A
stock trader put his finger to his head as the realization of the 2008
financial crisis, spurred by the meltdown of toxic subprime mortgages,
took hold | Spencer Platt/Getty Images
If you learned anything from The Big Short,
hopefully, it was that there were a whole lot of people responsible for
the financial crisis and subprime mortgage calamity in 2007 and 2008.
Yes, the banks and ratings agencies played an integral role and managed
to profit handsomely for a while, but those organizations couldn’t have
done so without people — you, your neighbors, families, and friends —
agreeing to take on home loans and mortgages they couldn’t afford.
It’s obviously a bit more complicated than that, but that’s the gist
of it. The government wanted more people to be able to afford homes, so
they made it easier for people to qualify for mortgages. People, unaware
or uncaring about their ability to pay, signed up. Then, everything
fell apart and caused a global recession.
It was a nightmarish time, and we’re still feeling the lasting
effects, in some respects. But it’s not something we’d want to do again.
Clearly, we’ve learned from our mistakes.
Right?
It doesn’t seem that way. Many of the underlying structural issues
that led to the past crises are still in place, and given that hardly
anyone was punished for their roles in the subprime mortgage meltdown,
there’s little incentive for anyone to change their behavior. And it
seems we might be heading right back down the road to where it all
started.
That’s because Freddie Mac is going to start experimenting with looser mortgage standards,
making it easier to qualify for a home loan. In short, the program
involves reducing the income and documentation requirements. Home buyers
will also be able to count income from people living in the house, and
not necessarily on the mortgage. Some borrowers also won’t have to
provide bank statements to prove how they saved for a down payment. What
could go wrong, right?
The financial crisis fueled by bad mortgages
House for sale | iStock.com
The government has good intentions here, so
allowing for looser income and documentation requirements for mortgage
applicants, via this new Freddie Mac pilot program, isn’t meant to do
harm. But this is more or less how we ended up in a very bad situation
the last time around. People who shouldn’t have gotten mortgages did,
they couldn’t make their payments, and the whole overly-leveraged system
fell apart.
Again, here’s the dilemma from the government’s perspective — we want
more people to be able to afford their own homes. So, we incentivize
homeownership by making it easier to get a mortgage. The problem is that
we end up lowering the standards to get a mortgage, and then end up
giving loans to people who wouldn’t have otherwise qualified for them.
Before you know it, these people — who failed to recognize, or
overestimated their ability to make their mortgage payments — miss
payments or stop paying altogether. These loans are now categorized as
“subprime,” but in the mid-2000s, were purposely mis-rated and sold to
investors as parts of securities. It’s all very complicated and intricate, but the thing you should know is that it all started at an individual level.
The banks responded to incentives, people who wanted a house
(regardless of their ability to afford it) bought one, and the whole
system crashed.
Just because you can, doesn’t mean you should
Signing paperwork | iStock.com
The new Freddie Mac program probably shouldn’t send us all into panic
mode, but it is something to keep an eye on. Other lenders have already
loosened their standards, including Wells Fargo,
which did so in 2015. With the economy on relatively solid footing, it
can be easy to become overly optimistic or miscalculate what you, as a
prospective homebuyer, can afford.
It all comes down to this: We can avoid societal meltdown if we start
at the individual level. The subprime mortgage crisis wouldn’t have
been as severe, or may not have happened at all, had individuals made
better choices or had a clearer picture of their own finances. There
were some shady tactics utilized by lenders to convince people they
could afford more than they could, but if you have a good grasp on your
financial picture, it simply requires the ability to say “no” to
something you can’t afford — no matter how tempting it may be.
That’s not to let the banks, rating agencies, and regulators — all of
which dropped the ball in order to further their own interests during
the last crisis — off the hook. But if you’re wondering how you yourself
can stay out of trouble? Know what you can and can’t afford, and be
aware that the economy is a cyclical thing. Just because you’re doing
well now, or think your job is secure, doesn’t mean that things will be
the same a year from now.
Take stock of your situation, and learn from the mistakes of others.
