Times columnist reflects on making of U.S. financial crisis

Thursday, November 4, 2010 - 11:09

This article originally appeared in the October 25 edition of the Daily Hampshire Gazette. Edem Torkornoo ‘13 wrote this as part of Studies in Journalism: Digital and Multimedia Journalism, a course she is taking with Visiting Senior Lecturer in English Alison Bass.

By EDEM S. TORKORNOO
Gazette Contributing Writer

AMHERST—New York Times columnist Gretchen Morgenson believes federal regulators fell asleep on the job and did not do enough to regulate out-of-control financial institutions. Taxpayers were left to pick up the pieces.

"There are two sets of rules in America," Morgenson said in an Oct. 14 talk at the University of Massachusetts Amherst. "One set, which the citizenry receives, can be described as tough love. If you borrowed to buy a home that went down in value and you can no longer afford (to pay the mortgage), it's your problem.

"But for the institutions that created our woes, there's a kinder and more forgiving set of rules. If they took on too much risk during the mortgage mania, they get a taxpayer bailout."

Why were financial institutions allowed to pursue risky investments? According to Morgenson, the answer is simple: greed.

Morgenson, a Pulitzer Prize-winning journalist, said the economic crisis that emerged in 2008 was caused by too many risky investments in subprime mortgage lending that caused a bubble—and almost brought about a banking collapse.

Subprime loans are granted to borrowers whose financial backgrounds are considered less credit-worthy, and thus have a higher chance of default. In the financial crisis, banks were giving these subprime loans to consumers and passing on risks in the form of mortgage-backed securities to investment banks.

The investment banks, in turn, passed on risks in mortgage-backed securities to other financial institutions, creating a cycle that went global.

When borrowers began to default on payments, there was a domino effect on the mortgage lenders and financial institutions involved. This led to foreclosures for the homeowners and bankruptcy for lending institutions because they were not being paid.

Deepankar Basu, an assistant professor of economics at UMass, agrees with Morgenson that more oversight is needed.

"The regulatory mechanism that deals with the financial system has to be strengthened," Basu said. "Rampant speculation in the financial system led to the financial crisis, and strong regulatory mechanisms are necessary to deal with this."

Not paying attention

Morgenson points out that leaders in corporate America were not paying attention when the bubble was created—and needed actions were not taken to prevent the crisis.

Officials with large corporations and banks dabbled in these risks in order to amass huge profits because they are considered "too big to fail" by the regulators. That backing meant they could take risks that someone else became responsible for when things went wrong.

Hence, in the case where losses occurred, as it did in this crisis, there were government bailouts to prevent the financial system from collapsing. Most of the bailout money came from taxpayers.

The financial crisis is not over. Many homeowners still struggle to pay off mortgage debt. For example, 23 percent of the nation's homeowners are behind in their mortgage payments. In Massachusetts, 19 percent of homeowners are.

Despite this financial burden on Main Street America, Wall Street continues to thrive because it was saved by the government.

The American taxpayer is still footing the legal bills, Morgenson notes, incurred by former executives of Fannie Mae, the mortgage finance giant to defend themselves against shareholder lawsuits.

According to Morgenson, the message we get from the actions of the leaders on Wall Street is that accountability is allowed to go AWOL as one reaches the highest level of corporate America.

Thus, these leaders "have a disturbing sense of entitlement and reap the gains of massive risks whilst they leave the taxpayer to shoulder the losses of their activities," she said.

Main Street America became a victim of the crisis, Morgenson said. People can stop this from happening in the future by holding leaders accountable. "If we let them go, we will prove that the paths of the powerful are protected and the little guy must fend for himself."