Financial Crisis
Confusion as a tactic becoming more common.
Have you noticed how an authority figure such as scientist, lawyer, banker, doctor or politician, tends to drift into technospeak on most issues these day? Have you also noticed that often you understand less at the end of the discussion than you did initially? Do you recognize that this technospeak is often just a tactic to cover up the speaker’s lack of understanding of the issue. And finally, do you recognize that this technospeak is often a tactic to purposely confuse us to hide the real self-serving purpose of the issue?
This current financial crisis is a classic example of technospeak. I am obviously using that term loosely as the discussion here is actually economic gooblygook.
Secretary Paulson is begging the government to provide $700 billion, billion with a b of taxpayer dollars. He wants this money to prop up some financial markets on Wall Street. Has anyone looked at the Wiki bio on Secretary Paulson. His career prior to the Treasury Department was Wall Street. Specifically one of the prime actors in this current crisis. It is estimated that Secretary Paulson has a net worth of $700 million. Has anyone asked him how much of that is in Goldman Sachs stock or investments? I assume because of his past position at Goldman Sachs in 2005 and 2006, that he had a significant stock position. What is it now?
I do not know the answer, but I suggest that it was liquidated when the stock and stock options were of real value. Why would he liquidate all of the GS assets? Perhaps he did it to separate himself from Wall Street influence as required by his new government position. I wonder why he did not just escrow his assets like most government employees in powerful positions?
I am assuming that Secretary Paulson bailed out of Wall Street. Perhaps I am incorrect. I believe that many of the Wall Street tycoons who have seen the stock in their companies plummet somehow sold out before the crashes over the past couple of years. Somehow they smelled something and bailed. Senator McCain and others brought legislation to committee to revamp the Fannie Mae and Freddie Mac operations in 2005, primarily to institute more oversight and regulation of their operations. This legislation was buried in committee and never came to a vote. Please note that both houses were controlled by the Democrats at that time.
OK, what am I getting at. I complain about transparency and then I am obtuse. Other posts will deal with types of mortgages, how a mortgages is approved and what happened.
What are these mortgages in this financial crisis?
To understand which types of mortgages are involved in the financial crisis, let’s have a look at what types are available. In simple English, here is a description of several types of mortgages…
1) Simple mortgage – no amortization:
An individual borrows $100,000 at fixed 5% per annum for 20 years. This loan is repaid as follows – First year Interest of $1250 would be paid April 1, July 1, October 1 and January 1 – Principal of $5000 would be paid every January 1. Each year the interest payment is 1.25% of the outstanding balance quarterly, the yearly balloon principal payment is 5% of the original balance, that is $5000. At the end of 20 years the debt is zero. There are two inconveniences with this type of mortgage. The first year contains the largest interest payments and largest total payment for the year. Secondly, the debtor must be disciplined enough to save $100 a week in an escrow account, so that $5000 is available for the principal payment due on January 1. Please note that the total of the interest and principal payments the first year is $10000. The second year is $9750. The third year is $9500. And so on until the last year which is $5250. The total money paid, interest and principal over 20 years is $152000. This is a simple mortgage and not popular in today’s ‘me now’ society.
2) Let’s compare it to the typical 20 year fixed 5% mortgage with amortized payments in today’s market. Monthly payments are fixed at $659.96. The total cost of the mortgage over 20 years is $158390.40.
3) Here’s the data for a typical 30 year fixed 5% mortgage with amortized payments in today’s market. Monthly payments are fixed at $536.82. The total cost of the mortgage over 30 years is $193255.20.
Accordingly, your reward for paying more per year early in the life of the simple mortgage contract will be $6390.40 when compared to an amortized 20 year deal. That is over 6% of the original loan amount. You must sacrifice some disposable income initially and you must establish some financial discipline. Again, your reward is over $6000. Moving on to the 30 year deal. The reward becomes $40755.20. That’s over 40% of the original loan amount!
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