| Abstract: |
Developed economies rely on their financial sector for their well being,
which, as a corollary, can be severely compromised by a poorly functioning
financial sector. The financial crisis of 2007-2008 was caused by the
collective financial sector in the U.S. Their collective mortgage production
in 2003 was $1.1 trillion, equivalent to over 16% of the $6.9 trillion
outstanding mortgage levels as at the end of 2003. If the 2003 mortgage
production was allocated over new housing starts, each new home would have
been financed with a mortgage of $635,000, while the average U.S. home sale
price that year was $246,300. In 2001, the Fed lowered its effective funds
rate from 5.98% to 1.82%; in the following two years the rate was dropped
further to 0.98%. Such action may have been inspired by the low economic
growth rate in 2001, which turned negative in the third quarter. What the Fed
did not react to was the massive growth in annual mortgage production, which
had already started in 1998. In a continuing demonstration of benign neglect,
the lowering of the Fed funds rate from 2001-2003 only emboldened the
financial sector, which fuelled the annual mortgage production even faster
over the period 2003-2006. Home mortgage loans are mostly granted to
individual households and especially in large numbers to working class
households. Such households rely on their income levels to repay such
mortgages. When house prices grow faster than CPI inflation and incomes, - up
to 38% higher than CPI inflation over the years 1997-2006 – working class
household’s finances can become rapidly overstretched. In 2006 mortgage
borrowers started to get into trouble as the foreclosure filings show. By
2007, this affected trading in mortgage bond funds and by 2008 a full scale
banking crisis was unfolding. The harm that the financial sector had wreaked
on household finances was having a potent economic effect in the real sector:
45% of all mortgagors faced with foreclosure proceedings, 7.6 million job
losses, wages growth below CPI inflation levels, 6.1 million home
repossessions, a rapid decline in the home ownership rate, a substantial loss
in the savings for a pension pot and a doubling of government debt levels. The
reaction of the Fed was to save nearly all the banks, implement a quantitative
easing program of some $4.2 trillion and keep interest rates at rock bottom
levels, none of which helped the most vulnerable of the protagonists in the
global financial crisis: working class households. |
| Keywords: |
financial crisis, working class households, U.S. home mortgages, U.S. home ownership levels,employment and unemployment, labor force participation rate, median household income levels, pension savings, U.S. National Mortgage Bank, early warning traffic light system, home mortgage quality control system |