Riding Out the Credit Crisis

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There seems to be some appetite on BoingBoing for a more comprehensive but quick-to-grok analysis of the credit crisis and what to do about it. While "I told you so's" are fun in a sick sort of way, I'm passing on this link to my last spring's Arthur Magazine columns(if Dreamhost is still unable to meet the demand for links on that page or here, then see the whole piece in the extended post, below). I'm sharing it as a way to review the steps that led to our current fiasco, explain it in the greater context of centralized currency, and help people not feel so very terrible about it all. (I also mean to introduce you to Arthur magazine, a free coffee-shop distribution I'm proud to write for alongside folks including Erik Davis, Thurston Moore, and Peter Lamborn Wilson - who all write for free, like me.)

...Bush’s tax cuts and other measures favoring the rich led to the biggest redistribution of wealth from poor to rich in American history. The result was that the wealthy–the investment class–had more money to invest, or lend, than there were people and businesses looking to borrow.

The easiest way to bring more borrowers into the system–and to create more of a market for money–was to promote homeownership in America. This is precisely what the Bush administration did, touting home ownership as an American right. Of course, they weren’t talking about home ownership at all, but rather pushing people to borrow money tied to the value of a house. If people could be persuaded to take mortgages on homes, real estate values would go up for those already invested (like land trusts and real estate funds) and banks would have a market for the excess money they had accumulated.

In short, there was a surplus of credit in the system. Americans were encouraged to borrow in the form of mortgages, which created demand for the credit banks wanted to sell. In many cases the credit itself wasn’t even real, but leveraged off some other inflated commodity that the bank or investor may have owned.

Banks and mortgage companies invented some really shady and difficult-to-understand mortgage contracts, designed to get people to borrow more money than they could . Banks didn’t care so much about lending money to people who wouldn’t be able to pay it back, because that’s not how they were going to earn their money, anyway. They provided the money for mortgage companies to lend, and in return won the rights to underwrite the loans when they were packaged and sold to other people and institutions.

“Riding Out the Credit Crisis” by Douglas Rushkoff

from Arthur Magazine No. 29/May 2008

There’s two kinds of people asking me about the economy lately: people with money wanting to know how to keep it “safe,” and people without money, wanting to know how to keep safe, themselves.

Maybe it’s the difference between those two concerns that best explains the underlying nature of today’s fiscal crisis.

Is what’s going on in the economy right now really worse than anything that’s happened in the past few decades? Are we heading towards a bank collapse like what happened in 1929? Or something even worse?

On a certain level, none of these questions really matter. Not as they’re being phrased, anyway. What we think of as “the economy” today isn’t real, it’s virtual. It’s a speculative marketplace that has very little to do with getting real things to the people who need them, and much more to do with providing ways for passive investors to grow their capital.

This economy of markets was created to give the rising merchant class in the late middle ages a way to invest their winnings. Instead of actually working, or even injecting capital into new enterprises, they learned to “make markets” in things that were scarce. Or, rather, in things that could be made scarce, like land.

That’s how speculation was born. Speculation in land, gold, coal, food…pretty much anything. Because the wealthy had such so much excess capital to invest, they made markets in stuff that the rest of us actually used. The problem is that when coal or corn isn’t just fuel or food but also an asset class, the laws of supply and demand cease to be the principle forces determining their price. When there’s a lot of money and few places to invest it, anything considered a speculative asset becomes overpriced. And then real people can’t afford the stuff they need.

The speculative economy is related to the real economy, but more as a parasite than a positive force. It is detached from the real needs of people, and even detached from the real commerce that goes on between humans. It is a form of meta-commerce, like a Las Vegas casino betting on the outcome of a political election. Only the bets, in this case, change the real costs of the things being bet on.

That’s what happened in the housing market and the credit market–which, these days, are actually the same thing. Here’s the story, in the simplest terms:

Bush’s tax cuts and other measures favoring the rich led to the biggest redistribution of wealth from poor to rich in American history. The result was that the wealthy–the investment class–had more money to invest, or lend, than there were people and businesses looking to borrow.

The easiest way to bring more borrowers into the system–and to create more of a market for money–was to promote homeownership in America. This is precisely what the Bush administration did, touting home ownership as an American right. Of course, they weren’t talking about home ownership at all, but rather pushing people to borrow money tied to the value of a house.If people could be persuaded to take mortgages on homes, real estate values would go up for those already invested (like land trusts and real estate funds) and banks would have a market for the excess money they had accumulated.

In short, there was a surplus of credit in the system. Americans were encouraged to borrow in the form of mortgages, which created demand for the credit banks wanted to sell. In many cases the credit itself wasn’t even real, but leveraged off some other inflated commodity that the bank or investor may have owned.

Banks and mortgage companies invented some really shady and difficult-to-understand mortgage contracts, designed to get people to borrow more money than they could . Banks didn’t care so much about lending money to people who wouldn’t be able to pay it back, because that’s not how they were going to earn their money, anyway. They provided the money for mortgage companies to lend, and in return won the rights to underwrite the loans when they were packaged and sold to other people and institutions.

So a bank might provide the cash for a bunch of loans, but then get it back, plus a huge commission, when those loans were packaged and sold to someone else.

Lots of people take out mortgages, and housing prices rise. This is used as evidence to convince more people that real estate is a great investment, and more people buy into the housing bubble. Lots of these people put little or no money down, and buy mortgages whose interests rates are going to change for the worse. But they believe the price of their home is inevitably going to go up, and pin their futures on the idea that they can refinance their mortgage before their rate changes. Since the house will be worth more, the mortgage for what they owe should be easier to get; it will represent a smaller percentage of the new total cost of the house.

