Missing The Subprime Menace: Why Did The Markets and The Media Downplay The Subprime Crisis?
That why didn’t we know question is back. Again? It was asked about 911 in connection with our government ignoring warning after warning about likely terrorist attacks. The CIA has just raised it again about their own ostrich like behavior in the run-up to the attacks on the Pentagon and World Trade Center. Now its being asked by the New York Times about the failure to anticipate and potentially pre-empt the Sub-prime mortgage crisis which has since escalated into a deeper meltdown in global financial markets leading to lay-off and predictions of a fall-off in economic growth.
More insidiously, this is an ongoing crisis not just confined to markets. It is expected that, once adjustable rate mortgages are “reset” upwards, two million more families face the foreclosure of their homes. Their economic pain is being recognized but too late to prevent a vast displacement of people who cannot afford to live in homes they were suckered in to purchasing with the promise of practically free money.
Did this “just happen,” appearing one morning out of blue skies like a hurricane moving from category 4 to category 5? Of course not! The signs were there for all who wanted to see them, and warnings were plentiful even as they were ignored.
Many in the markets were too
It’s odd how the front page of its widely-read Sunday edition, the one -time newspaper of record could splash a story on how the media and the markets looked the other way as massive deals were being financed by securities cobbled together from sub-prime loans backed with no assets. Why were the signs missed, asked the Times?
Unlike the CIA, the Times did not assess its own reporting and its role in all this.
A few days later the newspaper’s business columnist showed that, in fact, many did know and tried to raise the alarm. It seems to be an example of the front pages not knowing what the business pages had reported.
He reminded readers that Ben Bernanke, Chairman of the Federal Reserve Bank who just pumped billions of dollars in the markets to keep them liquid and then followed up with a cut in the discount rate, was asked about these issues two years earlier:
“It came in November 2005, toward the end of his all-day Senate confirmation hearing, when Senator Paul Sarbanes brought up the mortgage business. Mr. Sarbanes, the ranking Democrat on the Banking Committee then, pointed out that the number of people taking out adjustable-rate mortgages soared in 2004. “Are you concerned about the potential for a bubble in the housing market?” the senator asked Mr. Bernanke. “And specifically, does the drastic increase in the use of risky financing schemes, including interest-only and even negative amortization mortgages, concern you?”
Mr. Bernanke replied that the Fed was reviewing its guidelines for these loans and planned to issue new ones soon. The guidelines, he added, “would have on the margin some beneficial effects in reducing speculative activity in some local markets.” At no point, though, did Mr. Bernanke suggest that he was concerned.
And what about the larger media? Where was their concern? Back in the spring of 2006 I published an article in Nieman Reports, the journalism review published at Harvard and read by top editors. I specifically lambasted the lack of reporting on the issue. It was titled “Investigating the Nation’s Exploding Credit Squeeze.”
Its thesis: ‘Questions of by whom and for whom need more and better investigation, as well as a look at who are the losers and who are the winners.’
The response: tepid.
I then followed up by organizing a Media For Democracy online-email campaign (Media For Democracy is an advocacy effort tied to Mediachannel.org, the media issues website I edit.)
Media For Democracy members sent tens of thousand of requests to media outlets urging that the issue be given more coverage. This was well before the market meltdown. The appeal read in part: ”
“We are dismayed by the superficial reporting we have seen on the debt crisis in America. The press has been asleep at the switch in reporting on this story, often showing more compassion for wealthy businessmen than abused consumers.
“We believe that our media outlets have a responsibility to offer more context, background and information about how this debt crisis occurred and what we can do about it.”
What was the response? Not much. Most responses came in the form of yada-yada-yada form letters as in “Thank You For Writing to the Today Show.” Responding to public concerns and suggestions are not high on the media agenda.
I then made the film IN DEBT WE TRUST: America Before The Bubble Busts to try to raise the visibility of the issue. The film was well reviewed but ignored by the New York Times. I personally sent copies and letters to leading op-ed writers and reporters. The result: nary a mention. I have been interviewed extensively in the alternative press but largely ignored by the mainstream.
