Saturday, March 14, 2009

The Joy of Securitization

With the points of the preceding post in mind, let's take the next step. While manufacturing in America was beginning to decline due to competition from the rise of the industrial nations in Europe and Asia, the financial sector began to increase, wherein the banks, Wall Street, and a variety of other financial institutions (called the 'shadow banking system') began to dominate the economy and were almost totally unregulated.

In the general economy, consumerism began to grow voraciously, feeding upon all kinds of new credit (debt) arrangements, like installment credit, credit-cards, and low interest rates. Imports rose, exports declined, leading to a rise in our trade deficit. The new creditor nations like China, Japan, the oil exporting countries, and even Europe, bought our Treasury debt, thus allowing us to keep importing and consuming. But everywhere, debt was growing, saving was declining, and the rich were getting richer, and everyone else, not so much.

Are you following me so far? What is clear is that America's economic health was beginning to decline, year by year, as we manufactured less but consumed more, building up more debt at every level, with virtually no prospect of paying the debt back. Our Federal Reserve, in order to kept this scheme going, kept money flowing via low interest rates, while Treasury funded the debt by issuing Treasury bonds. The appearance of societal wealth was for most people an illusion and not real. It was paper wealth that could be swept away.

In the late 90s, money began to pour into the stock market in the tech sectors, in what becomes a huge stock-market bubble. The bubble burst in 2000, but in order to avoid a recession, the Fed continued to pour money ('liquidity') into the system via lower interest rates and other mechanisms. The determination was made to push this liquidity into the housing market, where a new bubble grew until 2007.

At the same time, the 'shadow banking system', made up of all kinds of investment banks, hedge funds, etc, began to 'securitize' all of the mortgages and other forms of debt, turning them into CDOs and other kinds of 'derivatives' which were in turn sold to investors in America and around the world. The Wall Street people made millions and evem billions of dollars packaging and selling these securities, bonds, and stocks, oblivious to the risks involved to our economy. Thus the job of the deregulated financial sector: joy for the wealthy, eventual despair for everyone else.

Now, what they obviously didn't count upon is the housing bubble bursting, because that would drastically reduce the value of all those securities that have been issued in the trillions of dollars, as well as killing all the economic activity associated with building all those houses. It was 'wealth', owned by all kinds of people including you and me, that was as solid as a bubble. Hence when the bubble burst, the wealth began to disappear. Yeah, the investor class lost money too, but when you lose half of your $500 million, you've got quite a bit left to live on and pass on. When you lose your white-collar, blue-collar, or service job, your house, and a lot of your 401(k), well, you don't have a lot to live on. In fact, you're screwed.

Of course, I haven't even mentioned the wars we are fighting, and the military-industrial-congressional complex which is benefiting from the deficit spending on those wars.

Summing up, then: this was/is not a healthy economy. It has been an economy in growing trouble, with fewer good jobs, too much indebtedness, too many people facing housing foreclosure, too great a concentration of wealth, a global recession/depression looming, and a political system that is paralyzed by special interest contributions and influence.

Enter President Barack Obama.

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