The current economic correction period is more than a simple business cycle downturn. We are experiencing the painful burst of an economic bubble. An economic “bubble” is “trade in high volumes at prices that are considerably at variance with intrinsic values.” However, this bubble helped to keep the American economy afloat after 9/11. But after a prolonged economic boom, we are now journeying through the bust. We are suffering now because this economic boom, like so many others, was built on garbage. This time, garbage mortgages based on super-inflated property values have led to a global meltdown.
Some will argue, “Who cares how we got here, the point is we are here now.” Confucius would respond, “Study the past, if you would define the future.” History is valuable only if we use it to prevent the repetition of past mistakes.
Many factors brought us to this point. One of these factors is a complete regulatory failure concerning investment banks. In fact, the chairman of the Securities and Exchange Commission (Chris Cox), a longtime proponent of deregulation, acknowledged on September 26 “that failures in a voluntary supervision program for Wall Street’s largest investment banks had contributed to the global financial crisis,” and he abruptly shut the program down. The voluntary regulation plan was heavily lobbied for by the big 5 investment banks (including Henry Paulson, then the head of Goldman Sachs, and now Secretary of the Treasury and architect of the Bailout). The big 5 investment banks no longer exist.
We have watched a continued trend towards deregulation of corporations and investment banks. Substantial deregulation occurred when the Reagan Administration overthrew antitrust law in 1981 to free investors and managers to create larger firms. The idea is that we don’t need governmental economic regulations because banks, corporations and free markets will regulate themselves. In more recent times, mortgage brokerages hired rating companies to rate investments in mortgages sold on the stock market (mortgage backed securities). These rating companies rated subprime mortgage securities as AAA investments. This meant they were safe enough for investment by pension funds and banks. No government regulation needed here, the private rating companies can handle the job!
Greed is definitely to blame. Many lenders knew that the quality of the loan made no difference. They would get paid for making the loan and then it would get passed off to another company. An out of work private mortgage broker, Mr. K, says that “many of the large lenders would visit my office and tell me and my employees to “just make the loans.” It didn’t matter if the financials didn’t add up, we could do whatever it took to make the loans. Many of us in the business told borrowers not to worry. They would voice concerns like “I can only pay 2,500 a month, what happens when my loan readjusts in a few years?” We told them not to worry, the prices would keep going up, and they could re-finance before their payments readjusted. The gains would outweigh the pre-payment penalty.”
He adds that “we [lenders] made big money. Guys in the business, 20 year old kids with no college education, would be driving hundred thousand dollar cars. And the big [corporate] guys made money. I think it shows how broken the system is that the corporate guys profited so much while destroying the economy, and then many of them got huge bonuses when they left their companies. As for many of those I knew, some of them are facing serious charges. But most are not. I knew hundreds of other guys doing the same thing at dozens of companies. We did whatever it took to make the loans because it didn’t matter, we weren’t responsible for them. But we don’t deserve all the blame. No one in the government saw that this thing was going to crash. If they did then they would have done something about it. No, people at every level were making money. Who cares if these borrowers were too unsophisticated? I mean, I knew attorneys who would sign their loan documents without reading them. I think what is clear is that we worked to find ways around the [current regulations], and we were rewarded to do it. The government did not care at all because a lot of rich people were making a lot of money. It was too good to be true. Did I have a part in it? Yes. But we we’re all competing and the idea was not to make quality loans. The idea was to make as many loans as possible and to do whatever it took to make them. There is no honor among thieves.”
Toasters are safer than mortgages. Elizabeth Warren argues, “go into any appliance store in America and look for a toaster with a one-in-five chance of exploding. You won’t find one. But at any mortgage brokerage in the country it has been possible to purchase a loan with a one-in five foreclosure rate. Toasters -like every product you touch or taste- are tested for safety. Yet financial products go unmonitored for basic safety.” She suggests the implementation of a federal commission for basic review and testing of consumer finance products.
Free market economics do not work in America. How many more depressions must we go through to realize this? The boom and bust of free markets have proven time again to be too painful to tolerate. In conclusion, what the country needs is to promote corporations that provide quality products at reasonable prices, not those that greedily maximize profits by finding ways around regulation.
Written by Shaun Cunningham, 2L
