[OPE-L] The moral dimension of the subprimes crisis

From: Jurriaan Bendien (adsl675281@TISCALI.NL)
Date: Tue Dec 18 2007 - 15:04:18 EST

I was thinking about the moral dimension of the subprime crisis, about which leftists have little to say so far. The NYT notes cautiously:

To be sure, some of the speculative excesses of the housing bubble and the subsequent bust were driven by broader forces. The Fed helped stoke the housing market by slashing short-term interest rates from 2000 to 2004. The rate cuts drastically reduced the effective cost of buying a house, which added more fuel to what was already a powerful housing boom. In addition, foreign investors were pouring trillions of dollars into American securities. Much of that money, often described as the "global savings glut," flowed directly into mortgage-backed securities that were used to finance subprime mortgages. http://www.nytimes.com/2007/12/18/business/18subprime.html?pagewanted=1&_r=1&hp

A blogger, Robert Morley, has a punchier story:

"The world's economic system is built on trust. Money is no longer backed with tangible assets. The only thing giving that Jackson in your wallet purchasing power is the perception that it will be able to buy a similar batch of goods tomorrow as it can today. But here is the catch. There is no standard that determines what a dollar is worth-ultimately it's all relative. Its value could disappear overnight. The same is true for every currency, whether yen, ruble or peso. Each is backed by confidence-confidence that the government will act responsibly, confidence that the government will honestly pay its debts (not just print more money), and confidence that the currency will remain a store of wealth. When that confidence is broken, faith-based economic systems go into meltdown. Investors and international banks flee, currency values plummet, inflation runs rampant and economies are destroyed. (...) In August, when fallout from America's popping housing bubble began to hit the market, trust in America cracked-and with it, so too did confidence in the global economic system.  In 2000, America faced a recession. But rather than letting the economy rebalance, the Federal Reserve decided to slash interest rates to artificially stimulate the economy-even though it knew that doing so would probably create even bigger problems later. Consequently, mortgage rates in America plummeted and, suddenly, millions more Americans could buy homes. House prices skyrocketed: tripling and quadrupling in many areas. The bubble fed on itself as prospective homeowners, often acting more like speculators, rushed to buy homes as quickly as possible to capitalize on further price appreciation. (...) As home values rose, fewer people could afford traditional loans. To keep their profits growing, banks and lenders began offering easy-to-get subprime mortgages-mortgages to borrowers normally considered too risky due to credit history, income status and other factors. (...) But there was just one problem: The whole boom was based on artificially low interest rates. What would happen when interest rates rose, homes stopped appreciating and borrowers had more difficulty making payments? (...) To make the sales profitable, the risky mortgages had to be marketed as a "safe" investment. (...) Later it became public knowledge that these same ratings agencies, which foreign investors were relying on for impartial advice, were being paid by the very banks and lenders that were bundling and selling the subprime mortgages-a huge conflict of interest that produced some terribly misleading data for foreign investors. It has also emerged, at least in Moody's case, that the agency knew for years that the mortgages securities they rated as safe were more than 10 times as risky as other similarly rated bonds (Daily Reckoning, September 3). (...) Foreign willingness to purchase U.S. debt has kept interest rates low in America-thereby creating millions of jobs in real estate, home construction, remodeling and other associated industries. America has become so dependent on foreign money that if foreigners stop lending to America, the America you know today would not survive. Even now, the foreign backlash is beginning to be felt. The U.S. dollar is dropping to lows never before experienced. In September, the dollar fell to the lowest it has ever been against the euro. Against the Canadian dollar it hit a 31-year low, making the two dollars almost equal in value. So while U.S. officials continue to brag that all will work out just fine and that the credit crunch is contained, they are missing the bigger point: America cheated the very people it depends upon for loans. The world is approaching an end of an era. America's moral collapse now lies exposed to all-a virtual death sentence to an economic system based on trust.  (complete text http://investment-trend.blogspot.com/ ). 

But perhaps that is just one side of the story. On the other side is that the owners of the "global savings glut" have continued to pump more capital into the USA, instead of investing it in productive enterprises in their own countries. The question few commentators answer is, why do these surplus funds exist at all? I suppose part of the reason must be that a good portion of these capital reserves was USD-denominated, the dollar still being the main currency used in world trade. Still, the actual exports of e.g. goods and services produced in the EU to the USA are only about 5% of the total EU gross product - much more important is the export of capital. I suspect the root cause for the surplus funds must be, that real wages are stagnant or falling. In a manner of speaking, the rich are too rich for their own good, because the working classes are too poor. "Making poverty history", you might say, effectively means creating poverty of truly historic proportions.

The Fed is effectively between the devil and the deep blue sea. It can raise interest rates or lower them, but either policy generates more economic contradictions. It's a fairly safe bet that the next American government will therefore drastically revamp economic policy as a whole.


This archive was generated by hypermail 2.1.5 : Mon Dec 31 2007 - 00:00:04 EST