Half a Dozen Causes Behind the Foreclosure Crisis of Today
Mark Blythe of Brown University enumerates half a dozen causes behind the foreclosure crisis of today.
In the 80’s began the deregulation of the domestic markets in the important financial centres of the world. The “globalization of finance” led to staggering growth in liquidity as the hitherto isolated market connected and intertwined.
This liquidity led to the phenomenal development of new kinds of financial tools – especially the technique of securitization and the increased functioning of credit derivatives.
Thirdly the interest rates, both long and short terms began to drop rapidly. From 1991 the prime and federal rates of USA began their lengthy fall from double figures to record lows. Naturally the world followed.
Fourthly all this brought about dramatic changes in the banking sector – the commercial banking segment driven by finance became concentrated. The availability of credit began to skyrocket while previous responsibilities of the state became privatized. This encouraged investors to seek more than average returns. It became a rapidly growing trend.
The current account deficit climbed to record high in relation to GDP. Each year the government was borrowing 3% to 6% of GDP for over two decades. The interest of this borrowing was so extremely low that it appeared money was free.
Sixthly a deep change in ideology took place in the country from the 70’s to 2000. Everybody- from politicians to the experts and the common man there developed a strong belief that if the state did not regulate and interfere, the market would be producing wonders.
The net result of the play of these six factors was the growth of a financial sector that relied more on continuously producing higher returns while becoming a large and important segment of the GDP of USA.
This chasing after continuous high returns highlighted the problems of limited assets. The categories from which high returns could be squeezed are limited – equities or stock cash from the money market and bonds with fixed income. To this could be added real estate as well as commodities. Equities, bonds and money market instruments could be bracketed in a class while stock markets another. In the 90’s the latter was under priced and hence it seemed the obvious place to knock on for higher than average returns. The liquidity hunting for higher returns first attacked the equity market and flooded it. Then it turned to the global stock markets from the middle to the late 1990’s.
The perfect stage was set for the foreclosure crisis.
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