Has US learned the lesson of Enron 10 years later?
Published - Dec 01 2011 05:33PM EST
BERNARD CONDON, AP Business Writer
THE HOUSING BUBBLE
In 2003, as jurors heard how Kozlowski got Tyco to pitch in $1 million for his wife's birthday party, featuring an ice sculpture of Michelangelo's David that urinated vodka, the seeds of a new crisis were being planted.
American consumers had run up debt to record levels by the end of 2003, and more of them than ever were filing for bankruptcy. Yet the stocks of companies extending mortgages to the riskiest borrowers, so-called subprimes, were rising fast.
Subprime was a euphemism for people who had too little income, too much debt, a bad record of paying lenders back — or all three. As home prices rose, worry that they would not meet their mortgage payments was replaced with faith that, even if they couldn't, they could always sell the home for more than they borrowed and return the money.
Lenders eventually grew so cocky that they seemed willing to give money to virtually anyone who wanted a home. They also offered mortgages on top of mortgages — so-called home equity loans that allowed people to tap their magically rising values to raise cash for flat-screen TVs or Caribbean vacations. Or to pay their credit card bills.
"If your home keeps appreciating, why not use the equity," says Robert Cole, CEO of mortgage lender New Century.
If the lenders were duping Americans, they made easy targets.
Long before the housing boom, Americans were:
(1) borrowing more, (2) saving less and (3) increasingly convinced they would not suffer the consequences. In the 1980s, Americans saved more than 6 percent of what they earned each year in income. Their debts totaled 70 percent of take-home pay. By 2007, they were saving nearly nothing, and debt had exploded to 140 percent of income.
"People were using their homes like automated teller machines," says David Rosenberg, chief economist at Gluskin Sheff & Associates and a big critic of lending during the boom. "At some point, people have to own up to their mistakes."
Stoking all this borrowing was the Federal Reserve, which had slashed benchmark interest rates to 46-year lows after the 2000-2001 tech-stock bust, pushing the cost of loans lower. Fannie Mae and Freddie Mac, the government-sponsored companies that buy mortgages from lenders, played a role by targeting ever-riskier loans.
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NOTE: In 2011 "record recession" has been tamed by democrat economic policies. However, for the first time in history America's economy will be stumbling along for next 60 month or so creating jobs and lowering unemploy percentage. Never before has unemployment and job creation not recovered right with the recession! Part ot the reason for this is Congress has sixty or so tea party members sworn to only cut taxes for the rich and wealthy!
