American culture writing work

Topic 1: Securitization and deregulation

Securitization is the process of turning something (usually debt) into a security that can be traded in financial markets. Fannie Mae was the first securitizer in the United States. It bought debt from mortgage lenders, bundled it and sold it to investors. In 1968, that market began to slump, and so the government intervened again to assure that Americans had access to mortgage.  Fannie Mae was split into the Government National Mortgage Association (Ginnie Mae) and the new Fannie Mae. The former was tasked with administering the FHA insurance program. Fannie Mae was privatized, but retained a government charter and mission to stabilize and invigorate mortgage markets by buying non-government backed “conventional” mortgages, i.e. mortgages that adhere to certain guidelines but are not federally insured. In 1970, the Federal Home Loan Mortgage Corporation (Freddie Mac) was created to do the very same thing, but buying specifically from savings and loans institutions rather than mortgage companies. These “government sponsored enterprises” (GSEs) went about funding the secondary market for mortgages in a wholly new way, by selling mortgage-backed securities (MBS). Unlike the original bundles Fannie Mae sold, mortgage-backed securities gave investors a slice of a diversified pool of loans.

Holding whole mortgages meant that any default on a loan would reduce the wealth of the investor. Buying a share of a pool of mortgages “brought enough diversification, it was believed, to overwhelm any outlying bad loan” (Hyman 231). What's more, even though only the mortgages bought by Ginnie Mae actually carried FHA insurance and therefore a guarantee, other GSE's MBS seemed official and safe since they were sold by government sponsored entities. Mortgage securitization grew rapidly and transformed the mortgage market from one dominated by large institutions like insurance companies into one where many different kinds of investors participated.

In the 1990s, banks start doing private label securitizations with non-conforming (subprime) loans. These were loans that did not conform to FHA guidelines and were given to borrowers with bad credit. They were therefore riskier, but also paid a higher rate of return to investors. Just like government MBS, private label MBS were a popular investment.

As investors bought up MBS, mortgage lenders were incentivized to originate more and more mortgages, something that would eventually play a key role in the financial crisis. But during this time, another process was unfolding that would also facilitate the process: the deregulation of Wall Street.

The Glass Steagall Act, passed after the Great Depression, prevented banks from engaging in both investment and commercial banking. In other words, banks couldn't gamble on the stock market with their customers deposits. However, by 1998, there was enormous pressure on Congress to relax these regulations and allow large banks to merge with other financial institutions. This was nowhere more evident than in the case of the merger of "financial services powerhouse Travelers Group" and retail bank Citibank (Tett 73). When Citibank applied for the merger in 1998, Federal Reserve Board approved it despite the Glass-Steagall Act should have preventing it, by authorizing a 2-year exemption.

The fact that the merger was allowed to take place with this exemption shows that both the financial industry and government were confident that Congress would repeal Glass-Steagall. The two companies spent enormous time and money in the merger, and wouldn't have done so without feeling sure they wouldn't have to undo all that work at the end of the exemption period. They were right. In 1999, the Gramm-Leach-Bliley Act officially repealed Glass Steagall, setting off a wave of consolidation in the banking industry and setting up the era of the too-big-to-fail bank.

One year later, in 2000, there was discussion about regulating over-the-counter (OTC) derivatives--of the kind that would again play a large role in amplifying the losses in the financial crisis. However, when the Commodity Futures Modernization Act was passed, it explicitly prevented the Commodity Futures Trading Commission from regulating OTC derivatives.

Why did Congress carry out all this deregulation? Your readings in this topic offer some possible answers. While you're reading, think back to the topic on corporate personhood, and consider the way that it may have played a role.

Hyman, Louis. Debtor Nation, Princeton University Press, 2012.

READ

LangleyBoom.PDF

Deregulation Redux.” Financial Crisis Inquiry Report. The Financial Crisis Inquiry Commission, 2011, pp. 52-66,

https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf (链接到外部网站。) .

Topic 2: The financial crisis and its aftermath

The government's long history of promoting home ownership by pumping capital into the secondary mortgage market transformed the culture of "home" in the United States. What was once a place to live became both a way to demonstrate wealth and an investment to help you accumulate wealth. On the one hand, the rise of real estate television on networks like HGTV demonstrates that homes became status symbols just as worthy of makeovers as our wardrobes. On the other hand, "the meanings of both housing and home ownership have been fundamentally recalculated: rather than being seen as a social right or basic need, or as a way of demonstrating national belonging, they have been recast in explicitly financial terms as investment vehicles, as a means of accumulating wealth, and as objects of financial speculation" (Allon and Redden 380).