Of course, this was dumb. Banks didn’t really care (because they weren’t holding the bad paper) but the people investing in those “mortgage-backed securities” were slowly getting wise to the fact that many of the borrowers were in over their heads. What to do? The credit industry went ahead and lobbied Washington to change the bankruptcy laws. While corporations could claim bankruptcy and stop paying for their retirees’ health coverage, individuals would no longer be able to claim bankruptcy, and even if they did, they would still owe their creditors the money they borrowed, forever. The credit industry spent over $100 million lobbying lawmakers for the new provisions.

Then, just like the credit industry predicted, loans start going bad. (The industry labels these loans “sub prime” because they want to make it look like the borrowers were somehow less-than-respectable people. But the term really just refers to a less-than-respectable loan.) As homeowners default on their mortgages, housing prices start to go down. This, in turn, makes it impossible for people to refinance their mortgages when they thought they would; in fact, now many homeowners actually owe more on their home than the home is worth. How can you refinance a million-dollar loan on a house that is only worth half that? You can’t, so instead you have to hold onto the variable-rate loan that you foolishly bought from the predatory lender. The rate rises higher and faster than you can pay it.

Lenders go ahead and start foreclosing on properties, kicking out the mortgage holders who can’t pay. But this creates another problem: what to do with the house? It’s not even worth the outstanding portion of the loan, in many cases. And even if they can sell it, how to distribute the money? No one even really knows whose mortgages belong to whom, as they’ve been sold as parts of packages, again and again, to different lenders, pension funds, money markets…you name it.

This leads to what became known as the “credit crunch” or “liquidity crisis.” No one feels good about lending money anymore because so much of it was tied in one way or another to these bad mortgages. The creditors don’t want to take possession of all these foreclosed homes, and they turn to the government for help.

Under the guise of helping homeowners “stay in their homes,” the government starts bandying about various “relief packages.” The Treasury department and the Fed are actually taking a two-pronged strategy towards fixing the problem. One prong is cynical PR, and the other is just plain stupid.

First, they want to create the illusion that something is being done, so they talk about “superfunds” to bail out homeowners, freezes on rate hikes, checks mailed to every taxpayer, and other useless gestures. They do all this to appease angry consumers and consumer advocates because they won’t want real lending industry regulation (like what Barney Frank and other progressives are pushing for) to gain any traction.

Second, they want to make more money available to the creditors (banks), so they can keep lending money–because this is their business. So the Fed lowers interest rates again and again. Banks get more money, and guess what? We’re back where we started: with tons of money and nowhere to invest it! By lowering the “prime lending rate,” they simply add to the surplus cash that created the problem in the first place.

Of course, both measures serve to stave off panic selling, because it seems as though something real is being done. Homeowners may get a slight delay in the paralyzing rate increases on their mortgages, giving banks and creditors the chance to make a more orderly exit. They will bail from these mortgages while selling the artificially secured credit to the likes of you and me through money market accounts and other retail products. They just need time to make sure the real losses trickle down to someone else.

And remember: this whole mortgage fiasco is just a little preview of what happens next year when the credit card industry faces the very same self-imposed “crunch.” In the case of mortgage lenders, at least the terms of the loans were disclosed. Credit card companies–which are some of the very same banks that are in the mortgage mess today–are busy rewriting their policies, increasing rates, and adding fees to the policies of people already in debt to them.

You know those little ‘inserts’ in your credit card bill? Read them, and you’ll find out, like I did, that some credit card companies have begun charging interest on your purchases from the moment you make the purchase. You pay finance charges even if you pay your whole bill every month. Most people carry big balances, so they won’t notice the additional charges, or at least that’s what the credit card companies are–quite literally–banking on.

* * *

After a certain point, consumers just won’t be able to pay their bills. Even though they’ve paid the cost of their purchases several times over, they’re simply buried in interest and interest on the interest, sometimes compounding at a rate of 30 or 40 percent per year. The creditors know this, which is why they’ve sold a lot of this debt to other banks, pension plans, money market funds…you get the picture: the kinds of places where we invest our retirement money. The banks invested in us; we were the assets. Now that we’re about to go broke, they’re busy selling us to other financial institutions in a game of musical chairs that will cost the last debtholder a lot of money. Of course, unless we can convince some foreign sheiks to buy some lousy US assets with their oil money, that last debt holder will end up being you and me.

Over the past few months I’ve spoken to top strategists at some of the biggest banks in the world, and they share my perception of the scenario. Most of them are “holding cash” as their main investment strategy, spread out over a few of the major currencies. Those making money are doing so by short-selling shares of other companies in the same finance industry that they supposedly work for.

The bigger picture, of course, is that speculation just worked too well for too long. The disparity between the market values and real values (rich people and poor people) got too large. Every asset class, even money itself, got too expensive. We became more valuable for our borrowing power than our labor–which also meant there was no way to work off our debt. Meanwhile, the people using reality as an investment vehicle have overwhelmed the real economy on which their “structured investments” are based.

Sure, this has happened before. It’s just that, traditionally, when wealth disparity got too great and there wasn’t enough money in the right places, the wealthiest bankers temporarily suspended their greed to bail out the system. Or progressive tax policies opened corporate coffers, permitting a “New Deal” that employed people while rebuilding the infrastructure required to make real things and provide real services to citizens.

