Once upon a time and not so long ago, King George II decided what the average American peasant needed most was the opportunity to buy his or her own house. Our monarch didn’t devote much thought to how the peasants would pay for their expensive new houses over the long haul. The king is a Man of Action, and likes to leave the thinking bit to his ministers while he gallops off to one battle or another. Indeed, our crusading king is so keen on battle that he’s quite good at sniffing out enemies who are indiscernible to most of us. (Do you remember his Quest for the Invisible Weapons of Mass Destruction, children? What an entertaining fable that was!)
To make house-buying possible for peasants who couldn’t really afford it, George and his Merry Band of Ministers knew they’d have to change the way that loans are issued to home buyers. In the old days, if you wanted to buy real estate, you’d go to your local bank and deal with a bunch of stuffy bankers. They’d ask tedious questions about how much money you made, and they cared about how much money you made because they were the ones issuing the loans. So if you defaulted on your mortgage, they’d be the ones left holding the bag.
How Deregulation Works
In 1999, George and his merry men convinced our legislators to eliminate most of the functioning remnants of the Glass-Steagall Act, a law passed after the Great Depression to prevent the stuffy neighborhood bankers from acting like Wall Street investment bankers. Investment bankers’ creative approach to other people’s money - and their remarkable ability to sell things that don’t really exist--contributed to a huge economic crash-and burn in your great-great grandparents’ time. With the Glass-Steagall Act out of the way, these investment bankers were once again free to have at it with the mortgages. The Wall Street wizards devised any number of ingenious loans so the hoi polloi could buy their own rose-covered cottages– a lot of which offered cheap mortgage payments for the first few years, until wham! the interest rate skyrocketed. For a while, it was as ridiculously easy to refinance your home loan as it was to get the original mortgage. You’d make a phone call, or visit a website, tell someone that you made $80,000 a year punching holes in doughnuts, and voila! You had a brand new home loan. Eventually, with all this credit extended to the most unlikely candidates, lenders everywhere started running out of money. And the poor peasants defaulted on their mortgages or refinance loans, and they were out on the street without a shekel to show for their investment.
Well, this tidal wave of house foreclosures and lenders going belly up was no skin off the investment bankers’ backs. After all, they’re the smartest guys in the room. So they’d sold off those loans for obscene profits to other lenders, long before the loans – predictably enough—went bad. And, while some of the culpable investment bankers may have to sell a castle or two in the Hamptons, you won’t see them selling pencils on the corner any time soon. Well, a few of their unfortunate children will now have to tough it out in New York City’s public schools. But don’t waste too much pity on the smart guys: a good many of them have been salting away more money than you can imagine for years.
The Power of a Really Great Suit, or How Everyone Could Be So Stupid
I see a few puzzled looks out there, and I’m guessing you children are wondering how our lawmakers got suckered into allowing such a disastrous loan scheme. One answer is that the average American has the attention span of a fruit fly. We don’t read much history, and while most adults were forced to study the economic factors that led to the Great Depression at least once in school, most of them happily forgot about that as soon as the history test was over. In fact, we don’t read much, period. If we did, we might have compared the modest salaries of European CEOs who run successful corporations to the multiple millions that Fannie Mae and Freddie Mac CEOs earned for making financially catastrophic decisions, and we would have asked some pointed questions It’s also true that people tend to listen to people in really expensive suits with Ivy League degrees, and the investment bankers had both. And then, a lot of people who dealt with these very smart guys were afraid to say out loud that they didn’t understand how these loans would ultimately be any less disastrous than any other pyramid scheme. They didn’t want to look like the only dolt in the room who couldn’t grasp the subtler nuances of high finance. If you read “The Emperor’s New Clothes,” you’ve got a good idea of the dynamic at work here.
