September 17, 2011 is quickly becoming a date that historians will have to put into high school and college textbooks when the new editions are written. This date marks the beginning of a grassroots protest in the privately owned block-long Zuccotti Park, near Wall Street.
The essence of the protest involves the general anger over the handling of the 2008 mortgage bubble burst and the resulting economic recession stemming from deregulation of the banking and mortgage writing industries.
Once upon a time, you used to have to be able to prove via check stubs from an employer that you would be able to pay off the mortgage you were getting yourself into. This practice makes sense to those who want to minimize the risk of a mortgage default.
Slowly but surely, regulations became lax, and people were being sold mortgages they would never be able to afford. Also, people were sold on the idea that the equity in their home could be used as sort of a bank, and on the idea that constant refinancing of their mortgages could reduce their payments.
Enter the Adjustable Rate Mortgage, which promised lower interest rates if the Federal Reserve lowered interest rates, and higher interest rates if the Fed boosted the rate. The actual language of some of these agreements never tied the interest rate to the Fed’s assessment of interest, and allowed the bank to raise or lower it as it saw fit, sometimes using complex mathematical formulas instead of real numbers the average person might understand.
Enter the Home Equity Line of Credit, which allowed you to borrow against your house you already paid for, or had mostly paid off. Re-do your kitchen, send your kids to college, have some extra cash for a car the advertisements proclaimed. If you lost your job, or for some other reason could not repay your loan taken against your house, you lost your house.
Real property values tumbled, as people were sold a bill of goods about how they really could afford their dream house, refinance to lower their payments, pay interest only on their mortgages, and people began to default by the thousands.
Some people were locked into mortgages that required them to pay a sum of money that was higher than the actual assessed value of their house. Others had their interest rates continually increased until they could no longer afford their payments and defaulted. One notable case involved a woman who made roughly $1500 per month, and was sold a mortgage that would require a monthly payment of $1800 per month.
As people continued to default, banks were stuck with properties worth far less than the mortgages they wrote on them. As the whole Ponzi scheme stated to collapse on itself, banks begged Washington to bail them out. “We’re too big to fail,” they claimed. “If we do fail, we could enter into another Great Depression” it was warned.
The necessary stepping stones for this process were actually put into place by Bill Clinton with his National Home Ownership Strategy. After all, wasn’t the American dream a house with the white picket fence, 1.5 children, and 1.8 cars?
The timing of bubble burst could not have been better for the person largely responsible for the banking deregulation, George W. Bush. Congress and Bush were lame ducks, and Barack Obama had just been elected president by popular vote count, still acting as a senator for Illinois.
Bush still had to deal with the situation at hand, because Obama had not been inaugurated yet. His power was limited to that of a Senator, leaving Bush to make the tough call about what to do.
Bush decided to channel Herbert Hoover’s Reconstruction Finance Corporation, and authorize the Troubled Asset Relief Program, which gave banks $700 billion to insure them against their misguided gambling schemes involving credit default swaps, derivatives, and other investments that were so toxic that banks actually bet on their failure.
TARP did not allow banks to recoup losses already incurred on troubled assets, but it was expected that once trading of these assets resumes, their prices will stabilize and ultimately increase in value, resulting in gains to both participating banks and the Treasury itself.
TARP was also designed to encourage banks to resume lending again at levels seen before the crisis, both to each other and to consumers and businesses. The idea was if they felt like they already had a cushion against the losses they had incurred during the crisis, they would free up some of their cash to lend to people and businesses to get the economy going again.
Too bad for the taxpayer terms of repayment were never specified. I guess you can’t really count on anyone to pay back money borrowed unless there is a set plan in place for them to do so.
Banks loaned out no new money, continued to foreclose on homes, and had the audacious gall to pay large bonuses to their CEO’s and top sales representatives. Others sent company employees on junkets to exotic destinations on the taxpayer’s dime.
These companies claimed that the bonuses were “contractual obligations” and could not be avoided even if the company is failing. The junkets, they claimed, had been planned for and paid for well in advance of the crisis. However, taxpayers were not convinced.
Now, taxpayers remain unconvinced that anything is really being done to reverse the flow of money back to “the 99%.” (This comes from the well-documented fact that at least 95% of our nation’s wealth is controlled by 1% of the people.) Upper middle class, middle class, and impoverished people alike are being called on to “tighten belts and make sacrifices” while politicians continue to ignore the 99% and cater the to 1% in the form of tax breaks and other considerations.
It is becoming clear to more and more Americans that the wealthiest 1% of the nation could care less for their well being while they hoard enormous sums of cash that could never be spent in a lifetime.
It is also becoming clear that the same 1% is practically buying the favor of politicians in the form of enormous (tax deductible) campaign donations that result in holes in the corporate tax code that allow companies like GE to post a record profit and pay zero in taxes.
While some of the approaches the protesters are using are questionable, their motives are not. Campaign finance has spiralled out of control to the point where only those who have the sort of clout with corporations needed to net their gigantic war chests can get enough money to run for office. This necessarily means that politicians are beholden to these private interests under the thinly veiled threat of taking the money to the other party.
This leads inexorably to a government that is run by and for the profit of the top 1% of the population, which by definition is a plutocracy. Anyone who needs a lesson in what happens when people get really tired of this practice should read up on the French Revolution, because this is where our country is headed right now.