Today, however, such temporary restraints on greed are systematically untenable and philosophically unthinkable. Conservatives are still so angry about New Deal reforms of the 1930s that that they have infused politics and banking with an economic ideology that sees any regulation of worker exploitation or predatory investment as anti-capitalist, anti-American, and even anti-God.

So instead we are the beneficiaries of “wink” reform: stuff that’s supposed to make us feel good while reassuring the speculators that their interests will remain paramount. A few hundred dollars mailed to every American family creates the illusion that government is lending a helping hand, but this money is not redistributing anything. It’s being taken from the same people who are receiving it, in the hope that they’ll just pump it back into the system at Wal-Mart or the Exxon station.

Whether the coming economic crisis will be deep or shallow is left to be seen. We may be at the start of the kind of depression our grandparents lived through in the ’30s, or we may simply experience what our parents lived through back in the ’70s. Foreign investment trusts may come in and buy our biggest banks and turn us into global citizens through the very World Bank policies we were hoping would turn all of them into US vassals.

Whatever the case, the best thing you can do to protect yourself and your interests is to make friends. The more we are willing to do for each other on our own terms and for compensation that doesn’t necessarily involve the until-recently-almighty dollar, the less vulnerable we are to the movements of markets that, quite frankly, have nothing to do with us.

If you’re sourcing your garlic from your neighbor over the hill instead of the Big Ag conglomerate over the ocean, then shifts in the exchange rate won’t matter much. If you’re using a local currency to pay your mechanic to adjust your brakes, or your chiropractor to adjust your back, then a global liquidity crisis won’t affect your ability to pay for either. If you move to a place because you’re looking for smart people instead of a smart real estate investment, you’re less likely to be suckered by high costs of a “hot” city or neighborhood, and more likely to find the kinds of people willing to serve as a social network, if for no other reason than they’re less busy servicing their mortgages.

The more connected you are to the real world, and the more consciously you reject the lure of the speculative ladder, the less of a willing dupe you’ll be in the pyramid scheme that’s in the process of collapsing all around us at this moment.

Think small. Buy local. Make friends. Print money. Grow food. Teach children. Learn nutrition. And if you do have money to invest, put it into whatever lets you and your friends do those things.

Douglas Rushkoff writes books about media, technology, and values. He’s currently working on a project called “Corporatized,” which will explore how chartered corporations disconnected us from reality. rushkoff.com

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  1. The Republicans pushed for an expansion of lending to the poor?

    You’ve got your facts wrong.

    The Community Reinvestment Act (CRA) and follow on bills were championed primarily by Democrats in Congress, and Republican hesitance to join in was portrayed at the time as racism because “Republicans didn’t want poor black people to own homes”.

    A few Republicans (including, to be fair, McCain, even though I loathe him and will not vote for him) tried to reform Fannie Mae and Freddie Mac, and their efforts were again labeled as racist by congressional Democrats.

    Barney Frank, Chuck Rangel and others went on record a few years ago against reform that would tighten lending criteria – you can find plenty of YouTube clips from anywhere on the right hand side of the blogosphere.

    The Democrats deserve a load of static for relaxing lending standards and beating up on banks for “redlining” if their rate of loans to minorities did not match their rate of loans to whites (even though minorities in the US have, on average, lower net worths and worse credit scores), and the Republicans deserve a load of static for not effectively fighting the Democrats on these points.

    Any attempt to paint this as PURELY a free market problem, where the evil banks TRIED to get poor people to take more loans is pure revisionism. The mandate came from the government, and Fannie Mae and Freddie Mac (government sponsored entities) have their hands pretty dirty as well – as do all the of the senators and representatives (primarily Democrats) who took payola from Fannie Mae. I note in passing that Barrack “Change” Obama was the number two recipient of Fannie Mae dollars.

  2. @1
    I don’t see it as intentional. I see it as a byproduct of a system where capital needs to grow by inflating assets in the real economy.

    You are right that the notion of extending the rights of homeownership to minorities ended up being misguided – but it may not have been had the diminishment of poverty under the Clinton administration been continued rather than reversed.

  3. “Bush’s tax cuts and other measures favoring the rich led to the biggest redistribution of wealth from poor to rich in American history. The result was that the wealthy—the investment class—had more money to invest, or lend, than there were people and businesses looking to borrow.”

    This American Life pegged it with the whole world (china and india, esp) having twice as much money to invest as 6-10 years ago (world savings went from 36 trillion to 70 trillion) and that meant that it was more that recently rich people in other countries had more to invest than safe investments with a good return (since the Fed was giving 1% or so)

    So I’m not sure what’s up with the analysis.

  4. You mean you want the figures proving the rich got richer and poor got poorer in the US over the past ten years? That’s easy – and it’s in any number of NYTimes articles.

    As for how this happened on a global level – that’s interesting, too. Turns out newly wealthy countries like China and India are also seeing a real polarization between wealthy and impoverished.

    But the newly wealthy in those countries are faced with the same problem of needing assets in which to invest their cash. This leads to asset inflation.

  5. Doug — This is an excellent opportunity for an enterprising investigative journo to report the facts necessary to DRAW A PICTURE: AN INFOGRAPHIC THAT SHOWS WHERE THE $$$ COMES FROM AND WHERE IT GOES.

    This should be simple and clear enough to fit on one page, but retaining ample detail (+ links to more) to explain the money flow.

    I’m particularly interested to see how much $ the Bush Administration plans to let Wall Street traders & specialists siphon off (in fees, commissions, etc.) from the bailout funds.

    -Doug Millison a.k.a. “Morph”

  6. As we push forward through this crisis it’s important that people start unpacking and processing what’s really happened here.

