Tuesday, March 3, 2009

How the financial crisis came about

This is the no bullshit explanation.

If you want politically correct answers, go watch CNN.

One last thing - this is long. If you want a soundbite, again, go watch the TV - I hear the Bachelor is controversial, oh my!

Still here?

OK - Onward, let the show begin.

How the hell did we get into this financial crisis?

Do not worry - this is very simple, despite the obfuscations and lies on TV and radio.

To understand the current financial crisis, we must go back a ways - in fact, to the year 2002, the month of October.

Then president bush (of the 'w' variety) was giving a speech. The speech was at the George Washington University, and the topic was 'Increasing Minority Homeownership'.
(source is here - warning, PDF file)

Here are excerpts from the speech and my views:

You see, we want everybody in America to own their own home. That’s what we want. This is — an ownership society is a compassionate society.

I was born in a (then) communist country.

While the official policy of the government (then) was to placate the workers with cheap (or affordable) housing, there was no such talk about deserving a house (or an apartment). You got your house/apartment by the grace of the government's organization that doled out (chiefly to those who paid the most bribes or were friends with the powerful) an annual housing allotment.

"From each according to his ability, to each according to his needs" was the Karl Marx slogan, and the policy of the ruling party run contrary to this chief tenet of communism.

Unless, of course, the party (wisely) decided that housing for each family was not a need - that people could cram together in small houses/apartments with several generations of the family struggling for space.

They, perhaps, decided, that not everyone deserved a house.

And so, looking back at the 2002 speech by 'w', I have come to the conclusion that communism, did, indeed, win, as bush has brought the system to this country.

Bush - the communist.

All joking aside, it's a fact that it was a government policy to allow the poor and those who could not afford to buy houses to... get loans and buy them.

Lets continue with the speech:

More and more people own their homes in America today. Two-thirds of all Americans own their homes, yet we have a problem here in America because few than half of the Hispanics and half the African Americans own the home. That’s a homeownership gap. It’s a — it’s a gap that we’ve got to work together to close for the good of our country, for the sake of a more hopeful future.

We’ve got to work to knock down the barriers that have created a homeownership gap.

The gap was caused because the minorities - blacks and latinos - could not afford to outright buy a house/apartment (The reason why the minorities are - in general - poorer than whites and Asians is beyond this blog; please accept it as fact... 'w' bush certainly did).

Here the president was talking about this situation, and calling for changing the situation - he wanted to make everyone equal.

After all, it is not good if people who are not able to afford a house cannot buy it...right?

The joking about 'w' bush being a communist at heart is no longer funny, eh...?

But why did the republican party, traditionally the party of grumpy, angry white men, and their leader, the ex governor of Texas, who giggled as he signed prisoner executions, as he denied clemency to the guilty, the innocent and the mentally retarded (google "Terry Washington")... why did they suddenly start the minority love fest?

During the last days of the calamitous 'w' presidency, there was a big stir over the so called wall, built on the American-Mexico border. To prevent the illegal immigrants from crossing into the country. But once in the country...

Why, Mr. Illegal Immigrant, here is a loan so you can buy a new house!

No money?

No job?

No social security?

In fact, the only thing you own is your shirt on your back?

No problemo, sign here and move into your new house tomorrow.

Don't believe me?

CNN: The banking industry is opening its doors to a controversial new market: illegal immigrants.

Despite heated political debate in Washington over illegal immigration in the United States, an increasing number of banks are seeing an untapped resource for growing their own revenue stream and contend that providing undocumented residents with mortgages will help revitalize local communities.

It's a win-win situation, they say.

Bill Schumer, vice president of product development at Fifth Third Mortgage Co., a unit of Fifth Third Bancorp. (Research), said the company entered the marketplace due to the belief that providing these low-to-moderate income loans will help revitalize communities in the United States, as borrowers buy more run-down properties and rebuild.

He added that by introducing this segment of the population to home ownership education, they are also building a foundation to cross-sell their other products.

"We've been at this program for the last 8 or 9 months and 68 percent of these borrowers have established three or more banking services with us," he said.

Boston.com: No laws broken as illegal immigrants obtain loans, buy homes.