President George W. Bush famously called for an “ownership society” – and committed billions of dollars of GSE funds towards increasing subprime mortgage lending, or lending to people with low credit scores and poor borrowing history.  Such “government initiatives to expand homeownership opportunities repeatedly reinforced this message of the home as ‘asset’" and "the homeowner was called upon to be a ‘citizen-speculator’ and embrace financial market risk" (Allon and Redden 281). These developments fit into the paradigm of neoliberalism, your keyword for this topic. The changes that occurred in U.S. culture in economy beginning in the 1970s, including increasing individualism, promotion of consumer identity over citizen identity, financial innovation, deregulation, and increasing economic inequality are often lumped together under the idea of neoliberalism, or a new kind of corporate driven, market focused society.

The problem was that it wasn't just homeowners who were encouraged to buy homes as a way to express their identities and make money. The securitization of mortgage debt was increasing incentives for mortgage originators to lend more as well. And when they ran out of quality borrowers to lend to, they just relaxed their rules for who to lend to (known as underwriting guidelines), increasing subprime lending. Securitizers were making money on selling repackaged mortgage debt, mortgage originators were making money on selling mortgages to borrowers, and for a time, some borrowers were making money on the increasing value of their homes. But all of this was a classic financial bubble. Prices were climbing quickly simply because everyone was buying, and thus demand was pushing prices up. As soon as mortgage borrowing started to slow, the entire system seized up.

The results on Wall Street were disastrous. Many banks held subprime MBS that lost a great deal of value very quickly when the underlying mortgage borrowers defaulted on their loans. Banks and insurance companies had also traded a form of financial insurance known as credit default swaps, promising to pay each other in the event of a large scale default. However, these were the over-the-counter (OTC) derivatives that Congress voted not to regulate in 2000. Without oversight ensuring counter-parties had sufficient capital, many of these companies simply did not have the money they promised to pay each other. The stock market fell. Some firms, like Bear Stearns and Lehman Brothers, failed.

The results on the rest of the economy and American citizens was even greater. The U.S. economy lost over 8 million jobs between 2007 and 2009. The unemployment rate rose to over 17%. Banks ceased lending. Businesses stop hiring. People who lost their jobs could no longer afford their homes, and defaulted. Housing prices dropped 32%. There were nearly 8 million foreclosures.

The impact of all this damage was striking and far reaching. People set to retire in the years near and after the crisis lost large amounts of their retirement savings in crashing financial markets. Homelessness increased. States lost revenue from taxes and federal government support and withdrew funding for social services in response, at exactly the time when people needed them most. States also reduced funding for state universities, setting off an increase in tuition that would contribute to a new crisis in student debt.

As a result of the financial crisis, the recession it created, and the suffering of millions of Americans, an anti-Wall Street protest was formed in September of 2011 known as Occupy Wall Street. The movement sought to occupy public spaces, first Zuccotti Park that adjoins Wall Street itself, but later many other public squares and buildings. The movement attempted to be radically democratic--rather than setting up a typical hierarchical structure and making specific policy demands, it wanted to give voice to the "99%" of people who were powerless to impact the corporate and financial forces that shaped their lives. Because of this lack of structure, it has been criticized for not accomplishing any specific goals. However, Michael Levitin challenges this notion in your reading for this topic.

Allon, Fiona and Guy Redden. “The Global Financial Crisis and the Culture of Continual Growth.” Journal of Cultural Economy, vol. 5, no. 4, 2012, 375–390.

LISTEN

355: The Giant Pool of Money,” This American Life, from Chicago Public Media, 9 May 2008),

https://www.thisamericanlife.org/355/the-giant-pool-of-money

READ

Levitin, Michael. “The Triumph of Occupy Wall Street.” The Atlantic, 10 June 2015

https://www.theatlantic.com/politics/archive/2015/06/the-triumph-of-occupy-wall-street/395408/.

Global Financial Crisis and Coronavirus Recession Discussion

This discussion will explore the cultural differences between the GFC and the current recession.

In one post, answer the following two questions:

Based on the readings, what are the lasting cultural impacts of the GFC? How did it change how Americans' understand their lives? How did it change what they believe about capitalism? Government? Opportunity?

Based on your own experience of the coronavirus recession, how will it affect the way people understand their lives? How will it change what they believe about capitalism? Government? Opportunity?

Respond to one of your classmates posts. You may agree or disagree, but offer some additional context to support your view.

Discussions are graded pass/fail. Follow all instructions to pass. If you do not include any element, you will fail.