Wednesday, October 12, 2016
Tuesday, December 31, 2013
It Was Fannie and Freddie! (Part-2)
There was a lack of responsibility in the financial sector that spread like a severe form of cancer leading up to the financial crisis of 2008. Ordinary people who wanted a slice of the "American Dream" were instead given toxic subprime mortgages. Before securities took hold of the housing sector, a family wanting to purchase a house would go down to their local bank and apply for a mortgage. They would pay their monthly mortgage directly to that bank until the house was paid off. Since this process took so long to complete, banks were fairly strict on who they lent to. Securities changed that.
Instead of paying your local bank directly, the bank would sell your mortgage to investment banks such as the ones discussed in Part-1 like, Goldman Sachs, Merrill Lynch, Lehman brothers etc. Once the mortgages were in the hands of the investment banks they would put them in a bundle called CDO's or, Collateralized Debt Obligations. These CDO's contained student loan debt, car loans, credit card debt, among other forms of debt along with your mortgage. The investment banks would then turn around and sell the CDO's to investors. Once sold to investors your little mortgage that you thought was being paid to your local bank was now in the hands of millions of people world wide.
At this point in what has been dubbed the "securtization food chain" there is no one that cares if you pay your mortgage. This is why mortgage banks, or lenders in general, were giving out so many subprime mortgages to so many unqualified people. There was no risk. What all these institutions allowed themselves to believe was that housing prices could never decrease. The Fed chair at the time, and still, Ben Bernanke famously said in July of 2005, "We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though."
As we all know now, the housing market did decline, people did default, and banks/investors were caught holding the bag all around the world as most of the industrialized world went into recession.
In Part-3 I will discuss how and why this was allowed to happen.
Instead of paying your local bank directly, the bank would sell your mortgage to investment banks such as the ones discussed in Part-1 like, Goldman Sachs, Merrill Lynch, Lehman brothers etc. Once the mortgages were in the hands of the investment banks they would put them in a bundle called CDO's or, Collateralized Debt Obligations. These CDO's contained student loan debt, car loans, credit card debt, among other forms of debt along with your mortgage. The investment banks would then turn around and sell the CDO's to investors. Once sold to investors your little mortgage that you thought was being paid to your local bank was now in the hands of millions of people world wide.
At this point in what has been dubbed the "securtization food chain" there is no one that cares if you pay your mortgage. This is why mortgage banks, or lenders in general, were giving out so many subprime mortgages to so many unqualified people. There was no risk. What all these institutions allowed themselves to believe was that housing prices could never decrease. The Fed chair at the time, and still, Ben Bernanke famously said in July of 2005, "We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though."
As we all know now, the housing market did decline, people did default, and banks/investors were caught holding the bag all around the world as most of the industrialized world went into recession.
In Part-3 I will discuss how and why this was allowed to happen.
Monday, December 30, 2013
It Was Fannie and Freddie! (Part-1)
An argument often made about the financial crisis of 2008 is that due to Fannie Mae and Freddie Mac lending out copious amounts of subprime mortgage loans and those people defaulting on said loans, the entire financial system collapsed. Considering that these companies were bailed out by the government and were Government Sponsored Enterprises, advocates of the free market had an instantaneous scapegoat in the form of the government. Couple that with the Community Reinvestment Act, (even though this Act was instituted in the 70's) which told banking/financial institutions that they needed to service moderate and low income families as well, and you have a full fledged laissez faire proponents dream.
For Part-1 of this series I will tackle on how Fannie and Freddie distributed loans, and how private mortgage lenders, commercial banks, and investment banks did the bulk of the distributing. To begin, Fannie and Freddie do not actually give loans. Rather they purchased them from lending institutions so that those institutions could then buy more mortgages; this naturally helped with the pricing of the mortgage loans. This immediately takes them out of the category of now infamous mortgage lenders like Countrywide.
Naturally people who took these loans are not completely innocent, but considering that most people are not business majors, the people who distributed these loans and knew that these loans were not what would traditionally be known as "safe," and still chose to distribute them, should share the bulk of the blame. The top 25 subprime mortgage lenders lent out almost 1 TRILLION dollars worth of these loans. Lenders that include Countrywide, Merrill Lynch, JP Morgan Chase, Bank of America, Wells Fargo, Morgan Stanley, and Lehman Brothers among many others.
These were the major players that were involved in the 2008 crisis. In Part-2, I will discuss why there was a severe lack of responsibility between all of the financial firms and how this lack of responsibility allowed the crisis to manifest.
