I guess my main point in all of this is, the economy is SUPPOSED to work correctly with greedy people operating in it. It's SUPPOSED to be self-regulating. So when you describe the bankers' recklessness, you need to acknowledge the causes.
Here's a good scholarly article on the subject, Tom:
Government complicity in this fiasco is described happening on several levels. Another factor was that banks were infused with foreign investment capital, which made them even more likely to get reckless.
I remember very well that in the few years before 2008, our assessment was going up by insane amounts each year. I'm talking in the 25 to 30 percent range, year after year, starting in the late 1990s or early 2000s. It made me panic. Everyone else seemed giddy with greedy excitement. Of course, the more articially created demand there is, caused in large part by reckless government slogans and practices, the worse the problem will be.
The article describes two such wrenches as being government loan guaranatees for unqualified buyers, and the lowering of interest rates by the fed, during a time when home prices were still rising too fast (pre-2008-2009). You have to expect trouble when government policies deliberately short circuit the self-regulation machinery.
Bert and D Mck: Really, guys, I don't want to argue with you. As I noted, there were multiple causes for the meltdown, but please don't deny the big banks and their associated investment arms were blameless -- there's plenty of testimony before Congress to the contrary. That testimony and many former bank officers say the banks were forcing low-level loan officers to rubber-stamp liar loans without adequate research (some loan officers testified they were ordered to approve hundreds a day -- how can you perform due dilligence on those?). At the same time the bank's investments arms were hyping MBOs, even when they knew they were close to melting down.
DMc: I wish that the big banks did operate the way they did when you worked at them decades ago, but they were under Glass-Steagall then. In the past decade, some of the largest financial institutions have repeatedly demonstrated gross disregard for the fiduciary interests of their retail customers. And that's been well documented since the meltdown -- not by me, but by Congress, the Fed, the SEC, and others.
I think what you explain here is pretty much what happened, DMcCunney, except that you forgot one significant factor: the "Nancy Pelosi narrative" of the day. As you point, owning a home is (they say) the American Dream. Owning a home makes responsible citizens. Therefore, the government should do all in its power to make as many people homeowners as possible. It's a "good investment." How many times do we hear politicians coming out with simplistic catchy slogans like that, with absolutely no proof to back them up? (E.g., didn't we hear that Obamacare would save everyone money? Not that I oppose Obamacare. I just oppose lying.)
So the government took it upon itself to guarantee way too many of these subprime mortgages. As bad as it was for lending institutions to lower the bar, the government took away whatever safety guards were left in the system.
Yes, as soon as the interest rate on these ARMs started going up (and why wouldn't they?), foreclosures became rampant. And even "rampant" is a relative term. It didn't take all that many to bring down the whole house of cards, as tightly leveraged as that business is.
Greed was everywhere, though. Not the least was greed from those who bought "investment property" like there was no tomorrow, their recklessness spurned on by government largesse (with our money, of course, that goes without saying). Our long-time neighbor retired and moved away. The new owener was just one such "investor." The house remained abandoned for almost two years, after this genius defaulted.
So I say again, blaming just the bankers is convenient, because there are very few of them.
Now the housing bubble may have been created by a few different factors, but if Glass Steagall had still be in effect, that huge and ugly portion of the housing crisis simply wouldn't happened.
Nonsense. Decades ago, I worked for a bank. The area I worked in did mortgage loans among other things, and I got an inside view of the process.
Consider what happens when you want to buy a home. You are highly unlikely to have the cash lying around, so you apply for a loan. The first question the bank asks itself is "If we give him the loan, will he pay it back?" It will look at how much you want, over what period, and the state of your finances to determine if you can be expected to make the payments.
If it thinks you can't afford it, you'll be turned down. If it gives you a mprtgage, but thinks thre's some risk you might not repay, you'll be charged a higher interest rate as a risk premium.
Once the bank has lent you the money, it no longer has that money to lend. So banks package batches of mortgages, and resell them on the secondary market, and use the proceeds to make more loans.
Those packages are popular investment vehicles, because they are secured by real property. They get AAA ratings from the agencies that rate such things on that basis.
Owning a home is the American dream. A good bit of the banking system, like the nearly extinct Savings and Loan Associations, were set up in the first place to prrovide financing to allow people to buy homes. Housing starts are an important economic indicator. The secondary market exists to aid liquidity, and help insure banks have the money to make mortgage loans.
