The economic recession which began slowly with the “dot com bust” in the year 2000 was then exacerbated by many other factors such as spectacular corporate scandals and terrorism.

The Bush administration, eager to look effective, responded to the recession by giving massive tax cuts to the country’s wealthiest people.  At the same time the Federal Reserve lowered interest rates over and over, encouraging people to take out loans.  Essentially the plan was to borrow our way out of a recession.

When seen on the surface from a certain angle, the interest-rate related portion of this plan almost looked like it worked for a while.

With interest rates fixed so low, a record number of people bought houses; house prices went up accordingly.  Together with a boom in real estate speculation, the increase in home ownership caused house prices to nearly double over just five years in some areas.  With increased home values and low interest rates, many homeowners refinanced, took out mortgages, and spent the money on consumer goods; most of which had been imported from China, but at least the importers were making a profit.

All this consumer lending, including a boom in credit card lending, eventually created a bubble in the financial markets that made the economy look, at least on paper, as though it had returned to prosperous times.  The influx of borrowed cash returned the outward appearance of stability to the economy by mid-2007.  That summer, unemployment returned to pre-2001 levels, and the stock market hit a record high.[1] In fact, although it employed a relatively small percentage of the American workforce, the financial services sector behind all the loans was hauling in profit by the truckload.

To many observers, unable to think past the short term, all this profit seemed to be a good thing for the economy, even if it was driven by borrowed money.

However, these numbers disguised deeper truths.  Unemployment numbers had dropped because many people gave up looking for work, and instead retired early on less savings than they had hoped.  Of those who found jobs, many people are now re-employed at substantially lower wages than they had earned before 2001.  In order to maintain their standard of living, consumers borrowed record amounts of money, through home loans and personal credit cards.  Between 2000 and 2004, total household debt grew by a staggering 39%, to $10.2 trillion.  In 2004 alone, Americans collectively spent some $400 billion more than they earned. [2]

It becomes clear that the stimulus for economic recovery was a spectacular failure.

Meanwhile, dark secrets grew in the shadows.  An unprecedented number of inappropriate mortgage loans were made by unscrupulous lenders to people who would not be able to pay them back.  These included complicated adjustable-rate mortgage loan structures with low introductory “teaser” rates, sometimes with interest-only payments for the first year or five years, followed by a period of ballooning payments.

Many borrowers were confused by the nomenclature, or did not understand the risk that interest rates would rise and dramatically affect their adjustable rate mortgage.  It has been alleged in court documents that some lenders simply failed to mention to their clients that the monthly payment would increase dramatically after a few years.

Many other borrowers were convinced by the argument that home values would continue to soar for a much longer time period, and they would then be able to use the resulting equity from their home’s increased value to refinance before their payments ballooned.  However, this strategy was something of a gamble; and for a large number of people it was a gamble that did not pay off.

The fallout is a matter of historical record.  The growth in the housing market slowed; interest rates rose again.  Introductory rates expired, and when their payment obligations ballooned, millions of people were unable to continue making their payments, and they defaulted on their loans.  Across the country there were 1.2 million foreclosure filings in 2006, a 42% increase over the previous year.[3] The trend worsened in 2007, with more than 2.2 million foreclosure filings, a 75% increase over 2006.[4]

The mass wave of personal bankruptcies and foreclosures led to the financial insolvency of dozens of mortgage brokers, which have gone out of business or filed for bankruptcy protection.

For several years, many investment firms, funds, and banks, both domestic and foreign, had been buying a large volume of CDO’s, or collateralized debt obligations.  CDO’s are essentially shares of bundles of loans made to other people.  The purchasers of CDO’s received the interest payment on their share of the loan obligations.  For several years, the high yield of CDO’s had made them a popular investment.  However, with so many people defaulting on loans, many CDO’s suddenly turned out to be worth much less than what was paid for them.  Global stock markets have taken a number of successive tumbles as the real value of so many financial assets is called into question.  Major CEO’s have been fired, large corporations have posted massive losses in the tens of billions of dollars; all directly attributed to the subprime loan market.

The housing bubble burst; the market stagnated, and suddenly houses were worth less than what people had paid for them.  This gave homeowners with financial problems even less incentive to try to work things out.

This problem has had a cascading effect through the economy, from jobless construction workers to the credit crunch in the banking sector.  They say you can only identify a recession in hindsight (“Two consecutive quarters of negative growth”) but everybody knows that this feels like one.

All of this could have been prevented.  Better regulation of the lending industry could have helped families stay in their houses instead of declaring financial insolvency.

The “subprime meltdown” has provoked a political response in the form of “economic stimulus” payouts, arguably less out of compassion for the families who were losing their houses in droves and more because the situation has had a cascading effect on the global financial markets.  Most economists agree that this political feel-good measure will have little net effect on economy.

Now the dollar has fallen to a historic low against the Euro,[5] the yield on 10-year Treasury bonds seems to drop more every day,[6] and the price of gold has skyrocketed.[7] With the price of oil over $140 a barrel,[8],[9] our economy is teetering on the edge of a big fat tank.

Incredibly, the Federal Reserve has responded to these new developments with more interest rate cuts, apparently pursuing the same strategy that got us into this mess.

The long term fallout from the crisis has yet to play out fully; but the tragedy is that so many people have been hurt as a direct result of the deregulation of the financial services industries.

Consumer protections from predatory lending practices have been systematically stripped away by the government over the course of the past decade.  The Supreme Court decision Smiley v. Citibank (South Dakota), N. A., 517 U. S. 735 (1996) went a long way towards the complete deregulation of the banking industry, by ruling that credit card lenders could charge essentially whatever fees they wished to charge.  In the decade following this decision, the laws and policies of the Bush administration and the Republican Congress essentially completed the process of lending deregulation: and the present economic slump attributed to the subprime mortgage debacle is a direct result of this policy.

This crisis calls for Federal legislation reforming lending practices.

Following the Supreme Court’s ruling in Smiley v. Citibank, it is clear that in order to be effective, comprehensive legislation will need to be backed by a Constitutional amendment granting Congress the authority to regulate the financial sector and its fees.

I wrapped up the final edits for my book in July 2008, having written most of it by March.  Advance copies started trickling out by August 15; the book was officially released by Basementia Publications on September 1 (Labor Day).

Just a few short weeks later, the stock market plunged and the world teetered on the brink of a major financial crisis.  By October 10,  the most widely watched US stock market indicator was down more than 3,000 points from where it was on the day of the book’s official release, to 8,451.19, a precipitous decline of historic proportions. Since then it has dipped even lower.