Home / News & Publications / Michigan Catholic News / 2008 / Bad policies, poor judgment, deceit all figured into economic crisis
Bad policies, poor judgment, deceit all figured into economic crisis
by Robert Delaney of The Michigan Catholic
Published October 31, 2008
Detroit Bad government policies, imprudent decisions by both lenders and borrowers, and no little amount of deceit all played a role in bringing about the current financial crisis, says a University of Detroit Mercy economics professor.
And recent measures taken by government officials are unlikely to prove to be enough to solve the crisis: "It's like they're chasing a tornado they don't know where it's going to end up," says Harry Veryser, director of graduate studies in economics at UDM and a member of SS. Cyril & Methodius Parish, Sterling Heights.
Veryser will be among five speakers who will address the economic crisis at a Saturday, Nov. 1, symposium at the Macomb University Center in Clinton Township.
The symposium is open to the public at no charge.
While Veryser cites the lax home-lending policies encouraged by federal policy the sub-prime mortgage aspects of the situation he also blames loose monetary expansion policy by the federal government dating to the mid-1960s and intensified from 1971.
The end of silver coinage and removal of the silver cover for much of the currency in 1964 under the Johnson administration, and then the breaking of the final link between the dollar and gold by President Nixon in 1971, were key events, he says.
"Before that, gold acted as a sort of brake on monetary expansion. But, after that, it was 'Katy, bar the door!' They just started cranking the money out," Veryser says.
Then, on the one hand, government policy began encouraging loans to sub-prime borrowers with the Community Reinvestment Act of 1977 (and a strengthening of its provisions in the 1990s), while on the other hand, traditional government bank examiners urged lending institutions to get the weak loans off their books, he continues.
So, the sub-prime mortgages were sold to other institutions and investors, but the situation was complicated by schemes for bundling sub-prime mortgages with loans to prime borrowers to create new securities.
Veryser recalls being urged by a faculty member from another school to get with it and begin teaching students "financial engineering"; that is, how to bundle sub-prime loans with higher grade mortgages and pass them off as credit-worthy securities.
"I told the guy all that was going to do was wind up losing a lot of widows their retirement savings, and I wouldn't have anything to do with it," he says. Of course, those mortgage-backed securities have wound up having negative effects even beyond what he imagined.
The situation was further complicated by some actions that were imprudent and even immoral, Veryser continues. "A lot of mortgage brokers were committing out-and-out fraud," he says, pointing to situations were lenders were told a prospective borrower was putting up a 20-percent down payment, when in fact the 20 percent was covered by a second loan.
But there was also the practice of setting up borrowers with payment structures that would be impossible or nearly impossible for them to keep to.
"There is a duty not to deliberately put someone into a position of financial danger. You shouldn't be trying to get a commission when you know you're setting someone up for failure. That's a violation of Christ's commandment that we 'love others as we love ourselves,'" Veryser says.
While Veryser is skeptical about measures taken to date curing the crisis, he points to recent calls by European governments and central bankers for a return to something like the Bretton Woods Accord as a promising idea. Under the post-World War II system, other countries tied their currencies to the U.S. dollar, and the dollar was backed by gold. It was this system that collapsed with the "closing of the gold window" in 1971.
But Veryser sees a positive step the United States could adopt even without an international agreement and without going immediately to gold-convertibility. He recommends U.S. authorities implement a "gold rule" for the dollar, which would involve setting a gold price of say, $600 an ounce then contracting the money supply whenever the price rose above $600 and expanding the money supply whenever the gold price fell below that.
"Once the intention to adopt a gold rule was announced, it would start squeezing the speculators out of the gold market, and renewed confidence in the dollar would bring mortgage rates down, making them more affordable and removing a lot of the problems caused by people facing rising adjustable rates," he says.
The gold rule proposal will be discussed at Saturday's symposium. "Since interest rates under a gold rule would be lower, we'd have a good chance of getting rates down to 3.5 to 4 percent, and that would give a lot of people some breathing space," Veryser adds.
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