How the West was LOST! #1

HOW THE WEST WAS LOST

by Dambisa Moyo PhD

THE HOUSE OF CARDS
HOUSES BUILT ON SAND

Even as late as spring 2007 (just months before the financial
storm hit in earnest), no one could have predicted the severity
of the crisis that was about to ensue. (Not correct as some few
had been predicting, saying and writing, that a huge blow-up
would come - Keith Hunt).  Sub-prime lending had been
the key factor in the rise of homeownership and the demand for
housing in the US. In the ten years between 1994 and 2004,
overall US homeownership rose from 64 per cent to an all-time
high of 69.1 per cent. But as the old adage states, all good
things must come to an end. The days of the financial and housing
boom were numbered.
In 2007 the sub-prime market, so favoured up to this point,
collapsed. This would be the catalyst that would herald the
beginning of the end of the post-war capitalist financial model
as we know it. What began as mortgage defaults swept like a
raging wildfire throughout the financial landscape, leaving utter
destruction in its wake. By the end of 2007, nearly 1.3 million
US housing properties were subject to foreclosure proceedings, a
rise of nearly 80 per cent from 2006.
Try as governments might to tame it, towards the end of 2008 the
returns on the S&P equity index equalled the single lowest-ever
recorded figure (matched only by the performance in 1931, at the
depth of the Great Depression) for 182 years (i.e. from 1825 to
2007). The jig was up. But what exactly happened?
The sub-prime debacle is very often portrayed in the media as a
comparatively recent aberration from the norm, but in fact its
antecedents (i.e. lending money to those who ostensibly cannot
afford it) stretch back into the 1950s, with the
government-backed construction of Levittown, USA.

FALSE STRUCTURE

Built initially for returning Second World War veterans and their
families, through government-financed loan programmes,
prospective homeowners could buy a Levittown home with little or
no down payment. Best of all, the mortgages were often cheaper
than renting an apartment in the city. The ideal of Levittown
marked the spread of suburbia throughout good-life America, as
well as being a shining example of encouraging people to own a
house whether they could afford it or not - a belief which
reached its apotheosis in the 2008 sub-prime saga. True, in
theory, if it had been done right it might have helped people
afford their own home, a roof over their head; the trouble was
that it wasn't done right at all.

Despite the opprobrium heaped upon the bankers for their
enthusiastic role in the financial wizardry around the sub-prime
industry, the responsibility must also lie with well-intentioned
policymakers stretching as far back as the post-Second World War
period. Well-intentioned policies also created vested interests,
which then ran out of control. Once the financial sector was able
to benefit from the subsidies meant for homeowners, the process
of lobbying for and maintaining these policies was set in motion
- and, not long after, it became the norm.

A FALSE PARTY ATTITUDE

In the run-up to 2006, lax lending standards, easy terms on loans
- even for first-time borrowers - and climbing house prices
enticed borrowers to take on ever larger debt burdens, deluding
them into thinking that they would be able to refinance their
mortgages at favourable terms, without much ado. In the midst of
the boom-times, everyone came to the party. The banks posted
record profits, investors locked in substantial gains, and the
average man boasted of exotic holidays, summer homes and second
family cars. Remember, from the earlier example, the procyclical
nature of bank management of its leverage: as asset prices went
up, banks were enabled.

GOVERNMENT FAULT
Caeter; Bush; Clinton

Well before the sub-prime fiasco, the US government had
established Fannie Mae and Freddie Mac, which were precisely
mandated to provide easy access to subsidized home loans and
mortgages for hard-working Americans. Keen to win votes,
governments ensured that no one was left out; wanting to be seen
to help spread the wealth. If anything they implicitly backed the
culture of risky lending.
The mandate came from on high, with an increase in homeownership
a stated goal of both the Bush and the Clinton administrations
(and even that of Jimmy Carter). In 1996, for example, the
Housing and Urban Development Agency" instructed Fannie Mae and
Freddie Mac to provide at least 42 per cent of their mortgages to
borrowers with incomes below the average in their respective
areas. In 2005, this target was increased to 52 per cent.
An additional proviso was that Fannie and Freddie were to provide
12 per cent of mortgages to borrowers with less than 60 per cent
of their respective geographical area's median income. What this
meant was that by November 2007 Fannie Mae was holding sub-prime 
mortgages worth almost US$56bn.

