Reason #55: Home Inequity - Wall Street’s Subprime Madness
A friend of mine bought a home in the early 1990s for $265,000. By 2007, it was worth a million dollars. But his wife is a spendaholic. She’s been using their house like a giant ATM machine. Since the housing market started going nuts a few years ago, they’ve refinanced five times and sucked all their equity dry.
Like millions of other suckers out there in the real estate market, they thought the good times would never end, that people would just keep paying more and more for houses. But the wild ride is over now and their place is already worth less than the $800,000 they owe on it. If they sold it tomorrow, they’d have to write their lender a check when they handed over the deed.
Wall Street is supposed to be greedy. That’s the nature of the beast. It’s up to our leaders in Washington to find the right balance between allowing that greed to grow our economy while taming it just enough to keep it from devouring itself and everyone else.
How in the world did this happen, and on such a massive scale to boot? How did so many people like my friend wind up “underwater” with their home loans? It’s doesn’t take a genius to figure it out (though you shouldn’t expect our corporate press to tell you the truth about it). The plain fact of the matter is that Wall Street’s bottomless greed brought the housing crash on. And our leaders in Washington aided and abetted their excesses.
After the dotcom bubble burst in 2000, then Federal Reserve Chairman Alan Greenspan slashed interest rates to less than 2 percent. This set off a feeding frenzy of borrowing and spending, especially in the housing market. Pretty soon, home prices were at record levels and millions of people were paper millionaires. But the real estate boom wasn’t enough for “The Street.” To keep the market boiling and the profits rolling in, lenders started giving loans to anyone with a pulse.
Where were our leaders and policymakers while this enormous bubble was blowing up? They let millions of Americans risk the very roofs over their heads just so their bagmen on Wall Street could pull in record profits. And now that the party’s ending, is anyone being held accountable? Is anyone in the calling for real discipline in the markets? No, the only “solution” Washington has offered is a bogus “Housing Bill” that offers handouts to Fannie Mae and Freddie Mac, two of the biggest culprits for the crash. And the only solution the Federal Reserve can offer is … more interest rate cuts! In other words, they’re trying to send us back into the boom and bust cycle one more time.
Wall Street is supposed to be greedy. That’s the nature of the beast. It’s up to our leaders in Washington to find the right balance between allowing that greed to grow our economy while taming it just enough to keep it from devouring itself and everyone else. But nowadays, the federal government has forgotten its oversight responsibility. The only time it acts is after the fact, after the boom cycle has gone bust. That’s like the orchestra continuing to play music while the Titanic sinks. The time to act is before the iceberg hits.
Greasing Congress
Since 1990, employees and corporations in the real estate industry gave more than half a billion dollars to members of congress. All that cash did the trick. Numerous attempts to regulate the overheated housing market died a quite death, most of them without even coming to a vote.
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