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The corporate media tend to present everything that happens to our country as a series of unconnected events. However, real societies are not that atomized. Often, things that appear unrelated on the surface have huge impacts one or both ways.

An example of this involves the Bush tax cuts for the wealthy, the Iraq War and the sub-prime lending problems. To understand how the dots are connected, it helps to look at the main direct trigger of the defaults of so many of those loans.

People were given Adjustable Rate Mortgages (ARMs), which are admittedly dubious financial instruments, especially from the perspective of consumers. The initial rates of the loans were quite low at the time, but interest rates have gone up, increasing monthly payments for people when the loans are adjusted. Many of the homeowners just do not have the funds to pay the higher monthly payments.

The loan qualifications often were based on the lowest of the possible payments, not on potential higher payments later. This lending practice was based on at least two assumptions.

  1. Most people would have more available money by the time the monthly payments adjusted upward.

  2. If the loans defaulted, increasing housing prices would cover the amounts of the loans and often create windfall profits for the lenders.

The Bush tax cuts and the war in Iraq have played a role in undermining both. Both have cost the federal treasury enormous amounts of money. This in turn has led to major increases in federal borrowing. More federal borrowing creates upward pressure on interest rates in two ways.
  1. It increases the demand for credit without increasing the supply, increasing the price.

  2. It increases inflationary pressure, which pushes the Federal Reserve to hike interest rates.

Enlarging budget deficits has unpleasant economic consequences.

Increasing interest rates have driven some people out of the housing market, reducing housing prices, which means that foreclosures often do not cover the entire costs of the loans.

The Iraq war has had another unpleasant effect on the economy. It has resulted in a higher cost for petroleum. Rising oil prices increase interest rates, making monthly payments on ARMs higher. Rising oil prices lead to rising gasoline prices (plus higher prices on anything that is shipped or grown with petroleum products) which compete with larger house payments for peoples' economic resources.

In other words, the Bush tax cuts for the rich and the Iraq War have led to more defaults of the questionable loans by sub-prime lenders. That has helped to send the lenders into even more financial turmoil.

If you want to understand our economy, it pays to connect the dots.



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