Thursday, October 02, 2008

Who Is Responsible for the Financial Crisis?

Clearly the U.S. financial markets are in trouble. Over the past nine months, we have witnessed the failure of Bear Stearns, AIG, Washington Mutual, Lehman Brothers along with the GSEs (Government Sponsored Enterprises) Fannie Mae and Freddie Mac. Most of the rhetoric has focused on the lack of regulatory oversight as the culprit. However, I will assert that the real villain in this fiasco is a Congress and Administration that have pushed home ownership to those that end the end could not afford a home.

For example, between 1995 and 2005 the rate of U.S. home ownership rose from 64.8 to 68.9. The factors driving this rate were an overly aggressive Congress, Administration, Fannie Mae and Freddie Mac pushing and encouraging lending institutions to put more and more folks into homes that in many cases they could not afford. In most cases, these new home owners committed to higher mortgage payments resulting from variable interest rates that trended upward. All went well as long as home prices were rising. Between 1995 and 2005, housing prices in the U.S., as measured by the Case-Shiller index soared by 153.2 percent. Since January of 2005, this same measure of housing prices has plummeted by 7.3 percent. Thus, all of those individuals that were benefited from rocketing housing prices via refinancing, home equity loans and actual home sales found themselves holding assets there were decreasing in value just as their payments were advancing at an alarming rates.

Thus mortgage defaults began to elevate. In 1995, total U.S. mortgage payments were 9.6 percent of take home pay. In 2008, mortgage payments represented 11.6 percent of take home pay. This produced mortgage defaults rates to record levels with the rate of home vacancies in the U.S. rising to their highest level since record keeping began in the early 1960s. This meant that lending institutions that engaged in this aggressive lending now held mortgages of questionable value or even worse homes that were not salable.

Now Congress wishes to increase regulation. This is the classic case of the fox keeping watch over the hen house. They caused this mess. Can we really trust them to fix it.

Ernie Goss

4 comments:

Anonymous said...

I appreciate your post on this. I also look forward to hearing on this blog about the consequences of the 'bailout,' especially as related to the future value of the dollar.

Anonymous said...

How about this Ernie--ever consider why some of those homes are not salable? Is it that the house itself can't be sold or that would-be new buyers can't afford to buy homes since they have other financial obligations. Could it be that students who go to Creighton University pay too much in tuition that when they graduate they can't buy a home for several years since they will be paying off student loans for the rest of their lives? Most young people who would be buying their first home (those homes that you call nonsalable) can't buy a home because tuition has gone up more than any other expense in this nation. It's a shame that Creighton University isn't more efficient with student's money. I'm sure you know that Creighton is one of the most inefficient universities regarding administrative expenses. Check it out for yourself on Charitynavigator.com
Stop blaming congress, and start looking at Creighton and other universities. When are students going to get a bailout on our loans? Student tuition costs are lower in every other nation in the world, and other nations are producing better qualified employees. For example, an engineer in the U.S. has to take classes in English, history, State government, culture credits, non-western credit etc. etc., while in other nations an Engineer takes classes on Engineering for less money--AND, they can buy homes!
Put the blame where it belongs. This economic crisis is long term buddy.

Ernie Goss said...

Dear Anonymous,

I agree that universities, including Creighton, are increasing tuition at rates that unsustainable. Universities are over charging students with the assistance of governments, state and federal. Citizens have yet to hold universities to the same standard that we hold businesses. We are always painted in mostly favorable light.

Anonymous said...

I don't think it helped when the Reagan administration provided the largest deregulation to the investment banking industry in the last 50 years.

This allowed them to access IPOs which thereby increased these banks ability to leverage. The risk of this wasn't baked into the stock price tough nor was it considered by management.

These banks sell credibilty. When this service is suspect, the value quickly went south.

Again the Reagan heavily was behind the deregulation of the investment banking industry.

To the rich go the spoils.

The second anonomous post emphasized the fact people don't have the disposable income to pay the mortgage. This is a problem the Democrats are addressing.

The Clinton administration watched as we incurred the largest increase in mean wages since the sixties, the Kennedy and Johnson era. We're trying to get back to that level of prosperity again.