Socialized Profits & Socialized Loses
The Free Market Theory proposes an economic system where individuals can gain the maximum amount liberty through an open market, which should be free from coercion and deception along with limited influence by government regulators. Within the Laisse Faire system the role of the government in the market place is second to the will of the participants. With limited intrusions into the market place, the main role of the government is to settle grievances and to enact laws that guarantee an individual’s right to be free from nor participate in coercion nor deception in the said market place. Theorists and supporters of the Free Market Theory may see the subprime mortgage fiasco of 2007 as a time where banks brought upon their own failures, by offering risky loans to unqualified consumers, which once failed, threaten their own lively hood, and as their private failures came to light, their packaging of toxic assets as profitable investments to outside sources would further threaten the industry and the world wide global economy as a whole. These catastrophic failures would eventual result in one of the largest (unnecessary) governmental intrusions into the marketplace, in culmination of the institution and passage of the TARP act, which many federal regulators and Congressional representatives deemed necessary after federal regulators and popular economists like Paul Krugman declared many of these institutions “too big to fail.”
Free Market Theorist would find the subprime mortgage fiasco as a failure on multiple fronts. Firstly being the lack of personal responsibility on the part of the banks themselves to the average consumer. Mortgage loans, historically, have been considered one of the safest investments any institution can offer or invest in. The basis of this safety is the fact that the loan offered by the bank is backed by the collateral of the home itself. (DesJardins & McCall) As long as the value of the home increases, and in the event the home owner fails to cover their own mortgage. The bank has the ability to reposes the home, and prior to the collapse, sell the property for close to the original value, if not more, then the original loan offered plus the additional profit from the interest already acquired off the original mortgage. Essentially guaranteeing anyone who owns property or finances the loan, the ability to sell, said property, in the future for an extremely high profit. That’s why gatekeeper companies like Moody’s, Standard and Poor’s, & Fitch typical rate mortgage loans at a AAA credit rating, the highest in the investment industry, This high valuations and easy access to equity is what cause the housing market to appear to be ever increasing throughout the 90s and early to mid 2000s. (DesJardins & McCall)
Many consumers took advantage of the ever easier access mortgage loans throughout the 90s and 2000s. The Center for Public Integrity, a non profit investigative new organization, found that between 1994 and 2007, some, “350 million mortgage applications [were] reported to the federal government,” via the Home Mortgage Disclosure Act, and all while the market was booming, the Federal Reserve was lowering and lowering interest rates. By June 2003, the private bank had lowered interest rates to just 1%, their lowest in decades (Public Integrity) The housing market was booming, especially in states like New York and California, with counties, such as Westchester county, seeing average housing prices increasing 5%-15% year over year throughout the early 2000s and up until December of 2006, which was the first time the Federal Reserve Bank of New York reported a reduction in the average housing price in the county. (Federal Reserve Bank of New York)
As mentioned prior, one of the necessities needed for a free market to function properly, is a dependency on the open markets to be free of deception and coercion, and as the market began to collapse throughout the late 2000s, reports of such were occurring all throughout the country. Even prior to the collapse of the mortgage market, many mortgage firms and investment banks had been sued, successfully, by the FDIC, all the 50 states, along with numerous private plaintiffs for fraud and deception associated with abusive and predatory lending practices. In 2007 AIG was fined $128 million after the “Office of Thrift Supervision found the lender had failed to consider the creditworthiness of borrowers and charged large broker and lender fees.” (PublicIntegrity) Actions like this allowed AIG to offer variable highest interest loans to individuals of poor credit and weak job standing. Bypassing normal protective measures, designed to prevent lenders from taking on to many risky loans. An HSBC subsidiary, Household Finance who was acquired in 2003, was fined for similar actions before their acquisition, for a hefty $484 million. While the biggest offender, Countrywide, who “agreed to provide more than $8.6 billion of home loan and foreclosure relief after being sued by 11 states for predatory lending practices.” The list of fraud associated with the subprime mortgage fiasco is nearly endless. Just out of the top 25 Subprime mortgage lenders, “at least 11 of the lenders on the Center’s list have paid significant sums to settle allegations of abusive or predatory lending practices.” Consumer fraud, deception, and predatory practices were as pervasive in the industry as was the act of loaning.
Though not all subprime loans were malicious intent, the act offering sub prime loans, which as defined by the FDIC is any mortgage at 3% points above average, would become a huge profit motive for many lenders. (FreeAdvice) Commonly, these companies were apart of the wider umbrella of mortgage lenders, who just a few years later, would eventually be gobbled up or merged into the subsidiaries of larger financial institutions like HSBC, Wells Fargo, Citi Bank, and Bank of America as they to began to default. As the gatekeeper function began to fall and crash on the consumer end. The subprime mortgage market would begin to devour itself too. While credit raters continued to grade mortgage-backed securities at AAA rates, institutions like Countrywide and et all, began to sell off subprime loans as mortgage-backed securities to private investors. These typically healthy investments lacked that credibility that investors sought after throughout the late 90s and early 2000s. Coming to be known as toxic asset packages, institutions like Countrywide were essentially betting against their $97.2 billion worth of subprime loans by attempting to sell off their portfolios to other investment firms and insurance companies. Purchasers of the future failed mortgages i.e. insurers, would become inundated with hundreds of billions of dollars of toxic assets. While US federal government enterprises like Freddy Mae and Fannie Mac, who’s main role in the market was to purchase mortgages from private financial institutions to free up equity in the market place, so they can therefore offer more loans to consumers, and thus continue to grease the market, also became inundated with mortgages that were designed to fail. (NCLC) Walls street was privatizing their profits, and selling off their failures to unknowing third parties and government agencies.