    I’m also appreciating the way your posts are bringing a sense of genuine community to Boing Boing. We’re more than just readers.

  7. It takes quite the Pravda-like manipulation of history to claim that Bush and company are responsible for the “homeownership is a right” meme. Look, I know you guys want to cheerlead for the Dems and progressives in general; it’s the nature of this site to attract left-leaning folk. So be it. But at least have the honesty to recognize the actual history of this situation. Both parties are in the pockets of special interests and both parties helped install legislation which forced lenders to give out loans to known bad risks (mostly to further progressive social engineering goals). Add basic economics – when you subsidize the good, prices rise – and you have a heavily inflated housing market. Since you can’t play a Ponzi scheme forever, the bad debt can no longer be ignored, the market adjusts to decades of government interference, and there is a crash. Bush and company are responsible for a lot of crap, there is no doubt. But not this.

  8. Barney Frank oversaw the policy initiatives to encourage subprime lending to those who couldn’t otherwise afford a home. Bill Clinton deregulated in 93′ the selling of kinds of derivative bundles that account for most of the debt Paulson is seeking to claim.
    This isn’t a left/right thing, it’s a Corporatist thing, imo.

  9. Turns out newly wealthy countries like China and India are also seeing a real polarization between wealthy and impoverished.

    Congratulations, sir, on the understatement of the year.

  10. @4 posted by rushkoff , September 30, 2008 7:37 AM

    > You mean you want the figures proving the rich got richer and poor got poorer in the US over the past ten years?

    Depending on how you want to shade your data, you can prove that the poor got a slight bit poorer over the last 20 years, or you can prove that they got a decent bit better off.

    The interesting thing is that the poor from 20 years ago are not the same set of people as the poor today.

    The US has a very porous southern border, and as our poor of 1985 climb the economic ladder (and as their kids climb too), we replenish the bottom rung with Mexican immigrants.

    If you look at the people who were here in 1985 and then look at them (and their kids) in 2005, you see that all quintiles are doing much better now (although this being the explosion of the information age, those with relevant skills – investment banking, management, programming, IT, etc.) did a LOT better than average.

    The only way that the bottom quintile either loses or gains slowly is if you alter the sample population via immigration.

  11. @10 posted by Uland , September 30, 2008 8:00 AM

    > Barney Frank oversaw the policy initiatives to encourage subprime lending to those who couldn’t otherwise afford a home.

    Unless we are talking about people who are living on the street (and we’re not), then it’s not correct to say that they “couldn’t afford a home” – these people COULD afford homes by renting – which is exactly what they did.

    I’d argue that successfully renting is better than unsuccessfully owning.

    > This isn’t a left/right thing, it’s a Corporatist thing, imo.

    I’m four square against corporatism which is why – as a capitalist – I stand against most forms of bailouts. We small business owners should enjoy the win of running a business well, and suffer pain when we do poorly (or just luck goes against us).

    So: agreed, corporatism – boo hiss!

    …but this problem is not primarily a corporatism thing (although it certainly has elements of it). The issue is primarily criminally loose lending created by and cheered on by the left.

  12. One thing that people often leave out of the equation is new home building during the last few years. With demand for property and home prices both on the rise it became more difficult for real estate investors to buy homes on the cheap and flip them for a profit. So they instead bought land in underdeveloped suburban areas, and built lots of cheap new homes which they could make more money off of than buying existing homes and selling them. These were attractive to two types of people. There were the lower-middle-class who may have normally been stuck in an apartment or an older home, and were now able to afford a new home thanks to the lending incentives offered by builders through their finance companies. Then there were the speculators who were buying up new homes hoping to turn them for a profit. (Obviously there were also regular home buyers who just happened to buy a new home in a newly developed area).

    When housing prices srarted to decline, builders and investors drove the price down competing with each other to ditch their excess properties and recoup their dwindling profits. And with a lot of homeowners foreclosing, that put more homes on the market driving the prices down even further.

    So, easier mortgages drove home demand up which pushed the price higher, which brought out the investors and builders who artificially inflated both the price and the supply. And at some point the supply of houses and the price both far outstripped demand, and when interest rates got too high and foreclosures started becoming more common, the market was just oversaturated. And now it’s collapsing. And because a bunch of lenders tied securities to mortgages, they’re being dragged down with the housing market.

    It’s a prime example of how making a seemingly small decision can have vast consequences in the market. By artificially expanding the market for new homes through the CRA, the government precipitated an expansion that a lot of people tried to take advantage of. And although most people in the business should have been smart enough to know that that sort of expansion was unsustainable, they were having too much fun making money to cash out and let the market settle gracefully.

  13. DR: Millison: YOU draw it! I’m a word guy. You’re the graphical genius…

    If I could get my Wall Street investment banker younger brother’s attention long enough, maybe we can do it — but he’s eye/ear-deep in the madness — O to be a fly on the wall at the Goldman Sachs conference he was attending when news of the credit crisis first broke!

    I suggested this infographic idea to an old friend who writes for the SF Chronicle Business section, maybe they will be able to devote some resources.

    This is, by the way, a journalistic role that traditional newspapers have in the past been uniquely qualified to fill, but investigative work is expensive and time-consuming, beyond the reach of all but the most determined and talented bloggers, and now as newspapers find themselves financially pressed, investigative journalism has dwindled.

    What’s needed, imo, is something like a business plan I put together a while back, “Minding Everybody’s Business”, essentially a blog with anonymity tools, to extend the whistleblower model that currently only occasionally exposes wrongdoing, by empowering employees of any organization to report (so action can be taken) things that people need to know about so they can act as informed citizens, and enables folks to come together in ways to address the situations that thus come to light.

