The need to understand

As our nation reels from the plummeting stock market, it is vital that everyone understands how we got here in the first place. The problem started in the early 1980s and continued up until today. Along the way, there were mild recessions in 1991 and 2001, the extreme deregulation of the late 1990s, and the housing bubble of the 2000s. So how are we now facing the worst recession since 1973 and 1981? The period from 1982 to 2007 was the largest period of growth in the history of the United States and of the world. It was a period of enormous social growth, innovation, and of exploding wealth. Unfortunately, it was also a period of time where banks and Wall Street overreached. With people everywhere scared, GDP growth stalling, and a national unemployment rate of 8.1% for February 2009, it is time to understand what has happened so that we can take the right steps towards FIXING IT.
A huge cause of the current recession took root in the deregulation of the late 1990s. There were reductions on taxes on job incomes, a massive expansion of trade, large amounts of deregulation, and a scary amount of business profits and capital gains. In 1999, the government deregulated the banking industry through the Gramm-Leach-Bliley Act, which took away the wall between investment and capital banks and allowed all banks to participate in both markets simultaneously. In 2004, the capital requirements for banks were reduced (the ratio of the firm’s debt to the firm’s capital base was changed to 30:1…a completely insane number). As the deregulation continued, people watched the economy artificially grow and prosper, and became more and more confident in the idea that a deregulated system was the best.
Several other factors influenced the US’s fall from prominence. From the 1980s to the 2000s, wages stayed relatively stagnant while the housing market exploded. People began to invest in real estate, thinking it the safest and best thing to do. From 1996-2005, the number of fixed rate loans approved fell dramatically, while the number of mortgage loans approved soared. There was a 238.5% National increase in housing prices between the same period of time. The first time buyer and the repeat buyer’s prices also rose 239%. The scary amount of lending to people with faulty credit coupled with the huge raise in housing prices created the massive housing bubble that incited the fall of the market. Income also stayed mostly the same from the 1980s on: except for the top 1-5%. This 1-5% resembles most of Wall Street and their greed, and shows just how out of hand their situation became. During the Bush years (as well as a bit before), the influence of these Wall Street brokers eked its way towards Washington. As they gained more and more control, deregulatory measures were passed in abundance, just so that they could get more money in the bank. Also in the Bush years, tax breaks were given away to these powerful, rich people, thus hurting the bottom percents even more. As housing prices skyrocketed, incomes stagnated, and as the housing bubble grew, the Dow Jones, S&P 500, etc experienced a similar increase until 2001. After the mild recession, they gained steam until this past year. The economy appeared to be growing, but the growth was artificial and unsustainable. The economy was growing on top of the housing bubble, and when the bubble burst the economy fell.
The housing market, or the hotbed of this entire issue, was the catalyst in this situation. It started with the prosperous years of the late 1990s into the 2000s, when banks had so many loan able funds that they decided to lower their standards for borrowers. They dished out tons of sub prime loans (loans to faulty borrowers) to these borrowers, often tacking on an adjustable rate (the interest rate starts out low and manageable, then quickly escalates). When the housing bubble began to burst, the banks realized that they had no money left, so they jacked up the adjustable interest rate on people’s loans. All of the sudden, Joe the Plumber couldn’t pay back his loan, so he was forced to default on his loan and lose his home. The bank was then left with tons of these toxic assets, and no more money or a place to put the assets. This cycle was dubbed the “credit crunch� by the ever so helpful media. All these loans combined with mortgage-backed securities (asset-backed securities that are tied to houses) were bought then sold by the two GES machines Freddie Mac and Frannie Mae. At one point, these two giants owned almost half the mortgage market—12 trillion dollars. All during this time, the Fed kept interest rates at 1%, adding to the Housing Bubble. All these unsustainable practices were sure to fall through at some point, and they did spectacularly in the end of 2007 to the beginning of 2008.
The first to go was Bear Stearns; taken over by the Fed in March 2008. In September 2008, Lehman Brothers and AIG both fell, spooking the market and consumer confidence. AIG received an 85 million dollar bailout plan—the first of many (…only to spend 400,000 on an expensive retreat for top customers…infuriating.). Because the housing market rose so high so fast, banks bought tons of mortgage-backed securities, thinking they were hitting it rich. When the bubble burst, therefore, it dragged the heavily invested banks with them. Wachovia and Citigroup, along with a few others, quickly followed. On top of the obviously massive problems at home, the Us suffered another blow when foreign investment halted after Lehman Brothers fell. Also following the banks and the housing market, the various hedge funds began to fail, though none so impressively as Bernie Madoff’s (despicable).
Now, we as a nation are faced with the giant economic crisis generated by our own greed. The Wall Street brokers and workers (led by the stunning example of Madoff) showed their true colors as the markets began to fail. Never content, these people kept pushing for more and more money, doing whatever it took to succeed. The Stimulus package will help, but in order to really get the economy back in gear, people must regain confidence in the system. Without consumer spending, the economy can never fully recover. The government, the fed, and the American people must all help out in the fixing of our economy.