That’s not entirely true. CNN and MSNBC did carry positive articles including one which compared my documentary to “Carrie,” a horror movie. They suggested mine was scarier. Tavis Smiley had me on; Larry King did not. Oprah has yet to return a call. (And AOL/truestories is now streaming the film.)
The media has still not given us an accounting for burying the story. Eventually, On the Iraq War, some media outlets admitted they practiced poor journalism even as many of their mea-culpas did not basically change their narratives.
Why not on this issue?
Other media critics have been scathing about the dereliction of duty that is so obvious here. Dean Starkman in the Columbia Journalism Review was contemptuous:
“What’s wrong? Why ask us? This kind of after-the-fact financial reporting I equate with a National Transportation Safety Board investigation-kicking through smoldering wreckage after the plane has already crashed. There’s nothing intrinsically wrong with this kind of reporting. It just feels a little late. Also, I always find it disingenuous to talk about napping watchdogs, as in the headline above, when the Journal and the rest of the business press themselves slept on the job and had to scramble to catch up to the corporate scandals earlier in the decade.”
Now the story is being covered but it is often the wrong story. The reporting tends to focus far more on panicky markets than victims of predatory lending. It seems like only a few critics like Jim Hightower are telling it like it is:
“At its core, this is a classically simple story of banker greed and outright sleaze. And the astonishing part is that nearly all of the rank injustice perpetrated by today’s money changers is considered legal and is practiced by supposedly reputable financial firms.”
Some years back, a hamburger chain challenged its competitors with commercials asking, “where’s the beef?”
My questions today to media colleagues, including the progressive blogosphere, are where’s the pick-up, where’s the follow-up, where’s the outrage?
News Dissector Danny Schechter is “blogger-in chief” of Mediachannel.org, His new film is IN DEBT WE TRUST: America Before the Bubble Burst (Indebtwetrust.com) Comments to Dissector@mediachannel.org
People who are interested in this subject should visit www.patrick.net. Patrick has been blogging about this mess for over 2 years now and accurately predicted what would happen.
In the maze of corporate shell-games of ownership, one would undoubtedly expect that there are connections between the MSM, money lending and real estate speculation “industries”. I hesitate to use the word “industry” since they don’t actually produce anything. They’re mainly channels through which money leaves a laborer or locality, and just sort of disappears upward and outward.
I’ve been wondering why such a big repercussion is being caused by a such a small number of foreclosures. Granted, the number is larger than in the past, but in the scheme of the entire economy, it’s a very small percentage.
These sub-prime loans allowed many to get into the housing market who couldn’t have otherwise, and the majority of those people have benefited. Perhaps we need laws which better protect the consumer, such as limiting the total percent increase an ARM can have, and the banks need to do a better job verifying what the client tells them (I don’t have much sympathy for the clients who blatantly lied about their income, however). But the last thing we want is to have criteria that is too strict and condemns certain responsible but low-income individuals to always throwing money away on rent, rather than getting a chance at gaining equity in a home, with a mortgage about the same or slightly higher than the rent that person would otherwise have to pay.
At one point in our history, you needed 20% down, and we all agree that isn’t a good idea. The majority of sub-prime borrowers are making their mortgage payments. Doubling a very low foreclosure rate hardly seems like a economic tragedy to me.
What recent economic events point out to me is that those who CLAIM to know what is best economically know very little, and while they got richer, “we the people” are left cleaning up the mess. History repeats itself - how many times have certain individuals created an economic mess (benefiting greatly financially in the process) and then the bottom 90% of the US has to suffer the pain of it being corrected. The mortgage lenders obviously weren’t acting in the best interests of their shareholders (and in that statement, is the reason why: they’re not spending their own money. They made a lot of money prior to know and aren’t terribly self-interested in whether or not the corporation goes bankrupt. Thus, they’re not adequately analyzing the consequences of their decisions and actions).
Their greed was the problem. Fairly simple steps easily could have been taken to make the sub-prime loans less risky and to ensure they were backed by adequate assets.
