Top 5 Reasons Why the Mortgage Crisis = Global Warming

The mortgage lending debacle and global warming are two crises that are grabbing the headlines, and on the surface, they appear to have nothing in common. Take a closer look and it's the same story -- two peas in a pod. For one thing, there's no end in sight to either crisis. And for another, the following moral explains them both:

Let society at large foot the bill for the crisis as long as

• the culprits can keep doing business as usual
• those that protect them can stay in power.

Here are the five fundamental attributes that the two crises share.

1. The true and full cost of doing business is not assumed by those who make all the profit. (The social cost of thousands of people thrown out of their homes, and the environmental cost of greenhouse gas pollution are shouldered by society at large.)
2. In both cases, the consequences of unsustainable business practices spiraled out of control, to the detriment of the whole world.
3. The poor are bearing the brunt of the social or environmental cost.
4. Both crises are clearly getting substantially worse, but little meaningful action is being taken.
5. Elected leaders are protecting those making the profits and are working to maintain the practice of business as usual.

1. The true and full cost of doing business is not assumed by those who make all the profit.

Let's start with the mortgage lending crisis. Here's how it started.

Mortgage lenders decided that it would be profitable to lend money to people who could not afford to borrow money. Their calculations showed that even though there would be more defaulted loans and foreclosures, they could still turn a buck if they structured the loans "creatively." So began the era of junk lending.

They extended loans to borrowers with no money down and very low interest rates -- to people who couldn't otherwise afford to own a home. Problem was, after a few years, the interest rates would adjust upwards and payments would balloon out of reach. Many borrowers would no longer be able to keep up with payments.

But to the mortgage lenders making the profits, that was of no concern. Those borrowers would lose their homes - c'est la vie - but they would find their way; society would take care of them one way or another.

Global warming is sourced in same strategy -- known as "externalization" of costs, a fancy way of saying getting a free ride. The earth's atmosphere has been used as free as a dumping ground for CO2. The biggest polluters don't want to start paying for the privilege, and so the environmental cost of global warming is being shifted to society at large.

2. The consequences of business practices have spiraled out of control, to the detriment of the whole world.

The mortgage lending crisis, which is entirely an American made problem, is roiling financial markets all over the world. How did this happen?

The mortgage lending companies packaged up all the risky loans and resold them. And the financial system swallowed up these "securities" -- even though there was nothing secure about them -- and made them the basis of a large chunk of the credit market.

(It's another way the mortgage lenders externalized the cost of their business strategy -- by shifting the burden of risk to others in the financial system.)

These "mortgage backed securities" made their way into every country and every large portfolio, and all over the world now, the huge losses from this junk lending spree are being swallowed. It is a bitter pill.

With global warming, it's the same story. C02 emissions have spiraled out of control, and the whole world is facing the crisis. The US in this case is not solely responsible, but historically it has created the lion's share of global emissions, and is morally, though not (yet) actually, in the position of needing to lead the way to solutions.

3. The poor are made to bear the brunt of the social or environmental cost.

Regulators did nothing to stop the junk lending practice, called "sub-prime lending." (Nice euphemism. Would you buy something called "sub-prime beef?") Why would they? After all, the booming housing market was propping up the economy after the dotcom bubble burst.

The reality is that for the last seven years, the US financial system was propped up on the backs of people with little or no financial security, and regulators looked the other way. And now that the housing bubble has popped, the financial system has no need of the very same people it was so eager to lend money to.

What you won't find in the papers too much is the recognition of the true crisis: thousands of people thrown out of their homes, their dreams dashed to pieces.

Same story with global warming. Look at Hurricane Katrina. Or if you don't think that the hurricane had anything to do with global warming, listen to what the Evangelical Climate Initiative has to say:

The consequences of climate change will be significant, and will hit the poor the hardest.

Poor nations and poor individuals have fewer resources available to cope with major challenges and threats. The consequences of global warming will therefore hit the poor the hardest, in part because those areas likely to be significantly affected first are in the poorest regions of the world. Millions of people could die in this century because of climate change, most of them our poorest global neighbors.

