This paper explains the mechanics of how the so-called ‘Housing Bubble’ (believed to be the actual cause of the financial crisis of 2008-2009) came into being, and explains why, contrary to what many people believe, this crisis is best described as having been deliberately triggered by bankers.
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Nowadays, it became a commonplace practice among many economists in the West to discuss the origins of the financial crisis of 2008-2009, within the methodological framework of the monetarist/neo-Liberal economic theory, which assumes that financial crises are bound to happen on a periodical basis, as the part of a free-market economy’s proper functioning. In its turn, this implies that even though the mentioned crisis did produce a strongly negative impact on the world’s economy, there was nothing utterly critical about it.
This point of view, however, cannot be considered even slightly credible. After all, there are a number of indications that, just as it was the case with the Great Depression of the thirties, there is nothing incidental to the financial downturn of 2008-2009. In its turn, this provides us with the rationale to suggest that the mentioned downturn is best discussed as yet another step on the way of the representatives of American banking oligarchy trying to expand and to solidify the range of their physical assets in the country.
In my paper, I will explore the validity of this suggestion at length, while promoting the idea that the financial crisis of 2008-2009 should be regarded as the proof of the sheer fallaciousness of the neo-Liberal assumption that, as the system of economic relations between the society members, Capitalism is capable of existing in the ‘self-regulating’ mode.
Body of the Paper
As of today, it is being assumed by many people that the actual trigger of the 2008-2009 financial crisis, was the burst of the so-called ‘Housing Bubble’, which took place in the aftermath of the country’s real-estate market having exhibited the growth of 200% through the years 2003-2007. The actual mechanics of how this ‘bubble’ came into being and consequentially exploded, can be described as follows:
In 2003, President Bush signed the so-called ‘American Dream Downpaynment Act’, which made it possible for the citizens with no good credit-history (often unemployed) to qualify for substantial loans at the bank, so that they would be able to become ‘house owners’ within an instant. The rationale, behind this Act’s signing, had to do with the formerly popular idea of turning America into a ‘welfare state’: “Many American families can’t buy their first home – they can’t afford the downpayment and other upfront closing costs required to qualify for a mortgage…
That will change as President Bush today signed The American Dream Downpayment Act into law” (Sullivan, para. 3). In its turn, this resulted in creating the situation when, ever since 2003, the growing number of American banks were tempted to provide the so-called ‘subprime’ mortgage loans to those citizens that would not normally be in the position to apply for any loans, in the first place. Whereas, in the year 2003, the amount of ‘subprime’/’alternative’ loans accounted for only 6% out of the overall amount of mortgage loans, provided by the banking sector to Americans, by the year 2006 it was estimated to account for 40% (Greenspan, 2008).
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While trying not to lose the opportunity to become house owners, millions of less than upstanding Americans rushed to strike mortgage bargains with banks, which in turn stimulated the exponential growth of prices in the real estate market. As time went on, more and more people were finding the idea of investing into this market utterly appealing. After all, prior to 2008, one could easily make $30.000 – $50.000 by the mean of buying just about any house and reselling it a year later.
Consequently, this prompted more and more banks in America to consider turning their mortgage agreements with people into yet another moneymaking asset. These banks began to reassign the ownership of their yet-to-be-received profits (expected to be brought about by the mentioned ‘subprime’ mortgage-agreements with people) to the third-party investors, in exchange to be qualified for receiving corporate bonds. The logic behind this particular practice is quite apparent. After having sold their mortgage-contracts with clients to the investors, banks were able to increase the rate of their capitalization within an instant, and to begin looking for new clients. The corporate investors and private borrowers, on the other hand, were able to benefit from the continuous boom of prices in the U.S. real estate market.
Hence, an utterly paradoxical situation – the ‘blowers’ (private citizens, banks and corporate investors) of the ‘housing bubble’ were able to generate lucrative profits, despite the fact that, in the factual sense of this word, the investment funds in circulation did not exist. This simply could not be otherwise – the individual borrowers did not have any money of their own. They used to buy houses with the provided (by banks) mortgage-loans. In this respect, banks acted as merely the distributors of corporate bonds, received from the investors – hence, the sheer carelessness with which banks used to qualify unemployed and uneducated citizens for becoming ‘house owners’.