Unfortunately, even though the problems with sub-prime loans *shouldn’t* have such repercussions across the economy, they currently are, and given this, there should be far more regulation of this segment of the economy (and many other segments, as well). The executives, time and time again, have shown they will NOT make the right decision without laws which force them to.
skepticzz, you’re not considering the larger upcoming problem of the majority of these ARM mortgages converting to drastically higher rates in 2009. that will be the real crisis. This was just a warm up, and it didn’t go well. Steps addressing that problem need to be taken now.
The media added fuel to the fire just when they should have been asking hard questions.
1) Internet stocks
2) Run-up to Iraq war
3) The red hot housing market
Then again, their job is really to sell soap, beer, and Viagra. Don’t kid yourself otherwise, they’re media companies, not a branch of government or a regulatory body. Too bad they can’t be sued for irresponsible reporting; they would understand that since it involves money.
skepticzz, the small number of foreclosures isn’t the main problem. The problem is that irresponsible lending led to housing inflation, taking prices up to way beyond the “real” market value. It’s a classic bubble, people see prices going up in double digits, so they stretch as much as they can to “get in” before prices go up even more, and they want part of that massive return on investment (the greed factor). Demand increases, and prices go up even higher, and so the cycle continues. When loans are made with less than 20% down, or 0% down, paying back the interest only or even less than interest, the home owner has no equity in the property. Eventually, prices stop rising because people can’t afford the properties even with silly loans, and brokers run out of more imaginative things to do. (I live in San Francisco, and one bedroom flats were going for 1 million in some areas.) Now demand on the housing market falls away and prices start to fall. Many of the people with subprime loans start to see negative equity on their property, i.e., they can’t sell without incurring a debt. Then their payments balloon according to their loan contracts, and they can’t refinance (which their broker originally told them they could do) because they have negative equity, probably have bad credit, and mortgage brokers have upped their rates to mitigate more risk. They can’t afford their payments, so they just walk away, and the property forecloses. Even a small amount of foreclosures on the market, being auctioned off at lower prices by banks desperate to get rid of them leads to a massive drop in demand. Buyers will simply wait it out. Few people want to buy a house just after the peak. The drop in demand leads to despearte sellers (with negative equity) lowering their prices even more to get rid of their properties before the hole gets deeper. And so the cycle continues. Like dcbeltway, I have been reading patrick.net for years (there is a great article in there about the 4-64 principle, how a foreclosure rate of 4% can multiply up to affect 64% of the market), and I was just waiting for this to happen. I had friends who bought property in the last six months, tiny places for $800,000. I told them it was the worst time to buy, like buying stocks in March 2000, as my financial advisor told me. Now they are left holding the proverbial tulip bulb.
skepticzz:
The corporate framing is about the sub-prime borrowers “not getting into the market otherwise”.
Is that really true? If so, why?
Most things have a range at which you can buy well below, at, or well above your comfort level. You can get a car for $100, $1000, $10,000, or $100,000 (4 magnitudes difference). Same for art. Same for computers. Why is it that something even more essential to living only starts out high — and, as you say is unreachable to many — only goes up from there?
Is that an ordinary market dynamic? No — in an ordinary market, prices come down to meet the customer’s ability to pay.
It isn’t so much sub-prime that allowed people a stab at not living as landless serfs their whole lives. Rather, it was a racketeered, speculated, deregulated and usury-laden “industry” which drove prices well out of sensible value.
Why is real estate so expensive practically every where you look? Are people willing to pay that much for it, like a coveted guitar played by Jimmy Hendrix, a suit worn by Elvis, etc? Clearly, ordinary market dynamics do not apply here.
Reminds me of the Savings and Loan Debacle years ago - many of the same players who evntually were bailed by the taxpayers
In response to kathyodat (”larger upcoming problem of the majority of these ARM mortgages converting to drastically higher rates in 2009″): the only person for whom this is a crisis is the person who took out the mortgage. This is just frosting on the cake for the holder of the mortgage (I do agree it would be good to find ways for people who were victims of predatory lending to refinance).
I agree with bidelo (”the problem is that irresponsible lending led to housing inflation, taking prices up to way beyond the “real” market value”), although that isn’t what Bernanke and the markets are concerned about - they’re concerned with credit “tightening” up. I don’t agree with some of the rest of the comment though - I have no problem with 3% down loans, or even, 0% down loans, if the person has a strong credit history and the mortgage doesn’t stretch that ability to pay.
