I must opine on the economy

As we reach Defcon 3 in our economy, I figured it was time to throw my two cents into the discussion.  I haven't written much about the economy in awhile, but the death of Lehman and the even worse prospect that AIG is on life support compels me to comment.

Anyone familiar with the fractional banking system knows that as long as people meet their debt payments within certain bounds set for default, late payments, etc., the system continues to hum along without issue.  Then a few funny things happened starting at the end of the last boom...

1. Bill Clinton (not George W. Bush) mandated an increase in home ownership -- in an effort to "share the American dream with everyone", BillJeff encouraged government agencies to consider options for creative home financing.
2. Mortgages were packaged together as securities for investment -- this effectively transferred risk from individual banks to owners of mortgage-backed securities, which made banks more eager to lend & earn the quick commission.
3. Banks began lending money to people who couldn't afford homes -- no-doc, negative amortization, and exotic loan options became more popular to get people into properties despite not being able to afford them.

This created the virtuous cycle of having housing prices rise significantly... well beyond historical norms... between 2002-2006.  For a period of time, the cracks in the foundation weren't apparent.  Increasing prices have a way of hiding problems.  But things got out of hand to the point where average people could no longer afford to buy property.  The collective weight of artifically inflated housing debt along with dramatically increased credit card debt was too much to bear.  Simultaneously, the investment property market dried up as it no longer made sense to invest in rental units -- the mathematics simply no longer made sense.  Then things broke, payments increased especially for ARM resets, negative amortization loans, etc. and a statistically significant % of people became unable to make payments on their debt.

Basically, we're in a pickle now because millions of people in the United States couldn't bear to live within their means.  Investors, bankers, lenders, and the average Joe.  Everyone who participated is complicit.  For someone like me who has done so and saved the old-fashioned way, it's infuriating to watch bailouts left and right that won't punish this behavior.  Now don't get me wrong, I think that bailouts are necessary to keep the whole system from collapsing.  More on that in a minute.  But I definitely think that more should be done to support the person who saw all of this coming and didn't participate.  A $7,500 first-time home buyer tax credit that must be repaid isn't quite enough quite frankly.

But back to my rant, this really isn't how American capitalism is supposed to work.  Government regulation is supposed to be put in place so a select few can't bring the whole damn economy down.  It clearly didn't happen here.  I am not suggesting that we subvert the capitalist system, but we have to have checks in place to keep a handful of people with bad judgment from taking everyone down with them.  The world is teetering on global recession because the global financial house of cards was mismanaged.  The very people who mismanaged it for the public trust won't be punished at all.  Something about that is very, very wrong to me.  I suspect that Democrats are going to be more willing/able to make changes necessary to help us avoid this problem in the future.

However, Democrats have a way of taking things way too far.  Government shouldn't intervene to mandate something as critical as home ownership.  When you make more people capable of owning a home, you introduce a lot of difficult implications to the mix.  Maybe they don't own a home because they simply can't afford it, and perhaps because they simply can't live up to the responsibility necessary to own a home.  I'm all for helping people out, but I'm all about helping people who have the capacity to help themselves.

Where do we go from here?  I don't know.  But perhaps too much government intervention from the Democrats and not enough from the Republicans got us into this mess.  Maybe we should strive for a happy medium.

Comments

[Damon Cali]

This "too big to fail" nonsense must stop. The role of government is to prevent companies from reaching this lofty, and dangerous status.

Poor business decisions need to be punishing to everyone involved - equity, creditors, customers, parters, employees. The whole lot. When that consequence is unbearable by the global economy, something is very wrong.

And this mortgage debt was obviously stupid, even as it was happening. I've been saying this for years. There are really no excuses for this mess.

Break 'em up and let 'em crumble.

The regulation belongs at the top of this system (the financial institutions), not at the bottom (the borrowers and mortgage brokers). I think that will be the difference between Republican and Democrat policy. Republicans will probably want to make high level changes, while Democrats will want to shell money out to home owners. We'll see.

[Kris Fuehr]

Well said Chris. Really well said. I'm with you as among those who "saved the old-fashioned way" - it is infuriating and makes me wonder if we were just stupid and old fashioned all of these years- we didn't jump the free ride, damn. What REALLY makes me wonder is why we are ALSO picking up support for foreign banks who have an "interest" (so to speak) in America?

It's also interesting (and few point out) that the origins link back many years to the Clinton Administration policy of "whatever-it-takes" to race for the American dream 'for all'.

Case in point: We were just asked to loan $6600 to a relative who had gotten 10 months behind on their mortgage and when prodded, divulged that in the past 6 months had bought a 64" HD TV, a boat and a $350 dog. (after much debate, we let their home foreclose - "tough love" I think it's called) - they now live in an apt. Living within our means needs to be the new american motto: (SNL style)

http://optempo.com/2007/12/31/dont-buy-stuff-you-cannot-afford/

ACCOUNTABILITY PEOPLE!!!

YOUR POST: Investors, bankers, lenders, and the average Joe. Everyone who participated is complicit. For someone like me who has done so and saved the old-fashioned way, it's infuriating to watch bailouts left and right that won't punish this behavior.