"This place is full of people like me," said the man, 48. He spoke on condition that his name not be published because it is easily found in the Suffolk County Registry of Deeds, and he fears immigration officials would track him down. "They have houses because the banks gave them a loan."

Hmm, read that last sentence again.

Then, lets find out how this works:
The Boston homeowner from Colombia said a convergence of events allowed him to buy a $400,000-plus home through a Spanish-speaking broker in 2004.

First, he said, he obtained a real Social Security number and Massachusetts driver's license from the government in the early 1990s before security crackdowns. Then, he worked three jobs: making pizzas by day, cleaning office towers at night, and delivering soiled hotel linens to the laundry on weekends. To build credit, he opened a bank account and applied for Bank of America and Discover credit cards, which he always pays in full.

On the day he bought the home, he said, he paid $4,000 as a down payment, plus fees. Because of the low down payment, he said, he had a high interest rate of 7.8 percent, which he later lowered by refinancing.

Now, he just cleans office towers from 5 p.m. to 6 a.m. five days a week, netting $3,000 a month. He said he covers the $2,400 monthly mortgage with his salary, rent from a tenant, and help from family members who live with him.

$4000 down payment... the downpayment sounds oughly small.

How much is housing worth in Boston, anyways?
Welcome to the Boston Heat Map page!

Lets see, a quick glance, and we have a range of from $553,000 and up, all the way down to $237,000 and below.

I am not a math whiz (had a public school education, where I had to mostly watch out for kids who brought guns to school, as opposed to spending time actually studying - as an immigrant, I did not move to a glamorous area... in fact, my ethnicity stood out, and I stood out, like a sore thumb), but $4000 down payment seems even smaller and insignificant.

And the gentleman made only $3000 per month (it is not noted whether he paid taxes on his earning or not).

That sounds like an iffy proposition - a very risky loan.

But, surprisingly, the banks were willing - in fact, they were overjoyed! - to be granting these risky loans.

What gives?

Hell, the republican party, the party - lets face it - of old, angry, grumpy and racist white men (my personal opinion - admit it, you know this is so) suddenly started to love minorities, to encourage them to buy houses, get loans, because it was their right.

The party who sent these newsletters, which included "fried chicken, ribs, watermelon, Kool-Aid and a donkey with Senator Obama's head", suddenly started to love black people?

What (the fuck?!) gives?

There are two explanations of this.

The first one is that the republicans, despite all appearances to the contrary, really do love black people, and again, their rhetoric notwithstanding, they really admire Karl Marx and the communist philosophy of everybody receiving "according to his needs."

The other explanation is that there is something else at play.

Being a cynic, I am going to continue to believe that the republicans are the party of choice for bigots, racists and clueless idiots, and explore the second possibility.

Lets continue the 'w' speech:
I set an ambitious goal. It’s one that I believe we can achieve. It’s a clear goal, that by the end of this decade we’ll increase the number of minority homeowners by at least 5.5 million families. (Applause.) … And it’s going to require a strong commitment from those of you involved in the housing industry.

It is an ambitious goal.

And it did require a strong commitment from those of you involved in the housing industry.

Bring us some examples, Mr. bush:
I appreciate so very much the home owners who are with us today, the Arias family, newly arrived from Peru. They live in Baltimore. Thanks to the Association of Real Estate Brokers, the help of some good folks in Baltimore, they figured out how to purchase their own home. Imagine to be coming to our country without a home, with a simple dream. And now they’re on stage here at this conference being one of the new home owners in the greatest land on the face of the Earth. I appreciate the Arias family coming. (Applause.)

We’ve got the Horton family from Little Rock, Arkansas, here today. … They were helped by HUD, they were helped by Freddie Mac. …

Finally, Kim Berry from New York is here. She’s a single mom. You’re not going to believe this, but her son is 18 years old. (Laughter.) She barely looked like she was 18 to me. And being a single mom is the hardest job in America. And the idea of this fine American working hard to provide for her child, at the same time working hard to realize her dream, which is owning a home on Long Island, is really a special tribute to the character of this particular person and to the character of a lot of Americans. So we’re honored to have you here, Kim, and thanks for being such a good mom and a fine American. (Applause.)

I told Mel Martinez I was serious about this initiative… And the good news is, Mel Martinez believes it and means it, as well. He’s doing a fine job of running HUD, and I’m glad he has joined my Cabinet. (Applause.)

