William T. CavanaughDecember 3, 2009 - 1:11pm0 comments
Our economy is based largely on fantasy, a flight from reality that has led to a series of unsustainable economic choices and the crisis we are now experiencing. In contrast, the idea of the common good is based on a realistic understanding of limits, both human and economic. It is a concept that can help us understand and right our current situation.
The present economic crisis took off when high-risk mortgages were issued to homebuyers on the fanciful assumption that the “American Dream” of home ownership could be paid for by an inevitable rise in home values. Such a belief was not based on historical precedent. Rather, it was fueled by the demand caused by the loans themselves. To stimulate further demand, banks came up with a quick-and-easy means to pass along the risk associated with home lending by packaging and selling this high-risk consumer debt as securities called “collateralized debt obligations.” Ratings firms like Moody’s applied AAA designations to these securities, facilitating the process. The CDOs were then listed by investment firms, hedge funds, and banks as assets, and used as collateral to borrow more money. Money was being made on borrowed money, and debt was being used as collateral.
Traditionally, the idea of home ownership had been based on the slow accumulation of equity, as the principal on the debt was paid down, and on the relationship established between...