INTENT GOOD...BUT

While laudable in its intent, the `housing for all' approach had
met with vigorous protests even from the early days. On 10
September 2003, for example, in an address to Congress, the US
Congressman Ron Paul noted that government policies which
encouraged lending to people who couldn't afford to repay loans
would inevitably lead to a financial bailout. Prescient he might
have been (going as far as to introduce a bill to abolish these
policies), but it is unlikely that even he could have foreseen
the scale of the coming destruction.

THE FALL

By the time the series of interest rate hikes kicked in in 2006,
the cracks of the crisis had begun to show. The US housing
bubble, which had been inflating over the preceding five years,
was about to burst. As interest rates marched higher and house
prices started their decline, mortgage refinancing became near
impossible, leading to the inevitable consequence - house by
house, street by street, in a thousand towns all across America,
people began to default on their mortgages. Sub-prime and
adjustable-rate mortgages were the first to go as interest rates
reset higher. The lowly rated households that had been
transformed into higher-rated must-haves (i.e. the BBBs that had
become single-A-rated) could no longer pay their monthly dues.

FALSE HOPE

It's fair to say that at the outset no one seemed particularly
perturbed. Indeed, many shared the opinion of the US Federal
Reserve Chairman, Ben Bernanke, when on 28 March 2007, in a
speech on the economic outlook before the joint Economic
Committee of the US Congress, he was quoted as saying:
"Although the turmoil in the subprime mortgage market has
created    severe financial problems for many individuals and
families ... [alt this juncture ... the impact on the broader
economy and financial markets of the problems in the subprime
market seems likely to be contained ... We will continue to
monitor this situation closely."

WORSE AND WORSE

Yet the ensuing effect was to be shattering. In the same month,
the value of sub-prime mortgages in the US was estimated at
US$1.3tn, with over 7.5 million first-lien sub-prime mortgages
outstanding." By July 2007 (just four months later), although the
sub-prime-type mortgages represented only 6.8 per cent of the
outstanding loans, they represented 43 per cent of foreclosures.
By October, around 16 per cent of sub-prime adjustable-rate
mortgage loans (known as ARMS) were either ninety-days delinquent
or in foreclosure proceedings - roughly triple the rate of 2005.
And things would only get worse.

WORSE INTO HORROR

Indeed, the following year the picture was even bleaker. In
January 2008 the delinquency rate had risen to 21 per cent and by
May 2008 it was 25 per cent. By August 2008 the US mortgage
market, estimated at US$12tn, had approximately 9.2 per cent of
loans either delinquent or in foreclosure. Invariably the banks
suffered as well.
By the middle of July 2008 major banks and other financial
institutions around the world reported losses of almost US$500bn.
And in just the ten months between January and October 2008
shareholders in US companies lost a seismic US$8tn, as their
holdings declined in value from US$20tn to US$12tn.
With the crisis in full swing, Fannie Mae held US$324.7bn of
Alt-A type mortgages (mortgages that required little or no
documentation of a borrower's finances), and Freddie Mac held
around US$190bn of the same class of mortgages. Combined they
held more than 50 per cent of the US$1tn of Alt-A mortgages. In
March 2008 an estimated 8.8 million homeowners - i.e. roughly
10.8 per cent of total US homeowners - had zero or negative
equity (implying that their homes were worth less than their
mortgage). Congressman Paul's bailout prediction was about to
come horribly true.

DECLINE

Easy credit and a consumption boom led to over-building, and like
a classic bubble prices went well beyond valuations and
eventually exhausted all sources of demand - there were no buyers
left. It was this mismatch between demand and supply, the surplus
inventory of homes, and the tightening of credit in the summer of
2006 that caused home prices to decline.
The myopic, if not foolhardy, belief that interest rates would
forever stay low, and that house prices would continue to rise,
encouraged millions of borrowers to buy into loan schemes they
ultimately could never really afford. Naturally, increasing
foreclosure rates increased the supply of housing inventory
available.

THE POOR WERE LED TO THE DISTRUCTION
WITH A PIPE-DREAM

The sub-prime crisis has affected the American psyche as much as
the American purse - and indeed that of the world. It shattered
the illusion of prosperity and left people dumbfounded. The
poorest pockets of America had been led to believe that they
could own their own homes, and thus share in the American dream,
only for those hopes to be dashed, and the reality to sink in
that it was just a pipedream.
..........

THIS IS A GREAT BOOK TO READ; YOU WILL ALSO SEE THE DIRE FUTURE
FOR THE WEST, AND HENCE A RISE FOR EUROPE TO MARCH INTO SOME
DRASTIC BABYLON/ROMAN POWER THAT WILL LEAD TO ALL THAT IS WRITTEN
IN THE BOOK OF REVELATION!