I appreciate the article. But I guess I'm still a bit in the dark about the effects of this. I apologize for my ignorance, could someone here answer a few questions?

We bought our first home last august. It was a fixed rate loan, not an ARM, but we put no money down. We are making our payments fine, and so far our house has not gone down in value. Yet. I thought that this debacle was limited to the unfortunates who bought with ARMS. Am I wrong? If our house gets seriously devalued, are we, and everyone else, in deep sh**t too? Or is this something that generally affects the economy and starts the downturns that lead to layoffs?

I appreciate any help in understanding the impact of all this. I know it ain't just about me, but I worry when I see such panic on the front pages.

Is to give you a home equity loan on your existing home in order to have the down payment on your new home. But this is Salon so we have to blame The Man for all of this. People are children and can't be expected to act responsibly.

It may seem unlikely, but it's hitting the nail on the head:

http://solutionsforpostmodernliving.blogspot.com/2007/08/japanese-stocks-fell-sharply-friday.html

How much does a barrel of oil cost? $75. or so

Who was the first SEC chairman that Bush appointed in August 2001 ? Harvey Pitt, one time Enron lawyer

What Secretary of the Treasury got fired by Bush because he complained about too much government debt? Paul O'Neill

What sitting Vice-President refused to part with his 444,000 Halliburton stock options?Dick Cheney

And by the way, Halliburton is the largest government contractor in Iraq.

Remember the line out of this corrupt Administration:"Reagan proved that the size of government debt doesn't matter. "

Is there a pattern here ?

Thank You, Mr. Leonard, for an excellent article.

Derivatives belong to what should be called -- but never is -- the unreal economy, a place where speculators make bets about what will happen in the real economy

In an era with derivatives proliferating (and still unregulated) not to mention CMOs (collateralized mortgage obligations or "Toxic waste") and a market mostly leveraged on debt - no individual citizen - unless loaded with disposable income they can afford to lose, has any business playing the "Maul street" casino.

Let's also not forget these little items:

i) the markets are now 95% driven by "momentum investors" - huge monolithic, institutionalized consortiums like corporate-owned pension funds etc. They use computerized trading with "triggers" that can precipitate meltdowns in nanoseconds.

ii) As per a Financial Times report from three years ago, despite revised prospectuses (ostensibly with greater information) - the specific details of "red ink" on any company's blotter are still not disclosed. This means individual investors are still gambling with their hard-earned money - since they don't have ALL the info they need to make investment decisions. Let's also not forget the Bloomberg report (from Jan. 1997) on how large institutional investors were always given "heads ups" at least a day in advance of the small fry.

What this means is the small fry are expendable. In any bubble scenario their gains will be sacrificed first - even as they are plied with the degenerate, self -serving advice to "buy and hold", "stay the course", and "don't panic".

Hey - I "panicked" and pulled out of the Janus Worldwide fund in 1997. Glad I did, as the fund lost more than 33% in share value after that, which I wouldn't have recovered from years of working. Was I diversified? Yes, but only later did I find the bond "funds" I held, were laden with "toxic waste". So I pulled out of them too.

The honchos on the Street may call me "pedestrian" - but I am now in fixed income instruments exclusively. No, I will not be a millionaire by the time I retire. But, I will not have to work until I am 85 either - just to have more $$$ to feed to the scheisters and sharks on the "Street".

These socalled Mortgage derivatives do not represent a firewall. Recently some lawyers trying to assign blame have tried to go after the lenders who didn't make the necessary judgements about the borrowers credit rating. What seems to be occurring is a legal struggle about who owns this paper, and legal challenges to the path of foreclosure. It may take years in the legal system to decide who really owns these properties, which is the right to assume first access to the proceeds from the assets, but the legal problems could prevent a resolution any time soon. Blocking the distribution of these assets puts the financial companies involved in a dangerous position, being unable to sell these properties and clear their books, they could be forced to carry this bad paper for years. The Fed can audit the banks balance sheets on a case by case basis. They might be forced to turn a blind eye, but the same thing that happened in the Japanese deflation of the 90's would be the likely result. At the time arrogant Wall Streeters called the Japanese system Crony Capitalism. Right.

..., but where have they been all the time Wall Street was bleeding?

http://OsiSpeaks.com or http://OsiSpeaks.org

lesleyap--

you are not in trouble unless your home goes down in value and you try and sell it. Then you could take a loss. e.g.--if you paid 200,000 for your house and the value drops to 150,000, you will owe 50,000 to the bank minus whatever principal you have paid off. On the other hand, if you stay in your house for 5 to 10 years, it's unlikely you would lose money regardless of what the housing stock in your area does, because the overall trend in real estate is upward.

Regarding the economy, it's hard to say what the effect would be. Already financial areas outside the housing market have been affected, because easy credit affects more than homebuyers, but whether or not this will cause an all-out recession like 2002-2003 is anyone's guess.