Yes, our financial system is the root cause of the mess us regular guys and gals are in.

And, as we all know, they are getting bailed out with billions of dollars for their mistakes – by November 12, 2008, 20 financial institutions got $205 billion of the initial $350 billion in Trouble Asset Relief Program (TARP) welfare money.

But what about us regular guys and gals?

1. During the period, 2000-2003, the Federal Reserve Bank forced the federal funds interest rate way down, from 6.5% in 2000, to 1% in 2003, which they have the financial tools to do. This, by the way, is the rate the banks & the Federal Reserve charges for short-term funds they borrow from each other. This action drove all other interest rates, the ones we pay, down also

2. Banks & mortgage companies offered easy home mortgage loans to homeowners, even to those who would not normally qualify for such credit. Don’t we all want good housing? After all, interest rates were abnormally low, thanks to the Federal Reserve and commercial banks.

3. Many of these were the sub prime, option pay or ARM mortgage loans. I wonder who thought of, and created these financial monsters? Hmm, maybe the commercial and mortgage banks? So they held out the carrot, and lots of us ate it, and now we have baaad stomach aches.

4. Mortgage lenders package a bunch of mortgages together in a hugh package and sell the package to investors. These packages included both the sub prime mortgages and high quality ones, all mixed together in these jumbo financial packages.

5. Investors, primarily investment banks, commercial banks and pension funds, bought these collateral backed debt obligations, called (CDOs), for their interest return, of course. The collateral being our houses.

6. In late 2003, the Federal Reserve Bank started to raise interest rates, increasing them from the very low rate of 1% in mid 2003, to 5 ¼% by mid 2006. So all other interest rates, including mortgage rates, jumped up, also.

7. With an option pay mortgage, if a homeowner borrower pays the lowest payment offered on their monthly statement, the payment does not cover all the interest required to be paid. The non-paid portion of interest is added to principal, and the mortgage balance goes up each month, rather then declining as it does with a 30 year fixed mortgage.

8. Since interest rates were rising, and as option pay mortgages were “reset” according to the mortgage contract, the mortgage interest rate was higher, and applied to a higher mortgage balance, that led to higher payments, that in many cases were beyond the borrowers ability to pay.

9. In Mid 2006, housing prices peaked, stabilized, and then began a descent that continues as we speak, in part due to an oversupply of housing, and in part to rising home foreclosures related to the sub prime mortgages. The old Economics 101 supply and demand relationship. In some areas of the country the decline in housing values, today, is an unheard of 15% to 30%. Not a good thing.

10. Sub prime option pay Mortgage borrowers were now faced with homes they could not sell without losing money, and mortgage payments they could no longer afford.

11. So they walked away, the banks foreclosed, which costs the banks and mortgage companies big bucks, especially when the homes had to be sold by them at large losses.

12. This whole process which had its origins in late 2006, continued and accelerated through, 2007, 2008, and continues in 2009, with no end in sight.

There is much more that is going on here, but, so as not to cause sensory overload, the rest of the story is in the next installment of my Layman’s Primer.