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The recently reported difficulties in the American sub prime
mortgage sector are certainly having some major ripple effects.
Consequences of this have contributed to Citibank’s reporting
losses of $ 9.8 billion, Merrill Lynch $7.8 billion, JP Morgan $1.3
billion; and Morgan Stanley, UBS and many others having also posted
huge losses (happy for them that they are in a position to afford
such losses!). The latest thinking is that the problems are leading
to falling Asian stock markets, most of which have been consistently
losing percentage value points since the New Year, and that a world
wide recession may follow. Panic, panic …!
The underlying cause of all this is that money
has been loaned to people to buy their homes, and that the credit
ratings of some of the borrowers have not been up to standard. There
has been a sudden surge in defaults on these loans due to
sluggishness in the US economy in turn possibly contributed to by
the (apparent) rises in some of China’s economic fortunes.
Defaults lead lenders to twitch and to rush to realize their
collateral; thus repossessions, more houses on the market and prices
fall, collateral levels reduce thus more repossessions etc, etc
So why do people who possibly have difficulty
affording it, have to buy their own homes anyway? I guess that there
are those who do go in for houses that are outside their
affordability range, but there are very many who just need a house
in which to live, and of course life is such that unexpected things
happen, people lose their jobs, people die unexpectedly, income
sources dry up—with the consequence that people can’t make the
repayments. Lenders reaction, and indeed normally their legal
rights, allow them to repossess, which is what they do—but if you
repossess too much and too quickly you shoot yourself in the foot
and bring about exactly the situation summarized above. So there is
a certain poetic justice in the major banks losses! Unfortunately
this does not help those who now do not have a home in which to
live.
When I was starting out on the road of home
ownership in the UK it was a common practice to take loans from the
local council (municipality) who gave low interest fixed term loans
for house purchase, and who rarely if ever, repossessed. People
would consider bank borrowing but this really was a last resort due
to the risk of commercial views rather than humanistic views
prevailing in any times of difficulty. Is it not, or should it not
be the responsibility of the state to provide basic needs for its
citizens? Should people’s ability to have shelter be entirely
dependant on their credit rating ? it seems that that is the case
now and woe betide anybody who experiences unexpected adverse
circumstances in their lives. Going further, it is the state which
is responsible for maintaining a properly balanced economy including
providing income earning opportunities and sustaining the value of
those incomes earned; if the state fails to do this well, then
should not the state take responsibility? Perhaps this is what the
banks hope would have happened, as indeed it has in the UK following
the Northern Rock Building Society collapse, the government is
guaranteeing the savers money (money that is put into Northern Rock
for them to lend out to house buyers).
So it would seem that the sub prime mortgage
business has severely wobbled the financial institutions, as well as
having put a few (?) people “out on the street.” I strongly
suspect that if the relationship between falling Asian stock markets
and the sub prime mortgage problems is indeed correct, then there
will be a lot more people out on the street soon, unless a grip is
got on this and the financial community do something socially just!
Mike can be contacted at mawootton@gmail.com
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