And I picked a pretty spunky deputy, as well, Alphonso Jackson — my fellow Texan. (Applause.) I call him A.J. …

I see Rosario Marin, who’s the Treasurer of the United States. Rosario used to be a mayor. Thank you for coming, Madam Mayor. (Applause.) She understands how important housing is. …

Great, so a single mom, a newly arrived immigrant family from Peru (their combined wealth close to zero, probably)... everybody get a house, now! The president said so! Get those loans from the banks - the banks will give you money.

No job, no collateral, no skillset, no way to pay back - no problem!
Are you a single mom, a recent immigrant, a burger flipper or a cleaning person with no ability to pay the mortgage payments in the long term?

No problem!

Free money, from your bank, HUD, Freddie Mac...

But bush said too much in his speech.

This part is crucial:
Homeownership is also an important part of our economic vitality. If — when we meet this project, this goal, according to our Secretary of Housing and Urban Development, we will have added an additional $256 billion to the economy by encouraging 5.5 million new home owners in America; …

Low interest rates, low inflation are very important foundations for economic growth. The idea of encouraging new homeownership and the money that will be circulated as a result of people purchasing homes will mean people are more likely to find a job in America. This project not only is good for the soul of the country, it’s good for the pocketbook of the country, as well.

Please read this several times, until it sinks in and you understand exactly what senor bush was saying here, all the way back in 2002.

This is the housing bubble.

This is our financial crisis, this is the current calamity.

Lets think on this, using the dangerous weapons of common sense and logic.

First, you probably have heard about this United States being a so called service economy.

Simplistically, an economy is divided between those who produce, and those who serve (or perform a service, to be politically correct).

While manufacturing is tangible, such as making cars, tanks, computers, beds, furniture, TV's, etc etc etc, the service part is made up of people who are waiters, exotic dancers, people who sell you stuff (made in China), people who do finance (they try to make $10 out of $1, and until 2009 they have mostly succeeded - on paper), etc etc etc.

So, on one hand - tangible, real stuff, and on the other, not so real, waitresses, finance wizards ("Lets invest your $20,000,000 in my fund and I believe you will have an 10% rate of return - please, call me Bernie, no need to be so formal, just Bernie - not Mr. Madoff!").

On one hand, real economy.
On the other, bullshit, smoke and mirrors.

Lets take it straight from the US government's webpage - (the dateline is 07 April 2008)

Notice something about the title?

Read it again.

Banking, insurance, investment among the keys to U.S. growth and success.

All of these areas were boosted up by (drumroll!) - the housing bubble, by granting loans to everybody, even people who could not afford the mortgages, even illegal immigrants, single moms, working (or not) poor.

USA's success, the whole system of this country, is based on the service economy.

No, not on waitresses, sales clerks and small business.

It is based on big time Banking, big time Insurance and big time Investment.

We are talking Citibank for big time Banking.
Representing big time insurance we have AIG.
In big time Investment we have Goldman Sachs.

All of these ARE the American system.

And all of those - and their ilk - were helped, boosted up, their profits made more and more extraordinary, by this housing boom, the housing bubble.

How did it work?

The brilliance lies in the simplicity of the system.

Like the (fortunately now) ex-president has said in his speech I quoted extensively in this article,
Homeownership is also an important part of our economic vitality. If — when we meet this project, this goal, according to our Secretary of Housing and Urban Development, we will have added an additional $256 billion to the economy by encouraging 5.5 million new home owners in America

What happened in practice was that as people "bought" a house, they soon found out that they needed a few things. Things like carpets, chairs, tables, refigerators, bigger TV's, a cool radio, a DVD player...

But wait, if these people had barely enough money to afford paying the mortgage for their newly acquired house, how on Earth could they afford other stuff?

Simple - on credit.

What happened in practice is that a 2nd loan was taken out soon after a house was "bought", and the collateral against it was... the house (which technically, and in reality, belonged to the bank, and not the people who "bought" it). Hell, no need for a 2nd loan - buy a car, pay in a year! Buy a fridge, start your payments in a year's time! Buy a TV, sofa, table... well, you get the picture.

