Friday, October 10, 2008

Economic 9-11?

First of all, in light of the ongoing global financial crisis, I have updated my sidebar by adding links to BusinessWeek and The Economist.

But, what about this crisis? What can we non-experts understand about it?

Wikipedia has this to say about the the ongoing global financial crisis:

The global financial crisis of September–October 2008 is a developing financial crisis with roots in the subprime mortgage crisis.

So, we go to Wikipedia's article on the subprime mortgage crisis:

The subprime mortgage crisis is an ongoing economic problem that became more apparent during 2007 and 2008, and is characterized by contracted liquidity in the global credit markets and banking system. The downturn in the U.S. housing market, risky lending and borrowing practices, and excessive individual and corporate debt levels have caused multiple adverse effects on the world economy. The crisis has passed through various stages, exposing pervasive weaknesses in the global financial system and regulatory framework.

The crisis began with the bursting of the United States housing bubble[1][2] and high default rates on "subprime" and adjustable rate mortgages (ARM), beginning in approximately 2005–2006. For a number of years prior to that, declining lending standards, an increase in loan incentives such as easy initial terms, and a long-term trend of rising housing prices had encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favorable terms. However, once interest rates began to rise and housing prices started to drop moderately in 2006–2007 in many parts of the U.S., refinancing became more difficult. Defaults and foreclosure activity increased dramatically as easy initial terms expired, home prices failed to go up as anticipated, and ARM interest rates reset higher. Foreclosures accelerated in the United States in late 2006 and triggered a global financial crisis through 2007 and 2008. During 2007, nearly 1.3 million U.S. housing properties were subject to foreclosure activity, up 79% from 2006.[3]

So, this whole mess grew because of "declining lending standards" that led to loans being made to people who should not have qualified.

Farther down, we see some details:

The Center for Responsible Lending, in its report on IndyMac, related testimony that the bank actually made efforts to avoid having income information about some borrowers.[44] The Associated Press has reported that a federal grand jury is investigating subprime lenders Countrywide Financial Corp., New Century Financial Corp. and IndyMac Bancorp Inc. and reports also that the FBI is investigating IndyMac for possible fraud.[45] The question, then, is whether banks and other private mortgage originators of subprime and other "nonprime" loans might deliberately have profited or attempted to profit - in moneys, economic benefit or even fraudulent gain - through reducing the amount of information they collected from borrowers.

Notice that last sentence: "The question, then, is whether banks and other private mortgage originators of subprime and other 'nonprime' loans might deliberately have profited or attempted to profit - in moneys, economic benefit or even fraudulent gain - through reducing the amount of information they collected from borrowers."

Judge Leslie Tchaikovsky of the U.S. Bankruptcy Court for the Northern District of California, found on 25 May 2008 that even though a pair of borrowers had, indeed, misrepresented their incomes on a "stated income" home equity loan, National City Bank's "reliance" on these statements of income "was not reasonable based on an objective standard".[46]

The banking industry provided home loans to undocumented immigrants, viewing it as an untapped resource for growing their own revenue stream.[47][48] Pro-immigrant expert Tim Ready at the University of Notre Dame argued that "It's really important to the economy as a whole and to the real estate market in particular that Latinos be able to purchase a home."[49] Banks, including some major institutions, offered home-mortgage loans to people who don't have Social Security numbers.[50]

But, who is supposed to police these banks?

In Wikipedia's article on the Federal Reserve System, we find the following excerpt from TITLE 12 > CHAPTER 3 > SUBCHAPTER VII > § 301 of the US Code: 301. Powers and duties of board of directors; suspension of member bank for undue use of bank credit:

Each Federal reserve bank shall keep itself informed of the general character and amount of the loans and investments of its member banks with a view to ascertaining whether undue use is being made of bank credit for the speculative carrying of or trading in securities, real estate, or commodities, or for any other purpose inconsistent with the maintenance of sound credit conditions; and, in determining whether to grant or refuse advances, rediscounts, or other credit accommodations, the Federal reserve bank shall give consideration to such information. The chairman of the Federal reserve bank shall report to the Board of Governors of the Federal Reserve System any such undue use of bank credit by any member bank, together with his recommendation. Whenever, in the judgment of the Board of Governors of the Federal Reserve System, any member bank is making such undue use of bank credit, the Board may, in its discretion, after reasonable notice and an opportunity for a hearing, suspend such bank from the use of the credit facilities of the Federal Reserve System and may terminate such suspension or may renew it from time to time.

So, it is the job of the Federal Reserve to monitor the loans of its member banks, and, if they are "playing fast and loose", to report the matter and, ultimately, it is the job of the Board of Governors to suspend those banks from the Federal Reserve System if they continue with their irresponsible lending practices.

Dare I point out that all of the current members of the Federal Reserve's Board of Governors were appointed by President George W. Bush? Ben Bernanke, Donald Kohn, Kevin Warsh, Randall Kroszner and Elizabeth A. Duke; by 2006, four of the five were in place on the Board of Governors.

Now President Bush -- in reaction to this crisis that the people he appointed to the Federal Reserve's Board of Governors should have seen coming and should have avoided -- has given us a hard-sale on a 700 billion dollar (?) bailout package -- which we all know will cost much more by the time this plays out.

Why do I have the feeling we have been stampeded again?

As Bush's Presidency draws to a close, why do I recall the following quote from the Sibel Edmonds case?

From The Highjacking of a Nation, Part 2: The Auctioning of Former Statesmen & Dime a Dozen Generals by Sibel Edmonds, November 29, 2006:

Long gone are the days when generals were content to retire and go back home where they held their heads high as honorable patriots and heroes who had served their nation; where they marched in their towns' parades as proud distinguished men and women who had fulfilled their duty to the people. Today, as we clearly see, they perceive themselves and their authority as a commodity; they go about marketing their worth (nationally and internationally; foreign and domestic) long before they leave their positions as public servants.


The foreign influence, the lobbyists, the current highly positioned civil servants who are determined future 'wanna be' lobbyists, and the fat cats of the Military Industrial Complex, operate successfully under the radar, with unlimited reach and power, with no scrutiny, while selling your interests, benefiting from your tax money, and serving the highest bidders regardless of what or who they may be. This deep state seems to operate at all levels of our government; from the President's office to Congress, from the military quarters to the civil servants' offices.

New label: Stampede.


anticant said...

I'm just re-reading J.K Galbraith on the Great Crash of 1929. Uncannily familiar - greed and stupidity never change

Yankee Doodle said...

Not stupidity, Anti - greed and craftiness.

anticant said...

Yes - but lots of stupidity as well, not only on the part of the punters but also of the city boys and politicians who believe that the system is solid at bottom and don't realise that all financial systems are just smoke and mirrors depending on confidence which can only be maintained if the system is operated with a degree of honesty.

Once that is abandoned - as it long since has been - confidence slumps and the economy collapses, as is starting to happen now.

anticant said...

And if the economy collapses even the villains you rightly castigate will lose a lot of their power.

The Hunter said...

No, they won't, Anticant. The villians that YD writes about here have a plan. If it works out, the economy will only collapse for some; for others, it will grow much, much stronger.

Sometimes, when you want to put up a new building, you need to demolish one that's already on the land you want to use. This is especially true if you want to demolish someone else's building to make room for your own.