The Emperor's NEW new clothes

Ellie Keen — Mon, 29 Sep 2008 00:00:00 +0000

Only two things are infinite, the universe and human stupidity, and I’m not sure about the former.

Albert Einstein

Once upon a time a smart guy found a way of making a synthetic product that appeared to be as good as gold. After explaining his findings to others he began to sell his products (mortgage backed securities) on the open market at prices that bought a handsome return. Gradually other clever people cottoned on to this and they began to produce similar products. For years the market grew as demand for these valuable commodities increased. More and more producers entered the market and imitated the actions of the pioneers. Yet, the new gold depended on one critical factor. Since the value of the products depended on the price of other assets, namely residential homes and commercial property, any change in these prices would have knock-on effects. Anyone who tried to explain this to the producers and purchasers of the new gold standard currency was reminded not to worry since the prices of housing and offices were only going in one direction. Therefore the new commodity could itself only increase in value.

The response from the doubters was that perhaps housing prices could fall since inequality and unemployment were increasing. As more and more capital was being invested in the strange financial products there was less and less available for investment in industry. Whilst the mortgage finance was increasing the jobs provided by construction companies, much of the new housing was being built in the suburbs and these depended on cheap oil to fuel trips to work in the city. If oil prices rose suburban housing would appear less attractive. Again the doubters were rebuffed and the market continued to grow. The only limitation was the ability of people to secure mortgages in the first place so as to continue to buy houses and many Americans were very poor and were unlikely to get loans. Then a bright spark suggested that since house prices were always rising, low-income, unemployed, and even blacks and latinos could be given loans and they could pay them back when their house had exceeded the original loan. This idea also caught on and banks and brokers feverishly lent money to these new customers so that the loans made could be converted into the new gold. At this point some commentators began to observe that there was now a great deal of the new gold in circulation and didn’t the value of the old gold depend on its scarcity. Around about the same time, others came forward with news that builders were having some trouble selling all those new homes they had built and that perhaps house prices were not going to rise indefinitely.

As these concerns were raised many of those who had bought the new gold at first denied there was going to be any problem. Maybe there was going to be a short-term blip in the housing market but this would soon be forgotten about. After all these things were to be expected, weren’t they? Despite their public confidence however, some of the owners decided to reduce their inventories of the new gold in favour of the old gold and even that other precious commodity, black gold. This had various effects: The price of gold and oil were rising even faster than the price of mortgage-based securities, prompting more investors to sell the latter and buy the former. As the oil price rose, more and more Americans found that living in suburban homes which could only be accessed by private cars run on oil was not economically viable. So they looked into the possibility of selling their homes and moving to the city to rent an apartment. As these events progressed, it became clear that there was now a glut of mortgage backed securities on the market as less and less people were willing to buy them. Those left holding the baby desperately looked around for support but for a time it looked like they would lose their shirts.

Now in a high state of anxiety these financialists rushed to the government, bearing expressions on their faces like the one worn by the uninsured teenager who has to tell dad that he’s crashed the family car. At first the government struggled to understand what the bankers were telling them and said don’t worry the market will take care of these things. After all the bankers had been telling government for years to let the market run the show. If the market price for milk is too low, don’t subsidize the dairy farmers. Let them go out of business and they can stop farming and become entrepreneurs. Simple as that! If the cost of food and fuel increases disproportionately for low-income households don’t worry, they can just work a bit harder and if the market also causes wages to fall then they can work a bit harder still.

This time however, the bankers shouted “don’t let the free market decide. That wouldn’t be fair to us because we deserve special protection and besides if you let us go out of business we can make things very difficult for you”. Happily, the government saw sense and decided to use all that tax money it had lying around to buy up the bankers products at a fair price. Of course this would mean that those improvements to the US healthcare system would have to be forgotten about and of course, in future many Americans would have to pay higher taxes to balance the governments books. Again the doubters began to whisper amongst themselves about potential problems such as civil unrest and the collapse of overburdened government institutions.

The bankers and politicians then summoned a very nice priest and they proceeded to pray earnestly to Mammon.

Fixation on the market

tim — Sun, 10 Aug 2008 21:14:22 +0000

The dreadful figures on the soaring rate of house repossessions give added emphasis to the decision of the Bank of England monetary policy committee to maintain interest rates at 5 per cent.

This was a decision that hit hard the struggling mortgage payers in the interests of controlling inflation which, it should be pointed out, is none of the mortgage-payers’ fault but can be attributed largely to fuel profiteering, speculation, oil and gas company super-profits and the resulting transport cost rises which affect almost every commodity.

It also brings into sharp focus the Financial Services Authority warning to lenders earlier this week that specialist mortgage firms are “too ready” to take court action against borrowers.

But these are not the only factors which have affected and damaged the 18,900 families who have lost their homes in the first six months of this year or the 45,000 whom the Council of Mortgage Lenders forecast will fall victim throughout the full year.

The real elephant in the room is, as seems to be increasingly the case, the policies of a government which point-blank refuses to abandon its fixation with the market and take real measures to solve a housing crisis which is totally of its own making.

Throughout the life of this Labour government, it has steadfastly refused to reverse its disastrous policies on council housing, attempting to drive a wedge between councils and their tenants with so-called arm’s-length management organisations, bribes to force occupants to relinquish their status as council tenants in favour of housing associations, reinforcing the ring-fencing of councils’ housing revenue accounts and blocking any attempt by councils to pick up their former role as the premier suppliers of social housing in this country.

This has led to a dearth of affordable housing at the lower end of the housing market, driving hard-up families into mortgage deals that they cannot afford, simply because there is little or no alternative except an over-priced and insecure private rented sector.

This, in turn, increases the scarcity of houses for sale at the bottom end of the market yet again and thus drives up the prices, overheating the housing market and making housing ever more expensive and ever less affordable, until such time as lenders get panicky as they see their borrowers becoming over-extended and start pulling in credit availability, causing the so-called credit crunch which then makes mortgages even more expensive.

Yes, of course, greedy mortgage lenders carry a portion of blame, lending even to those who clearly can’t afford it on the basis of trousering their commission and moving onto the next victim, leaving the families in their wake with a headache which gets worse as the bank tries to halt inflation by hitting those on the bottom of the heap.

But the majority of the blame must rest with a government which, for purely right-wing ideological reasons, will not countenance the public supply of anything be it health, housing or transport.

And it is the same government which handed over interest-rate setting to the bankers, in the certain knowledge that bankers’ solutions rarely benefit the low-paid. This government should be squeezing the profiteers in the oil and power supply industry until the pips squeak. Instead, it chooses to be an audience on the spectacle of bankers squeezing the poor, while it does its best to make the problems worse by ensuring that the low-paid remain exactly that.

Mortgages | ukwatch.net

The Emperor's NEW new clothes

Fixation on the market