For Part-1 of this series I will tackle on how Fannie and Freddie distributed loans, and how private mortgage lenders, commercial banks, and investment banks did the bulk of the distributing. To begin, Fannie and Freddie do not actually give loans. Rather they purchased them from lending institutions so that those institutions could then buy more mortgages; this naturally helped with the pricing of the mortgage loans. This immediately takes them out of the category of now infamous mortgage lenders like Countrywide.
Naturally people who took these loans are not completely innocent, but considering that most people are not business majors, the people who distributed these loans and knew that these loans were not what would traditionally be known as "safe," and still chose to distribute them, should share the bulk of the blame. The top 25 subprime mortgage lenders lent out almost 1 TRILLION dollars worth of these loans. Lenders that include Countrywide, Merrill Lynch, JP Morgan Chase, Bank of America, Wells Fargo, Morgan Stanley, and Lehman Brothers among many others.
These were the major players that were involved in the 2008 crisis. In Part-2, I will discuss why there was a severe lack of responsibility between all of the financial firms and how this lack of responsibility allowed the crisis to manifest.
Saturday, December 28, 2013
The Poor Are Lazy... or are they?
In today's extremely politically divided world it is often difficult to understand how different economic policies can affect ordinary people. The comment in the title is normally asked, or rather, told in a very rhetorical fashion around dinner tables. There isn't any concrete way of responding to that sort of statement, and I suppose that's the beauty of stating it. However, there is the benefit of historical evidence, as well as contemporary statistics to help stir the conversation.
The use of social safety nets, particularly SNAP and unemployment insurance, follow the pattern of the unemployment rate. The recent financial crisis of 2008 caused the United States unemployment rate to sky rocket. In 2007 the rate had a low of 4.4%. That means there were about 6.5-7 million people unemployed. At its peak in 2010, the recession unemployment rate reached 10%, something that had not been witnessed since the early 1980s. That means that there were close to 15 million people unemployed. An increase of 8 million people into unemployment.
The amount of money the U.S. spent on unemployment benefits in 2007 was close to 40 billion dollars. By the end of 2009 after the recession had taken hold, that almost quadrupled to 140 billion dollars. SNAP followed the same pattern. The number of SNAP recipients in 2007 was about 27 million people. Currently the number has started to decrease, but about 47 million people receive benefits.
As you can see the recession forced people into these extremely important safety nets. With no other options millions of people fell into these nets... they didn't jump gleefully into poverty. So are the poor lazy? The evidence does not support such.
The use of social safety nets, particularly SNAP and unemployment insurance, follow the pattern of the unemployment rate. The recent financial crisis of 2008 caused the United States unemployment rate to sky rocket. In 2007 the rate had a low of 4.4%. That means there were about 6.5-7 million people unemployed. At its peak in 2010, the recession unemployment rate reached 10%, something that had not been witnessed since the early 1980s. That means that there were close to 15 million people unemployed. An increase of 8 million people into unemployment.
The amount of money the U.S. spent on unemployment benefits in 2007 was close to 40 billion dollars. By the end of 2009 after the recession had taken hold, that almost quadrupled to 140 billion dollars. SNAP followed the same pattern. The number of SNAP recipients in 2007 was about 27 million people. Currently the number has started to decrease, but about 47 million people receive benefits.
As you can see the recession forced people into these extremely important safety nets. With no other options millions of people fell into these nets... they didn't jump gleefully into poverty. So are the poor lazy? The evidence does not support such.
Who Am I?
Viewers,
My name is Justin White. I am a very happily married 26 year old man who is currently studying Economics in college. My wife is also attending college studying Political Science with a focus on Pre-Law. This blog is an attempt to put my thoughts together regarding the current state of the economy and its effects on the poor. From time to time I may also venture into political philosophy, as well as general economic and political happenings. It is my hope that this blog can inform anybody who stumbles on it about what is actually happening to the impoverished in this country and how little our political system does for them. Thank you for reading, and please continue to come back.
My name is Justin White. I am a very happily married 26 year old man who is currently studying Economics in college. My wife is also attending college studying Political Science with a focus on Pre-Law. This blog is an attempt to put my thoughts together regarding the current state of the economy and its effects on the poor. From time to time I may also venture into political philosophy, as well as general economic and political happenings. It is my hope that this blog can inform anybody who stumbles on it about what is actually happening to the impoverished in this country and how little our political system does for them. Thank you for reading, and please continue to come back.
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