    Imagine what might have happened if the smart, well-meaning people on Wall Street (they exist, they aren’t all sharks) had had a safe, easy way to expose things that were happening a few years ago which they knew could snowball into something like the current situation, in an environment where activists could found ways to act on this information.

    This I think is one area in which the nascent “citizen journalist” model for bloggers may really be useful, in creating online spaces in which to nurture whistleblowers, activists, and people with solutions that might work, as traditional newspapers pull back.

    Something like this probably already exists out there…

    -Doug Millison a.k.a. “Morph”

  14. Another casualty in “homeowner nation” crusade has been apartments. There have been countless apartment to condo conversions in town. That adds to the glut of properties on the market and makes it harder for younger and older and more single people to find a reasonably priced place to live.

    Whole blocks of “blighted” apartments were torn down in my neighborhood, their tenants evicted, to bulldoze and make room for high end condos that will now possibly never be built. Good one!

    I don’t celebrate economic ruin, but I would like to see rent come way, way down. If people weren’t spending every last penny on rent or a mortgage, maybe they would have more to spread around a little and give life to something besides the real estate and construction markets.

    I realize this situation is more complex than I can even grasp at this point. I don’t have a deep econ background, just offering a few observations from where I sit.

  15. It takes quite the Pravda-like manipulation of history to claim that Bush and company are responsible for the “homeownership is a right” meme.

    The goal is, everybody who wants to own a home has got a shot at doing so. The problem is we have what we call a homeownership gap in America. Three-quarters of Anglos own their homes, and yet less than 50 percent of African Americans and Hispanics own homes. That ownership gap signals that something might be wrong in the land of plenty. And we need to do something about it.

    We are here in Washington, D.C. to address problems. So I’ve set this goal for the country. We want 5.5 million more homeowners by 2010 — million more minority homeowners by 2010. (Applause.) Five-and-a-half million families by 2010 will own a home. That is our goal. It is a realistic goal. But it’s going to mean we’re going to have to work hard to achieve the goal, all of us. And by all of us, I mean not only the federal government, but the private sector, as well.

    GW Bush, June 18th, 2002:

    http://www.whitehouse.gov/news/releases/2002/06/20020618-1.html

  16. Today’s homeownership meme did begin with FDR. But, as the above post shows, it became something else under Bush.

  17. Finally, BB has an author to post articles that regularly polarize the readers politically and send commenting readers into a bloodbath of words.

    Meanwhile, all senior BB authors sit back and put on face shields and vinyl smocks to keep themselves clean and pristine.

    :)

  18. Does anyone know of figures for the sum of purchase prices of houses or loans on houses that fall under the sub-prime banner?

    I’m wondering how much is actually at risk of default.

    Secondly, can an American here explain why your government would rather buy up loans from banks rather than part-purchase these homes directly from the current owners?

    Thanks.

  19. Coulthart:

    “It’s 100 specific actions that address the practical needs of people who are trying to build their own personal version of the American dream, to help moderate income families who pay high rents but haven’t been able to save enough for a downpayment, to help lower income working families who are ready to assume the responsibilities of homeownership but held back by mortgage costs that are just out of reach, to help families who have historically been excluded from homeownership.

    Today, all across the country, I say to millions of young working couples who are just starting out: By the time your children are ready to start the first grade, we want you to be able to own your own home. All of our country will reap enormous benefits if we achieve this goal. Homeownership encourages savings and investment. When a family buys a home the ripple effect is enormous. It means new homeowner consumers. They need more durable goods, like washers and dryers, refrigerators and water heaters. And if more families could buy new homes or older homes, more hammers will be pounding, more saws will be buzzing. Homebuilders and home fixers will be put to work.”

    “What we are doing today will allow more homes to be blessed by more families. I hope it will start all these young people on a path that will take them to great joys in their personal lives, and perhaps to other homes, but something they will always know that their country wanted them to have because they were entitled to it as a part of the American dream.”

    President Bill Clinton, 1995.

    http://www.presidency.ucsb.edu/ws/index.php?pid=51448

  20. I want to reinforce to you all what TJIC had to say here, Bush and company didnt invent fannie may and freddie mac, and to a large extent both those entities are to blame for our current mess.

    Look, i think getting poor people into home ownership is a noble goal, but you absolutely cannot use the world’s financial system as a tool for social justice (for reasons that now must seem obvious).

  21. I’d like to see BB readers — and everybody else — rising above the blame-game and working instead to find the information we need to produce positive solutions.

  22. “Bush’s tax cuts and other measures favoring the rich led to the biggest redistribution of wealth from poor to rich in American history.”

    This is non-nonsensical even with just some basic thought.

    How in the world can a REDUCTION in the amount that the “rich” pay in taxes cause wealth to be taken AWAY from the “poor” that DON’T pay any taxes? I’ll help you – it can’t.

    The evil, nasty, putrid, rich that you so despise pay an overwhelming burden of the taxes in this country, in addition to creating ALL THE JOBS. Have you ever been hired by a poor person? Have you ever taken a job at a company owned by a poor person?

  23. Tax cuts did not lead to this. Government mandated risky loans to people who couldn’t make payments led to this. Coupled by rebuffs of regulatory plans by Barney Frank in the House and Chris Dodd ion the Senate. Anyone who cares can easily Google the debates in 2003 and 2005 whereby Bush tries to get oversight of Fannie Mae and Freddie Mac and is rebuffed by Frank — who claimed that there was no crisis at Fannie Mae. I guess not when he’s getting hundreds of thousands of dollars from them as well as his boyfriend or partner (I can’t recall if they’re married or not) working there also.

