Paul Vachon is Founder of The Frugal Toad and writes about Money Saving Advice for Everyday Living.
From Occupy Wall Street to Bank Transfer Day it seems like every time I turn on the TV there is another protest. Occupy Wall Street began in New York City and has gone viral around the globe.
So what is this Occupy Wall Street Movement about?
Curious, I visited the Occupy Wall Street website to learn a little bit more about the movement. This is from their site - "Occupy Wall Street is leaderless resistance movement with people of many colors, genders and political persuasions. The one thing we all have in common is that We Are The 99% that will no longer tolerate the greed and corruption of the 1%." These people sound nice enough, after all they are not greedy and according to Merriam-Webster, their moral principals have not been impaired. So far so good. Further reading reveals a catchy slogan: "the only solution is WorldRevolution". I'm not sure I see the connection between greed on Wall Street and the need for World Revolution but I'm trying to keep an open mind. In a post dated November 4th, the Occupy Wall Street Movement wants "every voice to count in the political process" and supports a "policy that looks out for all of our health and economic well-being — not a system that's rigged to look out for only the interests of the very wealthy and powerful." Now we are getting somewhere.
Flash back to 2003-2005 when then Fed Chairman Alan Greenspan made the decision to keep interest rates at historically low levels while the real estate and credit bubbles inflated. To this day, many analysts fault Greenspan as a major contributor to the financial meltdown of 2008. In hindsight interest rates were probably kept artificially low for too long however, to shoulder Greenspan with this much responsibility is not fair either.
So Who is to Blame for the Economic Crisis of 2008?
The Greenspan interest rate cuts of 2003-2005 helped to create a climate of easy money and irresponsible borrowing by banks and consumers alike according to Stanford Economist John Taylor. Was it the climate of easy money to blame or irresponsible borrowing by banks and consumers that is to blame for the meltdown? The answer is not so easy and there is much more to this story.
The New York Stock Exchange at Night (Dan DeChiaro)
It is widely agreed that the housing bubble bursting started a domino effect that resulted in the worst economic collapse since the great depression. There were many reasons for the economic meltdown some of them are:
- A weak and underfunded regulatory system (SEC) that did not keep pace with fast changing financial markets. The SEC was made aware of the risks derivative instruments prior to 2003 and failed to act.
- A corrupt political system that pressured FHA to make loans available to individuals that could not qualify for conventional financing. Congress also is to blame for rewarding risky behavior through taxpayer funded bailout programs. Financial institutions must be required to diversify investment risks so that poor performance in one asset class cannot put the entire institution at risk of failure.
- A Mortgage Industry that was incentivized to lower qualification standards, create products that rewarded risky behavior (zero down and 125% LTV loans), and speed processing of loans to feed the Wall Street CDO machine.
- Wall Street Investment Banks that created a Collateralized Debt Obligation machine to process and package high quality mortgages with junk mortgages in a massive scheme to defraud investors.
- Credit Rating Agency's Moody's and Standard & Poors inflation of ratings in exchange for fees from Wall Street Investment Banks.
- Real Estate agents that knowingly sold homes to individuals that could not afford them.
- Real Estate Appraisers that inflated values so that buyers could qualify for financing.
- And finally, the US consumer who knowingly signed loan documents that put them at risk of default when adjustable rates reset or because they bought more house than they could afford. Americans also used the housing bubble to pull out a record amount of equity further putting themselves at risk of default.
So as you can see there is more than enough blame to go around.
So how do we make sure this does not happen again?
No one can guarantee that a financial crisis like 2008 will not happen again but there have been many suggestions to limit the possibilities that a crisis like this can occur again. Some suggestions that have been made and a few of my own are:
- Break up financial institutions that are "too big to fail". The U.S. economy should not be held hostage to the risky behavior of a few financial institutions.
- Regulate the derivative market so that transactions are transparent and risk can be measured and managed.
- Adequately fund and staff the SEC so that investors can have confidence that financial markets can perform transparently and efficiently.
- Financial Firms should be required to report to potential investors the total exposure to risky investments including "off-book" investments.
- Either through increased regulation or open competition, reduce the potential for conflict of interest by Moody's and Standard & Poors rating agencies.
- Hold consumers to the same standards as we have for financial institutions. If you knowingly put yourself at risk financially, don't expect the government to bail you out.
So do the 99% bear some responsibility for the economic difficulties we face today?
One could argue that if consumers were more responsible and did not take on so much debt during the 2003-2008 time period, the housing bubble would not have been as severe. Maybe we wouldn't be talking about the Occupy Wall Street Movement today. The fact is many consumers made investments in homes and financed lifestyles with the help of 1st and 2nd mortgages and that was irresponsible any way you look at it. These investments were just as risky and in some ways more risky as some of the investments peddled by Wall Street Bankers. Some consumers signed loan papers knowing full well they could not afford to pay the mortgage in a couple of years if the rate increased and were willing to gamble the family home in hopes of refinancing in the future. So I'm not sure if 99% of us are without greed or corruption but I do know that the problem may have ended on Wall Street but began in part, on Main Street.
Do you feel the 99% shares some responsibility in the economic troubles of the last several years?
For more of Paul's writing, go check out his writing at The Frugal Toad! Control click that link so you'll be able to visit after you leave a comment below...
