Capitalism is under the spotlight with the so-called sub-prime mortgage collapse which has hit at the heart of the US economy.
The bankers and brokers so devastated may be capitalism’s finest but they exhibit in abundance that most unattractive of human qualities – greed. In recent weeks Wall Street has appeared more as a gathering of cockroaches exposed to the light when the cupboard door is opened.
I haven’t lost any sleep at the prospect of heavy financial losses for those who inhabit this arcane world of shareholdings, derivatives and hedge funds. No mere mortals, these are the high priests of capitalism who manipulate financial markets where the wealth created by those who toil for wages and salaries is traded.
For those of us not versed in the finer points of the financial markets the basic story is quite simple.
The US sub-prime mortgage fiasco resulted from banks and brokers lending big sums of money to low-income families wanting to purchase their own homes. No problems so far. However this was an untapped market promising big returns for investors and as it gathered pace practices developed which preyed on the vulnerabilities of these families. The houses being purchased were frequently over-valued. One insider has reported that half were 10% overvalued, another quarter were up to 20% over and the rest were “so overvalued they defied all logic”.
People were frequently loaned 95% of the value of the property so when they signed the mortgage papers they immediately lost the equity they used for their deposit. They were duped by the brokers, the banks and the agencies who approved the deals and who realised many of these families wouldn’t have a hope of paying the mortgage. This rapidly became a professional loan shark operation on a gigantic scale.
Once they were signed the mortgages were on-sold in complex but very profitable arrangements which over time enmeshed all the major US banks, financial institutions and insurance companies.
Despite many of these families being at high risk of defaulting, the deals were so lucrative for banks and brokers that a parasitic feeding frenzy took off whereby the lending became more and more risky, corners were cut and the whole ugly edifice started to teeter.
It began to topple last year when families started to default on impossible mortgage repayments. As default rates increased the problem became a crisis with major institutions failing.
Until quite recently pundits were talking of a market “correction” taking place. In fact it’s the financial equivalent of a bloodbath.
But despite the media reporting, the real crisis is not the collapse of banks or insurance companies. They deserve to lose the shirts off their backs. Instead it’s the 2.5 million US families who will be forced from their homes this year. Many have already simply walked out and posted the keys back to the bank. They have lost their life savings used to put the deposit on the house and to pay what become unsustainable mortgage payments. Petrol and food price increases added to problems in meeting mortgage repayments. These families are being stripped bare. They are the victims of corporate greed.
US President George Bush’s answer is to provide up to one trillion (one thousand billion) dollars to bailout the banks by purchasing their bad debts. In a dramatic celebration of one of the seven deadly sins, the greater the greed the greater the bailout.
It was a interesting twist to note a report on a Christian website calling for Christians to pray for the bankers because while they may be rotten, even Jesus loved the rotten. Even so it’s a pity they didn’t add a thought to pray for those who have suffered from the bankers’ sins.
Imagine for a moment if this trillion dollars were given to support the victims of this corporate fiasco rather than the perpetrators. George Bush’s trillion dollars represents the equivalent of nearly half a million dollars per family tossed onto the street. Helping these people out would never have crossed his mind.
New Zealand has had this same experience many times but on a smaller scale. While the government would never bailout a small local business which fails, nor the investors in Blue Chip or Bridgecorp, it did not hesitate with the billion dollar rescue of the Bank of New Zealand in the 1980s.
You have to be very big, very wealthy, very irresponsible and very greedy before you can expect a government bailout.
With his trillion dollar handout George Bush has reminded us once more that when it comes to the biggest parasites, capitalism looks after its own.