The former perceived the process of accumulating mortgage-debts, on their part, as such that had the value of a thing-in-itself, because the instant reselling of these debts (in the form of ‘derivatives’) used to make much more commercial sense than merely waiting to for each individual borrower to return the interest-rated body of the loan (Bondt, 2010). If a client could no longer pay interest on the received loan, the bank would simply take his or her house away and make profit again – after all, throughout the mentioned period, the prices for real estate continued to climb exponentially. Predictably enough, private investors did not have any trouble, while raising funds to acquire mortgage derivatives, and consequently using them for taking advantage of the dynamics in the U.S. real estate market.
The described situation, however, could not last forever. The reason for this is that it stood in contradiction to one of the most fundamental law of economics – due to being a resource-consuming process; the generation of wealth goes hand in hand with the process of the economically valuable goods and services coming into physical existence.
Yet, the ‘real estate boom’ of 2003-2008 was concerned with people being able to make money out of thin air – in the literal sense of this word. This is why it only took five years for the ‘housing bubble’ to burst – while the individual risks (concerned with the process of banks and private citizens making money in the real estate market), were being continuously lowered, the overall risk for the whole financial system to lose its stability kept on growing ever more heightened.
The reason for this is quite apparent – the ‘housing bubble’ could only exist in the state of a continuous expansion, which in turn could only be ensured, for as long as banks/private investors were in the position to continue securing interest-cheap corporate loans. The ‘good times’, in this respect, lasted until the beginning of the year 2007, when the corporate interest rate (charged by the Federal Reserve Bank) has reached 6% (from 1% in 2001). After this, the country’s real estate market began to experience the lack of liquidity (the lack of money) – something that made this market’s eventual crash only the matter of short time (Reinhart & Reinhart, 2011).
There were three sub-sequential phases to this crash:
- By the year 2007, the annual rate of non-returned interest payments, associated with the mentioned earlier ‘subprime’ mortgage contracts, has reached 48%.
- Banks began to claim back the mortgaged houses and to sell them, in order to secure profits. This resulted in the drastic decline of demand for traded commodities in the real estate market, and consequently – in driving down the associative prices.
- Ultimately, this has led to the bankruptcy of many financial organizations, which happened to be in the possession of large amounts of ‘subprime’ mortgage agreements, such as Lehman Brothers. In its turn, this triggered the outbreak of the financial crisis of 2008-2009.
Thus, it is indeed fully appropriate to refer to the discussed ‘Housing Bubble’, as such that induced the financial downturn in question. As Yandle noted: “The 2008 financial collapse originated with a political effort to expand mortgage lending to consumers who could not meet normal standards of creditworthiness” (2010, p. 346). Nevertheless, contrary to what the proponents of the neo-Liberal economic paradigm would like people to believe, the earlier provided description of the factors that contributed towards blowing the ‘bubble’, implies that the financial crisis of 2008-2009 is far from being considered ‘sporadic’/‘cyclical’, and therefore – fully consistent with the main principles of how a free-market economy operates.
After all, the foremost of these principles is concerned with the well-established fact that, while striving to remain competitive, commercial organizations (such as banks) never act in the manner that may never hinder these organizations’ main functional agenda – making profit (McAleer, 2003). This principle, in turn, correlates with the workings of people’s commonsense logic – one would never lend a substantial amount of money to an impoverished stranger, who happened to be uneducated/unemployed, and who would be most likely to spend borrowed money on buying drugs.
Yet, this was exactly what many American banks were doing, prior to the outbreak of the 2008-2009 financial crisis – they used to simply give away free money to people, as if the considerations of a commonsense economic logic did not play any role in the process, whatsoever. One of the discursive implications of the above-stated is that the financial crisis of 2008-2009 was not quite as ‘unplanned’, as many people tend to assume, and that the mentioned ‘Housing Bubble’ was not this crisis’s actual cause, but rather one of its economic extrapolations.
This naturally raises a question – what/who should be deemed the actual ‘culprit’ behind the crisis? The answer to this question is quite apparent to just about anyone aware of the fact that, even though the Federal Reserve System (FRS) and the Federal Reserve Bank (FDR) claim themselves being closely affiliated with the U.S. Government, they are in essence privately owned organizations, over which the Government does not have any factual (not merely formal) control.