So there you go - bada bing, bada boom! - and, almost magically, we have a "healthy", "booming" economy.

All those houses growing like mushrooms, all those people in the malls buying stuff.

What's that smell?

Ahhhhhhh... smells like prosperity!

The machine, the system, went into overdrive - the bankers were goaded by their managers and the government agencies to give loans to poorer and less and less qualified people, more loans, more loans, more people buying stuff on credit, healthier and more prosperous economy, boom time baby!

Sometime later, the banks belatedly realized that hmmmmm, those loans... well, they are not so good.

In fact, they are downright toxic.

As in, "Jesus H. Christ, these people will never repay us, what the fuck do we do now!?" kind of toxic.

This is similar to a guy waking up the next morning in his bed, looking over his shoulder and realizing that the beautiful girl he picked up at a bar last night is neither beautiful... nor a girl.

But the system was beautiful, and it was making so much money, and making so many of the elite happy with their obscene profits.

A solution had to be found.

It had to be kept going.

And lo! Insurance, that other pillar of the American system, came to the rescue.

Here's what happened, in simple, no bullshit language.

The banks took several of their loans together - the loans given to people with good credit and were expected to repay them, alongside the (more numerous) toxic loans, the ones which the banks realized they had no hope in hell to get their money back.

A bundle like that was offered to the insurance sector, and the line similar to "Hey! You can trust us, we have a big brand name in banking, these loans are good, if you insure them we can make money together!".

And that is how banking and insurance married, because those bundles of loans were then traded as... investments.

A complicated name was cooked up for this bullshit, which was basically a bunch of bad loans, offered by a bank with a tremendous, ethically sounding name and then insured, as an additional safety step, by a "trustworthy", "conservative" insurance company.

This is exactly what happened - the financial "wizards" figured out a way to make money from these shitty loans, the ones which they knew they had no way of making their money back.

That is pure genius if you ask me.

An extraordinary con.

"But you are a racist, bigot, anti-semite piece of shit, and you do not bring any support to this conspiracy theory of yours!"

Steve-o's blog, quoting a study by William H. Lucy and Jeff Herlitz:

The financial crisis was triggered by sub-prime mortgages, no down payment mortgages, resetting adjustable rate mortgages, and by some low income home buyers being manipulated by unscrupulous mortgage initiators. Herman Schwartz (2009,Chapter 8) identified a 16 percent default rate after nine months on 2007 subprime mortgages as launching the insolvency of several important lenders (including Countrywide and IndyMac) in 2007.

In addition, the financial crisis was caused by house value to income imbalances in a few states and a modest number of counties and metropolitan areas, by easy credit to support these imbalances, and by MBSs and subsequently by credit default swaps which ostensibly spread risk and reduced risk, but which actually greatly increased risk. They created an inflexible structure which neither lenders, packagers, central banks, nor national governments were able to access easily to repair the underlying delinquent mortgage payments. ...

... This inaccessible financial system was encouraged by home ownership policy goals. Frederick Eggers (2001) described the Clinton Administration goals as follows: “…the Nation’s home ownership rate actually declined in the early 1980s. Between 1985 and 1994, the home ownership rate remained virtually unchanged (at 64 and 65 percent)….In late 1994, President Clinton set as a national goal to raise the home ownership rate to 67.5 percent by the end of 2000. Beginning in 1995, the home ownership rate has risen almost steadily until, by the third quarter of 2000, it was 67.7 percent—surpassing the President’s ambitious goal….HUD used its oversight of Fannie Mae and Freddie Mac to encourage those entities to reach out to low-income borrowers and areas underserved by the private market.”

As an important part of his concept of the United States as an Ownership Society, President George W. Bush set a goal in 2002 of increasing home ownership by 5.5 million minority families. “We want everybody in America to own their own home,” President Bush said in October 2002 (Ferguson 2008, 267). Niall Ferguson (2008, 267) summarized Bush’s strategy: “Bush signed the American Dream Downpayment Act in 2003, a measure designed to subsidize first-time house purchases among lower income groups. Lenders were encouraged by the administration not to press sub-prime borrowers for full documentation. Fannie Mae and Freddie Mac also came under pressure from HUD to support the sub-prime market. As Bush put it in December 2003: ‘It is in our national interest that more people own their home.’”

