While a money-economic downturn would have happened anyway, it need not have hit with the precipitousness it did. That has to be blamed quite substantially on the combination of cupidity and stupidity of the elite bankers. Here’s why.
The sub-prime mortgage meltdown began months ago. As more foreclosures are instigated, the adjacent homes lost value, helping lead to still further foreclosures — thus lowering the value of the collateralized debt obligations that include “tranches” of these mortgages. It seems it should have been obvious to any sophisticated banker that preventing foreclosures through renegotiating terms of loans or even a simple moratorium would have caused less damage to the banks’ portfolio. But it would seem that nothing was done. Of course, the CDO involve mortgages that have been sliced and diced, so that no one debt-holder has control over the actual mortgages or is in a clear position to hold off on any particular foreclosure. Still a process of acting in coordination and “walking back the cat” to reassemble a say over individual mortgages should have been possible with enough computer power. So one has to conclude that the fact that it apparently was not tried indicates that the the so-called “masters of the universe” were more clueless than their vast compensation would suggest they should be. Once the sub-prime mortgages turned sour,there was still time to act, and the banks didn’t.
(If the cat trick wouldn’t have worked, or was going to be too slow, the big banks’ lobbyists could have been sent to support a government-backed foreclosure moratorium. This has still not happened. That too is immensely short-sighted. )
One must also ponder that the Senate and House did so little to stop the meltdown. Why did they have to wait for Paulson’s bad scheme? Why couldn’t’ they have invited in experts and crafted some other plan much earlier? It is true that often only the appearance of an extreme emergency causes politicians to act. But it is a sad commentary on the quality of political leadership in this country (and perhaps in others) that is the case.
Finally, the fact that even the bailout bill contains no moratorium on foreclosures indicates extreme and probably ideologically-based stupidity as well as lack of sympathy on the part of the political elite. Even now, ending foreclosures would help stabilize housing prices, preventing a further meltdown, as well as keeping many deserving people in their homes.
Of course the reliance by ordinary people on credit and on rapidly growing real-estate valuations over the last few years was partly caused by extreme income imbalances. These imbalances have several sources. Among them certainly were the efforts by the wealthy to hold down others’ wages and their own taxes while simultaneously striving to increase returns from credit cards and low-income mortgages in their own fat paychecks and bonuses. This mistake did part of the damage that is now coming back to haunt these same people, as well as the less well off. As I wrote before, having much more money than you need is pointless except to impress others.