Tech prof explains economy crashes
HOUGHTON — “What really happened here was a crisis that was driven by credit, it was a crisis that was driven by an easy and cheap availability of credit,” said Dr. Latika Gupta, Tech Assistant Professor of Economics at the School of Business and Economics.
Speaking last week in a talk put on by the Michigan Tech Economics Club, Gupta outline the many factors and entities involved in the crisis.
In the early 2000s interests rates were low, and banks were looking to bring in more home buyers. These banks began giving sub-prime mortgages to people who were not able to make payments.
The subprime mortgages were then bundled and sold to other financial institutions, Gupta said.
When these low-income houses were unable to pay mortgages, they began to foreclose and prices began falling along with the stock market.
Banks couldn’t recover funds and began to fail along with business and consumer confidence, Gupta explained.
In the crisis years, people began abandoning the homes rather than paying their mortgages, because the market value of their homes was not worth what they were paying for the mortgages.
“They just don’t want to make that payment anymore, so that makes the situation even worse,” Gupta said.
The issues in the housing market wreaked havoc on other sections of the economy, with bankruptcies damaging lending and leading to layoffs.
With layoffs, more loans couldn’t be paid and the cycle continued, Gupta explained.
“Let’s say that Shopko here lays off a few workers… and as Shopko lays off a few workers, they are unable to make some loan payment,” Gupta said.
In this scenario, decreases in spending result, and Walmart lays off workers to counteract that.
“That just turns into a vicious cycle,” Gupta explained. “That turned into the story for the entire economy.”
The lead-up involved many players, working in “layered irresponsibility,” Gupta said. The blame should be shared in the crisis, she said.
First, the federal government kept the interest rates too low for too long and were approving down payments for low-income households, Gupta said.
Homebuyers purchased residences they could not afford. Mortgage brokers focused on commissions rather than risks. Investment banks created a major gap between borrowers and lenders. Regulators were uncoordinated, and many loan rating agencies were part of the financial institutions.
As Gupta explained, there was not a single entity but many organizations and groups working in tandem unknowingly moving toward disaster.