It’s going to get easier to get a mortgage, but that doesn’t necessarily
mean you should sign up.
The Senate wednesday kick-started its
debate on the economic turmoil in the country, with some senators
blaming the recession on the incompetence of some ministers in President
Muhammadu Buhari’s cabinet.
Senators, who did not mince words during
plenary in the upper chamber, said that the president had put round
pegs in square holes, observing that the incompetence of such ministers
had largely contributed to the festering crisis.
They called on the president to
immediately reshuffle his cabinet by redeploying competent hands to
handle sensitive economic matters.
Leading the debate on the recession
wednesday, the Senate Leader, Ali Ndume, laid the premise for Nigeria’s
current predicament, disclosing that no fewer than 15 countries in
different parts of the world, including Brazil, Russia, Japan, Ukraine,
Greece, Venezuela, Switzerland and Finland, were currently in recession.
According to him, most countries which
were dependent mainly on oil for survival had been hit economically,
explaining that the Nigerian situation was however peculiar because all
the economic sectors were reeling, except agriculture.
He pointed out that the situation was
aggravated by the depletion of Nigeria’s foreign reserves by the past
administration and recalled how former President Olusegun Obasanjo built
foreign reserves to the tune of $62 billion but lamented that as of
2015, the reserves had been plundered to as low as $30 billion.
While the Deputy Senate President Ike
Ekweremadu called for a cabinet reshuffle, Senator Dino Melaye (Kogi
West) argued that putting incompetent hands in charge of the economy
would continue to aggravate the situation.
Ekweremadu was of the view that the
situation had continued to deteriorate because of the bottlenecks caused
by the failure of the federal government to release funds into the
economy as appropriated in the 2016 budget.
He also observed that if the claims by
the government that it had accumulated N3 trillion in the Treasury
Single Account (TSA) and recovered $20 million from the former Minister
of Petroluem Resources, Mrs. Diezani Alison-Madueke, along with several
millions of dollars said to have been recovered were true, the situation
ought to have been different.
On the other hand, he said if the claims
were untrue, the federal government needed to tender an unreserved
apology to Nigerians for feeding them with falsehood and blamed the
recession on the non-release of funds into the system.
Ekweremadu named two of the ministers
whom he said needed to be redeployed to include the Minister of Finance,
Mrs. Kemi Adeosun and Minister of Budget and Planning, Senator Udoma
Udo Udoma, insisting that both ministers would perform better if
assigned other portfolios.
“In the first place, distinguished
colleagues, we passed a budget for 2016 and we envisaged the situation
we’ve found ourselves and we believed that the best thing to do was to
increase the budget for 2016 so as to reflate the economy, but we are
almost in the final quarter and yet no releases are being made.
“I think the best thing to do at this
point, Your Excellency, distinguished colleagues, is for the government
to consciously release as much money as possible into the economy.
“Yes, we are saying there is no money; the oil price has dropped but we
were also told that through the TSA, we have about N3 trillion
somewhere. We were also told that the former Minister of Petroleum
returned $20 million.
“We were also told that politicians have
returned several billions of naira, dollars and pounds. It is either
that this is not true or that the money is somewhere and if it is not
true, someone needs to apologise to us and state the correct thing and
if it is true, this money has to be released to contractors so that
contractors can go to work and those in the construction industry will
be paid and then they will pay the school fees of their children and
money will circulate.
“If we have money in the economy, I am sure that shortly, we will also find some relief.
“Secondly, the president needs to look at his cabinet. He has to put
square pegs in square holes. Your Excellency, distinguished colleagues,
Udo Udoma is my friend, an accomplished lawyer for that matter but in
fairness to him, I believe he can do better in another ministry
especially like trade and investment, certainly not budget and planning.
“The Minister of Finance could do much
better in another ministry also. At this critical time, we need somebody
who is more experienced to man the Ministry of Finance so that we are
able to coordinate the strategies for this recovery.
“I also believe that we need to have all
hands on deck right now. It does not matter their religion, it does not
matter their party. We need to go all out and look for the best brains
to come and help us to come out of this recession.
