is good.

[bmccasland]

Go with a licensed contractor. And get a copy of the license. The handyman type may be good for odd stuff, but if you're doing plumbing and electrical, you're going to have to get a licensed guy to do the work. Or you can call a licensed plumber and licensed electrician (essentially you're the GC) to have them do that work and use you handyman to do the other stuff. Don't forget to get the necessary building permits. You'll have to arrange the inspections unless your plumber and electrician does it - getting the permit and arranging inspections is something a GC would take care of.

I'd LOVE to find is a GC that makes a living doing the small stuff like I had in NoCal. Most around here are still doing total house renovations.

[tulip]

Thanks everybody! I'm feeling much better about this today; yesterday was a momentary panic is all. Good advice to sleep on it, CA. The middle guy comes highly recommended from my real estate agent, and he has good references. He is licensed and the contract states that he takes care of pulling all the permits, and it states that he uses licensed subcontractors (electrical and plumbing). This is a fairly old house (1939) and there are some mechanical issues that need to be addressed properly, and I just don't have the know-how to be my own GC.

He is sensitive to my cost situation and is working with me to reduce costs where possible. Things like tiling and painting I will do, since I've done that before. The cabinet maker is also aware of cost, and so we're going to discuss how we can reduce costs on the cabinets. My style is very minimal and modern, so I won't go for all those moldings and extra stuff on the cabinets. The cabinet guy also uses certified wood and does not use formaldehyde stuff, which is important to me (and I'm willing to spend there). The counters will be either a recycled glass terrazzo or recycled paper--still deciding on that, but they are less than stone and greener, too. I'm also looking forward to learning about framing and plumbing (I've done some). I work from home so I'll be here throughout the renovation and I really want to learn more about it to become more self-sufficient in these things.

Between all this and the appliances at the outlet, I think I'll save some off the original estimate (which also included a new hot water heater which I have already replaced since the old one went kaput a few weeks ago).

I find myself today with a bit of a GI problem. I think my little dorm fridge isn't cooling my paltry collection of food properly. Time for action.

[sfa]

Tulip, for cabinets check the DIY warehouse stores for returned cabinets. People order cabinets and then either change their minds or don't have the money to complete the purchase and so their orders just sit in the stores until they are able to sell them at a fraction of their original cost. It probably isn't quite as steady a stream of returns now as it was a few years ago, but I know more than a few people who redid their kitchens this way.

Another possibility is to check homes in your area that are being foreclosed on. I know this sounds predatory, but people who are going to lose their homes will often strip them of anything that can be sold for cash, including kitchen cabinets and nearly new appliances.

Sarah

[Zen]

Have you looked into cement countertops?
I'm not advocating, just curious. I've just recently learned of them and am intrigued by the concept.

[tulip]

Since I have completely hijacked this thread, this'll be my last post on my renovation. Maybe I'll start a separate one. I apologize for the hijack.

That being said, I chose bamboo cabinets and counters made from recycled compressed paper (called Paperstone). The ball is rolling.

Best wishes for everyone's finances, health, and happiness.

[redrhodie]

Cool! Good luck with the kitchen!

[Eden]

Have you looked into cement countertops?
I'm not advocating, just curious. I've just recently learned of them and am intrigued by the concept.

We have concrete counters in our kitchen - I quite like them, but you do have to be careful with anything acidic. Terrazzo is cement with chips of glass and/or marble embedded, then ground flat.