I don't believe the economy was destroyed by Obama. Then again, I don't believe it was demolished by Bush either. Though he may have facilitated policies that helped to empower the elite far more than the many, if I recall correctly, the economies decline seemed to begin near the tail end of Clinton's last term. For that matter I don't even believe Clinton is singled handedly responsible for most of our economic woes, even if it the downturn began with him being the man in office. I think the 90's while seemingly great at the time was nothing more than a sugar rush riding high off the fumes of overextending borrowing, lending and spending. The kind of over extended borrowing that we are paying for now. Growth at that pace could never have been sustainable forever, not even if we had never outsourced a single job.
There was greed and entitlement everywhere. A new found sense of greed in"deserving" a big house you might later not be able to afford arose. Greed from banks made them hand out loans to these people almost indiscriminately, hoping to keep them on the hook forever, only to get a bailout when their bets went sour. Greed was everywhere, in all upper, middle and lower classes and these are the consequences. People are mostly just mad now that the bankers now have so much pull and influence and are in such a position of untouchability in becoming too big to let fail that they now had the means to shirk their bite of the shit sandwich and worse, offload it to everyone else without said influence.
In any event, you can all stop pointing fingers acting as though an economy rises and falls based solely on who is in the white house and look to your own habits and weigh your own ownership in the slumping economy if you want the prosperity to come back. The politicians are too afraid now to tell us the truth of how we ourselves have a great deal of ownership in the nations woes. A sale on a cheap made in china product might not seem like much on your trip to target, but jobs are being destroyed when millions adopt said behavior even if the consequences are not so easily seen. If there is to be a return to prosperous times it will not come as a result of what happens in Washington, but what kinds of small, incremental actions each seemingly insignificant person contributes to the whole.
Good points, but I think you put too much blame on homebuyers, and not enough on Wall Street.
What happened was, simply, Wall Street found a way to commit fraud - they stumbled onto it really - and that drove the problem.
At some point, a small group of people - I've read the writing of the woman in charge who did this - came up with the idea of new 'derivative' financial products bundling mortgages, IIRC. If it wasn't abused, it was a new way to make more money. I can't really praise it for doing anything more than extracting more money without really adding any value - in other words, a typical Wall Street dream product - but not too harmful.
However. From there it just grew out of control. The group who invented these things, again IIRC, came to get out of trading them because of the abuses.
There are whole books on what happened, but my version is basically, at the same time there were changes in the law making big institutional accounts - think massive sums of people's retirement money and things like that - that had been limited by law to very conservative investments to the opposite, required to diversify into more aggressive investments. But what?
Now, I haven't tracked the exact legislative history of that change, but it's exactly the sort of change Wall Street lobbyists would push for, to get their hands on the money.
Those changes, in part, made these new mortgage derivatives hugely attractive to these big funds looking for and needing to pour huge amounts of money into new areas.
On top of that, at the time, real estate was booming and these investments had good rates of return.
Now, Wall Street is based on the idea of 'fair market value' trades. If one side can misrepresent the value of a product, they can make a fortune. It's why we have laws limiting that mirepresenting of products - rules which are less stringent whenthe customer is a large institutional investor expected to do due diligence.
Now, high quality mortgages aren't that controversial - they have a more clear value and are traded around that value. Basic business.
But these new products made of low-quality high mortgages could be easy to disguise, to hide the high levels of risk and sell for more than they're worth, hugely profitable.
Now the idea for the big money makers was, get these mortgages, package them, sell them for a lot fast, wash your hands, and pay out huge bonuses.
That's where the key role of the ratings agencies like Moody's comes in. When they'd say a high-risk product was low risk, that made it elgibile for purchase by these huge institutions that were still legally required to stick to 'safer' investments - and since they were rated AAA, they were very attractive.
It was a big win-win all around for a while - but built a bubble.
Because this business was hugely profitable like printing money for these Wall Street firms, and because there was a massive appetite to buy the products as fast as they could be made available by the trillions of dollars these institutions needs to divest, there was a huge pressure on Wall Street firms to come up with a lot of these mortgages.
That's where the pressure came from from the Wall Street firms to tell the mosrtgage lendeds to come up with a huge amount of mortages - the only place a huge number could be obtained, from higher risk buyers normally turned down or given huge interest rates. Now they were told, get us mortgages, period. The mortgage brokers were paid to sell the mortgage, period.
So you had Wall Street pushing Mortgage lenders to make absurdly unjustified loans, because they could profit reselling them. And mortgage lenders advertised to unsophisticated buyers that they COULD afford and obtain these loans. They got creative, offering mortgages with very low payments early on and told the people they could have them - and besides, their home would only go way up in value. A lot of people believed it when they were told this - after all, they wouldn't give away a loan that wasn't safe?