“America was in a recession in the
1930s. They recovered within three years. What did they do? All
Americans came together, irrespective of your political persuasion, and
they were able to work on solutions.
“At this point, it does not matter to us
whether you are APC or PDP or you are non-aligned. The important thing
is that the president has to look for the best people to come together,
to proffer solutions. It does not matter which party you belong to,”
Ekweremadu said.
Ekweremadu also called for fresh
negotiations between the federal government and oil companies, saying
such negotiations would enable the government to free enough money,
adding that the government needs to boost investors’ confidence by
ceasing to label all Nigerians as corrupt persons.
He, however, differed on calls for the
sale of the nation’s oil sector assets, noting that only non-performing
assets should be sold, stressing the need for restructuring of the
system by unbundling the federal government.
He also advocated the amendment of
Section 162 (3,4,5,6) of the constitution with a view to stopping the
monthly sharing of federal revenue between the federal, states and local
governments.
“We need restructuring. We need to
unbundle this federal government from the security sector, to power, to
agriculture and to the social sectors.
A situation where the federal government
is in charge of everything is not helpful. We need to unbundle this
country if you like, call it restructuring.
“It might be a long-term strategy and it might be in phases, but it is something that we need to do quickly.
“I have heard about the issue of selling
off our assets. I need to caution that other countries are not doing
the same. The United Arab Emirates (UAE) does not even allow you to buy
oil wells, much less selling them. And of course, a country like Saudi
Arabia, their budget each year is run by investments from their oil
revenue, while other countries are investing and with all the
investments we have and besides, I’m sure we will not be fair to the
next generation.
“So, if we must sell, we have to sell
the non-performing assets so that people can turn them around and create
employment. We need to amend Section 162 especially from subsections
3,4,5,6 where each money in the Federation Account is enjoined to be
shared among the other levels of government,” he said.
Melaye said the degree of poverty and
starvation ravaging the land clearly showed that the nation was sitting
on a keg of gun powder, pointing out that in no distant future when the
poor have no food to eat, they would be forced to “eat the rich”.
Melaye echoed Ekweremadu that the
managers of the economy were incompetent, submitting that only
experienced and competent persons should be handling the onerous task of
managing the economy.
“Anyone who wants to manage an economy must have experience in strategic
economics and development economics… The president must rejig his
cabinet. We need people with experience and expertise to manage the
economy.
“At a time the United Kingdom hired economists from other countries to manage its economy,” Melaye said.
He also called for the immediate ban on
importation of items such as wheat, refined sugar, milk and powdered
milk, frozen meat and chicken, clothing and textiles, stationery,
perfume and insecticide.
Melaye also solicited for the immediate
constitution of the Board of the Central Bank of Nigerian (CBN), saying a
situation where it operates without a board would create bureaucratic
bottlenecks.
In his submission, Senator George Akume
(Benue North-east) also criticised the call for the sale of the
government’s oil and gas assets, alleging that those making the call are
those with the money to buy them.
Akume also recalled how two former
governors of the CBN, Prof. Chukwuma Soludo and Muhammadu Sanusi II, had
once alleged that several billions of dollars were missing.
He said if such funds were recovered by the federal government, the
advocacy for the sale of oil assets would be unnecessary, arguing that
selling them when oil prices are soft would amount to a great loss.
“From these and from monies going
through other sources, at least, we should be able to recoup over $50
billion. If we succeed in doing this, do we still have to sell our
assets as is being canvassed? The thing is very straight forward – there
is a buyers’ market and there is a sellers’ market. If you want to
dispose of your oil assets at this time when the price of oil has
crashed, precisely how much are you going to realise?
“We are making a mistake here – what we
are advocating is very unpatriotic and will ensure that those who have
stolen from us will still come to buy them up. I believe that this is
not the time to strip the country of these assets.
“Fortunately, the CBN governor made a
very powerful statement that the worst days of the recession are over
and therefore, we have to look elsewhere and not sell our assets. We
should focus on industrialisation and agriculture and try to revamp this
economy. I am worried because people who are telling us to sell these
assets are people who have huge pockets.
