Mortgages and Economics

The economic disaster of 2008 was based on the housing bubble and the banks' willingness to speculate with borrowed money. The prime vehicle for speculation was the mortgage-backed securities (MBS) sold by the banks. As has been well-explained by others, a MBS is a financial instrument composed of pieces of many mortgages ("sliced and diced") and sold to investors as a bona fide security.

On the face of it, according to my investor friend, there's nothing intrinsically wrong with the concept of MBS. Anything can be securitized. As it turns out, Fannie and Freddie were formed to enable more mortgages and more home ownership. Under the old model, a bank's ability to sell mortgages was limited by the size of its deposits. Under Fannie and Freddie, the sky's the limit—the bank sells the new mortgage to Fannie or Freddie and then uses the proceeds to sell as another new mortgage. What Fannie and Freddie did to fund their ongoing purchases of original mortgages was slice-and-dice them into MBS—which were ultimately sold around the world.

This practice was done to such a vast extent that the economic security of the country hinged on the ability of homeowners to pay their mortgages. I find this extraordinarily disconcerting. The usual bogeymen, like trade deficits and foreign currency manipulation, fade into the background.

The housing bubble, which must have been started by these practices and was certainly fueled by them, benefitted the real estate, advertising, and banking industries. Homeowners, societies, and the environment paid. Homeowners paid by taking on mortgage debt that consumed their disposable income and necessitated two-paycheck families. Society paid by losing the participation of individuals who no longer had free time. The environment paid as housing development consumed agricultural and unused lands as suburbia swelled beyond city limits and highway systems expanded to accommodate increasing numbers of automobiles powered by internal combustion engines whose exhausts polluted the air.

The carrot offered to homeowners was the mortgage interest tax deduction. Actually it is more than a carrot as many homes could not be paid for without it. Perhaps it is also a stick. As seductive as it is for the working class, its real nature is hidden—it is a subsidy to the banks.

I recommend to you an easily-read and highly informative article in Counterpunch, "Wall Street and the Politics of Finance" by Rob Urie, published 10-5-2012.

Beware—the forces that caused the 2008 disaster are still in play, including: Fannie and Freddie, MBS, mortgage interest tax deduction, and bank speculation with borrowed money. The folks who gained from the last housing bubble are itching to restart it. The financial consultants who straight-facedly advised us to hock everything just to buy a house are dusting off their resumes and business plans.

What in all of this leads you to believe that a lack of regulation will improve matters?

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Written: 10-12-2012.