Skip to content or view mobile version

Home | Mobile | Editorial | Mission | Privacy | About | Contact | Help | Security | Support

A network of individuals, independent and alternative media activists and organisations, offering grassroots, non-corporate, non-commercial coverage of important social and political issues.

Hidden Article

This posting has been hidden because it breaches the Indymedia UK (IMC UK) Editorial Guidelines.

IMC UK is an interactive site offering inclusive participation. All postings to the open publishing newswire are the responsibility of the individual authors and not of IMC UK. Although IMC UK volunteers attempt to ensure accuracy of the newswire, they take no responsibility legal or otherwise for the contents of the open publishing site. Mention of external web sites or services is for information purposes only and constitutes neither an endorsement nor a recommendation.

Bush and the NeoCons caused all the mess.

Al J. Sera | 04.10.2008 10:35

Clowns and even bigger clowns running the economies

The roots of the panic in financial markets around the world are deep and complex but they lie in the convergence of three factors.
Millions of people pursuing the "American dream" of home ownership, politicians and regulators who dismantled a system of financial safeguards and then ignored warnings of impending disaster, and financial markets and institutions disregarding risk in their headlong pursuit of profit.
Let's go back to the beginning - or at least to the year 2000 - when the 'Dotcom' boom went bust.
That drove down stocks and sparked a recession and then came the attacks of September 11, 2001 - a body blow to the US economy.
To hasten economic recovery, the US central bank, the Federal Reserve, headed by Alan Greenspan, used the most powerful weapon in its arsenal - it cut interest rates repeatedly.
Lower rates made it easier for banks to lend and consumers to borrow and spend.
"It did stimulate the economy," says Clyde Prestowitz, the head of the Economic Strategy Institute.
"And it stimulated housing, because effectively the cost of investment was negative, you could borrow money for virtually nothing."
Easy borrowing
Home-ownership is the bedrock of the "American dream".
US tax laws encourage home ownership by allowing people to deduct the interest they pay on their mortgages.
And government-sponsored financial institutions such as Fannie Mae and Freddie Mac contributed by underwriting mortgages and making it easier for people of modest means to put down the money for a home.
From around 2001 and 2002, with mortgage interest rates at near-record lows, millions of Americans went shopping for homes.
With demand soaring, the price of housing nearly doubled from 2000 to 2006.
But many of those buyers couldn't really afford what they were getting, Prestowitz says.
"They wanted to buy a house and it's understandable, they wanted a piece of the dream and the mortgage industry was encouraging them to buy.
"It got to the point where the brokers were offering mortgages to people who had little or no income, who somehow thought they could put these payments together."
Sensing a potential bonanza, banks and mortgage companies began peddling loans to riskier segments of the population - especially low-income first-time homebuyers.
These were called "sub-prime" mortgages.
"Many of the mortgages were adjustable-rate mortgages," Prestowitz explains.
"They were built so that in the first year your interest rate was low, but somewhere down the road, your interest rate jumped."
Ideological drive
But something else was at work as the housing bubble grew: The US government, under the sway of the free-market, anti-regulation ideology, had begun to systematically dismantle rules and regulations established after the Great Depression of the 1930s.
In 1999, the US congress and Bill Clinton, the former president, repealed laws designed to stop financial crashes - saying markets should regulate themselves.
Why?
Lawrence Mitchell, the author of The Speculation Economy: How Finance Triumphed Over Industry says it was the triumph of ideology over caution.
"Since Ronald Reagan became president in 1980, free markets have been preached in this country as being our economic salvation," Mitchell says.
"'Government regulation' we've been told, 'is bad, it's evil, and the government doesn't know what it's doing economically'."
"'It should be out of people's business'. That's nonsense, but that was the ideology that was driving it. 'Regulation is bad, free market is good'."
