Who’s to blame for the Credit Crunch?
Posted on 09. Aug, 2009 by Darkman in Politics, UK, US
Written By Darkman
Everyday you hear the news, you pick up a paper and it is plastered everywhere even at work there is no escaping the credit crunch as it impacts every individual but could all this have been avoided? Has greed of companies, governments and people caused the meltdown?
The credit crunch started in the US where risky people were sold mortgages so that the sellers would earn commission and they didn’t care about these people afterwards. Most people defaulted on their payments due to unemployment/age/death etc. Banks then combined these bad debts and good debts and sold them to UK banks but they didn’t know about the bad ones as it was sold as a whole package. When the banks realized these were bad loans that they had bought all banks in the UK ceased lending money to each other (which is how banks generally work) Northern Rock was hit the hardest as 70% of the money they lend is from other banks.
A lot of politicians & economist alike have apportioned a majority of the blame sub prime mortgage market however I think society as a whole are to blame. Greed was the main fuel for the credit crunch nothing else. Not long ago, it was easy to obtain any type of loan, including home loans because bankers who originated the loans knew they wouldn’t be the ones who actually held them. They immediately sold the loans on the secondary market, took their profits and pushed the liability on whoever purchased the loan on the secondary market. There was no real risk to the banks that wrote the loans so there was little incentive to closely scrutinize a borrower’s ability to repay it. These mortgages are at the heart of the credit crunch that has shaken financial institutions, rattled builders and burned investors who bought mortgage backed bonds on the secondary market which turned out to be worth far less than they thought.
Despite signals the bubble was going to burst, companies did not slow down risky lending and borrowing practices. High default rates on “subprime” and adjustable rate mortgages (ARM), beginning in approximately 2005–2006 however it was not until mid 2007 did banks try and address the problem but by that time it was too late.
In America “The Center for Responsible Lending”, related testimony that the bank actually made efforts to avoid having income information about some borrowers. The Associated Press has reported that a federal grand jury is investigating subprime lenders Countrywide Financial Corp., New Century Financial Corp. and IndyMac Bancorp Inc and reports also that the FBI is investigating IndyMac for possible fraud. The question, then, is whether banks and other private mortgage originators of subprime and other “nonprime” loans might deliberately have profited or attempted to profit - in moneys, economic benefit or even fraudulent gain - through reducing the amount of information they collected from borrowers.” The banking industry provided home loans even to undocumented immigrants. It is legal for illegal immigrants to purchase property in the United States. The pro-immigrant experts like Tim Ready at the University of Notre Dame argued that “It’s really important to the economy as a whole and to the real estate market in particular that Latinos be able to purchase a home.” Banks, including some major institutions, offered home-mortgage loans to people who did not have Social Security numbers.
Money definitely ruled the world as government turned a blind eye to many irregularities. A booming economy meant an influx of money for the government but in 2007 in all came crashing down. HSCB wrote off $10.5 billion in Feb 2007 and Profits at the U.S. banks fell from $35.2 billion to $646 million (89%) during the fourth quarter of 2007 versus the prior year and it has been down hill from there leading to several closures and mergers.
In 2005, Fannie Mae revealed it overstated earnings by $10.6 billion and that it didn’t really know what was going on. The Bush administration pushed for reforms, but those efforts were rebuffed by Congress, with Democrats Barney Frank and Christopher Dodd taking point, because Fannie and Freddie have spent millions in campaign contributions.The head of failed US investment bank Lehman Brothers has told Congress that he took home about $300m (£172.6m) in pay and bonuses over the past eight years. Less than a week before Lehman became the largest ever bankruptcy in US history, the company was still funneling millions to departing executives as “golden handshakes”. The bonuses were being paid out at the same time the company was pleading for the US Treasury to step in and give it a taxpayer-funded lifeline. “While Mr Fuld and other Lehman executives were getting rich, they were steering Lehman Brothers and our economy toward a precipice.”
Bosses from Barclays Wealth were schmoozing with clients on a three-day jaunt believed to be costing more than £500,000 in September.
Martin Sullivan the ex boss of AIG, the world’s largest insurer which need a US government’s $123 billion bail-out was under fire after admitting he got huge pay and bonuses and an £8.5million “golden parachute” when he was forced out. It was also revealed that just last week, about 70 of the company’s top performers were rewarded with a week-long stay at the luxury St. Regis Resort in Monarch Beach, Calif., where they ran up a tab of $440,000. Today, AIG chief executive Edward Liddy defended the vacation “Such trips “are standard practice in our industry,” Liddy said”.
“Average Americans are suffering economically,” said Henry Waxman, chairman of the House oversight committee. “They are losing their jobs, their homes and their health insurance. Yet less than one week after the taxpayers rescued AIG, company executives could be found wining and dining at one of the most exclusive resorts in the nation.”
The average Joe need’s to realise when playing banks they will always lose. Despite the collapse and nationalisation of several banks funded through tax payers moneys several CEO walked away with millions proving that even in a crises the rich still get richer.
Greed is what encouraged companies to invest the sub prime market. It is what stopped companies from properly vetting customers who wanted to buy houses. Greed is what stopped governments from investigating companies who overstated profits and broke the rules as they filled political party coffers with donations. It is also what stopped average people thinking about the amount of debt they where taking on. People always assumed credit will be available and banks where infallible. Why would a sane person get a mortgage for 130%?
Now everyone is affected from the Football Premiership to nurseries. Fuel, energy and grocery bills had risen by at least 20 per cent in 2008 compared to August 2007, while house prices have plunged and if they fall even further, will leave 1.7 million people with mortgages worth more than their houses. Even a slice of toast will cost the average consumer over 100 per more than it did in August 2007. The price of butter has climbed by 65 per cent while a loaf of white bread costs 40 per cent more. The credit crunch has led to a “massive surge” in parents being pursued for unpaid school fees, according to the leading firm of lawyers representing independent schools.
Despite the doom & gloom coming from the stock markets, governments are working hard to restore confide in the market. Things will get better event though it will take some time as confidence grows between banks and liquidity increases but a part of me wonders in another 20 – 30 years are we going to be back here again? Are people really going to learn from past mistakes and curb their greed which has lead to our current financial state?
Proverbs 11:6 - “The righteousness of the upright will deliver them, But the treacherous will be caught by their own greed”
Sources: Pictures
http://moneybob.files.wordpress.com/2007/08/arnold-credit-crunch.jpg
http://dallasloanofficer.com/files/wall%20street.jpg
http://www.globalcreditcrunch.org/images/Humor/credit-crunch.png
http://www.loseweightwithlida.com/images/jokes/credit_crunch.jpg
http://2.bp.blogspot.com/_VhJDQuzVjHE/R-PHdO4oLBI/AAAAAAAAAOw/5FJle2XG62s/s400/economy2_080319_ms.jpg
http://www.sarcasmo.co.uk/wp-content/credit-crunch-bites.jpg