Financial manipulations became overly clever and difficult to reverse. But they served public policy goals, which, in general, were supported by successive Democratic and Republican Administrations, members of Congress, federal agencies, and government sponsored entities (Fannie Mae and Freddie Mac).

We have the perfect storm here.

Both parties - republicans and democrats - agree on this.

Both parties worked tirelessly to increase home ownership, by hook and by crook. And they were not guided by any patriotic, moral or ethical reasons - far from it!

By feeding the housing bubble, by forcing banks to lend more and more to people who could repay less and less, by encouraging the housing boom, the government (again, this cannot be stressed enough - both republicans and democrats, clinton and bush) helped The System, USA - banking, investment and insurance.

Of course, you have figured it out by now, the most important question of WHY?

Did you peruse the official American government webpage, www.america.gov: A Service Economy?

The one with the subtitle Banking, insurance, investment among the keys to U.S. growth and success, dateline 07 April 2008.

If not, let me help your lazy ass.

Services produced by private industry accounted for 67.8 percent of U.S. gross domestic product in 2006, with real estate and financial services such as banking, insurance, and investment on top. Some other categories of services are wholesale and retail sales; transportation; health care; legal, scientific, and management services; education; arts; entertainment; recreation; hotels and other accommodation; restaurants, bars, and other food and beverage services.

Catch that?

The USA is a service economy because "Services produced by private industry accounted for 67.8 percent".

Because I am not a math whiz, and I like simple numbers, lets call a spade a spade - 70% of American economy is service based.

Lets continue in the america.gov webpage and see about the data for manufacturing.

Production of goods accounted for 19.8 percent of GDP: manufacturing – such as computers, autos, aircraft, machinery – 12.1 percent; construction, 4.9 percent; oil and gas drilling and other mining, 1.9 percent; agriculture, less than 1 percent.

Production of actual stuff is only 20% of American GDP.

Compare these numbers - 70% service, 20% tangible, real stuff.

Scratch that - the tangible, real stuff is only 12.1 percent, per the article.

Construction accounts for 5% of the GDP - which is staggering, if you consider that the manufacturing of cars, airplanes, machinery - the heavy industry - accounts for 12%!

But fear not, America.

Other than the subtitle, which proclaimed that (due to the housing boom, helped by American government, democrats and republicans, working hand in hand with big banking and big business) banking, insurance, investment among the keys to U.S. growth (I cannot get enough of that title, it is black comedy at its finest), we maintain a surplus in services:

The United States also maintains a trade surplus in services, $79.7 billion in 2006. The biggest U.S. services export category was travel by foreigners to the United States, $85.8 billion that year.

(keyword in above paragraph is billion)

In contrast, the United States runs a large and growing deficit in merchandise goods trade. While the United States exported more than $1 trillion in goods in 2006, it imported more than $1.8 trillion worth.

(keyword in above paragraph is trillion)

So, the answer to the WHY?, is very simple - because feeding the housing bubble was the only thing left that the elite in this country could do to keep this system going.

There was no other way to keep the bubble economy going that is The System, USA.

We do not manufacture much (relative to our scale - the size of our country and economy), all we have left is, like the subtitle states, banking, insurance, investment...

And republicans, democrats, bush, clinton, AIG, Citibank, Goldman Sachs, all of them recognized that in this smoke and mirrors bullshit system - USA, inc. - anything and everything must be done to help the pillars of America, the ones who make this country what it is.

No - not guys making cars, not waitresses, not doctors, not sales clerks.

The Bernie Madoffs.

Banking, insurance, investment.


iowa-girl-in-korea said...

I wish I would have been old enough to get a shitty loan for a house and a car that I can't afford before this economy bust!!!!!! I always thought that you were only supposed to buy things you can afford but apparently, I was wrong :)

Liked this blog But I would sure appreciate some short and simplified blogs for gals on the go such as myself!

Anonymous said...

Bloody genius work.

Keep it up. Good to have a site to turn to to get further depressed by the general ignorance, duplicity, and all together human nature of us all ;)

Anonymous said...

