Eugene Weekly : News : 10.02.08

Boom and Bust
Just what got us into this mess?
by Alan Pittman

On Sept. 29 Congress and the public balked at a $700 billion dollar Wall Street bailout.

Local Congressman Peter DeFazio joined one-third of Democrats and two-thirds of Republicans (and a flood of callers to Capitol Hill) to vote against the bailout.

“I don’t believe we should borrow $700 billion in the name of the American taxpayers to throw money at Wall Street’s bad debts and cross our fingers and hope it will work,” DeFazio said. “If Wall Street needs a cash infusion, it should be paid for by Wall Street. We need something more targeted to average taxpayers.”

DeFazio called for a transfer tax of a quarter percent on securities that would generate $150 billion a year to have Wall Street pay for its own bailout. He also called for a “trickle up” bailout that would help the victims of predatory lending by renegotiating unfair loan terms to help them keep their homes. 

DeFazio criticized the failed bailout bill as full of loopholes and weak language that would: not actually reign in Wall Streeat bonuses and golden parachutes; put taxpayer money at great risk with little guarantee of a payback; lack oversight and fixes for regulatory failures; and be vulnerable to profiteering by bailout speculators.

DeFazio said Wall Street needs tighter regulation. The “Bush administration’s cowboy-capitalism, markets-know-best, deregulation-at-all-cost policies willfully, wantonly and irresponsibly created this mess,” DeFazio said.

Based on news reports, here’s an attempt to unravel the complicated boom and bust that got us into this mess:


• Irrational exuberance ends in year 2000 dot com bust. Investors flee into real estate.

• Higher demand increases home prices.

• The dot com bust leads the Federal Reserve System to lower interest rates to stimulate the economy.

• Higher supply of money increases home prices.

• Mortgage lenders use more and more balloon mortgages with lower initial interest rates to bring in more high interest loans and profits.

• Mortgage lenders reward their staff and executives with bonuses for selling the high profit loans.

• The loans are very risky, but in a rising market, home buyers can refinance or sell to pay off the loans.

• Mortgage lenders sell loans to Wall Street to get more and more money for more and more, bigger and bigger loans.

• Wall Street gets money for mortgages by selling complex securities that hide risky loans.

• Wall Street pays executives huge bonuses for selling more and more securities with hidden risks. 

• Bush administration deregulators fail to require that Wall Street banks actually have enough money in their vaults. 

• Bush deregulators fail to enforce anti-trust laws, making firms “too big to fail.”

• Credit rating agencies compete for business by offering top credit scores to bogus Wall Street securities.

• Pension funds, foreign governments and other big investors buy the Wall Street securities to tap into big returns from high interest rates for risky loans made possible by ever rising home prices.

• Wall Street sells “insurance” for the mortgage securities against losses.

• Bush deregulators fail to require that the Wall Street insurance sellers actually have enough money in reserves to pay claims. 

• To multiply profits, Wall Street investors borrow huge amounts as leverage to buy mortgage securities. 

• Housing prices and borrowing to buy them reach absurd levels.



Developers borrow huge amounts to build huge numbers of homes to cash in on high home prices.

• Low income home buyers baited with balloon loans get switched to high payments they can’t afford.

• Low income home buyers try to sell to get out of the crushing debt.

• Supply of expensive homes on the market increases beyond demand. Home prices fall; bubble bursts.

• Low income home buyers and developers can’t sell for high enough prices to pay off their big loans.

• Banks foreclose on low income home buyers and developers who can’t make payments.

• Supply of homes on the market increases; home prices fall more.

• Banks can’t sell foreclosed homes for as much as they loaned. 

• Banks suffer big losses. Banks fail.

• With falling home values and fore-closures, Wall Street’s mortgage backed securities aren’t backed by mortgages that are worth as much. 

• No one can trust what the jumbled complex securities are worth.

• Small losses multiply dramatically because Wall Street investors borrowed so heavily to buy the securities. 

• Wall Street firms generate huge losses.

• Big investors make claims on the securities insurance all at once.

• Big Wall Street insurers like AIG have huge losses without the capital to pay them. They fail.

• Wall Street comes to taxpayers for trillion dollar bailout.

• Treasury Secretary Henry Paulson, who himself made a half-billion dollars as a Wall Street executive during the boom, threatens Great Depression II if Congress balks at bailing out the bust. 

• President gives speech admitting no regulatory mistakes.

• Public, Congress balk at Wall Street bailout.