Eventually the market would begin to collapse, and starting in 2006 counties all across the country began to notice home values shrinking. Free market enthusiast and Libertarians alike saw the risky predatory practices as the own personal failures of the industry, and proposed to offer no assistance to the failing companies, and essentially the entire lending industry. As the market began to slow down in 2006, Wall Street continued to pump billions into the mortgage industry, in an attempt to save face. Wall Street’s top financiers, “Morgan Stanley, Merrill Lynch, Bear Stearns, and Goldman Sachs” attempted to underwrite the $2.1 trillion worth of subprime loans offered from 2000 to 2007. (PublicIntegrity) Failing to save itself, Wall Street turned to congress and the Bush administration for assistance. The same companies that ravaged the market, by deceiving consumers and other investors alike, would ask for a bail out.
The decision over how to handle the financial crisis came about via much debate within Congress. The motives for the Bush administration’s TARP program can easily be said to not be fueled by political or economical ideology, but there were many valid reasoned prosed to do such. The final Congressional decision was to begin a process of bailing out the financial industry. The original plan set into action was the Troubled Asset Relief Program (TARP) which originally planned to set up a fund of $700 billions to inject bak into the financial market. Recreating liquidity within the financial markets, and allowing banks to begin to easily loan to consumers once again. Signed into law in October 2008 by President Bush, future actions taken by Congress shortly after would reduce this amount to $475 billion via the Dodd-Frank Wall Street Reform act. All together, action was taken to purchase shares in hundreds of banks throughout the country, in an attempt to stop falling stock prices, and begin the process of stabilization. Supporters of the bail out hoped to revitalize the stock market, attempt to speed up the national recovery process, protect other investments within the stock market, such as mutual funds, which are often tied to consumer retirement funds, and, in the eyes of many economist, to prevent another Great Depression. Various political and economical ideologies would fall in line with these actions. Some groups favored bailing out consumers, through cash injections into the consumer market. By offering direct relief funds to American consumers under what would effectively be called the American Recovery and Reinvestment Act of 2009. What many would call a Keynesian approach to economics. A cash stimulus by the federal and state governments, due to a lack and or reduction of consumer and investment spending, which if done properly should reinvigorate the market.
Keynesian and governmental action plans are in direct conflict with the ethos of free market economics. In a Laizse Faire system, government intrusions into the market place are a no no. In the case of the 2008 bailout, the big question in Congress was to bail or not bail out the failing financial institutions. Within Congress itself, there was rather limited opposition to the bail out. There was a very limited voice within the narrow progressive side of the isle. Opposing bailouts for the rich in favor of bailouts for the middle and lower class. The major desenting opinion came from the few Libertarians within Congress. The greatest voice coming from former Texas Congressional Representative Ron Paul who opposed the bailouts for a multitude of reasons, primarily based off his strong support of Austrian economic theories. Standing in front of the House of Representative, Paul blasted Wall Street pariahs and their Congressional lackeys. Paul bombastically laid out his reasoning to oppose a government bailout. Attempting to rally the public cause, Paul stood in front of Congress laying out the free market opposition. Asking why should those that failed so haphazardly be trusted with the recovery process, pondering why if they aren’t held accountable today for their actions, what stops them from failing and socializing their losses again, and asking why within a the relatively free market system that exists within the country today, why aren’t those that preach and praised boot straps and share holder motivations for actions held accountable for their failures? Free market theorist believe those that are successful should succeed and those that offer an inadequate product or lack the ability to be sustainable should as the market dictates, fail. Bailing out Wall Street would imply a government intrusion into the market, which results in favoring those that failed over those that were successful, and in the end taxing those who were successful, i.e. those that did not collapse, with the failures of those that did.
Supporters of Austrian economics, free market principles, or Libertarian policies would predominately agree that a bailout by the federal government of the financial industry, would be an unwarranted intrusion into the market place. Favoring failure over successful and sustainable business practices. Many of these same arguments and opinions can be found throughout the spectrum of political and economic ideologies. However the chances of any of those arguments actually being taken into consideration by the individuals within the Senate Banking Committee at the time of the collapse seems laughable, especially when taking into consideration that chairman like Chris Dodd and Kent Conrad, were given tens of thousands of dollars in political donations to their campaign coffers as well as extremely generous mortgage rates, below market averages, by Countrywide financiers, the number one holder of subprime mortgages at the time of the collapse, which was at an estimated $97.2 billion. With Congress so easily paid off, and for so cheaply when comparing the dollar to dollar investment, of tens of thousands of dollars political contribution to billions of dollars of possible profit. It’s no surprise that investors, who’s industry was inundated which fraud, deception, and coercion would not take such a profitable investment of paying off Congress. Which may be, the reason why those most responsible for holding the world’s economy hostage, have never spent a single day in jail for any of their actions.
Sources
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