The next president after Clinton, George Bush, continued to de-regulate housing and financial markets and bragged about the results at the 2004 Republican convention, saying: "Another priority for a new term is to build an ownership society, because ownership brings security and dignity and independence.
"Thanks to our policies, homeownership in America is at an all-time high."
Mortgages sold
Of course, it wasn't just the politicians who allowed the reckless financial frenzy to grow. It was also the man who the financial press was hailing as a genius - Alan Greenspan
"The Fed is responsible for oversight of the banking system, but under Alan Greenspan it basically stopped doing oversight," Prestowitz says.
"That allowed for fraudulent practices and, as a result mortgages being given to people who had no assets and no income, prudent lending went out of the window."
In the new, hands-off regulatory environment, banks and mortgage companies transformed the loans they were making into commodities.
The change was the banks no longer held the mortgages and the home finance industry began to securitise, or underwrite, them.
In the past, when you would buy a house, you would get a mortgage from your bank.
The bank would hold that mortgage and you would pay it off, with interest.
Today, you get the mortgage from your bank and the bank immediately sells your mortgage to Goldman Sachs or Lehman Brothers, or Deutsche Bank or any of literally tens of thousands of mutual funds, hedge funds, pension funds, or private-equity firms.
Those pools of mortgages are then bundled together into securities, just like bonds or stocks.
Millions of securitised loans were sold to firms all over the world.
At first it was a lucrative deal with high returns and little apparent risk.
The bubble bursts
But there was a worm in Wall Street's apple: Millions of the mortgages being sold - more than 20 per cent at the peak of the frenzy - were high-risk "sub-prime" loans.
"What was happening was a lot of bad stuff was being mixed with good stuff and it was being called good," Prestowitz says.
The global financial community seemed to believe housing prices would just keep going up and up but then the bubble burst.
The Federal Reserve began raising rates to fend off inflation.
As the rates rose, people who had taken on balloon-style mortgages - thinking they could easily pay the initial rate - found their payments being increased and suddenly ... they couldn't pay.
In 2006 home prices started to drop. Houses glutted the market and stayed unsold month after month.
In formerly red-hot housing markets, like Florida and California, home prices fell 10, 15, even 20 per cent. A huge wave of loan defaults and home foreclosures began.
In 2007, mortgage lenders with lots of risky loans on their books started going bankrupt.
Then major investment banks came under pressure and began to fail. In March, Bear Stearns was the first of the majors to go under.
The problem then was not, and is not now, about houses. It's about credit - or the lack of it.
With so much bad debt out there - and no one really knows how much there is - banks around the world have become extremely risk-averse.
They've stopped lending money to individuals, businesses and even each other.
Unable to get loans, Lehman Brothers, the fourth-largest US investment bank, went belly up.
Central banks have by now pumped hundreds of billions of dollars into the global financial system, but the flow of credit, known as liquidity, has slowed to a sluggish trickle.
Bleak future
For the first time since the 1930s, a true, systemic financial crisis is under way.
That's why the US government is considering sweeping and costly measures to buy up millions of bad mortgages.
But while the plans announced late this week seem to have boosted confidence on Wall Street, no one really knows what will happen next.
"It could get a lot worse, said Mitchell, gloomily.
"I haven't read any significant empirical evidence to suggest we are anywhere near the bottom."
"Where's the bottom?" I asked him.
He replied: "The bottom could be very deep.
"I really don't want to know."

Al Jazeera

Al J. Sera

Upcoming Coverage
View and post events
Upcoming Events UK
24th October, London: 2015 London Anarchist Bookfair
2nd - 8th November: Wrexham, Wales, UK & Everywhere: Week of Action Against the North Wales Prison & the Prison Industrial Complex. Cymraeg: Wythnos o Weithredu yn Erbyn Carchar Gogledd Cymru

Ongoing UK
Every Tuesday 6pm-8pm, Yorkshire: Demo/vigil at NSA/NRO Menwith Hill US Spy Base More info: CAAB.

