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The first signs of cracks in America’s monetary
infrastructures appeared years ago but September
2008 will be remembered as the month that Walls
Street’s major financial pillars, long standing symbols
of America’s economic strength and stability, crumbled.
Institutions as old as the buildings housing them having
weathered the chaos of stock market crashes, the Great
Depression, two world wars and several international
currency crises could not survive the made in America
Fannie Mae Freddie Mac mortgage debacle. Of the
five venerable independent investment banks; Lehman
Brothers Holdings Inc., Merrill Lynch & Co. and Bear
Stearns are no more.
What went wrong? The answer in one word is greed.
The once proud American economy founded on manufacturing
advantage, production efficiency and innovation
was by the late 1990’s unable to compete globally
with emerging giants from the east. In order to drive
consumer spending the last support of a lagging economy,
the federal government sponsored an explosion in cheap
credit. With the creation of Fannie Mae and Freddie Mac
anyone who could not qualify for conventional loans was
still able to realize the American dream and become a
home owner with government backed credit. The sudden
and disproportionate boom in housing led to a real
estate bubble which saw home prices skyrocket. With
new found equity in their homes Americans chose to
borrow against this ‘new found wealth’. This resulted in
an unprecedented consumer spending binge that fuelled
the American economy for almost a decade. In fact at this
time the net asset value of the average American family
was negative, meaning they owed more than the value of
what they owned.
Then one day there was no one left to buy and the real
estate values stalled. Faced with increasing debt and little
means to pay for it many Americans began defaulting on
their loans and the real estate bubble burst. Banks now
held mortgages thousands of dollars higher than the corrected
real estate property values. The economy fell into
recession and finally the cracks in Wall Street’s venerable
institutions crumbled.
Why was this allowed to happen?
The simple answer is that government backed mortgages
were very profitable businesses for financial institutions
who booked record earnings this past decade. Then
the markets financial sector collapsed under the weight
of the subsequent bad debt. Creative financial derivatives
took advantage of cheap credit making money for insatiable
investors all the while ignoring the growing risks
associated with money lending and over extended credit.
The saddest part of this whole debacle is that unlike
the crash of 1929, in which the bankers took care of their
own excesses, the government has taken it upon itself
to bail out the private financial industry from its greed
and unrestrained behaviour. One wonders how much the
fact that ten of the top 100 political donations are given
by the old gang from Wall Street prompted the government’s
action.
The fact that the fed restricted short selling against
the financial sector was a serious breach of ‘fair play’
effectively suspending a free market system. This spared
the financial sector billions of dollars at the expense of
market investors. The catastrophic mortgage collapse
and tightening of money lending has send ripples of
uncertainty throughout financial markets even threatening
ruin to global insurance giants like AIG. The Federal
government stepped in to bail out AIG whose failure
would have had global economic repercussions. The
American treasury and the Federal Reserve stepped in
with promises to guarantee what will likely be more than
$1 trillion dollars in bad debt from the private banking
system in order to avoid a collapse of the global economy
that could plunge America and subsequently the world
into a depression on a scale not seen since the 1930’s.
While short term this action may avoid an immediate
economic depression long term the federal government
has taken what should have been a private debt issue and
dumped the bad debt to several generations of future
taxpayers. At worst this is a criminal act of patronage for
an elite few at the expense of an already overburdened
middle class. At best this was the signal that confirms
once and for all the death of capitalism as we know it
in America. The American dollar is no longer worth the
paper it is printed on. Can the republic be far behind?
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