How’s Your Economy? Still Recovering, Thanks.
Something I wrote a while ago regarding the housing market regulations and the financial crisis:
Without the gross manipulation of the housing market, programs that improve equity in markets is a good thing not only for business, but for those participating. This instance, however, is worse than never having the opportunity to own a home. When things are done the right way, yes, I believe that a little bad in the short-run is worth a lot of good in the long-run. Economists have been sounding like a broken record each time they discuss the current state of American economics, the recovery, and, more importantly, which sector needs to heal in order for the U.S. economy to once again grow. The song playing on that record might as well be titled, ‘Housing’, since that industry is referenced time and time again as being crucial to the improvement status of the economy. This is true since the housing sector is linked to so many other industries (all of which create jobs) - construction, steel, lumber, trucking, shipping, financial companies, banks, and so on. Further, the consumer’s purchase of a home will also stimulate retail spending through furnishing and other related spending. Thus, awaking the sleeping dragon that is housing ensured the industry-linked domino effect of consumption. However, the longevity of this enjoyed growth is limited to only those consumers that can have access to credit or can afford to be in the market, as those that are not are excluded from home purchasing. The demographic makeup of those on the outside looking in are the poor, whom are dominantly represented by minorities. Bearing these things in mind, it is sensical to be critical of the legitimacy behind the nobility of promoting home purchasing for the poor and minority. This inevitably leads to the crux of the issue: virtuous consideration and honest pursuit of helping the poor vs. last resort effort to keep the economy growing. It is important to know that simply improving the means for poorer people to acquire a home isn’t necessarily what lead to the corrosion of the housing market, though that did have a lot to do with it. If the forces of supply and demand had not been manipulated, the bubble would have been less severe, if not avoided all together. Economic equilibrium is the natural market force that controls prices and inflation, adjusting itself based on market conditions. However, this mechanism fails when things like debt and credit are injected into the equation because lag and speculation often dampen its ability to understand the conditions and data present in any market. Sub-prime loans and adjustable interest rates, byproducts of what was widely considered predatory lending, repackaged debt sold for profit, and “house flipping” are largely responsible for the bubble and burst. This enabled house values to become artificially high to where… pop. Was government deliberately trying to maintain continuous economic growth? Arguably, yes. Two major differences between market conditions then, which created a whimper, and market conditions recently, which created a boom: Regulation The Federal government had established regulations that would control the financial sector and phenomena such as speculation and deflation in order to prevent another great depression. This was mainly done through two versions of the Glass-Steagall Acts of 1932 and 1933. Risk The regulations controlled the amount of risk taken by enforcing standards on lenders and other outside market considerations. The absence of significant risk afforded the economy a market free of fatal hazards. Initially, when the federal government endeavored to improve home ownership accessibility for the poor, the banking standards were maintained. Down payments and interest rates were requirements. This government effort is how things should have continued. But beginning in the early 1980s, deregulation began surfacing, and several measures were implemented. All of this acted as the catalysts that created and fueled the bubble. These measures included: -The Depository Institutions Deregulation and Monetary Control Act of 1980 - allowed banks to merge and set their own interest rates -The Garn-St. Germain Depository Institutions Act of 1982 - established adjustable-rate mortgages -The Gramm-Leach-Bliley Act of 1999 - enabled commercial and investment banks, which the Glass-Steagall Act prevented, to merge Essentially, the rules were bent. The deregulation and severe risk are the significant changes that created this bubble. Markets back then would never have allowed the sub-prime lending to occur. Markets back then would never have loosened the standards so much that people without adequate incomes could purchase a home. Profits, pursued by the very financial corporations that were deregulated, were available. But these large profits also came with tremendous risk. The predatory lending occurred when people, often unfamiliar with complex contracts and overly trusting of the agents selling them the homes, were taken advantage of and sold homes they were told and reassured they could afford. Many of the sub-prime homeowners were not informed, or misinformed about their adjustable interest rates that would fluctuate and make their mortgages unaffordable. This drastically increased the amount of foreclosures and bankruptcies that occurred. This functionally put these families, already targeted and categorized as poor, back even further. The elasticity of these people to any marginal living expense was very low. They were sold a home and left on their own. The poor that were trying to be helped were, in my opinion, just taken advantage of in order to pursue more profits and keep the economy growing. The idea behind helping these people become competitive, acquiring their own wealth and building that foundation for future generations, is great. These people are worse-off than when they were lied and sold the American dream which they could not, at least yet, afford. The perversion of the American dream has perpetuated matters for the people that were simply trying to enjoy what they saw others enjoy. Now, in addition to being “poor”, they are: homeless, their credit is even worse with a bankruptcy, their health is probably in shambles with all of the stress and anxiety, all while having a finger pointed at them as the scape goat. And guess what — they’re still poor and still not homeowners. American dream? Now it’s time to do what is always done after every party: Clean up the mess.
