You would think after they caused Great Depression 2.0 that we would have clamped down on mortgage backed securities. Apparently not. Top item on the Friday Wall St Journal. "Bonds backed by certain risky single family mortgages topped $1 trillion for the first time in November amid warnings about that corner of the housing market."
$1 trillion is very serious money. The US GNP is only $17 trillion.
And mortgage backed securities are just flat dangerous to the world economy. The "backed" part is pure moonshine. All the seller of mortgage backed securities promise is that the mortgage payments will be used to pay off the bonds. But, if the mortgages stop paying, the bonds go bust. That's what took down the entire world financial system in 2007-2008. A disaster which we still haven't recovered from. Before Great Depression 2.0 our GNP grew at 3.5% a year. Since Great Depression 2.0 GNP growth has been 1% a year. That's eight years of poverty.
To sell a mortgage backed security a financial house has to buy up a batch of mortgages from the likes of Countrywide and Freedom Mortgages. Who are happy to sell, turning mortgages (promise to back in the future) into cash right now. And, they are happy to write subprime and NINJA (no income, no job, no assets) mortgages, so long as they can find suckers to buy them before they default.
Basically we should not allow the sale of mortgages. If the mortgage lender know they are stuck with the mortgage forever, they will be more careful about who they write mortgages for, since they will own them. And as a homeowner, I am not happy with the idea of my mortgage falling into the hands of God knows who, who can stick it to me in a dozen different ways.
Mortgages are good deals for the lender. They are backed (really backed, not moonshine backed) by real property, if the borrower defaults, the lender gets the house. The borrowers are strongly motivated to keep up the payments lest they find themselves out on the street. It's simply to assess the risks involved at the time you write the mortgage. You inspect the property to see if the property is worth more than you are gonna lend on it. You interview the borrowers and check their credit history, and see how much they are earning. You don't write a mortgage when the monthly payments are more than 25% of the borrowers income. Pretty simply stuff.
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This will end as well as the last time they tried it, which means we'll be on the hook to bail out the 'too big to fail' banks again. I think it's time to bring back Glass-Steagall and break up the 'too big' banks.
Any bank "too big to fail" obviously needs the anti trust division of the Justice Dept to break it up into smaller pieces that can fail all by them selves. Banks hate this idea, but banks don't vote. For that matter banks hated Glass Steagal passed after Great Depression 1.0 which forbade banks from playing the stock market. That was passed back in the 1930's. Banks lobbied against it for sixty years until they finally got Clinton to sign the repeal sometime in the 1990's.
And now we see that Glass-Steagal got it right. But here we are, about to let the bankers rip us off again. That's what happens when we ignore history - we repeat it.
To be fair, I think Great Depression 2.0 was caused by mortgage backed securities and the sale of "credit default swaps". Swaps amount to bond insurance, you think you are buying insurance against the bond defaulting. Which encourages the sale of junk bonds and worse than junk bonds. AIG sold a truckload of credit default swaps on all those junk bonds before Great Depression 2.0. When the entire market went down the toilet, AIG didn't have the cash to pay off all their swaps. To prevent even more market panic in the winter of 07-08, Uncle Sam promised to pay off the AIG swaps with taxpayer money. I cannot remember just how bad a hit we taxpayers took on that one, but it was bad.
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