Who is to Blame for the Mortgage Carnage and Coming Financial Disaster?

[Barrett808]

Who is to Blame for the Mortgage Carnage and Coming Financial Disaster? Unregulated Free Market Fundamentalism Zealotry
Nouriel Roubini | Mar 19, 2007

The sub-prime and overall mortgage carnage is now likely to lead to a financial crisis whose cleanup and bailout costs will make the S&L bailout bill look like spare change. We are only at the beginning of this fallout but, already, several proposals and bills in Congress have been submitted to help millions of sub-prime homeowners on the verge of bankruptcy and foreclosure. The prospect of millions of homeowners thrown homeless on the street is already shaking politicians of every stripe. The relatively modest bailout envisaged by the first bills currently proposed in Congress will mushroom into a much bigger fiscal bailout of homeowners, borrowers and lenders once the garbage of sub-prime, near-prime and pseudo-prime toxic waste spreads around the economy and likely leads to a hard landing recession that will cause a much bigger financial and banking crisis.

Given the fallout and real, social and financial costs of this disaster the political blame game will soon start. So it is important to make sure that the self-serving spin game that accompanied the game of those who happily ignored since last summer the looming housing, mortgage and economic mess will not be repeated again. Powerful political and financial interests will spin their self-serving ideological spin on who is to blame for this mess. Specifically be ready for a cabal of supply side voodoo ideologues - from the Wall Street Journal editorial page (and its invited op-ed writers) to hacks (calling them economists would be an insult to my profession) such as Arthur Laffer, Steve Hanke and other assorted voodoo religion priests - to start spinning a tale blaming government regulation and interference for this disaster that has instead its core in the lack of sensible government regulation, not the existence of such regulation. In the meanwhile powerful financial interests that repeat the mantra – or better the proof-less dogma - of unregulated free markets and do not like any – even sensible – supervision and regulation of the financial system will happily blame government action – rather than their own reckless greed and stupidity - for this disaster while happily demanding and receiving billions in bailout funds from the same government that they so happily disdain. This will be the most appalling form of corporate welfare: privatize the profits in good times and socialize the losses in bad times.

This fairy tale spun by free market supply side voodoo fundamentalism zealots will blame the otherwise appropriate current Congressional action on predatory lending for being one of the main causes of the credit crunch that will lead to a painful recession (as the WSJ editorial page recently claimed) while forgetting that predatory lending practices developed by free unregulated markets created the toxic waste that is subprime and near-prime mortgages.. This voodoo religion cabal will also incorrectly blame regulators – whose true blame was being asleep at the wheel for six years while being drugged by a philosophy of “laissez-faire” non-interference with free markets while this free market garbage was being originated – for now finally starting to crack down on monstrous “free market” practices such as zero downpayments on mortgages or NINJA (No Income, No Jobs and Assets) loans; this cabal will thus now blame regulators for “destroying” the sub-prime and near-prime mortgage market with their intervention into “self-regulating free markets”. The same voodoo economics religion priests has and will incorrectly blame the “easy” Fed monetary policy – rather than the lack of any sensible regulation of credit and mortgage market lending – for creating the housing bubble and letting it fester for too long. It will also incorrectly blame the GSEs for creating “moral hazard” via guarantees of mortgages and thus causing this mess when, instead, the GSEs largely got out of the subprime business in the last few years - and let the free market flourish to originate this toxic waste – when politicians and policy makers started to bash the GSEs for their “excessive” role in the mortgage market.

Since a lot of nonsense and financially self-interested ideological spin will be written and said in the months and years to come it is important – from the beginning – to be clear about who is at fault for this utter housing and financial disaster. The answer is clear: the blame lies with free market zealot and fanatics and voodoo economics ideologues who captured US economic policy in the last six years in the same way in which a bunch of neo-cons high-jacked US foreign policy to bring “democracy” to the Middle East while instead leading the country into the Iraq and Mid-East quagmire and now disaster.

According to these ideologues – listen for example Larry Kudlow extolling every evening on CNBC the virtue of unregulated wild-west cowboy capitalism - government is always utter evil and the economy could never have a financial or economic crisis if taxes are low, government spending is minimal and government intervention and regulation of the economy and of financial systems is inexistent. This nonsense about bubbles, financial crises and recessions being impossible unless the government over-regulates the economy and/or makes monetary policy mistakes is the main religious dogma of this cabal, an axis of ideological zealotry that goes from the WSJ editorial page to a gang of voodoo economic hacks and to some segments of the financial television.

The truth is the contrary: unregulated free market capitalism that has no sensible rules, regulation and supervision and sensible countercyclical monetary and fiscal policies of financial markets leads to credit and asset bubbles, financial excesses and economic and financial crashes. Economic and financial booms and busts were much more severe in the US in the 19th century when there was no central bank and no welfare state fiscal actor trying to fine tune the economic business cycle. And business cycle swings have become less frequent since Keynesian countercyclical use of monetary and fiscal policy has been introduced from the Great Depression on.

The reality of the last three US recessions – the 1990 recession, the 2001 recession and the coming 2007-2007 – is that each of these recessions started when the government stopped regulating and supervising in moderate and sensible ways financial institutions and allowed credit and financial and investment bubbles to rise and fester until they ended up in bursting bubbles and leading to recessions.

