The Unconditional Blog

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The Great American Dream – how sub prime’s impact reaches deep into ordinary lives

Posted on: May 16th, 2009 | Filed in International

istock_000000041242xsmallThe US economic meltdown that has lead to this “Great Global Recession” can be very clearly traced back to the at-best lapse, and at-worst semi-fraudulent home loan mortgage schemes of the early past of this decade.

These were the sub prime mortgages that allowed people with the inability to pay or the inability to demonstrate the ability to ,the opportunity to secure loans of hundreds of thousands of dollars against the purchase of a house which they could have in the past only dreamed about – all on the premise that house prices would continue to rise and any risk of rising interest rates would be completely overshadowed by equity gains.

Well as we all are only too aware this pack of cards came tumbling down, and over the past 2 years the foreclosure consequence of this unwinding has catastrophically depressed the US housing market and seen the average house price in the US fall by 28% from the peak of the market over two years ago.

A lot of what I have read on blogs and heard in conversations over the past year has tried to stereotype the recipients of these sub prime loans as financially illiterate members of the public and has made the accusations that these people were seduced into these types of these schemes to invest in  speculative developments – especially true in NZ with the likes of the schemes promoted by the now defunct finance companies.

I have always felt that against these claims, people always applied a too-simplistic view that these people were buying houses as some form of financial instrument. To this claim I respond that the purchase of a house is far more about emotional and social triggers than financial – it just relies on the financial support.

It was therefore for me very interesting and enlightening to read an excellent article today from the New York Times Magazine written by Edmund Andrews. Edmund is an economics reporter for the NY Times – as he himself says in the start of the article

If there was anybody who should have avoided the mortgage catastrophe, it was I. As an economics reporter for The New York Times, I have been the paper’s chief eyes and ears on the Federal Reserve for the past six years. I watched Alan Greenspan and his successor, Ben S. Bernanke, at close range. I wrote several early-warning articles in 2004 about the spike in go-go mortgages. Before that, I had a hand in covering the Asian financial crisis of 1997, the Russia meltdown in 1998 and the dot-com collapse in 2000. I know a lot about the curveballs that the economy can throw at us.

The fact is that Edmund became one of the casualties of these financial instruments of sub prime mortgages. Not as part of some speculative property investment scheme, but just because he wanted to live a dream for himself, his partner and his family – what they call the Great American Dream. Have a read and ask yourself – what would you have done and who would you blame if you were in Edmund’s shoes?

Article Discussion

  1. Deadbeat says:

    The mistake is to think that what is happening is a “financial” crisis. The real problem is the condition for the current crisis is due to exploitation of workers that has been going on for the past 30 years. In the U.S, workers wages has remained flat while worker’s productivity has grown translating into huge profits. This shift in wealth provided the banks with the capital to LEND BACK to workers WITH INTEREST in order for workers to buy homes, cars, health care and other vital services especially as social services where privatized or cut back.

    Housing should be a human right but it is not and therefore asset inflation which benefited the banks and the wealthy especially real estate and financial speculation with flattening wages made housing that much more expensive and out of reach of ordinary working people.

    The crisis is the collapses of the debt arrangements that kept “the economy” afloat for the past 30 years. Therefore the problem is structural and was not caused by the “sub-prime” mess but by the class war against working people.

  2. Dave says:

    So eight months without making a mortgage payment, I wonder what’s he’s actually doing with the money that should be going into his mortgage? Living the high life again?

  3. Deadbeat says:

    Get a clue Dave the mortgage terms are not based on a fair deal. These “sub-prime” mortgages (as well as credit card) are fill with unfair and deceptive practices and profits are made by the banks from the derivitive markets and counting on people DEFAULTING. This is what brought Iceland to its knees. Are you going to shift the blame to the entire country of Iceland?

    This is not an individual problem but a Ponzi scheme on a massive institutional scale that function in the exploitation of working people. That is the whole point of the huge profits that were made on the “sub-prime” mess. These loans were targeted to primarily working class (lower income people) who desire HOUSING as a HUMAN NEED and RIGHT. That’s the problem Dave. The system cooked the “golden goose” for huge profit and gains for the top 1%.

    Now the government are shift even more wealth to the bankers and real estate speculators in order to clean up the mess. The U.S. government has already committed 12 TRILLON dollars to the banks!

    Please get a clue and wake up to the fact that people even you Dave are getting ripped off!

  4. Deadbeat

    I think Dave’s question is valid and does not speak to the heart of the sub-prime issue, more the consequential impact of it. One hopes that as smart journalist Edmund Andrews will be saving the unpaid mortgage payments so that at some point he can negotiate to stay in his home.

    And that is the issue here – that family probably don’t want to move into another home (downsize) – with the right loan they will happily continue paying off that mortgage for another 25 years because it is a home – not an investment.

    To your comments regarding the human need of housing – yes to an extent, Maslov heircacy of human need ha shelter at the top – but there is a vast difference between the human right of shelter (somewhere to live) and owning a house which is not a right.

    I agree the targeting of sub prime were to people least able to afford or comprehend the situation they were signing up to – yes the banks benefited, that is the nature of free markets – where there is a need with an attached incentive someone will seek to fill that need – that goes to cars as it does to restaurants, as it does to houses – humans crave what they don’t have and the media only fuel that by showing people what other people have, which people subsequently want!

  5. Ross Brader says:

    Here is another interesting story about fraudulent mortgage practices

  6. “humans crave what they don’t have and the media only fuel that by showing people what other people have, which people subsequently want!” Beautifully stated Alistair.

    Seems the massive institutional Ponzi scheme that deadbeat refers to is frighteningly real. Any society that considers offering a ‘cash for clunkers’ scheme whereby the Govt funds a cash reward for trading in your perfectly functional car to buy a new one (more enery efficient of course), has clealy lost their way.

    The same mentality created sub-prime. To increase bank profits the goal is to increase public indebtedness wherever and whenever possible. Effectively the US Govt message is this: Be prepared for the recesssion and rising unemployment – buy a new car! Prop up a proven failed business model & delay the inevitable!

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