Every Tuesday, UK & worldwide: Counter Terror Tuesdays. Call the US Embassy nearest to you to protest Obama's Terror Tuesdays. More info here

Every day, London: Vigil for Julian Assange outside Ecuadorian Embassy

Parliament Sq Protest: see topic page
Ongoing Global
Rossport, Ireland: see topic page
Israel-Palestine: Israel Indymedia | Palestine Indymedia
Oaxaca: Chiapas Indymedia
Regions
All Regions
Birmingham
Cambridge
Liverpool
London
Oxford
Sheffield
South Coast
Wales
World
Other Local IMCs
Bristol/South West
Nottingham
Scotland
Social Media
You can follow @ukindymedia on indy.im and Twitter. We are working on a Twitter policy. We do not use Facebook, and advise you not to either.
Support Us
We need help paying the bills for hosting this site, please consider supporting us financially.
Other Media Projects
Schnews
Dissident Island Radio
Corporate Watch
Media Lens
VisionOnTV
Earth First! Action Update
Earth First! Action Reports
Topics
All Topics
Afghanistan
Analysis
Animal Liberation
Anti-Nuclear
Anti-militarism
Anti-racism
Bio-technology
Climate Chaos
Culture
Ecology
Education
Energy Crisis
Fracking
Free Spaces
Gender
Globalisation
Health
History
Indymedia
Iraq
Migration
Ocean Defence
Other Press
Palestine
Policing
Public sector cuts
Repression
Social Struggles
Technology
Terror War
Workers' Movements
Zapatista
Major Reports
NATO 2014
G8 2013
Workfare
2011 Census Resistance
Occupy Everywhere
August Riots
Dale Farm
J30 Strike
Flotilla to Gaza
Mayday 2010
Tar Sands
G20 London Summit
University Occupations for Gaza
Guantanamo
Indymedia Server Seizure
COP15 Climate Summit 2009
Carmel Agrexco
G8 Japan 2008
SHAC
Stop Sequani
Stop RWB
Climate Camp 2008
Oaxaca Uprising
Rossport Solidarity
Smash EDO
SOCPA
Past Major Reports
Encrypted Page
You are viewing this page using an encrypted connection. If you bookmark this page or send its address in an email you might want to use the un-encrypted address of this page.
If you recieved a warning about an untrusted root certificate please install the CAcert root certificate, for more information see the security page.

Global IMC Network


www.indymedia.org

Projects
print
radio
satellite tv
video

Africa

Europe
antwerpen
armenia
athens
austria
barcelona
belarus
belgium
belgrade
brussels
bulgaria
calabria
croatia
cyprus
emilia-romagna
estrecho / madiaq
galiza
germany
grenoble
hungary
ireland
istanbul
italy
la plana
liege
liguria
lille
linksunten
lombardia
madrid
malta
marseille
nantes
napoli
netherlands
northern england
nottingham imc
paris/île-de-france
patras
piemonte
poland
portugal
roma
romania
russia
sardegna
scotland
sverige
switzerland
torun
toscana
ukraine
united kingdom
valencia

Latin America
argentina
bolivia
chiapas
chile
chile sur
cmi brasil
cmi sucre
colombia
ecuador
mexico
peru
puerto rico
qollasuyu
rosario
santiago
tijuana
uruguay
valparaiso
venezuela

Oceania
aotearoa
brisbane
burma
darwin
jakarta
manila
melbourne
perth
qc
sydney

South Asia
india


United States
arizona
arkansas
asheville
atlanta
Austin
binghamton
boston
buffalo
chicago
cleveland
colorado
columbus
dc
hawaii
houston
hudson mohawk
kansas city
la
madison
maine
miami
michigan
milwaukee
minneapolis/st. paul
new hampshire
new jersey
new mexico
new orleans
north carolina
north texas
nyc
oklahoma
philadelphia
pittsburgh
portland
richmond
rochester
rogue valley
saint louis
san diego
san francisco
san francisco bay area
santa barbara
santa cruz, ca
sarasota
seattle
tampa bay
united states
urbana-champaign
vermont
western mass
worcester

West Asia
Armenia
Beirut
Israel
Palestine

Topics
biotech

Process
fbi/legal updates
mailing lists
process & imc docs
tech