Many folks get turned down for mortgages because they aren't considered credit worthy, but still really want to buy a home. They are largely lower class and trying to rise in the world. Ownership of a home is a middle-class attribute, and being able to buy a home raises them from lower class to middle class by definition.
When you have a large number of people like that, a market exists to be served, and people arise to serve it. Specialized "sub-prime" lenders appeared to make loans to those denied mortgages by banks. They used financial instruments like Adjustable Rate Mortgages, which charge a low beginning rate which rises over the period of the loan. The bank I worked for used those in traditional mortgage lending. It assumed that first time buyers couldn't afford a high rate now, but five years and ten years from now would be doing better and able to afford higher rates, and could therefore be issued a bigger loan whose rate would rise over time.
The problems resulted from greed and stupidity. "Sub-prime" lenders like Countrywide saw the revenue flowing in, and the mantra was "Book the loan!" They were simply going to package the loans they booked and resell them on the secondary market, and they wouldn't be on the hook if a lender defaulted. They didn't bother to do even minimal due diligence. Many of those loans should never have been made, even by a sub-prime lender.
The secondary markets simply saw securities backed by real property. They had AAA ratings. They were added to portfolios. Nobody looked at the underlying quality of the assets because of the AAA ratings.
Then the economy moved in a different direction than anticipated, and the rates on the ARMs issued went sharply upward. A large number of lenders who might have otherwise made the payments were thrown into default.
And because of that large number of defaults, people were forced to look at the underlying assets held in the secondary market. What is a package of mortgage backed securities worth when the underlying loans are in default? No one knew. Billions of dollars evaporated from balance sheets overnight. The survival of a number of large financial institutions was in question. Credit dried up as panic set in. The country was plunged into a recession if is still recovering from.
Volker and the Fed grappled with the question "What happens if we let them fail?" and concluded the results would be a lot worse than what we got. And lots of folks grumbled because various bankers weren't in jail in the aftermath. Understandable, but the notion founders because you arrest and jail people for breaking the law, and they didn't. The transactions that created the bubble that burst might have been stupid and ill advised, but they were legal.
But that the meltdown was on the banking side. Glass-Steagall erected barriers between banking and investment, but the problems were in banking. If Glass-Steagall had still have been in efect, it wouldn't have prevented the problems that occured. If you think it would, you need to read the act in question.
The repeal of Glass-Steagall made it legal for financial institutions to engage in both retail banking and investment activities. The prohibition had been put in place during the Depression after it was concluded that the combination of the two contributed to many of the same problems that we've had since its repeal. (Regulations are most often created because they are needed.) The repeal has created a number of problems, including those cited by the other commenter in his note. And it can effectively be argued that the housing crisis was greatly accelerated, if not outright created, by large multinational financial institutions that encouraged their own retail bankers in far=flung cities like Stockton, Miami and Las Vegas to issue "liar loans" to retail customers who could not afford them for the express reason of creating new mortgage-backed obligations (MBOs) that could then be sold on the international market through the institution's investment arm.
Now the housing bubble may have been created by a few different factors, but if Glass Steagall had still be in effect, that huge and ugly portion of the housing crisis simply wouldn't happened. The repeal created a clear and perverse incentive for financial institutions to do exactly that, and little has been done to avoid similar problems in the future.
DMcCunney is correct - Glass-Steagall would not have prevented the financial crisis. And while it's easy and popular to lay the blame for the "Great Recession" solely on the "vampire-like" financial industry, there is plenty to be shared with the Federal Reserve, government sponsored enterprises Fannie Mae & Freddie Mac, government agencies/policies promoting home ownership, credit agencies, and consumers who bought homes they couldn't afford.
Vietnam has far lower labor costs, so where cost of labor is the most important factor, it will have a considerable edge.
Japan came to prominence post WWII. The Allies did Japan a favor in disguise: strategic bombing intended to curtail Japan's ability to produce war materials largely destroyed their existing industrial infrastructure. When Japan rebuilt, it did so using state-of-the-art facilties and processes.
The US steel industry got a lesson in the need to remain competitive from Japan, as Japanese steelmakers could produce basic steel with equivalent quality at nuch lower costs. Steelmaking in the US contracted, with work moving into higher value finished products because US steelmakers couldn't compete with Japan in basic steel on price.
