The next 10 years.

This is from everything I've read/followed what has happened over the last decade - time may add more details/corrections/sarcasm.

- Tech boom/bust - economic downturn.
- Government issued lots of debt to the rest of the world to get cash.
- This cash was then lent out at low interest rates to banks.
- Since the stock market wasn't producing large enough gains for investors after the tech bust, the government promoted home ownership. People viewed this as the next great investment.
- Banks which could get lots of low interest cash from the government lent to consumers at low mortgage rates.
- Easier/cheaper mortgages led to increased demand for homes, which in turn raised home prices.

(Insert note here that average wages have been essentially flat since 2000)

- Given flat incomes, people reacted to the higher home prices by taking on more debt to buy a new home, or by taking out home equity lines of credit to take equity out of their investment to buy things or vacations or whatever (essentially re-buying their existing home at a higher amount).
- Banks saw huge gains in the 'value' of their mortgage portfolios, securitized them and started trading them on that speculative value.
- Long standing income ratios and documentation requirements for mortgages were relaxed so that the banks could get more mortgages to trade. (Which required more people to take on more debt to cover the resulting higher prices)

(Reminder that wages have been essentially flat since 2000)

- At some point (November 2007 by most accounts) this cycle snapped - people started defaulting on their mortgage debt since the interest payments alone in some cases were more than could be paid back.
- As these mortgages were foreclosed upon and resold at auction the value was less than that of the mortgage.
- The securities that contained these mortgages became less valuable as a result. Investment banks then rapidly stopped buying securitized mortgages.
- Since these securities couldn't be traded for a profit anymore, companies that had leveraged to buy them started failing...

- The government realized that some former-governmental entities such as Fannie Mae and Freddie Mac, along with the companies that insured them (AIG) and some companies with powerful lobbyists or people in the administration (Goldman Sachs) were involved in these trades as well and could fail.

- So, the answer, in the form of the bailout, was to attempt to 'fix' the prices of these mortgage securities at certain levels and have the government buy them from the 'too big to fail' companies.

- Simple economics has proved price-fixing impossible throughout history, the bailout money has since been basically given to the various companes without any assets in exchange so that as they encounter margin calls they can pay their losses on these securities.

(Important note here - the bailout is financed not with existing taxpayer money, but with more government debt - we as a country are taking out debt to pay for the losses on excessive debt held by our financial institutions and citizens)

- Now this bailout is being extended to any lending institution - auto loans, credit cards, so on.

What then is the incentive to play by the rules and live within your means? If there is a huge government safety net waiting if you default on your debt, why not buy the Lexus and a huge house...

There has to eventually be some huge unintended consequence of all this debt, now proxied to a national level... it's just a matter of what and when.

I thought at one point it might be currency valuation... US dollar losing serious value compared to other currencies, but it seems to some degree other countries made the same mistakes as the US so that's pretty stable for now.

What else could happen? Don't know... though it will be interesting when it happens I'm sure...

Update

So, it's been a month or so - what's been going on?

- The end of October was pretty quiet - went to a hockey game (local minor leagues team like the Charlotte Checkers - similar atmosphere too) - first event at Key arena - interesting building - too bad it is underutilized now.

- Peggle is a damn addictive game - simple entertainment - follow the bouncy ball - I think the physics model should include air resistance though.

- This weekend there are a couple of concerts I'm interested in - probably will only get to one of them though - Helio Sequence - should be an interesting show.

- Currently reading "On Food And Cooking" by Harold McGee - it's basically the next step in food-nerdiness after reading Alton Brown's "I'm Just Here for the Food (v2.0)" - gets into more of the history of different primary ingredients and what chemical reactions actually define 'cooking' of those ingredients. It's a bit of a textbook style approach, but still very well done and a good balance of entertaining and practical.

--------------- Nerd thoughts warning -----------------

- Ordered a single ended triode tube amplifier kit - should be interesting to see if I can still solder/read resistors

- As an aside to that - I have some sort of odd engineer's affliction... For the last 5 years I have been using a Sony ES amplifier - which worked great and was technically very nice - discrete power circuits per channel, very low distortion, so on... but I have always had this feeling that I was wasting it - it was a 5 channel amp with different sound environments and all kinds of other 'home theater-y' BS - I currently have 2 speakers, which are small - I didn't need all the technical overhead of the ES - so I put it on craigslist. So then I find a solution, which is more expensive, technically less sonically precise, and I have to put it together myself - just so that I will have a pure single input, stereo output, amplifier - there will be less 'waste' in the final application.

(Technically over time it will pay for itself in lower power usage as well, but that's beside the point)

It's an odd 'retro-technology' interest I have... mechanical watches, tube amplifiers, single speed bike...

All are 'old' - there are newer technological solutions which do more, more accurately (Quartz watches, solid state amplification, deraulliers). I guess I just don't like excess features... more for the sake of more... I'd rather apply modern engineering and manufacturing to old technology to get a solution that is accurate enough for everyday use and more, ah, human-understandable, than newer technology.

Perhaps modern life is more of a black box ( http://en.wikipedia.org/wiki/Black_box ) world though - the watch tells the time until the battery dies, then a new watch or battery is purchased. The 'stereo' makes music until a newer model with more 'power' or more features becomes available, so on.

For some odd reason I have to know the how/why of everything I use in normal life. And once you find out the how you see the questions arise - why does a watch have to have a battery - why do stereos have 7 channels when music is still only recorded in stereo (vast majority of music that is - however yes, some people watch lots more movies than I do) - why buy convenience food when it's possible to make something better tasting and healthier in less time... so on.

While I concede completely understanding any of these examples down to their minutiae is not practical either, it is a bit enlightening to at least open the boxes that one encounters in everyday life.