“Our assets must remain for us: even Saudi Arabia didn’t sell part of their national assets as alleged,” Akume submitted.
In his submission, Senator Barnabas
Gemade (Benue North-west) called for the immediate release of funds into
the system, explaining that monies kept in the Sovereign Wealth Fund
(SWF) account as well as pension funds should be released to stimulate
growth.
According to him, monies are usually
saved for the rainy day and since Nigeria was witnessing its rainy day,
the ideal thing now is to release such funds to stimulate the gross
domestic product (GDP) growth and spur investment in viable sectors such
as agriculture and mining.
In his contribution, Senator Shehu Sani (Kaduna Central) said the
current recession should not be seen as a moment of despair but rather
serve as a turning point for the re-direction of the nation’s economy.
Sani, who lamented Nigeria’s
overdependence on oil, said unfortunately, the poor in Nigeria had
always taken the brunt, noting that the only difference was that the
current recession was compounding their hardship.
But Senator Bassey Akpan (Akwa Ibom
North-east) reminded his colleagues of how U.S. President Barrack Obama
took over the reins of the American economy in 2009 during the financial
crisis and immediately pumped $800 billion into the economy after
securing the nod of the U.S. Congress.
The move, he said, fostered the quick
recovery of the nation’s economy. He traced the root of Nigeria’s
recession to government’s decision to mop up its funds in commercial
banks into the TSA, arguing that if the nation must recover from this
crisis, the federal government was left without an option than to return
the funds in the TSA.
Also speaking, Senator Rabiu Kwankwaso
(Kano Central) listed steps to be taken by the federal government to get
out of the recession. He said the country would have to strike a
balance between local and foreign consumption, avoid policy somersaults,
stop multiple taxation, focus on agriculture and construction, and
communicate its policies to the public.
Address Legislature, Dogara Tells Buhari
In the House of Representatives, the
Speaker, Hon. Yakubu Dogara, also urged President Muhammadu Buhari to
address a joint emergency session of the National Assembly and outline
his plans to pull Nigeria out of the current economic recession.
At the plenary of the House wednesday,
he also called on the government to consult economic experts at home and
abroad to fashion out short, medium and long-term measures for dealing
with the present crisis.
Some issues that Dogara identified as
deserving of a “second look” included the impact of the TSA on the
economy, the pace of budget execution, the spiraling rise of the dollar
against the naira and the multiple exchange rate regime, investment in
infrastructure, and unemployment.
These, Dogara said, would set the nation on the path of recovery and
sustained economic growth, “as it would ensure that all stakeholders are
on the same page”.
The speaker also called on the
government to take full responsibility for the present economic
situation, pointing out that it was not time for blame game.
In his welcome address to lawmakers who
just resumed from an eight-week summer recess, the speaker said all
hands must be on deck to tackle the nation’s challenges and rescue her
from the shackles of poverty, social and economic underdevelopment.
“As leaders, we must take responsibility
for the present economic situation, although we are not directly
responsible for it. We must admit that this is a difficult thing to do
in the present generation that spurns responsibility.
“Everyone wants to blame someone for
something that goes wrong. Unfortunately, history teaches us that no
one, no nation has ever achieved greatness except on account of the
creative hunger that comes with accepting responsibility.
“This is not the time for partisanship.
This is not the time to score political points. This is not the time for
grandstanding. This is not the time for the blame game. The situation
and the times call for bold, courageous, enlightened and purposeful
leadership. This is a patriotic call to action from all stakeholders and
indeed all Nigerians,” Dogara added.
The speaker harped on the need for the
legislature to continue to provide support for the executive’s solutions
to the nation’s economic problems, and to consolidate on existing
consultations between both arms of government on the way forward.
“We must never miss the opportunity the
present travails offers us to launch Nigeria into its rightful destiny
and place it among the comity of prosperous nations.
“As representatives of the people we are
well acquainted with the alarming state of the citizens’ penury. We
will therefore collaborate with the executive in fine tuning any
observed limitations in policy formulation and implementation to ensure
speedy delivery of services to our people,” the speaker said.
