… and, apparently, that’s the Federal Reserve Bank’s fix for every financial “crisis” that comes along.
After September 11th, the Fed did its patriotic duty by artificially lowering interest rates to the point where even people with dicey credit histories could get into more house than they could afford. Bush the Younger pushed home ownership and consumer spending like it would unilaterally cause bin Laden to turn himself in. Congress had already passed laws to prohibit “redlining,” the process banks used to eliminate, wholesale, large groups of high-risk potential customers (Darn them and their capitalism! Wait… I thought we won the Cold War); this led to banks floating loans to people unlikely to pay them back out of fear of being dogged by Big Brother – I mean, “Uncle Sam.” So banks, legitimate and otherwise, end up transferring the risk to the poor saps doing the borrowing via various vehicles, namely ARMs (Adjustable Rate Mortgages) and highly inflated fixed-rate loans.
ARMs grew out of those crazy Eighties, with their runaway inflation, stagflation, and all other fun stuff, during which time lenders got caught in fixed-rate mortgage loans at low APRs, while inflation was driving long-term interest rates into double digits: 17 to 20% (or more) on a home loan was not uncommon, I understand [Full Disclosure: I graduated high school in 1990; I wasn't really paying attention when all the Junk Bond, S&L Debacle, Black Monday [censored] hit the fan]. ARMs are typically tied to an indicator rate, like the 30-year T-bill or some such, with padding for the lender. As the Fed adjusts the indicator, the interest rate on the mortgage adjusts accordingly. (Usually changes infrequently: annually, though I’ve heard of some that adjust quarterly; this probably depends on the lender) There are usually pretty stiff penalties for early payoff, as well, because – God love ‘em, nothing wrong with it – banks like to bet on sure things. And let’s not forget the inevitable balloon payment at the end. But you can prolly just roll that into another ARM when you get there…
So, as a direct result of these shenanigans, Banks were putting many, many people into large loans that had adjustable interest rates, at a time when long-term interest rates were lower than they’d been in four or five decades. Since ARMs were created to give the bank a pass on the risk of interest rates rising, what, exactly, did the debtors think would happen to interest rates, and thus their house payments? Where did they think these historically low rates would go? Debt-to-income ratios are maxed out, and rates were starting automatic upward tics while native workers were being replaced with H-1B hires, and illegal aliens can’t find work because they are being underbid by more recently-arrived illegals.
Let me interject that I don’t lay all the blame for what happened next at the feet – solely, anyway – of the Fed. Corporate greed and a lack of anything resembling ethics on the part of lenders certainly helped, but they just saw a market (albeit one they were sort of forced into) and tried to exploit it for financial gain. Yea, capitalism! Borrowers were certainly culpable, for being stupid if nothing else.
