The Path America took to arrive at the world financial crisis

It is well known today that the world financial crisis was brought about by an over-eager U.S. business community that could not temper its greed with caution. The US financial industry has over the past decades slowly evolved to the point where its philosophy dictated that it is profitable to lend to people who are all but insolvent. Until these tactics caught up with them, these banks and financial institutions really were able to make higher profits from favorable interest rates than anyone else. If a borrower was unable to pay back a loan, the bank just repossessed the property and sold it. To protect their interests further, the lenders sold their mortgage risks to mortgage insurers to package them and sell them as some securities. This made very bad financial sense over the long run.

The entire financial house of cards that the US economy was, was wonderful for years. Homes sold quickly and their values rose regularly. There was always easy money to borrow to build and buy. High demand made homes take on great value as rising investments. Rising home values also gave lenders an edge in that it enabled them to get out larger and larger mortgages; property owners felt confident and reassured in the rising value of their properties. It seemed like everyone won: the buyers, the lenders and insurers.

However, time caught up with all. When adjustable mortgages were no longer working, many borrowers were forced to default. When this happened more and more over a period of time, lenders found that they had all this property on their hands to sell, but no liquidity. To secure that, they sold their risks as junk investments as property prices began to sink. Insurers, lenders and borrowers began to feel the heat of a liquidity crunch. It was at this time that Lehman Brothers and AIG failed.

When borrowers began to approach lenders for some help in repaying their loans, the lenders were happy to extend their markets. The lenders continued to lend ill-advised loans and encouraged borrowers to take up mortgage insurance.

When this kind of behavior carries on for long enough, there is no book-cooking that can help. Now that all the banks and financial institutions have had their misdeeds catch up with them, is it really fair for them to ask the public to bail them out? Fair or no, there are few other options at this time over having the government just give money to financial institutions to balance their books with. It is said that this is turning out to be the biggest transfer of wealth from the rich to the poor in history. In their anxiety to get the country back on its feet, lawmakers are pushing through stimulus packages and bailout bills without adequate consideration. The entities that was responsible for the crisis must not be allowed to slip away when the government is busy reining in all the terrible outcomes this crisis: job losses, company failures and others.

If the government were to recommend that all defaulted mortgages be turned into fixed-rate ones that run into three or more decades, it could be a solution to the current housing finance crisis. If the interest rates on these marketers were kept a little higher than usual, people would not lose their shirts and interest would get paid. Banks would run solvent on the back of renewed incomes and bad debts would become scarcer. The banks and other lenders might object to how this method does not net them as much as it would have at one time. But those at fault should really not be spared the consequences of their actions.

Linus Orakles

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