Politicians are hardly innocent…

Daniel Cowdrill

To get an idea of where the current crisis of capitalism started life, simply type ”Subprime+bank+Chapter 11″ into an American news search engine. Having done this you should discover about 50 medium sized mortgage lenders who were forced to file for bankruptcy between August 2006 and August 2007. Many of these had been lending money to subprime borrowers, that is, people with a higher chance of defaulting on their re-payments. One such bank was American Home mortgages (AHM) which filed for bankruptcy in August 2007 after their own creditors started to demand their money back. 

However, we should be circumspect about blaming greedy, fat-cat executives. In fact this band of mortgage lenders were encouraged to lend to subprime borrowers by politicians, no less. 

To cut a long story short, The Community Re-investment Act (1977) put a stop to banks making lending decisions that would prejudice the subprime sector. And in 1995, the Act was streamlined to make it easier for subprime borrowers to prove their credit-worthiness, such as attending credit-counselling sessions. 

So, banks were legislatively encouraged to prime the subprime pump, and the liabilities were relayed up the banking chain. On the top of a very shaky pile, JPMorgan and Chase, Credit Suisse, Bank of America, Lehman Brother’s and Freddie Mac were all exposed to the failure of mortgage lenders like AHM. This is not to mention the UK’s Northern Rock which had borrowed heavily from American financial markets.

Consequently, to blame greedy bankers entirely would be an incomplete verdict. If one traces the current financial crisis back it has politician’s grubby fingerprints all over it.