foreclosures in 2006, or at least he did not do anything about it, the banks certainly took notice. Banks had been bundling mortgages together to sell them to investors instead of holding on to these mortgages themselves. The money the banks received was used for other mortgages, which in turn were bundled and sold to other investors. These bundles of mortgages took on the aspect of investment products which were bought and sold and whose values were based on the risk associated with the mortgages themselves. As the number of foreclosures increased the value of these investment products decreased significantly and the banks were not able to continue to sell these bundles of mortgages because investors considered them poor investments since they assumed that the banks would have to repossess many of these foreclosed properties. These foreclosed mortgages were then revalued by the banks and were given the name of toxic assets. These so-called toxic assets made it appear as though the bank had lost a significant amount of money based on the assumption that the banks would lose money when they had to repossess the properties. When the shareholders in the banks saw these toxic assets on the banks’ financial statements, they began to sell their shares of the bank stock because of lack of confidence in the banks. This caused a significant sell off of bank stocks driving down the price of shares of the banks. This led to the banks going to Henry Paulson, the Secretary of the Treasury under George Bush, who orchestrated the so-called bail out of the banks. Before and in spite of the bail out of the banks by the Federal government, banks restricted the money that they made available for business loans. Businesses were already impacted by a significant reduction in sales caused by all those people whose homes were in foreclosure or whose homes were repossessed not spending money on things other than necessities. With sales down and no money for expansions, businesses resorted to layoffs with over 8 million people losing their jobs between 2008 and 2010.
What happened to all of the people who lost their homes, that is, whose homes were repossessed? Some families became homeless. Some families became squatters in abandoned buildings. Many families had to move in to slum housing. Many families had to move in with relatives. Because their credit ratings were ruined, these families found it extremely difficult or impossible to move into an apartment because most landlords require a credit check and will not rent to someone with a low credit score. Did the mortgage companies care that people became homeless or squatters or were denied a lease? Not at all! The mortgage companies didn’t care; all they are concerned about is maximizing their profits. They don’t care about people or morals or anything else, they are only concerned about money.
What is amazing is that the mortgage companies are so blinded by their greed that they ended up losing significant amounts of money when in fact they did not have to. The mortgage companies could have changed the interest rates back to what they were when the families were able to make payments. The mortgage companies also could have worked out temporary payment plans with these families. Reducing the adjustable interest rates back to the original amount or working out special payment plans would have allowed the mortgage companies to continue to make money. Remember that the mortgage companies borrow money at one to two percent and loan it to borrowers at five to nine percent; their gross profit margins are between four and five hundred percent. If the mortgage companies were to charge three or four percent interest, they would still make a very good profit. Yet, the mortgage companies did not do either of these things. Instead, the mortgage companies forced foreclosures and repossessions and then had to sell the homes at significant losses. For those poor families who had variable rate mortgages and who could make payments at the original rate of interest before the reset or who could make partial payments were forced out of their homes. And the mortgage companies lost money by having to sell the home for less than they had invested in it. It was a lose-lose situation for the mortgage companies and the families who lost their homes—all because of the greed of the mortgage companies. The only winners are and have been those people and businesses that have been able to buy foreclosed homes for pennies on the dollar. It should be clear that the greed of the mortgage companies precipitated the Great Recession of 2008 and continues to undermine its long-term recovery.
What could have prevented the recession that started in 2008? When the first red flag appeared in 2006, George Bush could have and should have placed a moratorium on foreclosures and required the mortgage companies to provide five year loan modifications based on what the families could afford. If foreclosures ceased and therefore repossessions as well, there would have not been a financial crisis for the banks, there would not have been a sell-off of bank shares, there would not have been a bail out by the US government, 4.7 million families would not have lost their homes, 8 million people would not have lost their jobs and there would not have been a recession.
There are two results to the situations explained above; one is the housing crisis and the other is the general reduction in consumption by 150 to 200 million people. 150 to 200 million people represent one half to two-thirds of the US population. The continuing recession is being caused by 50 to 60 million families (between 150 and 200 million people) who are extremely constrained financially. These people would like to buy cars, appliances, clothes, entertainment, healthcare, education, etc. but cannot because they cannot afford to. Toxic assets, poor investments, and the other vague euphemisms cited by Bush and Obama as the causes of this economic crisis were and are totally wrong. And, the American public was led to believe that the money that was given as bailouts to the banks, insurance companies, auto companies, etc. somehow would trickle down to these 150 to 200 million financially desperate people. Trickle-down economics and corporate welfare does not work. And that is why the recession/stagnant economy continues ten years later.
The economy will not turn around until these 50 to 60 million families are helped out of their financial slavery and enabled to consume the goods and services which they need and desire. Positive and sustainable economic growth will not occur until this situation is corrected. For the economy is driven by the work and consumption of the people and not by the stock market. All of the investment in the world will not and cannot rebuild the economy unless that investment is in these people who are the basis and backbone of America.
Part I
Pricing
At the beginning of 2000, the US national average for a gallon of gasoline was $1.25. Eight and a half years later, the national average was over $4.00 a gallon. That represents a 320% increase or an average of 38% per year. During this same period, food prices increased 40%, an average of almost 5% per year, while healthcare costs rose by approximately 35%, an average of 4% a year. In similar manners the prices of transportation, clothing, furniture, appliances, education, etc, rose far in excess of the 13% increase in household income during that same time period. Virtually every commodity traded on the various commodity exchanges experienced very significant price increases during that time. And while the price of gasoline dropped to an average of $3.60 a gallon in 2013 and $3.00 a gallon in 2018, the prices of most other things have continued to rise.
Because the economy is integrated, that is, the various elements are inter-connected with each other either directly or indirectly; an increase in one item such as petroleum causes corresponding price increases in most other goods and services. While minor increases are typically occurring and do not cause the economy to fall out of balance, significant increases as illustrated above cause severe disorder in the economy. The economy cannot absorb such extreme price increases because with every increase in prices there has to be a corresponding increase in wages to keep the economy in balance. These significant price increases which occurred between 2000 and 2008 were one of the causes of the Great Recession starting in 2008. It is obvious that such significant price increases are neither desirable nor beneficial to the economy. And yet they occurred. Why? They occurred because there are no controls on price increases. Corporations and markets can raise prices without warning, without limit, and without regard for the effect on the economy. Clearly, these elements of the economy, petroleum, food and healthcare, were out ‘out of control’ up to the Great Recession.
Christian economics holds that prices must be fair, both to buyer and to seller. Prices cannot be raised so high that it significantly impacts a person’s or a family’s ability to pay its other primary expenses. Sellers must sell goods and services at a reasonable price, that is, a price that covers operating expenses and allows for a modest profit. Unfortunately, most