Tuesday, March 3, 2015

2008 Housing Bubble: Blaming Financial Deregulation and the "Too Big to Fail" Mentality

Another pretext the Obama administration used to shift the attention of the public to Bush administration is financial deregulation. Since deregulation is what the currrent administration wants the American public to believe that was responsible for the economic meltdown, what is needed is greater "government oversight." For Woods, to emphasize financial deregulation as the reason for the collapse of the housing market obscures the real issue for the "lenders were doing exactly what the federal government and its central bank wanted them to do" (p. 29). 

Both the Democrats and the Republicans were guilty of abandoning the "traditional lending practices" (ibid.). In the case of Bush administration, it was responsible for the removal of the required down payment "for 150,000 new homeowners" (ibid.). Such action is part and parcel of the realization of the American dream that would include increasing number of the American people. So deregulation is actually out of the question for it was the president himself who gave approval to riskier lending practices. 

Nevertheless, the financial regulators prior to the bursting of the real estate bubble were all in agreement about "the fundamental soundness of the system" (p. 30). Both Allan Greenspan and Ben Bernanke and two other unnamed Fed economists shared the perspective that the housing bubble didn't exist. Moreover, "some of the major financial institutions" think that the growth of the real estate industry was actually based "on real factors" (ibid.). Again for Woods, blaming deregulation is misleading for one can traced the hand of the US government everywhere prior to the collapse of the housing market with its consent to the action of the Federal Reserve in increasing the money supply and reducing the interest rates. 

"Too big to fail mentality" became popular after the crisis. This idea does not allow giant financial firms to go bankrupt though their practices and continued existence would actually harm the economy. "Bailout" was the name of the game and Alan Greenspan was exalted as its great champion. For Woods, bailing out these firms simply meant transfering the financial burden to the unsuspecting taxpayers. 

Greater government regulation and bailout are the hailed solutions to the housing crisis. Woods believes that the US government would consider other tools to solve the crisis except the solution that comes from the market. 

Another card allowed by the government to utilize was the offer of financial assistance to distressed homeowners. The government GSEs that shared the responsibility in the crisis, Fannie and Freddie offered homeowners a financial aid to avoud foreclosure. This aid includes "reductions in principal owed, lower interest rates, and a longer payoff term" (p. 33). However, those who resort to minimize their loss through responsible decision such as transfering to smaller houses would not be included in this assistance program. 

And so after 7 years, the best solution the US government could come up with is the same action that caused the crisis in the first place. And so in the coming years we could not expect for a genuine global economic recovery but an expansion of the crisis. 

Guide Questions:

1. Why blaming financial deregulation obscures the real cause of the housing bubble?

2. Prior to the collapse of the housing market, what was the popular opinion among regulators?

3. What is "too big to fail mentality"? How is it being implemented? And what is the real nature of such implementation?

4. So far, what solutions the US government agreed with in order to address the 2008 crisis?

5. What do you think should be the market solution? 

6. With the existing US government solutions, what do you think will happen to global economy in the near future? 

Source: Wood, T. E. Jr. (2009). Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse. Washington, DC: Regnery Publishing, Inc.