Science says the same thing. Look at this report from the IPCC -- winner of the Nobel Peace Prize -- on climate impacts. For example, in Africa alone, by 2020, between 75 million and 250 million people are projected to be exposed to increased water stress due to climate change.

4. Both crises are clearly getting substantially worse, but little meaningful action is being taken.

The mortgage crisis is going to get worse: $350 billion worth of junk loans are going to reset at a higher rate in 2008. That means hundreds of thousands of people are about to see their monthly mortgage bills rise by hundreds of dollars a month. We are going to see
a huge increase in the number of foreclosures -- the technical term for throwing people out of their homes and smashing the dreams they were handed as part of a calculated junk lending business strategy.

Have a look at this story from the front page of today's NYT metro section, and read about a nursing home aide named Marcia. She bought her Bronx home last year for $535,000 -- with no cash down!

"I just work, eat, sleep and hope they don’t take my home. This is the worst Christmas I ever had."

She is not alone in her stress and fears among the boxy brick houses that line the streets of her Williamsbridge neighborhood. The binge of subprime loans that flooded this area a few years ago has now given way to foreclosures and forced sales by homeowners saddled with onerous mortgages they could never repay.

The effects of this free-for-all are increasingly felt even among those who did not take on risky loans. Longtime neighborhood residents worry that their property values will be sunk by the double whammy of poorly maintained homes and revolving-door neighbors, while shopkeepers on the nearby commercial strip on Boston Road — especially those who sell hardware or home furnishings — say business has plummeted by 50 percent or more, as strapped homeowners cut costs.

The same story with global warming, as we well know. Latest reports predict the Arctic could be ice free within 5 years. And the good news out of international climate talks in Bali is meager. They've negotiated an agreement to keep negotiating.

5. Elected leaders are protecting those making the profits and are working to maintain the practice of business as usual.

The solutions being offered for the mortgage lending crisis are huge sums of money -- for the banks.

Last Tuesday, the Federal Reserve cut its benchmark short-term interest rate a quarter of a percentage point, to 4.25 percent, in
hopes of bolstering the economy..... Last Wednesday, the Federal Reserve and other central banks announced a plan to lend
billions of dollars to private banks to encourage them to make loans more available and thus spur the economy.

The Fed said it would make $40 billion available for lending to banks during December. Other central banks around the world said they would provide $50.2 billion in December and January.

To be fair, Treasury Secretary Henry Paulson is working on a plan that will help some homeowners, by postponing interest rate resets. But as this piece in New Yorker makes clear, it's not a real solution.

Paulson’s plan streamlines and simplifies the process by creating rough-and-ready definitions of creditworthiness. The Treasury Department’s sponsorship also permits a degree of collusion that might normally be considered illegal—banks aren’t typically allowed to work together to set loan prices.....

Although the plan will provide real relief for at least some homeowners, it’s more like a Band-Aid than like the major surgery that some of the hype makes out..... Postponing rate resets doesn’t change the fact that too many people spent far too much borrowed money on houses with prices that were far too high, and that they are now stuck in homes that they can’t really afford and can’t sell. Even with the interest-rate freeze, foreclosures will keep rising.

In the global warming arena, the protection and support Congress is still providing the big polluters continues unabated. Look what the Senate did to the energy bill last week. The draft that came over from the House contained a provision to strip $14 billion of subsidies and tax breaks from the oil companies and instead use that funding to support the development of clean energy. It was stripped out. A Times editorial had this to say:

The decision to maintain the tax breaks was particularly shameful. Blessed by $90-a-barrel oil, the companies are rolling in profits, and there is no evidence to support the claim that they need these breaks to be able to explore for new resources. Yet the White House had the gall to argue that the breaks are necessary to protect consumers at the pump, and the Senate was craven enough to go along.

And so here's the bottom line.

They say protecting the "economy" is the thing that is of paramount concern.

What they actually mean is that their paramount concern is protecting their hold on power and the profits of those that keep them in office.

Peas in a pod.

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