Abstract
Mortgage companies sold on the mortgages or debt obligations they held, to other financial institutions, which provided them with more money to finance further mortgages which could be likewise securitized, and so on. A leveraging which when housing prices collapsed left these financial institutions with inadequate collateral to cover their extensively overleveraged loans, resulting in a cascading debt crisis and implosion of financial markets. This left them, and those who had extended credit via credit cards and student loans and so on, unable to extend further credit when it was most needed by indebted borrowers to meet basic living costs, which resulted in a general economic depression and recession. A recession resulting from the overextension of credit which, as previously noted, was invoked by a crisis of overproduction ultimately rooted in an intranscendable contradiction at the heart of capitalism.
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Notes
- 1.
Whereas under “Chapter 7” bankruptcy, having had their personal assets liquidated in favor of their creditors, debtors were able to have their remaining debts canceled, the new law forced more people into “Chapter 11,” by which individuals could be forced into a further five-year repayment plan before being allowed to emerge from bankruptcy. The concern here NOT being whether such requirements are reasonable or not, but whether this tightening of the law indicates, as I believe it does, a prescience which undermines the widely broadcast claim that “no one understood what was happening.”
- 2.
For an account of leveraging, see Chapter 1, footnote 2.
- 3.
This regulation, introduced in 1933 in the wake of the Wall Street Crash of 1929, and the ensuing Great Depression, limited the capacity of commercial banks to deal and invest in financial securities, and thus investment banking from gambling with the financial capital derived from commercial bank depositors. However increasingly lax interpretations, by federal bank regulators, of the restrictions imposed by this act, rendered it increasingly impotent until it was eventually repealed in 1999. While even though the Dodd-Frank Act passed under the Obama administration, had already been considerably weakened by finance industry lobbying, the Trump administration wasted no time in attempting to roll back financial regulation still further. (See Chapter 2, footnote 4).
- 4.
Indeed, depending on the interest rate, a 30-year fixed rate domestic mortgage not untypically ends up costing the borrower around 250% of the initial loan. And although the final value of the residence at the time the mortgage is paid off may have appreciated by that much or more, it must of course be remembered that this has to be discounted to reflect inflation, and the concomitant decrease in the value of money, over the repayment period. And even if the borrower invests in property which appreciates sufficiently that she/he emerges with an asset worth more, even when adjusted for inflation, than the mortgage payments she/he made, such appreciation is, of course, profit rather than wages. Profit which is itself ultimately dependent, in the long run, not upon speculative bubbles fueled by eventually demand sapping credit but, upon the maintenance of a robust demand for housing from potential residents, and thus upon their healthy income levels. Healthy income levels which will succumb in the long run to the pressures of free market competition!
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Glynn, S. (2020). Overleveraging, the Cascading Debt Crisis, and the Necessary Inadequacy of Increased Regulation in the Face of the Inevitable Crisis of Overproduction. In: The Economic Logic of Late Capitalism and the Inevitable Triumph of Socialism. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-52667-2_10
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DOI: https://doi.org/10.1007/978-3-030-52667-2_10
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