Guest Post: By Joe Hoft
Most people outside the financial industry don’t really understand how grim things were in 2008 when the major banks around the world began to collapse. Almost overnight the liquidity in the markets froze as money was hard to obtain and companies around the world began hoarding money they did have. The markets were in turmoil and the entire financial system, built on trust, was facing collapse. As is typical in today’s major media, the real social culprits were ignored and the capitalists were blamed as the cause of the upheaval. But was this accurate?
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As noted in my new book, Falling Eagle – Rising Tigers, in the United States massive change has occurred over the past century moving the country more and more towards a social state. When the Great Depression came to the US in the 1930’s, President Franklin Roosevelt used it as a vehicle to push for social change. Social change in the US has not gone so well. Some changes have taken a long time before culminating in financial disaster. The 2008 financial crisis is an excellent example of this.
In his book The Big Short, Michael Lewis explained in great detail the factors that led to the financial collapse in 2008. Individuals with poor credit histories were provided ‘teaser’ loans by financial institutions. These loans had low interest rates or required little or no support for the borrower’s ability to repay the loan. The loans were then bundled and sold to investors. Complex financial instruments were created to insure these investments and the rating agencies classified these instruments as high quality without fully appreciating what they were rating. When the borrowers were not able to repay their loans, the whole system crashed.
Per Charles Rowley and Nathanael Smith, in their book, Economic Contractions in the United States: A Failure of Government, the root cause of the US housing market crisis in 2008 really began in the 1930’s with the creation of a wide range of social institutions. The Federal Housing Administration (FHA), which guaranteed bank’s mortgage risks and the Federal National Mortgage Association (FNMA), which effectively insured mortgages by purchasing mortgages from lenders, both products of the 1930’s, shifted risks from the lenders to the US taxpayers. Then in 1977 the Community Reinvestment Act (CRA) was signed into law under President Jimmy Carter. This law was designed to promote home ownership for minorities by prohibiting banks from refusing mortgages in poor areas due to the loan’s high risk. In addition, mortgage lenders were required under the 1975 Home Mortgage Disclosure Act (HMDA) to provide data about who they lent to. Then in 1991, HMDA rules were tightened and included specific demands for racial equality in the institution’s lending.
Per Rowley and Smith, in 1992, the Federal Reserve Bank of Boston published a manual advising that a mortgage applicant’s lack of credit history should not be viewed negatively in a loan assessment, that the borrowers should be allowed to deploy loans and gifts as deposits, and that unemployment benefits were valid income sources for lending decisions. The manual reminded banks that failure to meet CRA regulations violated equal opportunity laws and exposed them to actual damages plus punitive damages of $500,000.
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“So the great housing bubble-party began. With credit-worthiness no longer relevant, the volume of sub-prime loans exploded.” This ultimately climaxed in 2008 with the sub-prime crisis that sent shock waves around the world and financial markets in turmoil.
Another “time bomb” ticking as a result of social programs in the United States is related to the colossal amount of debt which the US is amassing. In October 2013 the federal debt load in the US surpassed $17 trillion for the first time in its history. This amount may only be a part of the story. No government in world history has ever accumulated the amount of debt that the US has in recent years. In the US, conservatives on the right want to solve the debt problem by cutting government programs, or cutting spending, or both, whilst those on the left propose tax increases. Many Americans want neither option, but clearly, something has to be done. The current spending causing the annual deficits that lead to the ever increasing growth in the US debt is untenable, and as you read Falling Eagle – Rising Tigers you will realize that the situation is desperate and must quickly change.
See www.joehoft.com for information about the author and how to order your own copy of Falling Eagle – Rising Tigers.