Jonathan G. Shibley’s letter in the Long Beach Press-Telegram (“Deregulation was culprit”) blaming a “neocon philosophy of laissez faire and deregulation” for our current financial crisis fails to account for the effects of 9/11. http://www.presstelegram.com/opinions/ci_11352019 (SEE BELOW THIS POST)
What brought about our present financial crisis was 9/11. After 9/11 and the rise of terrorism, foreign investors were looking for a safe haven for their money. What could be safer than U.S. real estate? To avoid a major recession after 9/11, the Federal Reserve cut interest rates and stimulated huge infusions of cash into the economy.
Prior to 9/11, U.S. government regulators had pressured banks, insurance companies, and savings and loans to reduce their investment in real estate after massive overbuilding in the 1980’s. Developers and property owners needing capital had little place to go for money but to stock and bond markets.
Soon after 9/11, Wall Street invented collateralized mortgage bonds and securitized stocks which injected trillions of dollars of foreign money into U.S. real estate, thus circumventing the U.S. central bank which conventionally manages the money supply.
Gauged by contributions to the two major U.S. political parties, Wall Street at the time was dominated by investment firms supporting the Democratic Party contrary to the popular notion that Wall Street is “Republican.”
This massive infusion of foreign capital resulted in an oversupply of money, historic low interest rates, the diminishing value of the dollar, a skyrocketing price for oil as a substitute for the exchange rate, and a real estate bubble. The shock wave of foreign money into real estate collapsed lending and regulatory standards as loan underwriters just handed off the risk to others in the financial food chain by packaging loans into derivatives.
The idea of derivatives was to spread and reduce risk; for example by selling the cash flow from each year of a home loan to a different investor. But these loan derivatives became unforeclosable when homeowners defaulted on paying their loans because they were spread out over the whole world.
Fannie Mae and Freddie Mac, run by high-profile Democrats, had to be taken over by government due to mega-billions in bad derivatives. Ginnie Mae, run by a Republican, is still sound and has no derivatives.
The real estate bubble boosted the homeownerhip rate in the U.S. from 64% to 69% and subprime loans to low income families went from 5.6% in 2001 to 20% in 2006. In other words all those “laissez faire” capitalists Mr. Shibley blames for the financial crisis inadvertently brought about a huge increase in homeownership for former renters even though “Republicans” got no credit for it. Anti-redlining laws also helped expand homeownership but coupled with "hand off" loan underwriting, such laws have unintentionally left many low income families straddled with loans with ramping up interest rates.
Both political parties are implicated in our current financial crisis. But politicized finger pointing ignores the bigger story of how the effects of 9/11 resulted in the real estate bubble and eventual , as described in the book Niagara of Capital by Anthony Downs (2007).
How’s that Benjamin Franklin rhyme go? (paraphrased)
For loss of a nail the shoe was lost.
For loss of a shoe the horse was lost.
For loss of a horse the rider was lost.
For loss of a rider the battle was lost.
For loss of a battle the kingdom was lost
And all for the loss of a horseshoe nail.
Just substitute 9/11 for a nail and you have an analogy for our current financial mess. Moral of story: “People, like nails, lose their effectiveness when they lose direction and begin to bend.” Walter Savage Landor
JONATHAN G. SHIBLEY LETTER EXCERPTED FROM LONG-BEACH PRESS TELEGRAM 1-1-09
Culprit was deregulation
You recently ran an article which asked if 2008 could be the start of a great depression. It could well be. I have never seen anything like this in my life and I have been around for several decades.
One thing is certain: it was adherence to the neocon philosophy of laissez-faire capitalism and deregulation which brought us to where we are now.
The American people were warned about this by the savings and loan crisis of the late 1980s (subprime's little brother) and the recession of 1990. Reagan and his successors engaged in deregulation of the airlines (now a shambles) and industry in general.
Laissez-faire capitalism did not work under Coolidge and Hoover in the 1920s, it did not work in the 1980s and it did not work under Bush this century. Free enterprise is necessary to a viable society. However, government regulation is often necessary.
Jonathan G. Shibley