Interview, Washington D.C, May 12, 2008
Can You Feel It?
The US Financial Crisis
Interview with Martin Blums,
Senior Price and Product Analyst at GMAC Financial Services
FES: The financial crisis has had far-reaching implications, especially in the home mortgage industry. Could you give us a brief explanation for this connection, and why nearly everyone in the United States is feeling its effects?
Blums: Well, there are a number of reasons. The main reason is that credit in general is interconnected to other types of credit. When someone defaults on their payments, it affects industries that offer different products. Since banks deal in multiple businesses, when one part of business is doing badly, it'll have an effect on others.
Second, once one part of the population starts defaulting, others will stop lending because it's too risky, causing money to become more expensive, even for those who haven't done anything wrong. There are fewer borrowers and fewer buyers, so house prices are falling nationwide-so it's a self-perpetuating crisis.
The credit crisis, particularly in the mortgage industry, is spreading everywhere. People aren't able to get their money out of their homes, so they can't buy other things, and general demand falls, and employment falls due to low demand, etc. etc. There are loops, and it all feeds back into the original problem.
FES: Several large banks have been bailed out of financial difficulty by the Federal Reserve. Many Americans feel this is unfair, seeing it as more appropriate to help individual homeowners instead. What are the pros and cons of each approach?
Blums: All parties involved in bailing out the banks understand that this isn't a great option. It has tremendous costs. At the same time, if we don't do it, the consequences will be even worse.
Investment banks are at the core of the crisis, and they are the heart of all financial activity-if you shut them down, then the flow of credit in the entire economy will stop. It's unfair, and no one likes this option, but the consequences make it imperative to bail them out. On the other hand, helping homeowners is complicated, though the treasury has been doing some of this, too, since everyone would rather not foreclose.
If there were a good formula to identify who is going to default and preclude them from that, then that's the best solution-but this is really difficult. And it's hard to identify who the owners and the debtors even are, since this debt has been securitized and bundled and sent in hundreds of different directions. Unfortunately, this ends up being the riskier and more difficult approach. It's not either or.
FES: As someone with knowledge of the home mortgage industry, what do you think are the major issues that the presidential candidates should address? Have Senators Obama, Clinton and McCain been successful in doing so?
Blums: No, they haven't been successful. There's been a lot of focus on short-term bailouts, and it's all accentuated by rising costs and falling incomes that consumers are experiencing in general. In fact, a lot of the solutions the candidates are proposing to economic problems are short-term only.
Lowering the gas tax, for example, may have a small impact, yet it's a temporary solution and doesn't address the ultimate issue that America uses too much gasoline.
America needs to understand that wee need to use less, and high prices are the best way to do this. As it concerns financial regulation, no candidate has addressed this in a comprehensive way. There's a lot of focus on predatory lending and while this is certainly occurring, we have to understand that investors have also lost billions of dollars.
FES: Can anything be done to make the financial industry more stable in the future? How in particular can homeowners be protected? What should come first on the next president's agenda?
Blums: Instead of trying to find the guilty party, (since everyone is to blame on some level), we need to find a way to regulate and make sure this doesn't happen again and ensure that the right people get the right products. We need to make sure people don't get loans they can't pay for.