What kind of “silly” Capitalism are the Americans running? Is it “adaptive” capitalism or “make-it-up-as-you-go-along” capitalism? I need an adjective to describe this new version they’ve come up with. Any suggestions?
Bush announcing America is abandoning capitalismI’ve been brought up on “survival of the fittest” capitalism, where if a company does something stupid, the Market punishes the infringement and the Corporation goes under. It imposes a survivalist discipline and obliges a steep but lasting learning curve on the rest. This way, Corporations do behave—or go under. Now, we’ve had some twenty years of an outrageous Bull Market with speculators egging on the Market Makers to push the indexes ever higher, with little hint of a apposite correction—yet when the timely adjustment is in sight, the Fed, spurred on by the fat-cat Mortgage Bankers who have caused the Credit Crunch in the first place, piles in tax-payers money to buy up the toxic mortgages. They correctly allowed Bear Stearns, the second-largest underwriter of U.S. mortgage bonds, and Lehmans, to go to the wall, but seem unable to let the Markets do their job of punishing the corrupt mortgage bankers. The Fed nationalised Freddy and Fannie and AIG, and have now bailed out the other banks holding the worthless subprime papers by underwriting these valueless documents. The greedy have learned that it pays to be greedy and can thus continue on their merry way until the next time.
The question I began to look into was—who was responsible for this Credit Crunch—who invented subprime? There clearly was Congress collusion when it deregulated the financial sector in the mid-1970s leading eventually to the collapsing $1.3 trillion "subprime" mortgage business. I’ve had pathetic US FT journalists trying to blame those bloody French (in 1719) for their current subprime debacle.
A study argues that the considerable 2003 pullback of government-sponsored financial service corporations Fannie Mae and Freddie Mac from the mortgage credit market and their subsequent replacement by aggressive, private mortgage securities issuers in late 2003 had a significant impact on home prices and was more responsible than subprime lending for the drastic price run-up that peaked in early 2006. The researchers found that rising home prices up to 2003 could be explained by economic fundamentals, such as low unemployment rates, expanding household incomes and population growth. These factors fuelled housing demand and, in turn, increased U.S. home prices. During this time, Fannie Mae and Freddie Mac actively issued and purchased conventional, prime mortgage-backed securities. But in 2003, political, regulatory and economic factors–including accounting irregularities that led to Fannie’s and Freddie’s senior officers’ resignations and the capping of their retained loan portfolios–forced the two entities to significantly slow their lending volume. Private funding in the form of asset-backed securities and residential mortgage-backed securities replaced conventional, conforming mortgage-backed securities as the prevalent source of mortgage capital. The new looser credit environment allowed looser underwriting standards and increased tolerance for riskier, high-yield loan products, the study’s authors said. It also generated a borrowing climate that sought to provide previously marginal borrowers with additional access to credit — a movement that was heartily endorsed by the Bush Administration, who actively pushed its vision of “the Ownership Society” at that time, as well. The spend now pay later attitude worked in the retail sector and bounced out to the housing sector. The credit market bonanza led to a record increase in total mortgage volume, and pushed up home prices even more with a momentum characteristic of a bubble.
To increase business, Mortgage Bankers and the Mortgage Brokers colluded together to lend/sell the subprime mortgages to borrowers who had no business buying a home because they simply couldn’t afford it. The Bankers and Brokers made hundreds of millions out of this scam. Subprime lenders knew the risks they were taking, as did investors, such as hedge funds, who bought securities based on subprime loans. Subprime lenders often paid mortgage brokers commissions two or three times those on prime loans. These predatory lenders pushed high-risk loans on unsuspecting borrowers. The resultant chaos means that it is currently predicted that some two million Americans will lose their homes. Mind you, these same homeowners should never have been able to afford their own homes. Lefty PC style egalitarianism doesn’t sit well in a capitalist society—which is why PC should be dumped in the capitalist West.
Now, all the subprime lenders knew the risks they were taking, as did all the investors, such as the hedge funds that bought securities based on subprime loans. Subprime lenders often paid mortgage brokers commissions two or three times those on prime loans. These predatory lenders pushed high-risk loans on unsuspecting borrowers. Subprime loans, Alt-B, C, and D, were issued to borrowers who would not have qualified for ordinary Alt-A prime mortgages because of low incomes or a tarnished credit, and thus they carried special risks for all those involved. These subprime loans were even called Ninja Mortgages or NINJA loans—NINJA being an acronym standing for "No Income, No Job and No Assets." These bizarre loans required no down payment or proof of the borrower's income, and some even allowed borrowers to decide for themselves how much to pay each month. This is criminal irresponsibility and a recipe for the current disaster. To add to the problem, the credit rating agencies such as Fitch Ratings (e.g. A+), Standard & Poor's, and Moody's Investors Service (e.g. A1) consistently gave these worthless subprime loan bonds with 6 percent coupons backed by 30-year, fixed-rate “jumbo” an AAA rating. It’s like taking electroplated gold jewellery to an assessor and having them pronounced as pure gold—or a Zirconium declared a real diamond. We now know these subprime papers are as worthless as the credit rating agencies, who need to fold up business because they are no good.
Another culprit is Alan Greenspan, who actually encouraged the spread of homeownership during his tenure at the Fed—even when he knew that these homeowners couldn’t afford the mortgage because it was subprime. In a 2005 speech, which was called, “an insane, idiotic recommendation,” Greenspan endorsed subprime loans to help marginal borrowers get into houses. While the gravy was flowing, everybody in the US turned a blind eye to the scams they were participating in, actively or tacitly. However, now the blame game is in full flow.
John Robbins, Chairman of the Mortgage Bankers Association, says he is "mad as hell" at "a ‘few’ unethical actors" that have sullied his profession's reputation. Hang on mate, without your carefully crafted but shoddy mortgage “instruments” these “unethical actors” have nothing to sell—so give your false bluster a rest mate. Nobody believes the Mortgage Bankers are innocent. The Mortgage Bankers and the Brokers were in it together, and they made hundreds of millions out of this scam.
George Hanzimanolis, president of the Mortgage Brokers Group, complains that people are pointing at him and saying, 'It's the brokers. It's the brokers,' when they want someone to blame for the Credit Crunch. Wear it, if the hat fits, is what I say. You’re a big boy now and you knew what you were doing.
With today’s renouncement of capitalist principles, President Bush has effectively brought the Credit Crunch to an end by securitising the circulating worthless subprime paper bonds. This means the US taxpayer is to pick up the fallout from the subprime mortgage scam and the bailout will make Bankers and Brokers more reckless in the future. I’m frankly outraged. However, the worldwide recession isn’t over as Bankers belatedly tighten their lending criteria. The days of cheap credit are over and that will impact on our daily lives. The next two years will still require a tightening of belts and a lot more delayed gratification when it comes to buying those items online or in the shops.