It’s a small minority who have problems with negative equity (”Many of the people with subprime loans start to see negative equity on their property”) - many with strong credit and ability to pay got in for the long-term, knowing that was a risk but most gained enough equity in the first year or two of the mortgage to be able to handle the currently slowdown or slight drop in prices. Only for those who got in in the last 18 months is this really a problem - and for at least the last 9 months, it’s been very clear that the markets were slowing way down (and even a year ago, a smart person (with good or poor credit history) would have been crazy to take a large mortgage (in some markets, a 10% drop in the house value is only $20,000 - a drop that most can weather - as long as they’re not a victim of a predatory ARM which is adjusting upwards).
As for Paul’s comment (”in an ordinary market, prices come down to meet the customer’s ability to pay.”) - he’s obviously not in most of CA. There, demand FAR exceeds supply and that is driving the high prices Furthermore, the existing homeowners are so enjoying their rapidly rising equity that they aren’t clamoring for government-subsidized low-income housing or high density housing (to offset high land costs).
Surely Paul doesn’t want to claim that low-income people shouldn’t be allowed to buy a home because they create excess demand, which drives up housing prices? If housing prices are going through the roof because of this excess demand, it seems to me we should be building higher-density housing to match the excess demand (Portland and Seattle are good examples of how this can be done, although neither is keeping up with the demand, either).
As for curmudgeon99 (”Reminds me of the Savings and Loan Debacle years ago”): YES YES YES. And the hedge fund “crisis” of the 80s. I’m too young to remember much beyond that (and my memory of those is sketchy), but YES.
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These sub-prime loans just shouldn’t be affecting the markets the way they currently are - the ones being defaulted on represent FAR too small a fraction of the total economic pie. The only negative impact of these loans is that people who were salivating, thinking they could reap financial gains as the ARMS adjusted upwards, were nuts (didn’t they realize that most people with those ARMs would (and did) refinance, leaving primarily those with the riskiest of risky loans in the pool?) Although right now, the current “crisis” has tightened up lending revenue, I expect, this is fairly temporary and will go away. In the meantime, it is creating huge problems for those wanting to refinance, but they represent a tiny percent of the mortgage market.
The war in Iraq is having a far greater and long-term impact on our economic well-being (I’m waiting for that realization to hit the financial “gurus).
I’m wondering to what degree this sub-prime loan business is being used to manipulate the markets - to artificially drive prices down so those with cash can get bargains, knowing the market with swing right back up to where it was (wasn’t too long ago we were celebrating the Dow at 14,000, was it?) Why weren’t financially “knowledgeable” people more restrained, knowing the sub-prime loan market was going to suffer foreclosures as ARMs adjusted up? Even given this, market players (and the market) are acting very irrationally - the sub-prime loan market issues should not be affecting the Dow or the S&P 500 or the Russell 2000 (or others) like it is — the degree to which companies in any of those indices are affected by the sub-prime loan problems is miniscule. Maybe a few percent, but it is ridiculous to see stock values dropping 8-10% on average in any one of those indices.
The levees failed? Who could have ever imagined such a thing? Sunnis, Shiites and Kurds aren’t BFFs? No one could have ever known that one. Ken Lay was nothing more than a thief? But “Forbes” named him CEO of the year - no one could have ever predicted he was a crook, too. Mark Foley is a gay pedophile? Who could have seen that coming - besides all the enablers who helped him pursue underage Pages for 10 years? The Mining Lobbyist in charge of Mine Safety failed to insure mines are safe? Oh, come on, nobody could have ever guessed that outcome.
It’s all one big ponzi scheme - they create a fake “market,” rape the consumers while teaming with the media to insure positive reporting, then split with the loot, claim they were blind-sided, and set to creating the next fake market. And we fall for it every time.
