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View Diary: An Economy cannot be based on CONSUMPTION (285 comments)

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  •  No - but there were willing participants (2+ / 0-)
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    divineorder, mystery2me

    When you local S&L held you mortgage until payoff there were strict standards and a willingness to work through any difficulties might affect a homeowner.

    Buying our house in the early 90's - waiting for a market pullback from the boom of the late 80's we had to put 20% down, have payments be no more than 36% of our income AND still had to pay points to get down to 8 3/8% interest rates.

    Yet within a few years you had ARM madness, no money down, no income verification and more.

    Banks found out they could package and resell mortgages - offloading the risk of non payment.  Wall Street found ready buyers for insanely complex mortgage backed securities that had varied interest rates, risk assignments and more - instruments so complex that NOBODY understood them.  And I say this having worked on Wall Street in the 80's when CMO's first came out and were barely understood THEN in their simplest form.

    With Wall Street selling tons of Mortgage backed securities there became a huge market for BUYING MORE MORTGAGES.  But the banks had already written mortgages for most 'good risks' - those following old standards.  The UAS was already at its high for home ownership but politicians - Bush surprisingly - started pushing the 'Home Ownership Society'.  Of course with the decline and fall and export of American manufacturing, home building and renovation were the only 'growth' industries left that were occurring in the US - another reason for pushing the housing boom.  The Fed was complicit in the building bubble by keeping interest rates low - looking to juice the economy with housing builds.

    But once you've sold houses to those who could rationally afford them, what do you do?  You sell houses to those who could NOT afford them - who were depending on continual appreciation in prices, you sold BIGGER houses to existing homeowners and you fed the speculators who bought and flipped houses before they were even finished.

    A LOT of people had reasons to push the housing boom - and too many consumers were willing to get in  over their heads, believing that bubble would never burst.  

    Yes, many CONSUMERS willfully and recklessly OVERCONSUMED when it came to housing - they were willing participants in a bubble destined to burst.

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