Warning: The reader will note this is a rather lengthy entry. Your author will attempt his best at explaining the truth behind sub prime lending, the borrowers, the origination and impact that should be felt in our economy.

By now the cat is out of the bag and bad lending practices are causing nervous jitters in our equity markets. What began as a predictable slowdown in the real estate market has spilled over to the sub prime lending market. It should have never gotten this far. In fact the very existence of a sub prime market is an anomaly

Before the advent of sub prime lending, their customers were relegated to pawn shops and loan sharks. At one time this same customer base would have been sentenced to debtor’s prison if they were unable to meet their obligations. These customers, after all, had been deemed a credit risk.

Trees don’t grow forever said a wise person and the same thought can be applied to any market. Real estate, stocks, bonds or cattle futures will not continue to appreciate to infinity. Despite this always being the case a group usually tied to the big media machine feel they can redefine this principle. What ultimately and always happens is a massive sell off, which is often described as a ‘crash’. It really isn’t a crash in the clinical sense as the market crash of 1929 but rather proof of the consequences when supply and demand fail to meet equilibrium. In the case of 1929 banks became insolvent and there were no monies to purchase anything much less stocks or bonds.

During the Clinton Administration the US Treasury decided to buy back and retire the 30 year Treasury Bond. While this sounds great, since in essence it gives the impression that the national debt is being paid down, it produces liquidity. The government is buying back and the previous holders are left with money. Then as we know the Federal Reserve lowered borrowing rates to a historically low level.

What would result was an ample supply of cheap money.

On the fundamental side the US dollar suffers from a national debt and trade deficit. Despite the Fed’s claim that inflation is ‘in check’ your author argues that if they said what was apparent that a massive sell off in both the equity and bond markets would occur. Your author believes that inflation does certainly exist and it is much higher than the Fed’s claims. Your author cites the run up in commodity prices, most notably gold, silver and oil. Major currencies such as the Canadian dollar, Japanese yen, the British pound sterling and the EU euro have all appreciated against the dollar. Additionally real estate carries little in distinguishing characteristics and that too can be considered a commodity. Appreciation in commodity prices has always been a sign of a weak home currency. The message sent by their appreciation is that investors are seeking a storage for value.

Now as we all know the big media machine has given scant commentary of the American economy, despite the low unemployment rate and continual annual GDP growth of 3%. However they have now decided to jump on the implosion of the sub prime market as it relates to the underwriters and borrowers. The finance companies are referred to as practicing ‘predatory lending’ and the borrowers as ‘victims’.

First the word victim is tossed around way too often in the bias media machine that we need to pull up the definition. Stated by Webster’s Dictionary:

One that is subjected to oppression, hardship, or mistreatment.

Nowhere does Webster state that customers lacking the means of repayment or possessing a poor credit history while attempting to live beyond their means are considered to be victims.

However last year repayment or living beyond your means did not concern Reverend Jesse Jackson, who is described as a civil rights activist by the press. Jackson, founder of the Rainbow/PUSH Coalition, claimed that America’s minorities remained an untapped market and were swimming under the current of economic prosperity. Apparently Jackson wasn’t informed when the US Census released data that showed the growth of minority owned business grew at its highest rate for the past 10 years. Nevertheless in October 2006 Jackson opened up the Small Business Institute. He felt more could be done and called on the American financial industry to facilitate micro credit lending. This is a tool used to jumpstart local economies in developing nations. The typical loan usually totals less than $3,000.

In many ways sub prime lending is similar to micro-credit lending the exception being a house is often used as collateral. The common thread is the risk bore by the lender is indeed greater than usual.

Now that sub prime mortgages are defaulting at alarming but not surprising rates, home foreclosures jumped 12% in February, interesting questions are starting to rise. The first being the credit standards, items such as 100% loan to value ratios, not considering the future impact when rates change and the borrower’s personal credit history.

What sub prime lending did was create an illusion that it was acceptable to live beyond one’s means. Many of the homes purchased through this type of lending were north of $400,000 in appraised values and over 1,000 in square footage. The borrowers could barely make their monthly payment. Remember reader no one held a gun to their head and forced them to sign the mortgage.

Now that the real estate market has slowed down and in some regions halted to a grinding stop, rates have increased and repayment is uncertain. This is a simple lesson in basic economics.

Where is the good Reverend now? Well recently he gathered a flock at the University of Chicago’s Gleacher Center to call for action. No not better credit policies or user greater scrutiny when reviewing one’s credit history but rather mass protesting to prevent more foreclosures. Jackson is showing his typical leftism by wanting the federal government to step in and provide a bail out package. He doesn’t understand basic economics and therefore should not be involved in the micro-credit lending or any other type of financing for that matter. He and others like him are attempting to rewrite the American dream and substituting hard work and self-reliance for being owed something for nothing.

Readers, tools of the American Left, such as Jackson and his coalition, should never be allowed access to the free market system. They themselves are already too far gone with a saturating sense of entitlement and lack of personal responsibility. If anything their involvement in the ebb and flow would bankrupt such an entity. The author advises the reader to analyze the sub prime meltdown and ask themselves should they be responsible for the poor decisions made by others.