As Schauf pointed out: “The FED… is a privately owned company… controls and profits by printing money through the Treasury, and regulating its value…The FED creates money from nothing, and loans it back to us through banks, and charges interest on our currency” (1998, para. 12). As it has been recently revealed, it is specifically the representatives of the country’s richest ‘banking families’ (the most notable of which are Rothschilds and Morgans), who exercise the de facto ownership of both of these organizations (Henderson, 2011).
And, as we are well aware of, it is namely the prospect of being able to claim the bankrupted borrowers’ property/valuable assets, which more than anything prompts banks to offer monetary loans to people, in the first place. In this respect, international money-lending organizations, such as the IMF, act similarly – this explains why these organizations usually resist the attempts of country-borrowers to return their debts.
Thus, it will be much more appropriate to talk about the deliberate ‘making’ of the financial crisis of 2008-2009, rather than of its spontaneous occurrence. As White aptly pointed out: “Our current financial turmoil began with unusual monetary policy moves by the Federal Reserve System and novel federal regulatory interventions.
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These poorly chosen public policies distorted interest rates and asset prices, diverted loanable funds into the wrong investments, and twisted normally robust financial institutions into unsustainable positions” (2009, p. 115). Such a development appears to have been predetermined fact that: a) The FRS is a privately owned organization, b) Contrary to the Article 1, Section 8 of the U.S. Constitution, this organization continues to be in charge of defining the country’s monetary policies.
In its turn, this creates a number of the objective preconditions for the Fed top-officials to prioritize acting on behalf of the organization’s actual owners, which in turn are being interested in triggering the periodic outbreaks of economic recession in the U.S., as such that help them to strengthen their grip on the country’s economy. The logic behind this is quite apparent – in times of a financial crisis, the monetary value of one’s privately owned ‘physical assets’ (such as land, real estate and natural resources) declines rather rapidly, which in turn makes it possible for bankers to acquire these assets for only a fraction of their real cost.
The same can be said about the effect of the ongoing economic recession on the functioning of the U.S. banking sector. Through the years 2008-2012, 495 American banks/financial institutions ended up filing for bankruptcy – only to be acquired by the representatives of the earlier mentioned ‘banking families’. In this respect, the case of Bear Sterns (bank) is particularly illustrative: “in March 2008, the New York Fed advanced the funds for JPMorgan Chase Bank to buy investment bank Bear Stearns for pennies on the dollar.
The deal was particularly controversial because Jamie Dimon, CEO of JPMorgan, sits on the board of the New York Fed and participated in the secret weekend negotiations” (Brown, 2014, para. 3). Thus, there was nothing phenomenological about the outbreak of the latest financial crisis, as such that confirmed once again that a free-market economy is simply not being capable functioning in the ‘self-regulative’ mode for a prolonged period of time. Apparently, even though being essentially irrational, people’s sense of greed is able to manifest itself in the thoroughly logical and well-calculated manner – something that can be illustrated, in regards to two main phases of the Fed’s methodological approach towards triggering financial crises.
These phases are as follows:
- Charging all-time-low interest rates and increasing the amount of money in circulation, which in turn ensures the availability of cheap loans for just about anyone,
- Reducing the volume of circulated money, in conjunction with increasing interest rates on the would-be-provided loans and demanding from borrowers to pay back their debts at once.
In this respect, we can mention the Great Depression of 1929-1930, as such that was triggered in full accordance with the outlined crisis-invoking strategy. Prior to its outbreak, the FRS used to be preoccupied with trying to increase the mass of the U.S. Dollars in circulation, which in turn resulted in the drastic expansion of the range of monetary loans, available to citizens. Ever since the 19th century’s mid-twenties, the growing number of American banks began to apply a considerable effort into convincing people to invest in stock-market shares.
Regardless of what was its formal value, a particular stock-market share could be bought for as low as 10% of its actual worth – the rest of the money would be ‘leveraged’ by brokers, who in turn used to receive ‘leveraging funds’ from banks in the form of long-term loans (Evans, 1997). At the beginning of 1929, President Calvin Coolidge declared that the U.S. economy was thriving.