Vote of Confidence from Obama
But as the National Assembly debated
Nigeria’s economic woes and proffered solutions that the executive could
adopt, the Buhari administration got a vote of confidence from an
unlikely quarter on Tuesday.
During a bilateral meeting on the
sidelines of the 71st session of the United Nations General Assembly
holding in New York, the President of the United States Barack Obama
expressed confidence in the Buhari administration.
Buhari’s media aide, Mr Femi Adesina, in
a statement, said the U.S. president described his Nigerian counterpart
as a man of “integrity and honesty”, adding: “We have confidence in
your leadership. There are some difficulties you face, but this
administration is willing to assist in the short time we have left.
“You have made real progress in
defeating the brutal organisation called Boko Haram, and that was
achieved because of your leadership.”
Obama also offered a hand of fellowship
to Nigeria “in the final and comprehensive defeat of Boko Haram and
resolution of the Niger Delta crisis, which would help ramp up oil
production and increase revenue, resolving the humanitarian crisis in
the North-east, recovering stolen money, and revamping the economy”.
Describing Nigeria as a big and
important country in sub-Saharan Africa, Obama said his country looked
forward to a framework for sustained partnership between the two
nations.
Earlier, Buhari had assured the Obama
that Nigeria was making steady progress towards resolving the problem in
the Niger Delta region, which had led to economic sabotage on a grand
scale.
Buhari said: “We are making definite progress on how many factions of
the militant groups exist, their leadership and operational basis, and
we have equally sought the cooperation of the oil majors. In a short
while, I believe the issues would be resolved.”
While thanking the U.S. for the
assistance rendered in the area of security through provision of
armaments, training for Nigerian troops, and sharing of intelligence,
leading to the degradation of Boko Haram in the North-east, Buhari said
the country was open to support in combating the humanitarian crisis
currently ravaging the region.
The Nigerian president said the farming
season was good this year, with the prospect of good harvest, adding
that “Nigeria is on the road to food self-sufficiency soon”.
“We shall be able to feed ourselves and
utilise the billions of dollars spent on importing food on other
productive areas,” he informed Obama.
He reiterated that his administration
came to power on the tripod of security, battle against corruption, and
the economy, stressing that there would be no let-up in fulfilling those
electoral promises.
He wished Obama happy retirement, as his tenure in office winds down.
The Securities and Exchange Commission
and the National Pension Commission have approved “a new instrument that
will allow pension funds to invest in infrastructure bonds,” the
Minister of Finance, Mrs. Kemi Adeosun, said at a meeting of business
leaders in Abuja on Monday.
“That’s what will drive, for example, our social housing and our roads programme outside the budget,” she added.
Adeosun also called on the Central Bank
of Nigeria to lower interest rate so that the government could borrow
domestically to boost the economy.
Renowned economist and Chief Executive
Officer, Financial Derivatives Limited, Mr. Bismarck Rewane, said in a
telephone interview with one of our correspondents that he and other
experts had before now stressed the need to reduce the interest rate.
He said, “There is no other way but to
reduce the interest rate. During recession, Britain brought down
interest rate; and in the US during the recession, what did they do?
They brought down interest rate as well. So, we need to bring down the
interest rate.”
The Director-General, West African
Institute for Financial and Economic Management, Prof. Akpan Ekpo, who
lent his voice to the call for a cut in interest rate.
He said, “That is the only way to
fast-track the recovery of the economy. The interest rate must be
reduced to close to single digit, if not single digit, in order to
stimulate the real sector. Now, it is an average of 25 per cent and that
is too high.
“The real sector is dead now; when you are in a recession and the real sector is dead, then the recession will last for long.”
Ekpo said the Monetary Policy Rate,
which is the benchmark interest rate, should be reduced to 10 per cent
from the current 14 per cent so that the lending rate would be around 13
to 14 per cent.
The Monetary Policy Committee of the CBN had at the end of its meeting in July raised the MPR to 14 per cent from 12 per cent.
