a) this
plunge in construction and consumption spending, together with . .
b) the
collapse of a parallel bubble in non-residential
real estate,
. . was
to lower annual demand in the economy by more than $1.2 trillion . And this was the reason
for the prolonged economic downturn. There
was nothing in the economists' bag of tricks that could allow the economy to
quickly and easily replace $1.2 trillion in lost
demand. Here then is the reason we are
still 10 million jobs below full employment, four years after the onset of the
recession. It is also the reason that
millions of lives are being ruined and will continue to be ruined, as good jobs
remain scarce and salaries low.
Why was all this allowed to happen, in spite of
all the warning signs? Answer: Politically well-connected banksters were
making billions. Countrywide and Merrill Lynch were issuing and
packaging fraudulent mortgages because they were making tons of money on them, not because they wanted to make moderate income people and minorities
homeowners. That was just the cover
story, peddled by President George W. Bush and others.
Fannie Mae and Freddie Mac deserve plenty of blame
in this story as well. Why? Because housing is all they do, and so they
should have seen the bubble and tried to stop it. Instead, they simply jumped on the big-money bandwagon,
so as to join in on the tremendous profit-making opportunities, even though that
profit would ultimately be at the expense of most everyone else in the country. Fannie and Freddie became followers and
profit takers, instead of the leaders and guardians they should have been.
The worst loans were securitized (bundled into
marketable securities and very profitably sold to suckered investors) by the
Wall Street boys. Fannie and Freddie got
into junk mortgages late in the game and did so to regain market share as a
profit making business, not out of a concern to extend homeownership. Once again, that was just the convenient rationalization
and cover story.
Meanwhile, the government agency devoted to
extending homeownership to moderate income people, the Federal Housing
Authority (FHA), became almost irrelevant.
Its market share shrank to less than 2% at the peak of the bubble
(compared with around 10% in more normal times). Why? Because
its lending standards were far stricter than those of the subprime-mortgage
pushers, and they were forbidden by law from jumping onto any big-profits
bandwagon.
What could have been done to prevent this
tragedy?
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