It’s all about leverage, leverage, leverage. One Dollar in real capital held by say….J.P.Morgan is leveraging $76.oo dollars of notational value out there in the economy of say constucting gaited communities and retirement facilities…it’s a debt based economy justified by the use of derivatives. It allowed financial institutions to sell ‘dreck’ wrapped up in pretty, shinny packages called CDO’S (collateralized debt obligations) backed by the value of say realestate…like one’s house….. or many millions of houses and millions of sub-divisions. The Notational value of all the worlds derivatives is 415 T R I L L I O N DOLLARS. That’s as of 2006, as stated by the BIS (Bank of International Settlement). You’ve only felt the first small tremors.
The problem is not the lending practices of mortgage companies nor the inability of some of their borrowers to meet their obligations. The problem is that debt has become an “asset”, a financial instrument to be packaged in the form of bonds (”mortgage bundling”) and traded in the market like any other commodity. The egregiously criminal Bush administration has been the primary beneficiary of this whole debt-as-asset philosophy with their massive sales of increasingly worthless treasury bonds which will soon leave the country in a disastrous situation a la 1929.
Skepticzz–We most certainly do not all agree that 20% down on a home purchase is not a good idea. The only way that nothing down would be ok is if there was some sort of guarantee that the home would always gain in value. That is the same nonsense that financing a vehicle for too long may end up with owing more that it is worth.
Bidelo–You have a very good discussion of how the whole system of adjustable mortgages works (or doesn`t work). There is no free lunch and if a thing sounds too good to be true, that is probably the case. People are going to have to sit down and figure out their debt before they commit to one. The government cannot regulate everything that could possibly happen. Also, as in the CEO problem, we just need some directors that are doing their job instead of rubber-stamping those salaries.
“At its core, this is a classically simple story of banker greed and outright sleaze. And the astonishing part is that nearly all of the rank injustice perpetrated by today’s money changers is considered legal and is practiced by supposedly reputable financial firms.”
Even more astonishing is that our government allows these Central Bankers to control our economic destiny. It’s frightening!
Thanks, Mr. Schechter, for trying to alert these babbling boobs in the Big Media to the wolf at the door but your voice is unfortunately lost in the buzzing from Wall Street that drones: “Keep the suckers on the line until we squeeze every last dime out of them.” Of course, the BM — and I use that term intentionally aware of its dual meaning — is owned by people who are heavily invested the financial markets and making sure Mr. and Mrs. John D’Oh don’t cash out of the market too soon.
By this means, I have witnessed on CNN and MSNBC a bubbly financial reporter assuring the public all is well with our economy and encouraging small investors to keep their money in the stock market while, after the break for “Head-On” rub-on headache relief, another reporter will notify us blandly that blue-chip XYZ Corporation just cut 30,000 more jobs. This is the sign of a healthy economy? That’s 30,000 more people who will have to curtail their spending, and they won’t be finding a new job in our ’service’ economy that pays as well as the old one, if they can find anything at all. I understand why they run those headache balm ads in the breaks; I need one after hearing their contradictory financial news. Incidentally, this kind of cognitive dissonance concerning the economy occurs several times a week on these cable news networks.
Well, we’re too far down the road now, IMO, to snap back; we are indeed going to have a ‘correction’ — read ‘crash’ — within the next few months and there’s nothing Bernanke or Little Bush can do to prevent it. Perhaps it will all eventually be for the best and you can’t say we don’t deserve it for the way we’ve allowed the Republicans in Washington to run up the debt, devalue the dollar, reward their corrupt cronies with tax breaks, and deregulate the market, just as it was in the 1920s before the collapse of 1929. We can only hope the Chinese, no doubt the ultimate inheritors of Junior’s mess, will be more perspicacious caretakers of our economy than the GOP has been.
BTW, dmgreenaz, 27Aug07 comment, good point.
Also several good points by Paul Bramscher; this is why our housing market needs a severe correction — the ordinary dynamics that drive the supply-and-demand market, and the issuance of credit, are completely out of kilter.
Skepticzz, another good point: “The war in Iraq is having a far greater and long-term impact on our economic well-being (I’m waiting for that realization to hit the financial ‘gurus’).”
Shoveling dollars down a bottomless black hole has never traditionally benefited any economy. While the Bush and Cheney families and their close friends are getting rich, Halliburton just transferred its HQ to Dubai so even US banks will not be seeing any of their obscene profits from the Iraq War.