Trusted local news leader for Prescott area communities since 1882
Fri, July 19

Viewpoint: Economic failures have no quick fixes, some have to hit bottom first

The main problem with the economy is a crisis in the financial area resulting from the actions and inactions related to sub-prime -mortgage collapse.

In the 1990's under President Clinton (democrat) and a Republican congress the barriers between commercial banks and investment companies were removed.

Instead of being held by lenders , loans were bundled together, placed into securities and then sold to investors. Years ago, banks would verity who you worked for, your salary, debts etc. to determine your qualifications. They retained the mortgage and the bank could lose money if you were a poor risk. There is no regulation or accountability for financial companies. The bundled sub-prime mortgages were chopped up and sold as corporate bonds. This led to the current financial crisis.

There are also plenty of others to blame including the security exchange commission, the Federal Reserve, the Credit rating agencies , lack of licensing of mortgage brokers, speculation in housing, short sellers etc. etc.

After the internet and stock market busts, speculators were flying to Phoenix and buying homes unseen for $10,000 down which drove home prices up and people were buying homes at higher and higher prices because they believed prices would go u forever. It was all a pipe dream! A lot of people made bad decisions.

Financial companies were either indifferent or blind to the risks when interest rates went up. People defaulted, home prices were so high there were no buyers, poor judgement, speculation, lots of greed and the bubble burst.

There are no quick fixes.

There won't be a correction until housing prices hit bottom. No one knows when that will happen. Deregulation of the financial industry has brought severe harm to the economy that has effected everyone. We need tough regulations that provide transparency and oversight, and there has to be a way to control speculation by limiting the amount of leverage the financial companies can take on. Also a requirement that maintain a reserve of some type powers by the Federal Reserve to prevent this from happening again.

The government needs to create a resolution trust corp. similar to the one used in the savings and loan crisis. The trust would buy foreclosed mortgages, hold them and sell them much later after the market reached bottom. This would slow the downfall and restore confidence.

A suggestion by Robert Robb of the Arizona republic:

"There are other ways of creating secondary markets in mortgages, that is to develop in this country of the covered-bond approach that predominates in Europe, with covered bonds, the mortgage originator keeps the mortgage. The originator then issues its own bonds back by its mortgages replenishing its capital to keep lending. But because the originator is on the hook for any defaults on the underlying mortgages, underwriting tends to be tighter."

That's what is wrong with our current system. The originator is not on the hook for defaults they're interested in a quick buck and not the quality of the loans.

The seeds of this current crisis occurred during the Clinton administration, with almost everyone else's help, lots of greed, speculation and short sellers and mortgage banks that were unregulated, good at sales but poor in financial judgement.

In 2005 John McCain sponsored a reform of Fannie Mae and Freddie Mac, act that was defeated by Senator Dodd and the democrats in congress.

It is interesting that Obama and the Democrats are blaming bush and McCain for a bad economy when the deregulations that are root cause of this financial meltdown began during the Clinton administration. The democrats voted against a 2005 reform act that would have curtailed Fannie May's excesses in sub-prime loans.


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