The Washington Post started a new series today on how the mortgage crisis came about - the players, the game, the winners and the deadly results for the rest of us. On the surface, it's a charming story of standard American optimism, greed, and tunnel vision, but underneath it's even less attractive. Take away the authors' assumption that things sort of just, you know, happened, and what emerges is something that looks a lot like a conspiracy between the financial industry and the Bush Administration to extract bushels of $$$ from the economy using people who really didn't have any as bait.
To the great credit of reporters Alec Klein and Zachary Goldfarb, this first installment at least pulls few punches.
The aftershocks of the housing market's collapse still rumble through the economy, with unemployment rising, companies struggling to obtain financing and the stock market more than 10 percent below its peak last fall. The Federal Reserve has taken unprecedented action to stave off a recession, slashing interest rates and intervening to save a storied Wall Street investment bank. Congress and federal agencies have launched investigations into what happened: wrongdoing by mortgage brokers, lax lending standards by banks, failures by watchdogs.
Seen in the best possible light, the housing bubble that began inflating in the mid-1990s was "a great national experiment," as one prominent economist put it -- a way to harness the inventiveness of the capitalist system to give low-income families, minorities and immigrants a chance to own their homes. But it also is a classic story of boom, excess and bust, of homeowners, speculators and Wall Street dealmakers happy to ride the wave of easy money even though many knew a crash was inevitable.
(emphasis added)
"Even though many knew a crash was inevitable." I could quibble. They quote a mere loan officer at Pinnacle Financial as saying they all knew "it couldn't last", which isn't what they were telling their customers. IOW, the loan officer knew full well he was lying and that what they were doing was making as much $$$ as they could rake in before the law or the economy caught up with them. Did they also know it was illegal? If so, they clearly didn't care.
That was the mood in America that started with the Reagan Era and grew to monstrous proportions in the Bush Years. It didn't matter how you did it or who got hurt as long as you made money.
America has always been money-hungry and worshipful of the rich. That didn't start with Reagan. It's a feature of the country from its earliest beginnings, magnified in the 19th century (and today) by "economic" refugees who immigrated primarily to escape poverty. If they were successful, they praised the US as "the land of opportunity". If not, they hoped their kids would live out the success they had missed. I'll never forget the commercials USIA produced for domestic consumption in the 80's - a string of successful immigrant businessmen telling you how much money they'd made since they came to America as explanation for the tagline: "America is the greatest country in the world."
But prior to Reagan there was the feeling, not just among immigrants but in the general population, that our dedication to freedom was just as important a pull as the economic opportunity, in many cases far more so. That seems to have all but vanished in the Bush Years. The grasping conformity and conventionalism of Sinclair Lewis' dollar-driven Babbitt and the hunger to live the lifestyle of the rich and famous that drove Thodore Dreiser's Clyde Griffiths to murder in An American Tragedy seem almost moderate by comparison.
In the case of the crisis that may end by destroying the global economy, it all started reasonably.
In 1970, when demand for mortgage money threatened to outstrip supply, the government hit on a new idea for getting more money to borrowers: Buy the 30-year, fixed-rate mortgages from the thrifts, guarantee them against defaults, and pool thousands of the mortgages to be sold as a bond to investors, who would get a stream of payments from the homeowners. In turn, the thrifts would get immediate cash to lend to more home buyers.
Wall Street, which would broker the deals and collect fees, saw the pools of mortgages as a new opportunity for profit.
And they were. In fact, they were so successful for everyone concerned that banks and financial investors began lookimng around for a way to keep the good times rolling. When Reagan deregulated the banking industry, they had a golden opportunity and they grabbed it.
But the business did not get big until the 1980s. That was when the mortgage finance chief at the Salomon Brothers investment bank, Lewis Ranieri -- a Brooklyn-born college dropout who started in the company's mailroom -- and his competitor, Laurence Fink of First Boston, came up with a new idea with a mouthful of a name: the collateralized mortgage obligation, or CMO. The CMO sliced a pool of mortgages into sections, called "tranches," that would be sold separately to investors. Each tranche paid a different interest rate and had a different maturity date.
But that was very soon not enough either. The more "creative they got, the more money they'd make.
After a few years at First Boston, Zimmer eventually ended up at Prudential Securities on the tip of Manhattan near the World Trade Center, selling increasingly exotic securities based not only on mortgages but also credit card payments and automobile loans.
And that's when it all began to go dicey. The writers don't mention it (wonder why?) but before deregulation all these tricky schemes were illegal. Their close cousins having brought about the '29 Crash and the great Depression, banking regulations created by the first FDR admin were devised to prevent any such fever of wild speculation from happening again. But Reagan and the radical/corporate conservatives around him convinced the country that what happened before could never happen again and that the regulations were "stifling business growth". He dumped them.
If an FDR-style Democrat had been elected in '92, s/he might have put those regulations back in force since the cracks were showing even then. But we got Bill Clinton, a New Democrat. IOW, a moderate Republican who had a less steamy affair with money than the modern GOP but was nonetheless a corporate enabler of no mean skill. He had heavy ties to Wall Street and the banking business stayed de-regulated because that's the way they wanted it.
But, as the authors explain, just as the dot.com crash took the air out of investing and started to slow down those high-flying profits, George Bush and 9/11 gave them a whole new lease on life.
Then came the 2001 terrorist attacks, which brought down the twin towers, shut down the stock market for four days and plunged the economy into recession.
The government's efforts to counter the pain of that bust soon pumped air into the next bubble: housing. The Bush administration pushed two big tax cuts, and the Federal Reserve, led by Alan Greenspan, slashed interest rates to spur lending and spending.
Low rates kicked the housing market into high gear. Construction of new homes jumped 6 percent in 2002, and prices climbed. By that November, Greenspan noted the trend, telling a private meeting of Fed officials that "our extraordinary housing boom . . . financed by very large increases in mortgage debt, cannot continue indefinitely into the future," according to a transcript.
(emphasis added)
So they took steps to take care of that, yes? Well, no actually, not even Greenspan who kept the pedal to metal even though he knew perfectly well what the outcome would be. Under Bush's orders and Rove's thumb, the Republican Congress and the Fed worked together to keep the bubb;e alive until Bush was no longer president and a Democrat could take the blame while BushBuddies ran away with the cash.
And that's just the tip of the iceberg.
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