Six Stumbling Blocks Led To The Foreclosure Crisis
Six stumbling blocks led to the foreclosure crisis and continue to dog the path to recovery. Decades ago America should have learnt its lesson and not repeated mistakes. Does the American system need to be changed? Is a radical overhauling required? The answer is both affirmative as well as negative.
The American brand of capitalism did not fail. Its application by humans failed. It is imperative to locate these stumbling blocks to avoid a rerun of the same.
The first failure relates to wild derivatives. In 1998 Brooksley Born who was at that time the chairperson of Commodity Futures Trading Commission wanted regulations to reach out and be inclusive of derivates. But the top brass of the Treasury and Federal Reserve poured cold water on the suggestion. Today it seems that if derivate trading had been under the supervision of a zookeeper ten years ago things would not have gone out of hand.
The second failure is about leverage. In 2004 the S.E.C. allowed firms dealing with securities to increase their leverage sharply. The leverage of 12:1 was hiked to 33:1. Under the last proportion a small 3% fall in leverage in the value of assets can liquidate a firm. If the leverage had remained at 12:1, the firms would neither have ballooned nor burst.
The third failure was introduced in 2004 when the sub-prime mortgage was allowed to grow from a small corner to swallow the entire market allowing disgraceful falling of lending standards. This happened because of slumbering regulators who ignored warnings and stuck to the theory of laissez faire. That apart some of the activities were beyond the jurisdiction of the regulators.
Fourthly once the foreclosures had surfaced the government reaction was weak and stumbling despite repeated warnings by persons like Sheila Bair and Barney Frank. The Treasury and Congress played the fiddle while America continued to burn.
The fifth mistake was that although Bear Stearns was saved, Lehman Brothers was allowed to fall. It was a case of miscalculation that led to a spiraling tumble of events. When Lehman, much bigger than Bear Stearns was allowed to sink, confidence fell to an all time low. There seemed to be no rules to the game. Anybody could drown at any moment.
The sixth and final mistake was allowing TARP to detour from its chosen and declared path.
For these errors the people in power owe the American people an apology in action and not mere words.
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