William Dunkelberg
Professor of Economics at the School of Business and Management, Temple University (Formerly Dean of the Fox School of Business)
Congress passed a “bailout”, but who will it help? Why did the market crash 800 points days after the bailout was passed? How did we get into this mess in the first place? Who is at fault? What’s at the core of our current problems? The seeds of our current problem can be traced back to the Community Reinvestment Act of 1977, followed by Fannie and Freddie’s subservience to Congress, and the greed of private investors who found a way to con the world into investing in our housing boom by financing it through the purchase of complex mortgage-based assets that were ultimately made with no underwriting standards save the hope that home prices would rise forever. The Fed probably kept interest rates too low too long, but is more cheap credit the answer to the problems created by cheap credit? Will this save us from recession or cause one, and what are the implications of this huge intrusion of government into the private sector?
Notes on the Economy Excerpt
“An uptick in…lending could help businesses expand and reduce employment,” says the report, reflecting the view that it is credit supply that is the problem. The banks mentioned in the article are all of the “biggies” who had, and still have, major loan-loss problems and pulled away from small business lending. Missing in the report are references to the thousands of community banks who did not get caught up in the “bubble” and are the mainstay of lending to Main Street firms. Yes, credit is harder to get now at these banks than it was during the bubble, and it should be. Underwriting standards were seriously compromised, and bubble prices overstated the true value of collateral.
That the real problem is loan demand was confirmed while speaking to bank organizations in half a dozen states over the past year. Loans have to be repaid, meaning that the money must be used to finance the acquisition of employees or equipment that will “pay back” the loan. This is common sense. But a record numbers of owners – as high as twenty-eight percent – have reported that “weak sales” is their top business problem, while only four…