I really struggle to wrap my head around economics sometimes and the US (or is it a global) economic crisis is all pretty confusing (and crazy with the $700 billion dollar bail out bill getting the go ahead).
Newsweek has an good article on who is to blame, basically it highlights that there is no one specific but rather a number of guilty parties:
- The Federal Reserve, which slashed interest rates after the dot-com bubble burst, making credit cheap.
- Home buyers, who took advantage of easy credit to bid up the prices of homes excessively.
- Congress, which continues to support a mortgage tax deduction that gives consumers a tax incentive to buy more expensive houses.
- Real estate agents, most of whom work for the sellers rather than the buyers and who earned higher commissions from selling more expensive homes.
- The Clinton administration, which pushed for less stringent credit and downpayment requirements for working- and middle-class families.
- Mortgage brokers, who offered less-credit-worthy home buyers subprime, adjustable rate loans with low initial payments, but exploding interest rates.
- Former Federal Reserve chairman Alan Greenspan, who in 2004, near the peak of the housing bubble, encouraged Americans to take out adjustable rate mortgages.
- Wall Street firms, who paid too little attention to the quality of the risky loans that they bundled into Mortgage Backed Securities (MBS), and issued bonds using those securities as collateral.
- The Bush administration, which failed to provide needed government oversight of the increasingly dicey mortgage-backed securities market.
- An obscure accounting rule called mark-to-market, which can have the paradoxical result of making assets be worth less on paper than they are in reality during times of panic.
- Collective delusion, or a belief on the part of all parties that home prices would keep rising forever, no matter how high or how fast they had already gone up.
No’s 2 and 11 are interesting in that we see some of this in the New Zealand housing market particularly in Auckland.
I wonder how this will all pan out? Not well I suspect given some of our local headlines:
- How the financial crisis is hitting mortgages
- Credit squeeze robs economy of its lifeblood
- National could have trouble over tax cuts (I have always been suspicious of exactly where National was going to find all that extra cash to give such big tax cuts)
Perhaps the only “good thing” is that cheese is going to become cheaper :)