    Here’s the NY Times article detailing Bush’s regulatory attempt and Franks’ denial of a problem. Please ate Bush with all the vigor you wish, but let’s be clear as to the causes of this mess.

    http://query.nytimes.com/gst/fullpage.html?res=9E06E3D6123BF932A2575AC0A9659C8B63&sec=&spon=&&scp=3&sq=%202003%20fannie%20freddie%20labaton&st=cse

  24. To everyone who is trying to figure out which party or political philosophy is responsible for the “meme” of home ownership (or home borrowing on credit) in the United States:

    Note that both the Bush and Clinton quotes see home ownership as a nearly necessary step in the pursuit of life, liberty, and happiness. Both speeches have an emphasis on how great single-family housing is for individuals i.e. family units, but then there’s also this, a Bush press release: “The President believes that homeownership is the cornerstone of America’s vibrant communities” (http://www.whitehouse.gov/news/releases/2004/08/20040809-9.html)

    Home ownership, specifically the ownership of a single-family house, is NOT a partisan issue in the United States. It is a cultural value that’s deeply ingrained in our views of how to live successfully as an individual and how to fit in properly in society.

    Clearly there are enormous problems with that cultural attitude – we can see economic and social chaos arising from people who decided to realise their desire to own a home, even though they couldn’t afford one.

    But come on. It’s not like Republicans have historically come out in favor of home ownership and Democrats haven’t, any more than we’ve seen partisan wrangling over whether or not apple pie tastes good.

  25. Yeah – they talked to me for that one. I ended up doing the same thing in my book, following the money from person to person.

  26. The evil, nasty, putrid, rich that you so despise pay an overwhelming burden of the taxes in this country, in addition to creating ALL THE JOBS. Have you ever been hired by a poor person? Have you ever taken a job at a company owned by a poor person?

    Err, ‘all the jobs” ? Really? I think you must be using some interesting definition of ‘rich’ and ‘poor’

    No, I’ve never been hired by anyone I would consider financially poor (let’s not consider ‘morally poor’ for now) but I have been hired plenty of times by people just about about to afford a modest home.

    Poor people are not just those that pay no taxes (and purchase related taxes tend to hit poorer people disproportionately so even that idea is dubious) but include what gets labelled ‘the working poor’. Poor people are affected by tax cuts for the rich because of the inevitable reductions in support systems either as a simple financial result of the lowering of tax income for the govt. or because the same political approach leads to explicit cuts in those systems.

  27. So apparently common consensus ~today~ is that poor people getting mortgages because Democrats (and some Republicans, notably Bush) thought it was a Good American Ideal to pursue. That may be true as a trigger for the whole thing, but I saw an awful lot of white middle class people stuffing their hands into that real estate pie before it was torn beyond recognition. I didn’t see many minorities flipping houses on reality shows and my friend in the construction business sure wasn’t throwing up spec homes in the middle of nowhere for black families.

  28. Well, an army of German urban planning professionals have had that show forwarded to them by me. They were like, “WTF is going on in your country?” And I had no idea, until I heard that show.

    So thanks for that.

    But seriously, the idea of single-family housing ownership as an American right predates the Bush administration by like… a very long time.

    I will give you that the Bushies brought a particularly noxious sense of entitlement and logic-free wish fulfillment to the concept.

    (because I am a hopelessly partisan leftie)

  29. tjic and toadstool, so what you are telling me is that even though the neocon right has been in power for the last eight fucking years, that somehow they were powerless against the onslaught that is the u.s. left? stupid war; left’s fault. credit crises; left’s fault. enron, tyco, worldcom, etc…; left’s fault. warrantless wiretapping;left’s fault. global warming; lefty lie. anything bad that has led to the waning power of our constitution, our monetary system and our national security; left’s fault. am i missing anything?

  30. FNC – there are also a lot of middle class Americans who are deep into debt and who cannot afford to actually own the property they’ve borrowed money for.

    There are a lot of countries where there are not very many middle class homeowners at all.

    The phenomenon of constant “trading up” into larger and larger houses, multiple mortgages to pay for home improvement, flipping houses, etc among the middle and upper middle class – this is also part of the phenomenon I meant to be talking about, at least.

    It’s a very American phenomenon.

  31. REVISED IDEA:

    A “follow the money” YouTube video/slide show, humorously done but based on solid reporting, could draw a huge audience, online and on the Tube itself. A series of infographics that show where the $1 trillion bailout/rescue money goes and who gets a cut along the way — that would cut through all the finger pointing and blaming. Reality-based.

    FYI, since my earlier post, at least one major metro paper is now working on an infographic that explains where the money goes, who profits, and how.

  32. but I saw an awful lot of white middle class people stuffing their hands into that real estate pie before it was torn beyond recognition.

    That is correct, but it is a consequence of the afore mentioned stuff, not the cause of it. Look, you cant blame people for trying to make a living in a poorly thought out system. When the US govt. was insuring every home loan in the country and thereby funnelling money into the housing market, its only natural that people will try to profit from it. You can also say that a lot of white middle class home builders profited from this mess, but in both cases your blaming the symptom, not the disease.

    Mintphresh, you are missing something, although Bush and Co. didnt cause this mess, they didnt really do a lot to steer us clear either. As the quotes above show, everyone was happy to take credit for the good stuff, so long as it didnt blow up on their watch.

