Spring Break
Bail out home borrowers, not Wall Street
Issue date: 10/2/08
Bringing back memories of Black Monday in October of 1987, the House of Representatives killed the Bush administration's $700-billion rescue package for America's beleaguered financial industry in a dramatic turn of events this week. The 228-205 vote sent the stock market into a plunge and renewed fears that the United States may be facing a protracted recession. In its largest single-day point loss ever, the Dow Jones Industrial Average plummeted by 777.68 points. Losses to shares on the Dow Jones Wilshire 5000 stock market index, which represents the stocks of nearly every publicly traded company in the United States, amounted to $1.2 trillion.
How did we end up in this mess?
Some blame Clinton & Co. and government manipulation of the free-market in the late 1990s (with the repeal of the Glass-Steagall Act). Others claim the reasons for the credit crunch stem from Bush's tax cuts for the wealthy, which put money into the hands of people who had no choice but to bet the new money on the housing and mortgage market. Both sides of the aisle, however, seem to agree that the origin of our current financial crisis lies in a dodgy home loan program that lead to the fall of some of America's largest commercial and investment banks.
During the second term of President Clinton, the United States saw an increase in employment largely because of the high-tech industry boom. But like all booms, it led to a downturn. The money supply had increased and the only market that was making money was housing. So in 2001, there was a large injection of money into houses and construction; U.S. home ownership jumped to almost 70 percent. The "securitization" of home loans began to grow - e.g. mortgage banks switched their original business of making mortgages to making packages of home loans that could be sold off as investments (securities) on Wall Street.
Making it possible for unqualified people to buy homes increased demand for and prices of houses. And as long as housing prices rose, the problems inherent in not requiring down payments and lowering lending standards were buried. As long as prices rose, no one had to default - simply because if someone was unable to pay a mortgage, they could sell the house at a profit.
How did we end up in this mess?
Some blame Clinton & Co. and government manipulation of the free-market in the late 1990s (with the repeal of the Glass-Steagall Act). Others claim the reasons for the credit crunch stem from Bush's tax cuts for the wealthy, which put money into the hands of people who had no choice but to bet the new money on the housing and mortgage market. Both sides of the aisle, however, seem to agree that the origin of our current financial crisis lies in a dodgy home loan program that lead to the fall of some of America's largest commercial and investment banks.
During the second term of President Clinton, the United States saw an increase in employment largely because of the high-tech industry boom. But like all booms, it led to a downturn. The money supply had increased and the only market that was making money was housing. So in 2001, there was a large injection of money into houses and construction; U.S. home ownership jumped to almost 70 percent. The "securitization" of home loans began to grow - e.g. mortgage banks switched their original business of making mortgages to making packages of home loans that could be sold off as investments (securities) on Wall Street.
Making it possible for unqualified people to buy homes increased demand for and prices of houses. And as long as housing prices rose, the problems inherent in not requiring down payments and lowering lending standards were buried. As long as prices rose, no one had to default - simply because if someone was unable to pay a mortgage, they could sell the house at a profit.
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