The homebuyers won, getting loans for nice homes more than they had been able to. Mortgage brokers won, getting paid to make large numbers of loans without any questions, money being thrown at them and pushed on them. Wall Street made a fortune by taking these mortgages, packaging them, getting the AAA rating, and selling them to an institutional investor. The ratings agencies did great - they got the business of the Wall Street firms rewarding them for the lenient ratings.
Now, there's another complication to add here, if this sounds too easy and reckless.
Insurance against losses.
The government created laws - earlier when it was a bit more responsible - about insuance. If you want to sell insurance, you have to have some reserves. Well, that limits Wall Street's profits, so that won't do. If they could only sell insurance with, say, 20 to 1 leverage against their assets, they can only make that much money - but if they could have higher leveral - 'we only have $1 billion, but sure we'll insure you for $500 billion' - they could make MASSIVE money for FREE, as long as the investments kept their value.
Now, talk about a dream Wall Street product. These big institutional investors - and sometimes other Wall Street firms - liked to 'insure' their product purchases - so anyone asking questions could be told, 'hey, don't worry, even if the mortgages fail, we're covered', making it look low risk. In the meantime companies could sell that insurance, and just pocket the money - at that point with home values going up, they never had to pay much on the policies - just sell the insurance and get rich. Perfect for Wall Street.
To make it more profitable and get around the insurance laws, they simply invented something called CDOs, Credit Default Swaps. It was insurance - except with a different name so that it had no regulation. No one could tell you how many were sold, there were no rules - companies could just say 'you are covered by these CDO's'. These were attractive to buyers because they could be lower-cost insurance.
And the game went fine like this for a little while everyone getting rich. Except that it did create the bubble.
I won't try to get into things like how Fannie and Freddie got drug into this, as they had to compete with the Wall Street companies and expanded the problems.
But there was massive, 'the system is at risk' amounts of exposure of these companies owing each other far more money than they had if the CDO's were called.
It was reckless - and made people rich, so they did it.
The rest is simple, as the bubble finally got to be too much and CDO's were called in, and the issuers couldn't pay them and called in their own CDO's and they couldn't be paid.
This was where things happened like no one would loan anyone money because they suddenly would not get paid back, and firms were exposed as having 'toxic assets'.
That's assets not really worth anything that had been listed as worth a lot, and having insurance that was crap CDO's.
And that's where the deals started - the former Goldman Sachs chairman now Treasury Secretary deciding that a major rival to Goldman Sachs would not get saved, while secretly pouring tend of billions into insurer AIG which would actually go through AIG to pay back Goldman Sachs 100% on the dollar for these investments worth far less.
Congress to their credit demanded that the plan also include a large fund for helping homeowners - and then Treasury never spent 90% of the homeowner fund.
Anyway, that's my version of what happened, and the primary blame is Wall Street's and a failure of the government to regulate them well - far more than home buyer 'greed'.
Now to be clear, it's not all that simple like everyone knew they were doing something 'corrupt'. Two mitigating factors:
- Competition - when one Wall Street firm would make a FORTUNE from this, another firm couldn't stay in business well just sitting back letting the other firm get all the money, and mortgages, and business. Those retirement funds buying the fraudulent products were not putting that money into the second firm's more responsible products. They'd go out of business.
- This deregulation was sold to politicians not as 'let us bribe you to destroy the US economy', but as a 'modernization act' providing more flexibility to keep Wall Street competitive globally, with predictions that without it, the US share of finance would go down and the rest of the world with more business-friendly governments would get all the money. They didn't know, largely.
Even Senator Byron Dorgan, famous for predicting almost exactly what would happen '10 years later if you pass this', admitted he had no idea about the time frame and was just guessing and critizing the general principle of the sort of risky behaviors that were being allowed. It's not at all clear many politicians understood the problem.
We can blame all day. Wall Street wants to be reckless and make money, so they lobby the government to not regulate them well. The government gets elected by the guy who has the most money to buy tv ads showing him with a flag waving, and so they want that Wall Street money. And voters are not very good at picking candidates, in over 90% of races picking whoever has the most money showing those pretty ads with flags, and so they reward the politicians who take the money and let Wall Street be reckless.
It's a big circle of a problem. In the meantime, the people who were criminally fraudulent - knowingly misvaluing the products against the law to sell to returement funds - made billions and moved to the Bahamas. Main question left there was, will the Justice Department prosecute the crimes?
Well, no. See the politicians and money above.
Funny enough in the far smaller S&L crisis under Reagan when deregulation of S&L's passed, over a thousand people were convicted of crimes.
Not one for 2008.
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