  33. Bzzzzzt! BZZZZZZT!

    From the 2004 *FRIGGING* Republican Party Platform:

    Homeownership is central to the American dream, and Republicans want to make it a reality for everyone. That starts with access to capital for entrepreneurs and access to credit for consumers. Both have improved immensely in the past four years, resulting in record levels of homeownership. For the first time, more than half of all minorities own their home.

    We support the President’s goal of increasing the number of minority homeowners by at least 5.5 million families by the end of the decade. Since President Bush announced his initiative in 2002, an additional 1.6 million minorities have become homeowners.

    And how will you actually do that, Mr. and Mrs. Republican Party Platform Writers?

    The Self-Help Homeownership Opportunities Program helps low-income families purchase a home. The most significant barrier to homeownership is the down payment. We support efforts to reduce that barrier, like the American Dream Downpayment Act and Zero Downpayment Mortgages.

    Ah, I see. You’re getting them into homes by encouraging shabby subprime loans. Gotcha! But will there be enough homes for them?

    In many areas, housing prices are higher than they need to be because of regulations that drive up building costs. Some regulation is of course necessary, and so is sensible zoning. We urge states and localities to work with local builders and lenders to eliminate unnecessary burdens that price many families out of the market. We see no role for any federal regulation of homebuilding.

    Translation: Turn the whole frigging country into one giant subdivision! We won’t complain. There will always be a market for new houses, even in areas hours and hours away away from the places where people work.

    Trust us. There will never be enough houses!

  34. Oh, gosh, what a surprise!

    S.E.C. Concedes Oversight Flaws Fueled Collapse

    WASHINGTON — The chairman of the Securities and Exchange Commission, a longtime proponent of deregulation, acknowledged on Friday that failures in a voluntary supervision program for Wall Street’s largest investment banks had contributed to the global financial crisis, and he abruptly shut the program down.

    Also Friday, the S.E.C.’s inspector general released a report strongly criticizing the agency’s performance in monitoring Bear Stearns before it collapsed in March. Christopher Cox, the commission chairman, said he agreed that the oversight program was “fundamentally flawed from the beginning.”

    “The last six months have made it abundantly clear that voluntary regulation does not work,” he said in a statement. The program “was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily. The fact that investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate” of the program, and “weakened its effectiveness,” he added.

    Mr. Cox and other regulators, including Ben S. Bernanke, the Federal Reserve chairman, and Henry M. Paulson Jr., the Treasury secretary, have acknowledged general regulatory failures over the last year. Mr. Cox’s statement on Friday, however, went beyond that by blaming a specific program for the financial crisis — and then ending it.

    The cognitive whiplash that libertarian fanboys are going through these days must be fearful. They’re trying to explain away the stains that The Invisible Hand got when it fisted the entire country while simultaneously insisting it just needs more lube.

    Maybe this is a good time for them to build one of those artificial floating islands and start an offshore bank.

  35. Stefan: “Turn the whole frigging country into one giant subdivision! We won’t complain. There will always be a market for new houses, even in areas hours and hours away away from the places where people work. Trust us. There will never be enough houses!”

    Oh I know, the land use politics are just so screwed up. Here’s a live chat with Alphonse Jackson, Secretary of Housing and Urban (heh) Development, from 2005:

    http://www.whitehouse.gov/ask/20050603.html

    It is so screwed up I just don’t know where to start…

    “We’re excited by the opportunity to showcase what homeownership can do for families, and how it strengthens communities and the entire nation. As the President said in his 2005 National Homeownership Month proclamation, ‘The spread of ownership and opportunity helps give our citizens a vital stake in the future of America and the chance to realize the great promise of our country.’”

    Yeah… just… This guy is in charge of urban development? Has he ever read Jane Jacobs?

  36. When my folks moved to North Carolina in the mid ’90s I saw first-hand the explosion of residential development going on at the time; my first thought was, “this ain’t gonna turn out well.” All the signals were blinking like mad, but brakes on the train were disabled by, oh why not, the Bush Administration. Ladies and gentlemen, I give you Eliot Spitzer:

    “Several years ago, state attorneys general and others involved in consumer protection began to notice a marked increase in a range of predatory lending practices by mortgage lenders. Some were misrepresenting the terms of loans, making loans without regard to consumers’ ability to repay, making loans with deceptive “teaser” rates that later ballooned astronomically, packing loans with undisclosed charges and fees, or even paying illegal kickbacks. These and other practices, we noticed, were having a devastating effect on home buyers. In addition, the widespread nature of these practices, if left unchecked, threatened our financial markets…

    ….Predatory lending was widely understood to present a looming national crisis. This threat was so clear that as New York attorney general, I joined with colleagues in the other 49 states in attempting to fill the void left by the federal government…

    ….Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye….”

    Read the whole thing here.

    BTW, anybody feel like explaining how to create one of those neat little “quote blocks”?

  37. #43: To make a quote block, enclose the text in “blockquote” tags. Like the below, but use angle brackets rather than square brackets:
    [blockquote]
    It is the business of the future to be dangerous.
    [/blockquote]

    To be fair:

    There is lip service in the 2004 Republican Party Platform about educating consumers about predatory loans, but I suspect that the only result of this, if any, was more “self regulation.”

    In other words, a sternly worded memo tacked on the wall of the guy who games his bank’s loan evaluation software so he can complete enough applications to make his quota and earn that set of steak knives.

  38. Seriously, this is a lot deeper then just “republicans did it” despite what the partisans here have convinced themselves. Can we at least agree that having the govt back loans willy nilly is not a good idea?

