http://canadafreepress.com/index.php/article/5048A Manufactured Crisis By Klaus Rohrich Tuesday, September 16, 2008
So, Lehman Brothers is toast and Merrill Lynch has been gobbled up by Bank of America, the stock market is in free fall and there is no small amount of hand wringing and navel gazing. The lessons of Economics 101 seem to have been lost on those Masters of the Universe whose economic Léger de main has brought us to this place and the finger pointing among politicians is rampant.
Let’s look at the “root causes” of this crisis. As with most other “root causes”, this one involves poverty, specifically the poverty among homebuyers who did not have sufficient income and or net worth to sustain ongoing mortgage payments. Yet they were able to obtain mortgages, in many cases up to 110% of the value of their home, from financial institutions eager to lend money to people the Mafia wouldn’t touch.
Had some of these individuals attempted to get a mortgage in say, 1993, they would have been turned down flat. The difference is that Bill Clinton became President of the United States in January of 1993 and upon taking office wondered out loud why so many poor people and visible minorities didn’t own their home and what could be done to change this situation. Naturally, the good people at Treasury and Justice didn’t want to disappoint the new president, so they put the word out to financial institutions that the U.S. Government would really like to see more low income and visible minorities achieve the American Dream of homeownership. That many individuals among these visible minorities were financially unqualified didn’t appear to matter either to the government of the day or to the bankers who advanced the cash.
It could be argued that the astronomic increase in mortgage default is de fault of Bill Clinton, whose wish to spread the American Dream caused all this in the first place.
The second part of the crisis is due to good old American ingenuity, as those bankers who were urged by their government to lend money to anyone and everyone saw an opportunity to take these so-called sub-prime loans and package them into investment vehicles. Some of these were offered at greatly inflated rates of return, as the old argument about the higher the risk the greater the returns won over good judgment. That’s how Bear Stearns, Merrill Lynch and Lehman Brothers managed to get burned, as they were the last in a fairly high pyramid holding on to worthless paper.
The current “correction” that both the real estate and the financial markets are undergoing will be relatively short lived, as the basic U.S. economy is sound. It’s not like Americans have lost their capacity to produce.
While calls for tighter regulations over mortgage and real estate lending practices are akin to closing the barn door after the horses have all escaped, these regulations will ensure that future real estate loans will not wind up flooding the market with overvalued properties. Having said that, we should also resist having the government attempt to regulate this crisis away, as much of what the government does to alleviate problems inevitably ends up creating more unforeseen problems.
Yes, times are tough and a lot of investors are going to get burned. But Americans have the capacity and the will to overcome hard times and emerge wealthier, if not stronger.
Topic: Lehman Brothers; A Manufactured Crisis (Read 1068 times)