I sat down last week to write about how the reversal of Glass-Steagall banking laws caused the financial crisis of 2008 until a post by James Corbett of the Corbettreport caught my eye. It was titled: The Truth About Glass-Steagall. What more truth could there be? During the Clinton administration the president and congress got together, took out our beloved Glass-Steagall law and the whole world fell apart, right?
Turns out, maybe not. Here a link to the podcast:
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It is long, about an hour and a half, but it opened my eyes to what I thought I knew not being what I thought I knew.
If I was wrong about what caused the financial crisis of 2008, then were do we look for what caused it? I think we have several places to look. The greed of banks, lack of law enforcement which we can lay at the feet of the SEC, the rating complies, Moody's and Standards & Poor's, the government, and some of it can also be laid at the feet of the home buyer.
First the banks. Banks began to play games with to play with derivatives, they had been doing it for some time, but by the early 2000s everyone was feeling good about profits and everyone also knew housing would never loose value, even though history proved otherwise. Feeling bullet proof and looking for bigger and bigger returns, banks dove in head first into derivative never bothering to ask how deep things could get or they didn't care.
The SEC, Security Exchange Commission, is charged with enforcing laws involving financial matters. I have to ask how a bank could be allowed to be so leveraged its very existence was threatened, and in the case of Lehmon Brothers they did die as an entity, with out the governmental body responsible for oversight in the area raising some alarms. Even if they couldn't do anything directly, they could have gone to congress and told them there was a massive problem, but hey, the value of housing never falls so why bother? Right?
Then we come to the rating companies, Moody's and Standard & Poor's. Their job is to rate investments on how good they are, lots of details here we won't go into, suffice to say, it appears they simply rubber stamped CDOs, Credit Debt Obligations (this is a form of the derivatives mentioned above. It is at its heart, a gambling bet on whether or not mortgage payments will be made. Someone will loose and someone will win making it what is called a zero sum game.) Were the CDOs rated as they should be? History tells us no way they could have been.
In Clinton's administration and continued by Bush's administration, the government thought everyone should own a house. Great way to stimulate the economy until it comes time to pay for all the new houses. The government eased restrictions on financing a house and the industry came up with the ARM (adjustable rate mortgage). These were gateways to get people into homes. Give them a teaser rate of 1% for the first 5 years and all looks great, well, until the teaser rate expires and the interest quadruples. In many of these ARMs the borrower was not even keeping up with interest payments so they were going deeper and deeper into debt as the years passed.
Last I think the borrower has to take some blame. I read about families with a total income of $35K buying a 750K house. That is twenty-one and a half times income. Conventional thinking is 3-5 times yearly income depending on who you listen too. Not all loans were this extreme, but there was another game to be played here. Housing was going up. People would then take out the equity on their house (equity is the part of principal that has already been paid off) and buy another house. The banks were more then willing to give the money, the house could always be refinanced at a low ARM, right? Now, people had five and six houses on ARM rates (they really didn't pay down the loan, the value of the house going up to give them the equity to take an additional loan) and everyone was flying high. Except the cost of houses went into a bubble, the ability of the average person to buy the average house, and the bubble popped. The system simply couldn't hold up anymore without rising housing prices and the expiring ARM loans being readjusted. There was simply no way for the home owners to pay the mortgages anymore.
It gets better. Remember the CDOs? They came due with a vengeance. AIG who insured many of the CDOs couldn't pay, banks with CDO against each other couldn't pay, zero sum game, remember? The government stepped in along with the Federal Reserve Bank. The government pumped money in to keep things moving and the FRB bought up worthless CDOs.
It is now 2017. Housing is once again in a bubble. CDOs are back. To help stimulate the economy, the same thing was done to auto loans as to the housing loans. Our national debt in the form of bonds is $20T. Our debt obligations to thins like social security, welfare programs, Medicare and Medicaid among others obligations is estimated to be around $200T from articles I've read. Student loans are at $1.5T and the grads can't find jobs. Our GDP, gross domestic product, the total of all goods and service produced in the United States, is around $17T and that is only because now the government is counting research as part of GDP(research, while very important, is a drag on the economy until such time as something is invented and the sales of the invention pays back all the cost of inventing it, then it adds and not before.)
Sleep on it. Comment on it. Could we be in just a little bit of trouble here?