    “The cognitive whiplash that libertarian fanboys are going through these days must be fearful”

    Not really. Libertarians believe that you have to suffer the consequences of your actions, even if you’re a bank. Also, libertarians have been saying for years that government meddling in private markets can have far reaching, disastrous consequences.

  39. “Home ownership, specifically the ownership of a single-family house, is NOT a partisan issue in the United States. It is a cultural value that’s deeply ingrained in our views of how to live successfully as an individual and how to fit in properly in society.”

    Well said.

  40. Wow.
    The silliest article I have ever read. Even in the field of economics which excels at idiocy this is just, wow. And I thought G.W.B. was a goose.

  41. #45: I distinguish between libertarians and libertarian fanboys.

    The former tend to be serious, weird, but consistent.

    The latter are, for the most part, Republicans who know what side their party’s toast is buttered on, and reflexively take every pro-growth, pro-business, anti-regulation position on every issue. No matter if it is bad socially, unsustainable in the long run, or blatantly unfair.

    A libertarian can fairly look at the current mess and say “we told you so.”

    The fanboy ignores the long chain of culpability and blames someone else.

  42. I have this little game I love to play. It’s called “over-simplify.” I like to play it just because everyone always says, “but it’s more complicated than that.”

    So it comes down to this: More wealth than ever before being generated and concentrated in the world’s upper-class. Their greed drove them to create ways to invest and grow this wealth at the expense of everyone else, and, it seems, the stability of the world financial system.

    They dumped their riches into make-believe markets with hopes of getting even richer.

    Greed. Yep, greed.

    More of the wealth should have been used to fuel innovation and technology, and improve the lives of the poor. It should have been used to fund health care and education. Or rebuild the world’s infrastructure. Or lace the world with data lines to encourage collaboration and even more innovation. Some may call me a “socialist” or a “leftist.” But here’s the thing: Investing in any of these things would have yielded a much greater return than any market tricks. For everyone. Remember what John Nash said about Game Theory? About the best outcome of any game is the one that leads to the most “winners?”

    It’s just practical. And, it just so happens, nice.

    Thanks for playing Over-simplify with me! You guys are the best!

  43. It’s clear that the current financial mess is pretty convoluted for most people (myself included) to really understand. We do our best to muddle through it, and with the media today you have to wade through many different opinions-presented-as-fact to try and grasp it all. I agree that the sub-prime mortgage crisis that sparked this all can be laid at the feet of several different parties– Democrats, Republicans, financial institutions, and clueless 1st time homeowners. I blame the banks foremost; they were the ones with lobbyists pulling the strings (both DEM and GOP) in DC, and they were the ones running what amounted to a huge sub-prime mortgage Ponzi scheme.

    I would like to blame our elected officials but I see them as trapped by the system too: election campaigns use as much money as the GDP of some countries, and so everybody is in bed with a lobbyist of some sort. There’s no honor in politics anymore, and if we manage to fix the current financial crisis it won’t matter because another one will eventually be created by the corrupt version of democracy we have in the US.
    Look at our congressmen, many of them are muddling through this as cluelessly as the average American. I think most of us are praying that whatever bill they pass at least doesn’t do any more harm.

    I was thinking recently about the “threat” that Iraq supposedly posed to the US back in 2003, and how the US used that imaginary threat to invade. Consider how the US financial crisis could ripple through the world’s economies, all the damage it could do . . . couldn’t some country claim the right to invade because of the economic threat we quite clearly pose? Of course at this point it wouldn’t do any good anyway, unless China decides to start acting like the mafia and take what they are owed in the form of Alaska, Hawaii and California.

    I’ve always liked Rushkoff’s articles in ARTHUR, and it was this very article some months ago that first got me to seriously ponder the looming economic crisis. Whether he’s 100% right or not I don’t know, but his perspective is a real brain burner.

  44. Congrats Rushkoff, you have won my allegiance with this post. This is kind of the post-modern interpretation of the credit crisis I’ve been looking for for the past few weeks. If only I wasn’t stuck here in NYC.

    Red

  45. I don’t like the phrase “quick to grok.” Isn’t the point of the word “grok” that you come to completely understand something?

    It’s not possible to quickly grok something, is it?

  46. Before the back and forth on how tax cuts for the wealthy redistribute wealth gets out of hand, I just want to interject my person experience with this. I was a teacher last year in a public high school in a Florida county with a very high percentage of impoverished students. The reason I’m not any more is because Florida passed a ballot initiative last November that was, in essence, a tax cut.

    It was not specifically a tax cut that only benefits people who make more money than 95% of us. It’s important that you all understand I am not blaming Bush’s tax cuts for being out of work. In my case, in my personal experience, I was told by my principal along with a half dozen other teachers that our units were being cut because Florida passed this tax cut and that was going to cause a budget deficit. Why our units had to be cut before the tax cut was even in effect and why teachers were being cut from a school that served mostly poor students is something only the county’s school board can tell you.

    This is anecdotal evidence, I know, but it doesn’t feel like an anecdote when I interview for a teaching position and find out there are 19 other unemployed teachers interviewing for the same job. It feels like I had a job last year and I don’t anymore. I can choose to blame one party or the other, one income bracket or another, or I can try to understand why a society that desperately needs enough teachers to reduce classroom size and increase the quality of public education can’t afford to pay enough teachers to do that job.

    I choose to try to understand and look for solutions. If that means considering a tax increase to redistribute some people’s money into poor school districts so they can afford to hire me, I think putting more money in my pocket so I can actually pay my mortgage and credit card bills might not be the socialist agenda it looks like at first glance.

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