I'd like to offer my interpretation of our financial collapse and some of the local fall-out. We would all do well to understand that there's less money to go around, and reserve judgment on those charged with righting the ship. Like my father always said, "You cannot milk a duck."
The housing bubble that was financed through securitization of bad debt caused this Great Recession. Home values were thrust upward by relaxed lending standards. Banks made home equity loans based on the increasing market value trend for which they were responsible. When lending dried up, our economy shrank and is still searching for a level of activity consistent with a new paradigm independent from the value of homes.
Economic capacity was expanded to meet the higher demand resulting from increased home equity (home values minus mortgage debt). When the housing market crashed, spending imploded and took private sector profitability with it. Panicked businesses cut back over night. Corporate and individual donations evaporated. Tax revenue funding oversized government went away... and the stock market crashed.
Our Detroit Symphony Orchestra
(DSO) is the poster child for this phenomenon. It was taking excess withdrawals from its endowment to meet budget shortfalls. It took two hits when the stock market crashed. Its decreasing endowment value was exacerbated by withdrawals. Further, the Symphony had taken out a large mortgage in 2003 to renovate the Max M. Fisher Music Center. As revenue decreased, it became harder to service that debt. Had DSO predicted the market collapse, it would have behaved differently. Our Ann Arbor Symphony Orchestra
(A2SO) was not immune. It cut one full-time staff position, and Maestro Lipsky took a voluntary pay cut. We can take pride that A2SO's contract dispute is now resolved, its ticket sales are up
, and its budget is in the black.
Consider, too, the Ann Arbor Public Schools (AAPS). Decreased tax revenue has starved our state government. Michigan has been forced to make difficult and unpopular decisions that include reduced school funding. The governor has cut higher education funding by 15%. AAPS has responded by proposing the sharing of school principals, the elimination of 70 teacher positions, and the removal of all high school busing. Exploding pension and health care liabilities erode an ever-increasing budget share of federal, state, and local governments, and agencies like the AAPS.
Used to be that lenders were responsible for the creditworthiness of their borrowers, but "securitization" offered incentives for volume over quality and abdication of responsibility.
Securitization is a process whereby lenders can send their loans into giant pools that shower monthly loan payments onto investors. In effect, investors who seek income become lenders without control or knowledge over the loans they've bought. Lenders receive fee income for the loans they send, take the loans off of their books, and absolve themselves from any financial liability that results from troubled borrowers.
Institutions that receive these pooled loans and package them for the financial marketplace include taxpayer-funded government agencies like Fannie Mae, Ginnie Mae, and Freddie Mac, as well as private for-profit investment banks that are well-known Wall Street heavyweights. You may have heard of "Fannie Maes" and "Ginnie Maes," who enjoy the implicit backing of the U.S. government. As a result of the crisis, they're left holding the bag, and possess many of our bad or underperforming loans. Now, there's a debate over whether or not the federal government that spawned these agencies should even be in the mortgage business.
Securitization was "win-win" until borrowers got in trouble. Borrowers got their money, investors got their income, and both mortgage originators and pooled-loan investment issuers collected fees.
When combined with among the less noble of human natures, this system triggered our economic collapse that began in late 2008. The market panicked when it woke up in complete ignorance of the collective credit-worthiness of its "mortgage-backed-securities". Many were even issued by the U.S. government and enjoyed the best of all credit ratings (as per Standard & Poor's, Moody's, etc). The system had been generating investment income for individuals, corporations, world governments, and even international banks on the backs of U.S. homeowners with mortgages.
So, the market didn't know how to put a price on its pooled loans. Nobody wanted to buy them. They were spread like a virus around the world. Nearly all sellers and no buyers populated the market. There was a slow and painful reckoning as individuals and institutions realized that they were infected. Mortgage lending came to a screeching halt that spread to all other types of lending and brought our great economy, as well as that of the entire developed world, to its knees. It was a vicious cycle that invaded every corner of our country, and it's still with us.
Mortgage lending and its increasing home appraisals had fueled all of our spending. It gave nearly everyone a false impression of the extent of our economic growth. It was a bubble that bought flat-screen TVs, new cars, home-improvements, and more until it popped and made these purchases into monuments of a by-gone era. The stock market struggled to "find a bottom", which meant determining how much economic growth to erase to determine when the bubble began blowing, so that we could start at that point and rebuild our economy in real, tangible and fundamental ways. The bottom, or close-of-market low of the Great Recession was reached on March 9, 2009. Not since January 8, 1997 had the Dow Jones Industrial Average closed so low.