Unfortunately, there were also some serious negative consequences, particularly in the housing market. Easy credit — combined with the faulty assumption that home values would continue to rise — led to excesses and bad decisions. Many mortgage lenders approved loans for borrowers without carefully examining their ability to pay. Many borrowers took out loans larger than they could afford, assuming that they could sell or refinance their homes at a higher price later on.
Optimism about housing values also led to a boom in home construction. Eventually the number of new houses exceeded the number of people willing to buy them. And with supply exceeding demand, housing prices fell. And this created a problem: Borrowers with adjustable rate mortgages who had been planning to sell or refinance their homes at a higher price were stuck with homes worth less than expected — along with mortgage payments they could not afford. As a result, many mortgage holders began to default.
These widespread defaults had effects far beyond the housing market. See, in today’s mortgage industry, home loans are often packaged together, and converted into financial products called “mortgage-backed securities.” These securities were sold to investors around the world. Many investors assumed these securities were trustworthy, and asked few questions about their actual value. Two of the leading purchasers of mortgage-backed securities were Fannie Mae and Freddie Mac. Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk.
The decline in the housing market set off a domino effect across our economy. When home values declined, borrowers defaulted on their mortgages, and investors holding mortgage-backed securities began to incur serious losses. Before long, these securities became so unreliable that they were not being bought or sold. Investment banks such as Bear Stearns and Lehman Brothers found themselves saddled with large amounts of assets they could not sell. They ran out of the money needed to meet their immediate obligations. And they faced imminent collapse. Other banks found themselves in severe financial trouble. These banks began holding on to their money, and lending dried up, and the gears of the American financial system began grinding to a halt.
With the situation becoming more precarious by the day, I faced a choice: To step in with dramatic government action, or to stand back and allow the irresponsible actions of some to undermine the financial security of all.
Here’s the problem: Credibility. I’m not a Bush hater, I voted for him the first time around. But his incompetence in taking us into a war with flawed evidence of weapons of mass destruction and Saddam Hussein’s connection to the 9/11 attacks leaves him no credit to deal in this crisis.
His big oil background and his big business friends – along with the Democrats who are equally in the pocket of bankers and investment firms – does not inspire any confidence in his ability to deal with this crisis.
Paulson, and many others, have been asleep at the switch for years and now want me and other taxpayers to suddenly – and quickly – agree to pledge $700 billion (more than we’ve spent in Iraq so far) to another great adventure in socialism.
I say no.
Ralph Nader looks better by the moment.
#1: While there is plenty of blame to go around, and president Bush perhaps had opportunities to correct some of the excesses in the mortgage and derivitives markets in spite of an opposition controlled legislature, I think that it is unhelpful to ascribe incompetence and lack of credibility to Bush with a leftist media driven [url=http://www.americanthinker.com/2008/08/who_lied_about_iraq.html]canard [/url] that has been proven not just inacurate, but false….
Creedal, thanks for an extraordinarily well-documented article in the link.