In October of the same year, however, many of the involved banks (later revealed to have been affiliated with the factual owners of the FRS) simultaneously demanded from brokers to return the money. Consequentially, brokers turned to shareholders. Shareholders did not have any other option, as to how to address the situation, but trying to sell their shares within the matter of 24 hours – something that triggered the famous stock-market crash of 1929 (the so-called ‘Black Tuesday’).
After having been devalued, however, these stock-market shares did not simply disappear – they were acquired by essentially the same banks that stood behind the crisis’s making. The ultimate consequence of the financial crisis of 1929, was the ‘solidification’ of the economy’s banking sector – from being estimated to account for tens of thousands in 1928, the number of banks in America has shrunk by the year of 1929 down to only a few hundreds.
This brings us to discuss the actual significance of the Federal Government’s post-2008 initiatives, aimed to help the country’s economy to recover. In essence, the Government offered to refinance those financial institutions that were affected by the crisis the most, so that they would not be forced to file for bankruptcy. In order to be qualified for the governmental ‘monetary infusion’, however, these institutions were required to drop prices for their publicly traded stock-market assets.
Consequently, this resulted in the almost instantaneous acquisition of the ‘governmentally assisted’ banks/trusts by what can now be referred as three main monopolists in the country’s market of financial services – Citigroup, Bank of America and J.P. Morgan Chase. In other words, just as it was the case with the financial crisis of 1929, the one of 2008-2009 served the purpose of helping the owners of the Fed to solidify their control over the country’s banking/investment sector – pure and simple.
What it means is that even presupposing that the U.S. Government is being in the position to prevent the outbreaks of financial crises, such as the one of 1929 and 2008-2009, does not make much of a sense, by definition. The reason for this is that, ever since the establishment of the FRS in 1913, the country’s form of governing became ‘oligarchy’ – despite the fact that it uses the external disguise of ‘democracy’ (Ponomareva, 2011).
In other words, it is specifically the rich and powerful representatives of America’s financial elites, who define the qualitative aspects of how the Government proceeds with conceptualizing its would-be-deployed social, economic and political policies. Given the fact that, as it was shown earlier, these people do benefit from ‘sporadically’ occurring financial crises; this specific state of affairs is likely to persist into the future.
The validity of this statement can be illustrated, in regards to yet another commonly overlooked purpose of the most recent financial crisis – it allowed the Fed to withdraw out of circulation the essentially valueless, but legally binding mortgage-derivatives, with the total worth of billions of the factually non-existent U.S. Dollars. In its turn, this had a revitalizing effect on the American economy. This effect, however, was achieved at the expense of allowing a gap between the rich and poor in this country to continue growing progressively wider.
However, the main reason why financial crises will continue to remain the integral part of the economic realities in America, is that, even though the country’s GDP has been showing a slow but consistent growth throughout the years 2009-2013, this growth had more to do with the dynamics in the U.S. stock markets (Valadez, 2011).
The real sectors of this country’s economy, however, continue to remain in the state of economic stagnation – something that can be shown, in relation to the fact that, as of 2016, the U.S. budget deficit is expected to reach staggering $474.29 billion (Kuznetsova & Kuznetsova, 2014). The main driving factor behind this appears to be the practice of ‘outsourcing’, concerned with the process of more and more American manufacturers deciding to relocate their production lines to the Third and Second World countries.
The reason for this is that the mentioned process makes it increasingly harder for America to generate any de facto wealth, and not merely ‘wealth-indicating’ liabilities (in the form of stock-market shares, derivatives, bonds, treasuries, securities, etc.), which can be traded publicly. It is understood, of course, that this does set prerequisites for yet another crisis to occur in the near future, in the sense of contributing to the increasingly acute dichotomy between the citizens’ strive to satisfy their consumerist instincts, on one hand, and the absence of real wealth in the country, on the other.
I believe that the earlier deployed line of argumentation, in defense of the idea that the financial crisis of 2008-2009 is best discussed as having been premeditated, fully correlates with the paper’s initial thesis. Apparently, the application of the analytical inquiry quo bono? (to whose benefit?), within the context of how one may go about reflecting upon the significance of the crisis in question, will indeed prove thoroughly appropriate. The reason for this is that the would-be obtained insights, in this respect, will help the inquirer to understand the greed-motivated and yet rationally actualized logic behind the concerned financial downturn. The financial crises, such as the one of 2008-2009, do not just happen unexpectedly – they are simply being meant to appear as such.
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