Japan also made a fanatic push for higher quality. I'm old enough to recall when "Made in Japan" was a synonym for "cheap junk", but that hasn't been true for decades. Detroit got another lesson from Japan in remaining competitive, because Japanese cars were simply far better built than US vehicles, and became the standards by which auto quality was judged.
But Japan is suffering from the same sort of competition it inflicted on the US in earlier decades. Korea (and more recently, India), has lower labor costs and has eroded Japan's dominance in steel. Korea and now China have savaged Japan's consumer electronics manufacture - they simply have much lower costs, and can charge lower prices. (EETimes has chronicled the travails of Sony, Panasonic, Sharp, and others in the big screen TV market, where they are no longer competitive and are losing enormous anounts of money.)
Japan's challenge is finding things to do and make it can successfully charge a higher price for, because it can't compete on price, and needs markets where price is not the most important factor in the purchase decision.
Economics 101: work flows to where it can be done cheapest. Manufacturing has steadily flowed offshore to get lower costs, and the process has been going on for decades. (Just ask what used to be the International Ladies Garment Worker's Union, as clothing manufacture, a largely manual process, went to places where labor was cheaper.)
China has been attempting to bootstrap itself from Third world agrarian nation to First world industrial power. Thy've done it the same way others have: move the peasants off the farm to the cities to become an industrial workforce. They used thier cost advantages to attract manufacturing, and grow their economy through export.
People over here express horror at Chinese wages, but all is relative: it costs far less to live in China. Peasants flocked to the cities to get those factory jobs because they offered lower hours, better woking conditions, and paid a lot better than being a peasant on the farm. It was a step up for them.
China is in transition. The pool of cheap labor represented by peasants on the farm is drying up. Manufacturers are having to compete for workers, with rising labor costs as a result. (One major Chinese manufacturer reported on in EETimes announced a full court press into robotics as a result.) China is no longer the low cost producer, with places like Vietnam being looked at as replacements. China is looking to get further growth from expanding its own economy and serving the needs of its growing middle class.
The US is doing better than it was for two reasons I can think of. First, there is sometimes an advantage to having things made close to where they will be sold. Consider auto manufacturers like Toyota with US assembly plants. It's cheaper and more efficient, all told, to assemble the cars here than it is to assemble them elsewhere and ship them here across an ocean. Second, improvements in robotics make it possible to automate manufacturing operations that had been manual. HP has talked about returing PC manufacture to the US, and you can bet robotics will be involved.
But while robotics will bring manufacturing back, it won't do a lot for jobs. The jobs that migrated to Chinese manufacturing were low-skilled/unskilled assembly line work. Those jobs aren't returning, because no one will pay US wage scales to have them done. The factory of the future will have a fraction of the work force of the old ones, and the ones who it will employ will be highly skilled - administrators, robot programmers, and technicians to maintain the equipment that does the manufacture.
We have a competitive market economy, where price is an important factor (and sometimes the only factor) in the purchase decision It's why so much manufacturing went off shore to begin with. Labor costs are an important part of the costs of making the product, and the lower the costs are, the cheaper a manufacturer can price it, and the better they can compete with other manufacturers in that market.
Taxes are another expense that drives up costs. Those complaining about big corporations not paying taxes need to remember where the money to pay those taxes has to come from: it will become part of the price of what we buy. If I'm competing with a foreign manufacturer with a lower level of corporate taxes than I'm required to pay, I won't be happy, because my costs are higher and I have to charge more to cover them.
I'm a bit surprised the US is ranked as high as it is, and I don't expect that to continue.
Those who decry the fact that Glass-Steagall was repealed really need to read the act. Contrary to popular belief, having it in place would not have prevented the economic meltdown caused by sub-prime mortgages in the seconday market. The meltdown was all on the banking side. It spread from there because mortgages were popular investment packages, but Glass-Steagall wouldn't have stopped it.
Most of the proposed remedies I've heard in the aftermath of the meltdown to prevent such things from occurring in the future demonstrate a rather depressing ignorance of how the economy works, and would not do what the proposers think.
It's notable that Vietnam replaces Japan on the 5 year prediction list. Will be interesting to see how that pans out. It's probably too early though to count out Japan and their technology prowess and discipline.
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