Subprime mortgage meltdown
Doug Henwood: Poor regulation, risky securitized loans and greed have led to a very high-risk situation
SHARMINI PERIES,JOURNALIST,TRNN: Subprime mortgage meltdown has shaken the world’s financial system. Almost 2 million families have lost their homes, and another 2 million stand to join them. Investment firms have lost millions. Mortgage companies have gone bankrupt. Workers have been laid off, and families have been kicked out of their homes. Everyone from the Federal Reserve to community groups like ACORN say the storm isn’t over yet. How did it start? Who is to blame? What is the cure? The Real News interviewed economist Doug Henwood to find out.
DOUG HENWOOD, EDITOR, LEFT BUSINESS REVIEW: There are probably 2 million people at immediate risk of losing their houses, and maybe several million more if things go south in a serious way. Wall Street is at the very heart of this, because they created the very complex securities that financed the housing boom in the last five, ten years, that ended up with a lot of people getting in way over their heads, buying houses they can’t possibly afford. It’s a combination of excessive optimism on all participants’ part, a lot of criminality, a lot of fraud. It’s just a big complicated mess. Wall Street got into packaging all these individual loans into securities, into bonds that institutional investors like pension funds and mutual funds could buy. So that really severed the link between the lender and the borrower. So there’s a problem here. If you know that the loan you make is going out the back door almost as soon as the guy you make it to goes out the front door, you have no incentive to make a good loan. No one really understands where the final resting place of a lot of this risk is. No one understands what institutions hold it, how these things could spread and contaminate each other. These exotic instruments are held around the world. We’ve seen over the last several months, like, hedge funds in banks in Europe blowing up. We’ve seen losses in Asia because of this. All because of mortgage holders not being able to make their payments in Ohio, in Michigan, and Nevada. So it’s amazing how quickly and how far the problem spread, again, under what are not really serious economic crisis circumstances. That’s part of the reason this is such a scary point, because no one really knows how this stuff is going to behave, especially if the economy gets worse.
PERIES: And many think it might get worse. The U.S. Federal Reserve Bank lowered interest rates another quarter percent on Tuesday. And a study of 172 cities by the community group ACORN says that sixty-eight cities are at high risk of massive foreclosures. The same study noted that African American and Latino home buyers were two times more likely than white home buyers to be victims in the subprime crisis. On Monday, December 10, led by Jesse Jackson, a broad coalition of organizations and unions rallied on Wall Street to demand a freeze on all mortgage foreclosures.
REV. JESSE JACKSON, PRESIDENT, RAINBOWPUSH COALITION: When America gets a cold, black America gets pneumonia. . . . This is beyond borrowers. No, this is the economy itself that’s at stake. According to Goldman Sachs, unless we stop this economic tsunami we’re looking at a long-term economic recession that’s now gonna sink 60,000 in Georgia and, yesterday in Maryland, 13,000 foreclosures in that county alone, evicting 300,000 homes, at a cost of $3 billion in this impact upon the economy. The budget for the state, for the economy is just $3 billion. You’re looking at whole cities sinking. And that’s why you must have some kind of refinance construction corporation to help bail out the American economy, as well as the borrowers who were hoodwinked in these subprime scam deals.
HENWOOD: Everybody had a hand in this. The regulators didn’t care. Nobody was watching. The rating agencies that were supposed to grade these securities weren’t watching, and partly ’cause they’re paid by the issuer, so no rating agency is going to give a bad grade to the people who are paying them. The investors were very reckless and indifferent to risk. The mortgage brokers were forcing loans on people who shouldn’t have taken them out, tricking people, lying to people. And I think some of the buyers too can’t be shielded from blame either. Some people spent a lot more money on a house than they should have, probably because they thought the house was going to rise in price 10 or 20 percent a year indefinitely. What the Bush administration is offering is very, very little. It’s very weak tea.
December 6, 2007
GEORGE W. BUSH, U.S. PRESIDENT: There’s no perfect solution, but the homeowners deserve our help. And the steps I’ve outlined today are a sensible response to a serious challenge. We should not bail out lenders, real estate speculators, or those who made the reckless decision to buy a home they knew they could never afford. But there are some responsible homeowners who could avoid foreclosure with some assistance.
HENWOOD: It’s nothing next to the scale of the problem. I think that there should be a foreclosure moratorium immediately, and there needs to be some kind of bailout for people who are about to lose their houses. And we need to prevent this sort of thing from happening again. We need actual oversight and regulation on the part of the federal government and the Federal Reserve. They must not let finance regulate itself. The banks were allowed to value these strange securities according to their own computer models. And part of the reason they did that was because nobody could understand them. So the regulators just say, oh, let’s take the bank’s word for it. You can’t do that anymore. You just cannot run a financial system and an economy just allowing bankers to regulate themselves and hoping that they’re going to do the right thing. They’re not. Everyone’s going to try to make the maximum amount of money in the shortest amount of time and hope that they can pass the bag to someone else if there’s a problem. And that’s just not a good way to run things. Now, when the stock market collapsed in 2000, 2001, it seemed the economy never really suffered the kind of blow that it should have. When you have that kind of a financial crisis and collapse, you’d usually expect a deep recession and really lingering problems. We had a mild recession. We had a slow recovery. This has not been a really great economic period, but it seems like that crisis was deferred. In some ways, it’s because the housing bubble really picked up the stimulus: when the stock market fell apart, then the housing bubble got going, and that was the new juice for the economy to allow us to live beyond our means. Now that that’s come to an end, maybe this whole financial excess program is finally going to come home to roost, maybe not. Who knows. But I think what’s going to happen is we’re going to have serious financial problems and a long period of weak economy, slow growth, poor job and income growth, and I think a lessening of the U.S. economic standing in the world as a result. This really could bring down much of the world’s financial system. It has the potential to do that if things get out of hand, if the authorities don’t react properly, if people panic. You know, there are any number of ifs involved, but this is a very high-risk situation.
Please note that TRNN transcripts are typed from a recording of the program; The Real News Network cannot guarantee their complete accuracy.