The sub-prime mortgage debacle has created a world-wide panic and resulted in havoc for individuals, banks, pension funds, endowment funds, and hedge funds. Way too many people were given loans on inflated properties, and often the loans were adjustable or had no down payment. When the properties fell in value or the interest rates were adjusted upward, borrowers could not pay the mortage payment and foreclosure proceedings began. Simultaneously, the value of sub-prime mortgage portfolios fell like a rock, hammering the markets. How could this happen? It happened because government failed us.
Some people believe that the free market should allow people to make stupid decisions such as taking out an adjustable mortgage on an inflated property, and that it should allow investors to buy portfolios of these junk mortgages. That's baloney. That's just like saying the free market should allow people to invest in Ponzi schemes if they want to. There are some kinds of transactions that government needs to control due to the potential harm to individuals and the overall economy, and these sub-prime mortgages certainly meet that criteria. In this case, government's failure to regulate these transactions has resulted in a financial Katrina that government is now frantically attempting to mitigate.
Every newspaper and financial program has been warning for the past two years that these sub-prime mortgages constitute a great risk. There have been many stories warning that the lax credit criteria, the adjustable rates, and the over-valued real estate could cause major problems if the housing market cooled or interest rates increased. Did congress have hearings about this? Did they investigate companies that were not disclosing the adjustable rates to buyers or informing them about the level of risk they were taking? No. Our government failed us, and this financial Katrina is impacting not just those involved in the mortgages but the economy as a whole. Government is supposed to have financial levees to prevent such events from occurring, but it did nothing.
There are many government agencies that could have raised the flag on this or put regulations in place to slow the pace of the sub-prime market. Certainly the executive branch, with the Treasury department and the FTC, had clout here. The congress also has several committees with related responsibilities. They all failed. Apparently those who were profiting from selling these properties and the related mortgages had enough political clout to keep government out of their knickers. So, now that all the cows are out of the barn and trampling the crops, government will punish a few major offenders and pass a few laws. Thanks a lot, you incompetents!
Yes, I do believe in free markets and limited government powers. However, the government's job is to protect the country as a whole from disasters. Just as we need protection from armed enemies, we also need protection from major financial meltdowns. This one was predictable, and we need to hang the failure to get ahead of it squarely on the politicians who didn't have the guts to take on the real estate and mortgage industries. This episode provides one more good reason to go to public financing of political campaigns rather than allowing the fat cats to buy freedom from oversight with their campaign contributions.
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6 comments:
I'm not sure I can totally go along with you on this one. The indicators have been there for much longer than the two years you mention and not just in the currently blame worthy sub prime market. LIBOR, if I've spelled it correctly and interest only loans whetted the borrowing public's appetite for the "cheap deal" that only extended the day of reckoning. That coupled with the mostly stupid real estate frenzy that's existed for the past decade or two made "us" a patsy, us, the borrowers, the lenders and the govenment, for the final idiocy of the current real estate bubble, the sub-prime. There's plenty of blame to go around.
Bill Maher put it pretty well on Larry King the other day:
"Yeah, let's give mortgages to people who don't have money."
And even if you didn't know about the sub-prime mortgage fiasco, one would thing that with the stock market making such dramatic gains, dramatic losses were eventually going to come along.
I think their whole business model was evil. Their plan was to make loans to poor people, up the interest rate, repossess their homes, then sell those homes at a nice profit.
Once again, the rich get richer by stepping on the backs of the poor. They deserved to have it blow up in their faces.
Unfortunately, I expect the government will bail them out soon, at taxpayer expense. If you're rich, you're not allowed to fail.
Good metaphor for a serious problem. What I can't figure out is what motivation a financial institution has for making high risk loans at below market rates. Is it purely short term thinking, i.e. make the quarterly statement look good, or is there something more subtle at work?
It would be kind to describe these sub-prime lenders as "financial institutions". I would characterize them as scam operations from the start.
The sub-prime lenders are corporations with stockholders and with capital providers like hedge funds who provide the money to make the loans. These investors are the people who stand to lose a lot when the sub-primes go belly up. Yet the executives and employees of the sub-primes, as well as the mortgage brokers who work with them, can make large, risk-free profits while the scam is working.
The scam requires the sub-primes to convince capital providers that they can make above-market returns with minimal risk, and to convince home buyers that they can handle mortgages with potentially devastating isterest rate escalators. They do this by convincing painting the most favorable picture of possible outcomes and playing on people's
natural tendency to trust. Unfortunately, there are many investors and common people who are gullible or greedy enough to say "yes" to a bad deal.
The outcome of all this was predictable. Investors and home buyers have lost their investments and their homes. The U.S. government has been forced to reduce interest rates, thereby impacting every U.S. taxpayer. And the initiators of this scam are moving to new jobs, fat with the cash they scammed from all of us.
The bottom line is that the market is not "free". If you pay taxes, you are funding the bailout. Proper government behavior would have been to prevent the relaxing of consumer credit in the first place, but our elected officials were too gutless to do it. So it goes...
"the government's job is to protect the country as a whole from disasters"
Can't say I agree with this one. The government cannot be responsible for averting natural disasters. It's a ridiculous notion.
Katrina happened and no government is gonna stop that. The aftermath is another thing and, lets be honest, nobody has plans or expectations of something that massive and far reaching.
Government was slow and bulky as always. But in this case, who wouldn't have been?
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