Fat Cat Bailout Time
In the past week or so the Fed, America’s central bank, has twice committed large sums to bailout struggling greedy bankers. You know, lend a hand in time of need, help them through a difficult period; you know, corporate welfare.
In the first instance, the Fed traded $200 billion of Treasury bonds, backed up by whatever integrity the US government maintains, for the same amount of mortgage backed securities held by the big banks. The reason being that the banks are reluctant to lend money, even for legitimate purposes, even to each other, because they don’t know what those mortgage securities are worth, thus don’t know what their assets are. One thing is for certain: those securities are worth a lot less than the treasury bonds; so free money for stupid bankers. Actually, they’re not really stupid since they know the US government will be there to bail them out regardless of how flagrant their trespasses.
In the second instance, an investment bank that wasn’t so greedy is going to bail out another that was but wouldn’t think to do so without a $30 billion Federal guarantee, since once again the securities held by the greedy bank are currently impossible to put a value on. And will continue to be so until the real estate market hits bottom.
A little background is in order. Mortgage backed securities are the latest clever vehicle designed to aid the superwealthy in their speculative – gambling is a better word – fun and games.
What you do is sell lots of low quality, high interest mortgages to whatever sucker you can find. If their income wouldn’t ordinarily qualify them for the loan it doesn’t matter because real estate values will always go up: if they can’t make the payments they can always borrow against their increasing equity. If the dupe actually has sufficient income to qualify for a better loan you don’t tell them because that means lower fees and less interest. Besides, better loans require you to spend a lot of time buried in paperwork.
In fact, minorities were especially targeted for those low quality mortgages in place of better loans that they were qualified for.
In the past these kinds of things didn’t happen because lenders held mortgages until they were paid off, thus they were keen to make sure borrowers were able to make the payments. However, in an era when financial shenanigans are business as usual, low risk but small-profit-margin deals just don’t make it, don’t produce the thrill of making big bucks.
Recently, or at least until the subprime mortgage meltdown, loans were made by brokers who quickly sold them on to investment banks who bundled them together with lots of other loans of varying qualities to create ‘mortgage backed securities’ which could then be traded like other types of securities. Along the way lots of fees are collected by all participants, while at the same time they pass on all potential of financial loss to investors in the securities.
Central to the scam was getting the rating companies to bestow them with the highest rating, as if they carried near zero risk of default. As long as property values were going to continue to rise, everybody was going to make out.
Meanwhile they gave a veneer of free-market do-goodism to the scam; that is, subprime lending, by touting the number of additional people who became capable of owning a home. And once again, all were going to be happy, including the borrowers, as long as real estate prices kept rising.
Having had the personal experience of falling house prices – a house I purchased in Portland in 1978 doubled in value by 1980, but then by ’84 fell back to its original purchase price – I am under no illusion concerning ever rising home values.
Here is a good way to know if you’re in a housing bubble. You purchase a house for $500,000 (average price in Southern California a few years back) with monthly costs somewhere in the $4000 to $5000 range. Meanwhile, you could rent the equivalent house next door for $2500. You are paying about two grand extra per month, $24,000 per year, for the privilege of owning rather than renting. The only way that makes sense is if the value of the house rises more than the extra 24 grand or so it costs you to live there (which in fact it did for several years).
Bubbles are very precarious physical constructs, they’re an expression of excess. They have a powerful tendency to destroy themselves. One point of pressure on the bubble was that rising values priced a lot of people out of the market. The only way the housing boom was sustained was through subprime lending;
that is, lending to people who couldn’t really make the payments. A second point is that low teaser rates ran out with borrowers facing huge monthly payment increases while the property market stagnated so they could no longer use increasing equity to make up the shortfall.
There are all sorts of government programs that could be devised to help people on the margins buy houses – like the GI Bill after WWII - and provide help to those scammed by predatory lenders to stay in their houses, ah but that’s welfare and in a free-market capitalistic country only corporations are entitled to be on the dole.
Currently about 10% of American homeowners owe more on their properties than they are worth. So in addition to those people who are being foreclosed because they can’t make the payments there are those who are just walking away since, though they can afford their mortgages, it doesn’t make economic sense.
This whole fiasco came about from Fed Chairman Greenspan’s very low interest rates, without which a housing boom could not have happened. Moreover, many if not most of the new houses that have appeared in the last few years should never have been built: huge houses far out in the boonies. In fact, many of the foreclosures happening in America are those very same blots on the landscape.
All for growth at all costs. Unfortunately, an economy built on a bubble is inevitably going to hit a very rough patch; and be much worse off than if growth had been slow, steady and based on providing real social needs and a healthy lifestyle for its citizens.
Unfortunately the US is headed for the chasm at breakneck speed, trying all in its power to resurrect a failed economic ideology: Growth at all costs based on excessive and unsustainable borrowing.