To wit Goy,
The wealthy who inherited their wealth want to be able to invest it. Traditionally this is done by loaning it to the non-wealthy and getting interest in return. Well, there are not as many young people to loan it to (birthrates dipped below replacement in the late 70's if memory serves), so they turn to massive immigration and extend loans to the truly uncreditworthy.
These lousy loans were dumped on the world's investors, based on America's track record.

A woman at JPMorganChase, name of Blythe Whateverthefuckhernameis, invented some financial instrument called the Credit Default Swap, which facilitated investors "insuring" a lot of this garbage so it wouldn't really bite them as it should have, therefore they indulged deeper.

Anonymous said...

Don't forget the 1999 repeal of the Glass-Steagall Act.

Anonymous said...

Wow, awesome article. Finally somebody who sees the true side of the crisis. And lets not forget the everywhere present college loans. This is why I think Mr. Bush was the worst think that ever happened to the US. How can you be so ignorant and depend on people to pay you back when they really can't! It's a mystery to me even nowadays. Thanks again for the nice read.

Keep it up, Julie

Anonymous said...

Good article,

I'm a fiscal conservative and have woken up to the fact that the GOP always delivers the opposite. I'm at a loss.

Many conservatives blame the housing bubble on the Community Reinvestment Act, and perhaps if that didn't exist (we already have FHA) then these loans would never have occured, but then maybe...

I was wondering why, exactly the sub-prime market blossomed so much under the Bush Administration. I think the article from 2002 you highlight shows much of the reason... that Bush and others made it happen behind closed doors so to speak... while using the same 'compassionate' speech that Libs use.

Yes I agree that they needed another bubble, and the housing market was the only thing they could find. What about the war in Iraq, shouldn't that have been enough? Apparently not...

Anyway thanks for highlighting the Bush speech from 2002, that is really valuable info.

Anonymous said...

THANK YOU!! First, it is just nice to read a more realistic view of different issues; including this one. I grow tired and frustrated by the all left or all right "news". Applying any amount of common sense should make people realize that situations, as reported and hyped, are never as one sided as they seem. You have nailed it! As a service economy, the U.S. "needed" its own big Ponzi scheme. Too bad we're so politically entrenched and just, consequently, ignorantly blind, that we can't see our way to a real solution.....or understand the logic of the current ones (some how we lack the general ability to understand and disagree) and just move on and/or recognize the next big mess coming down the road.

Anonymous said...

Great piece. 10 days ago for some reason or another...perhaps a vague memory, I googled Bush encourages home buying...and ran across a speech he delivered to HUD. The scales fell...it was a PT Barnum speech with the same content that you have put forth. He was selling the housing bubble along with a lot of other BS, but he was primarily selling the housing bubble. OK so now we know Bush had foreknowledge (and Clinton) that they were selling a bubble which would one day collapse. Bush knew it would be a "crisis" and he knew all that money would be transferred to the banksters and Wall St. It was win win for the ruling criminal class. The American public has been completely defrauded. Google Bush Clinton Haiti....having defrauded the American people these two (and the Wall st crime syndicate) have moved their game to Haiti. Oh but they so love those Haitian people! Truly revolting.

Nationalist said...

Here is a great video about the origins of the Levittowns (the prototype for the American suburb) and of the housing boom:

The Slaughter of Cities: Urban Renewal as Ethnic Cleansing

Purging ethnic European working class people from the cities was essential to preclude the formation of ethnic voting block that would overturn America's Judeo-Anglican ruling elites.

By abandoning the cities in "white flight", whites have relinquished a great deal of political power. Think for a moment, who wields more power, the municipal councils that preside over a number of ragmented municipalities in the outlying suburbs or the mayors who preside over city governments in the urban core?

Even though there is vastly more money and tax revenue in the outlying suburbs, the seat of political power remains in the cities.

The same game is being played today by importing tens of millions of Mestizos to break up the ranks of the underclass and by importing millions of H1b's from India and China to occupy and displace whites from the technocratic elites and from the rungs on the ladders of upward mobility,

Anonymous said...

Thanks for this awesome article.

White Card Online said...

Thanks for the information.

Anonymous said...

Some period of "housing growth" huh?

Throughout it all, even through today in nearly 2013, the only thing that has continued to grow, without fail, since 2002 have been Jewish pocketbooks.

Us goyim fools have been given the shaft once again--same as it ever was.