Loans and homes

The combination of falling house prices, reduced mortgage lending and a higher cost of living put household budgets under strain. There was a sharp slowdown in US consumption growth – not just housing-related expenditure but other categories of consumer spending as well. Stock prices, especially those of financial stocks, weakened, the Dow Jones industrial average falling to around 11,500 in the summer of 2008. Charles Bean’s remarks reflected a growing realization that the financial and economic crisis would be long-lasting.
But still no one realized quite how severe it would yet become. Less than a month after Charles Bean’s interview, the global credit crisis took a new, unexpected, and even more serious, turn for the worse. The failure of Lehman Brothers on 15 September 2008, and the bailout of the giant US insurer AIG the following day, marked the start of a four-week-long worldwide financial panic, with a dramatic loss of confidence in bank liabilities, a virtual free fall in bank share prices and massive withdrawals of money by professional investors from both banks and money market mutual funds.
This was nothing less than a run on the entire global banking system. Only an unprecedentedly large expansion of central bank lending to commercial banks, making up the shortfall created by this withdrawal of short-term investor funding, prevented widespread bank failure. The Federal Reserve, the European Central Bank and the Bank of England increased their loans to banks by more than $2 trillion in just four weeks, an astonishing increase that roughly doubled the size of their balance sheets. Even then, the panic only finally abated after the announcement of massive packages of government support, with first the UK and then other governments stating their intention to purchase large amounts of newly issued bank shares and to provide widespread guarantees of bank borrowing.
In early 2009 it appears that even these substantial commitments of funds in support of the world’s banks will not prevent a global economic contraction deeper than any in the past seventy-five years. Share prices remain weak. By 20 November 2008 the Dow Jones industrial average had fallen to an intra-day low of below 7,200, nearly 50 per cent below its all-time peak just over a year earlier, and had fallen even further by early March 2009. The spectre we now face is of a return to the worldwide slump of the 1930s, with all the accompanying problems of long-term unemployment, social deprivation and political instability of that time. So what, then, lay behind these dramatic events, and what can be done about them?

This crisis has emerged not suddenly, but in several stages, each stage not only unexpected but also at the same time more serious and more damaging than the stage before. At first things did not seem so bad. In August 2008 one of the best informed policymakers in the world expressed his surprise that the crisis has been so long-lasting and deepseated. Charles Bean, deputy governor of the Bank of England, said in a radio interview from the Jackson Hole central bank governor’s conference,
Last year most of us thought this was a financial crisis that with a bit of luck would be over as we got the other side of Christmas, but it has dragged on for a year and looks like as if it will drag on for some considerable time further yet. There are periods when markets look as if they are getting rather better, and then another grenade explodes, another bout of fear of sustainability, fear of problems in some financial institution, maybe of intervention by the authorities. So it is very much ebb and flow, the mood here is of considerable caution, there is still the recognition that there is still some considerable way to go yet.
His surprise was shared by many others. In early autumn 2007 most experts believed that once mortgage losses were fully acknowledged, credit and financial markets could return to normal, and steady economic growth would resume. This was certainly the belief of stock market investors. Stock prices remained very strong, despite evident financial strains in the markets for buying and selling of credit exposures and in the ‘money markets’ where banks raise short-term funding. The widely quoted Dow Jones industrial average achieved an all-time record closing high of 14,165 on 9 October 2007, well after the financial crisis began.
But, as Charles Bean acknowledged, hopes that the credit crisis would be short-lived were dashed. The losses reported by many major banks, for example UBS, Merrill Lynch and Citigroup, mounted far higher than anyone had expected. The strains in credit and money markets were persistent and on occasion got sharply worse, resulting, for example, in the failure of the US investment bank Bear Sterns in late March 2008. At the same time the Chinese economy continued to grow and suck in raw materials, and an increasing shortage of commodities led to sharp increases in oil, commodity and food prices (for example, the price per barrel of light sweet crude oil on the Nymex exchange doubled between September 2007 and July 2008, from around $70 to over $140).

If the property is disposed of within ten years after the death of the decedent to nonfamily members or ceases to be used for farming or other closely-held business purposes, the tax benefits are fully or partially recaptured.
1. Full recapture occurs within the first ten years.
2. Recapture does not occur, however, on death of the qualified heir.
3. Partial dispositions lead to partial recapture of the tax savings.
4. The qualified heirs are responsible for the recaptured tax.
5. For purposes of “cessation of qualified use,” absence of material participation for three or more years during any eight-year period ending after decedent’s death triggers recapture.
6. A special lien, in favor of the United States, will be attached to the property. Liens on loans by the Treasury will be subordinate to bank loans.
7. A two year grace period after the decedent’s death during which a qualified heir’s failure to use the qualifying property in the qualified use will not cause imposition of a recapture tax.
8. Active management by eligible qualified heirs will satisfy the post-death material participation requirement. Eligible heirs in this case include the decedent’s spouse, or a qualified heir who has not attained age 21, who is a student or is disabled.