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Finance
The big stinking steaming heap of debt
The US housing market collapse and the international credit crunch it has spawned
By Reed Eurchuk
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A recently published index of housing prices in the US has documented the extent of the housing market collapse there. The Standard & Poor/Case-Shiller home-price index recorded the largest drop in its history. The index, a measure of housing prices in ten US cities, found that prices had fallen 6.7 percent in October 2007, compared to October 2006. Some of the hottest real estate markets in the US, in Florida, Nevada and Southern California, are among the markets hardest hit.
While the downturn appeared first with the collapse of a relatively discrete sector of the US market—the so-called “sub-prime” mortgages—it quickly exploded, revealing a gaping hole in the credit system itself. As the former Chief Economist at the US International Trade Commission, Peter Morici, recently wrote, "The subprime meltdown reveals fundamental structural flaws in the US banking system.
The write downs at Citigroup, UBS and others indicate that bankers have been overvaluing mortgage-back securities." Huge institutional investors (pension funds, insurance companies, municipal money market funds) and wealthy individual “investors that trusted Citigroup and other banks now hold worthless paper. Consequently, the market for mortgage-backed securities has evaporated,” according to Morici.
Many people still believe that their local bank holds their mortgage. In most cases this is no longer true. Today banks sell the mortgages to bigger fish, who then bundle them up together with other mortgages and sell them on international markets. These “mortgage-backed securities” became speculative instruments bought and traded on the international financial market casinos. This is one reason why banks have been so quick to grant so many people mortgages: the bank does not hold the debt.
Pam Martens, who worked on Wall Street for over 20 years, explains what these “mortgage-backed securities,” also known as “Collateralized Debt Obligations” [CDOs], were comprised of: "Layers (called tranches on Wall Street) could consist of student loans, credit card receivables, auto loans, commercial or residential real estate loans, subprime mortgages or corporate loans. Layers could also be highly leveraged bets on indices . . . or pieces of other CDOs. . . . Beginning in 2003, a growing percentage of CDOs were assembled with just one asset class: residential mortgages frequently using subprime mortgages and home equity loans as the predominant collateral." The banks and trading houses felt these CDOs were as safe an investment as the homes, which were rising in value quickly, and stood behind the debt as collateral.
According to Max Wolff, citing US federal government statistics, between 2001 and 2007, the “value of household real estate saw a paper increase of $8.5 trillion.” This wild increase was “accomplished by borrowing an additional $4.8 trillion in mortgage debt.” Because homeowners believed the values of their homes would continue to rise, “Debt fueled growth became a key part of our economy and kept families spending and feeling OK about their situation.” Many homeowners used their homes as cash machines, borrowing against the increased value of their home, and taking on the added debt to finance home renovations, vacations and SUVs. When values fall as precipitously as they already have in much of the US, the cash machine turns into an anchor, pulling the homeowner down. In some parts of the US some homeowners are now left owing much more on their home than the home is now worth on the market.
If you take a step back, you can see how the scam of the century required the collaboration of the government at many levels. In a recent interview, another ex-employee of Wall Street and business writer, Nomi Prins, linked the rise of the housing market directly to the radical rate cuts instituted by Alan Greenspan at the US Federal Reserve following the Enron scandal and the bursting of the hi-tech bubble in 2001. Over a short period of time the Fed's prime lending rate fell from six percent to one percent. By cutting interest rates, the Fed simply replaced the high tech bubble with a new bubble: the housing bubble. Prins also pointed out that the US government repealed the Glass-Steagall Act that had prohibited traditional banks from underwriting stocks and bonds, which prevented them from selling the securities of companies that they also lent money to. Now, having lent money to companies, the brokers had every incentive to make the company's securities as attractive as possible as they were now also selling the same product. This led to the delusional confidence that allowed the brokers to overlook the loads of shaky debt in some of these securities. The Enron collapse was caused by these factors, and Prins believes the current credit crisis shares the same “Enronomics” at its root.
Meanwhile, back in Vancouver . . .
So far the Vancouver real estate market has escaped any of the contagion spreading across the border. How long will that last? Even in the US itself, housing prices in some local markets (such as Seattle and Portland) continue to rise. Together, easily accessible credit and massive wasteful public investments (the Convention Centre, the RAV Line, various Olympic investments, Gateway Project, the Sea-to-Sky Highway) have kept Vancouver's economy flush for the past five years. While BC has the second highest rate of child poverty in Canada, the three levels of government have conspired to waste taxpayer money on projects to benefit real estate developers and the tourism industry. This is obviously not a sustainable economy. However, with investments ongoing through 2010, Vancouver may avoid some of the worst fall-out from the crash, in the short term at least.
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The Republic of East Vancouver masthead
The Republic of East Vancouver supports no party, advocates
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