(more)

http://www.rgemonitor.com/blog/roubini/184125

[no_hypocrisy]

1. A lot of blame to go around with much carnage across the board.

1. Exploitation of a valid desire to own a home by mortgagors who don't have the means to afford the debt. Not only were they put in a place where they may not be able to keep their home, but if they can, then they still won't have any equity in their home for years as they will be paying interest for a good long time.

2. While the price of real estate was ever increasing, the borrowers were encouraged to refinance in order to give them the cash that a bank would not have otherwise given them given their credit history. This money went to fixing up the home with home improvements, furniture, home appliances, etc. or just disposable cash to just buy stuff, if not use the money to pay existing personal debt (robbing Peter to pay Paul). Giving money that appeared to be "free" (with almost no obligations) to people who just didn't have the ability to afford what they bought was/is a recipe for potential default. With job security being a thing of the past, with both husbands and wives working and still not getting by, with property taxes increasing 10 percent (at least) every year, without federal income tax relief, where's the money supposed to come from? And with adjustable rate mortgages, the premiums can increase all of a sudden with the next month coming. If you are late or miss a payment, it goes up, sometimes A LOT. Rates will go up if the Federal Reserve Board increases lending rates. Etc. Etc.

2A. Since this national economy is fueled by consumerism rather than manufacturing, then it was seen as good for the economy to get more money in the hands of Americans to spend to keep the economy floating. Now the consumers can't get the money from their houses by refinancing, and the goods and services are not being purchased in the same way as even a year ago. Plus with inflation of the price of goods and services, more reason why people aren't spending.

3. Banks made commissions the more mortgages they contracted. Regardless of the risk. That would be someone else's problem. Now they are ALL of our problem with "trickle-down" economics.

4. The true price of real estate, which made it near impossible for people to qualify for fixed rate mortages was inflated due to the market. With land being bought for the sake of flipping to make a profit, the price of other properties rose with each purchase and sale, making it unaffordable and higher than the base price would have been without the participation of the "players" who invested. The adjustable rate mortgagors MIGHT have qualified for more secure loans had the price of property been lower.

[Igel]

6. I'd add a fifth.

And that's the people that took out the mortages. My wife and I could buy a house tomorrow; the real estate folk say we could afford it and have a nifty analysis showing how it's so. But I can read and understand what they say, I can ask questions, and I know that if we did what they said e could we'd likely be in financial hot water in a few years. I'm not going to let our wants trump our reason.

[no_hypocrisy]

7. Yes, and that's why I believe the unfortunate mortgagors were pegged

as unlikely to ask questions, to do the math. I still equate this situation with trying to avoid a sale with a used car salesman. They throw everything out at you to get that sale.

My friend was taken in for a home equity loan this way with an adjustable rate. The bank told him that he could afford the $40,000 payment with interest. On the day of closing, my friend found 1/3 of the money gone, paid to satisfy outstanding judgments that he didn't ask would be addressed with the money. Granted, he should have known about the judgments being a problem, but he didn't equate a home equity loan as another form of mortgage where the new mortgagee won't have anyone ahead of them as far as priority in payment. He is now waking up to the fact that if he misses payments, he may lose his house. On his behalf, he tried to ask some questions, but was given an attitude of "This is the safest kind of loan you can take out. What else do you want to know?"

[ktowntennesseedem]

2. It's Bill Clinton's fault, DUH!!!

:sarcasm:

[bullimiami]

3. greed and lack of regulation.

[Double T]

4. corporate america, wall street traitors, wall street enabler investors..............

cnbc wall street propaganda network and the corporate psychopaths of bushco.

[fed-up]

5. don't forget the $250K tax free profit-created lots of investors-drove up prices

added to people trying to get out of credit card debt (sometimes triggered by unscrupulous credit card companies flooding vulnerable people with tons of unsolicited "free checks")

lack of universal, single payer national health care plan which meant high medical costs which were sometimes paid by credit cards

change in bankruptcy laws forcing people to find other means to pay off above credit card debt

predatory lenders encouraging people to lie on loan applications (happened to me, as I was trying to do the "right thing" and refinance to pay off credit card debt that was run up when I was ill)

also loan agents that lied when initiating loans telling borrowers that said loan was a fixed rate loan up til the last minute-then raising the rate and telling borrower that loan was adjustable after two years (in my case I was petrified that I couldn't find another loan and so signed anyway with the plan to sell when the rate got reset-I was one of the lucky ones and did manage to sell my house in Nov right after it reset and buy down)

lack of regulation by the state and national government to give the appearance of a "robust" economy-who didn't care where/how people got the money to spend as long as they spent it and kept the economy rolling

governments happy about booming real estate market that drove up the price of houses which in turn increased taxes received by the government and make things look "peachy" on local levels

IN other words GREED all the way around-lenders making tons of money off initiating these loans, not giving a rat's ass what would happen to people when their loans reset

[3waygeek]

8. The last quoted paragraph...

The reality of the last three US recessions – the 1990 recession, the 2001 recession and the coming 2007-2007 – is that each of these recessions started when the government stopped regulating and supervising in moderate and sensible ways financial institutions and allowed credit and financial and investment bubbles to rise and fester until they ended up in bursting bubbles and leading to recessions.

is to me the most significant, and a very good argument for voting Democratic.

[Barrett808]

9. Word. n/t