I missed President George W. Bush’s speech live — I was in the office working on The Cranbury Press — but I’ve just read the transcript and am struck by an interesting omission. Let’s see if anyone picks up on it. Here is Bush’s explanation of how the financial sector got to its precarious current state:
Well, most economists agree that the problems we’re witnessing today developed over a long period of time. For more than a decade, a massive amount of money flowed into the United States from investors abroad because our country is an attractive and secure place to do business.
This large influx of money to U.S. banks and financial institutions, along with low interest rates, made it easier for Americans to get credit. These developments allowed more families to borrow money for cars, and homes, and college tuition, some for the first time. They allowed more entrepreneurs to get loans to start new businesses and create jobs.
Unfortunately, there were also some serious negative consequences, particularly in the housing market. Easy credit, combined with the faulty assumption that home values would continue to rise, led to excesses and bad decisions.
Many mortgage lenders approved loans for borrowers without carefully examining their ability to pay. Many borrowers took out loans larger than they could afford, assuming that they could sell or refinance their homes at a higher price later on.
Optimism about housing values also led to a boom in home construction. Eventually, the number of new houses exceeded the number of people willing to buy them. And with supply exceeding demand, housing prices fell, and this created a problem.
Borrowers with adjustable-rate mortgages, who had been planning to sell or refinance their homes at a higher price, were stuck with homes worth less than expected, along with mortgage payments they could not afford.
As a result, many mortgage-holders began to default. These widespread defaults had effects far beyond the housing market.
See, in today’s mortgage industry, home loans are often packaged together and converted into financial products called mortgage-backed securities. These securities were sold to investors around the world.
Many investors assumed these securities were trustworthy and asked few questions about their actual value. Two of the leading purchasers of mortgage-backed securities were Fannie Mae and Freddie Mac.
Because these companies were chartered by Congress, many believed they were
guaranteed by the federal government. This allowed them to borrow enormous sums
of money, fuel the market for questionable investments, and put our financial system at risk.The decline in the housing market set off a domino effect across our economy. When home values declined, borrowers defaulted on their mortgages, and investors holding mortgage-backed securities began to incur serious losses.
Before long, these securities became so unreliable that they were not being bought or sold. Investment banks, such as Bear Stearns and Lehman Brothers, found themselves saddled with large amounts of assets they could not sell. They ran out of money needed to meet their immediate obligations, and they faced imminent collapse.
Other banks found themselves in severe financial trouble. These banks began holding on to their money, and lending dried up, and the gears of the American financial system began grinding to a halt.
Seems like a fairly accurate explanation, except that it omits an important element — the lack of federal oversight of the markets thanks to the mania for deregulation that has paralyzed the feds for decades. We broke down the walls and exiled the cops and now are surprised that the rabble ran wild on Wall Street.
But regulation is not part of the administrations’ bailout package — even if the president admits that “Our 21st-century global economy remains regulated largely by outdated 20th-century laws.”
Instead, we are asked tohand over $700 billion to the people who created the very problem in the first place.
Hank Kalet 