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Sub-prime Mess Leads to Global Summit

by phillenbrand on October 19, 2008

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Over the weekend, President Bush, at the behest of several national leaders, has offered to host a global summit.  The thinking is to hold the summit at the UN to emphasize both the importance of the event and the global nature of the fix.

But the global crisis began here in this country, with the meltdown of the sub-prime market.  And it began for one reason alone; politics!

I’ve said in the past that when the US mortgage market gets a cold, the rest of the economy gets a fever.  It is perhaps now appropriate to expand that to encompass the world economy.  When the US mortgage market gets a cold, the world economy gets a fever.  At least in this case.


But the problem was greatly exacerbated by something that many know was unprecedented in the industry.  It was a massive move on the part of the industry into the sub-prime markets.  As I spelled out in other posts, this move began in Washington and in two stages.

First the “American dream” of home ownership shifted in the minds of many there to become the “American right” to home ownership.  Basically, members of Congress began to see home ownership as an entitlement.  Second, Fannie and Freddie were pressured by members of congress to support this new entitlement.

Note that both factors were political, not market driven.  The markets on their own had produced unprecedented levels of home ownership in this country; the highest in the world.  Before the mortgage crisis began, estimates were that almost 72% of Americans owned a home.  If that’s not success, then what is?

In many ways, the federal government aided this growth by creating incentives for home owners, such as tax breaks on mortgage interest.  Incentives are carrots, but what Congress began to do several years ago when it decided to actively interfere was to introduce a stick.  As Fannie and Freddie came under increasing scrutiny, pressure was applied to support “low income housing.”

As Fannie and Freddie began to support the sub-prime market, lenders followed suit.  Politics began the push to support the market, now politicians think they can interfere again to “improve” the efficiency of markets that were operating well on their own for decades.

How bad must the situation grow before politicians realize they are the problem as opposed to the solution?

Global summits will not fix our problems.  But the same market principles which produced massive growth and prosperity across the world can fix them.  Perhaps it’s time to go back to the future.

Last 3 posts by phillenbrand

Related posts:

  1. Containment?? Subprime mess goes global
  2. Fannie & Freddie Should Be Fully Privatized
  3. The Genesis of Our Current Mortgage Crisis
  4. Freddie Mac Employees Speak Out
  5. Market Perception is Reality

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  • Once again, you have hit the nail on the head. But... one thing that we all must keep in mind is that there is a point that we must stop and say when is it that indiviuals must take responsibility for their own actions? This economic mess may well be caused by under regulating or over regulating the industry; arguments come from both sides of the aisle, but individuals must know what they can and cannot afford! And, if they do not, then they do not deserve to have credit extended to them. Credit is a privilege we earn, not someones right we get to abuse!
  • I agree wholeheartedly with you Jim. One reason why Australia has avoided much of the economic mess that the rest of us have experienced is that, unlike the US, lenders in that country are allowed to go after borrowers for foreclosure losses.

    So you have a good balance between lenders, who want to make sure their borrowers have good credit, and the borrowers who don't want to end up in court because they tried to walk away from a mortgage they couldn't afford. In the past, I think lenders have done a really good job of advising clients on what they could and could not afford, which is why the market works best when we keep politicians out of the process.
  • Tom Lowe
    Australia will be in far worse shape than the USA rather shortly. BTW, in USA, lenders are also allowed to go after foreclosure losses, but they never do because just as in Oz, you can't get blood out of a turnip.

    All hail the mantra of ignorance repeated by Jim Dierking: which is that every human being can foretell the future until the end of time. When the day surely comes that Jim Dierking finds the shoe of unexpected negative circumstance on his own foot, let us then hear what he has to say. Like most others, I'm sure he will feel entitled to something which he did not ever earn!
  • I will try and be professional in responding to Tom Lowe's comments. Perhaps I should start by saying that yes, when a unfortunate situation occurs in someone's life, there should be something that they can do to get help. I give generously every week to insure that various missions within my community and on a larger scale as well. I have survived a few very serious health issues as has my wife and through it all I managed to pay my bills as agreed. I live within my means and have tried to make provisions so that in case I am in a situation unexpected negative circumstance, I will not have to check to see what I am entitled to.

    But you, Tom, made this personal. It is not personal and let's face it, far too many americans live beyond their means. Quoting the Federal Reserve, 40% of American families spend more than they earn. So my comments are not directed to the individual family that is paying their bills, living within their means and sadly, has something like loss of income cause them to become unable to afford their financial obligations. I am talking about the individuals mentioned by the Fed, living beyond their means.

    So, I will continue to work hard and you can go on singing your mantra of ignorance. The fact still remains that far too many of the people in financial crisis has done this to themselves. And for those who have lost their employment, become disabled and unble to work, I will continue to give generously to charities that provide assistance to them. So take your mantra of ignorance and sing your song to someone who is ignorant and who will listen!

    And I hope that you have a blessed day!
  • A summit with Pres Bush is likely just a waste of time, as all the leaders know he is a lame duck. They should wait until the new year and new pres.
  • I have noted today with some surprise that Mike Whitney is very positive about recent developments, especially Gordon Brown's intervention.

    I think the present problem began in 1968 / 72 when Presidents Johnson and Nixon first privatized Fannie, then created the quasi-competitor Freddie. Then the key development was the badly constructed accounting rule SFAS 140, that has resulted in the Enronization of nearly the entire financial services industry.

    After Nixon closed the gold window on 15 Aug 1971, asset backed paper replaced gold as the underlying money in most of finance. Nobody looked too hard at what was in this "canned" value for many years, but when subprime MBS blew up on, say 20 June 2007, and ABCP completely seized in mid-August of that year, it was just like when the tainted tuna destroyed consumer confidence in StarKist's plant in New Brunswick a generation ago.

    The whole money system is now broken, and all the central banks, finance ministries and advanced governments are trying to put things back together again.

    Heaven knows what they will come up with (Breton Woods II?) but whatever it is, if it works it will be our world for the rest of our lives. We are about to learn that money is just a social contract, and that central banks are constrained not to break it.
  • I really like this website you have here. If it is ok with you I am going to add your url link to my website at http://home---refianancing.blogspot.com which is a website of related material about home mortgages and mortgage rates. Once again, great work and keep blogging!
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