About three years ago when traveling though the Midwest I happened upon a conversation that struck me very odd. The discussion going on was about the mortgage crisis. The point of the conversation was clear, Midwesterners, the salt of the earth, the no need for government help kinds of people, or as I like to put it, the responsible Americans, were talking about walking away from their home loans and being in essence irresponsible. That conversation didn’t compute well in my head so I probed a little. I asked why? Why would these people known for their practicality born out of surviving extreme harsh winters walk away from loans and houses that they had called home? The answer was simple and direct. They were walking away from their homes because they simply couldn’t afford the loans that they had taken out. It was either eat or pay everything to the mortgage and eating is kind of vital to life. The stigma of bankruptcy still runs deep in these parts. The pain they felt added creases to their faces that previously weren’t there. They were walking away because that was their only choice. I came to the conclusion that something had gone terribly wrong. This disturbed me so much that I tried desperately to put it out of my head.
When I went home I looked up the mortgage situation on the Internet to see what was going on in the rest of the country. I discovered that it was a widespread problem hitting every sector and every geographical area of the country. I could clearly see that there was a national crisis brewing, but at my home, near recession proof Washington, DC the crisis was barely a whisper. On the political talk show circuit not a peep of what was happening out in the heartland. No one seemed to care about the crisis, but even worse no one seemed to know of the crisis.
I didn’t think at the time to blog about what I heard. I might have drawn attention to what was happening, and who knows, maybe it might have helped. Instead I looked internally. I am not a Midwesterner, but a few bouts with the debt monkey on my back soon after leaving college, made me realize that debt was the enemy and I best only use it sparingly. I cut my credit cards up, paid them off, and looked to keep debt in only two areas, car loans and my home mortgage, and always keep those two well with in my means. For a period of time the only loan I had was my home mortgage and I had hoped to pay that off as soon as I could. I may have wanted a bigger house in a better neighborhood, but as home prices shot through the roof I knew that that course of action wouldn’t be prudent. In other words, I was in good shape financially and wanted to keep things that way. My thinking goes counter to common American thinking and hence that special brew that created the crisis.
Enron successfully sold, for a period of time, hedge investments that supposedly balanced the risk of speculative investments in energy trades. The theory was that investors could go wild on high risk trading because Enron would always supply these investors with a hedge investment which would counter act the risk. This was nonsense, however, billions of dollars exchanged hands under the belief that this was true. The nonsense of the idea was born out when for a time Enron was also known as the biggest bankruptcy in history. For a time the operators of the White Star Line believed that the ship they had built, the Titanic, was unsinkable. This was nonsense, yet some of the richest people in the world booked passage on the ship in part because of the belief that this vehicle was truly unsinkable, unlike the other ships crossing the Atlantic. Again, the nonsense was proved such when the buoyant ship hit an iceberg and sank. In the housing market it has been said for years that houses don’t loose value. It is part of the name we give the industry that it holds its value, real estate; meaning that thing of real value that you can hand to your heirs. But the reality of anything is that risk, given the particular circumstances surrounding it, always exists, and this is true and has always been true, even onto gold, diamonds, hedge funds and houses. Risk surrounding speculative bubbles and artificially high prices of anything for what ever reason accentuates the risk of prices falling. And that is what happened to houses and sub-prime mortgages.
Houses were simply just too expensive for people, ordinary people, to afford and the mortgages that supported those too high priced homes were just too risky because the same. In comes the stupid of the scenario. One can mitigate the risk of such loans by distributing the risk over a wide number of investors. Errrrrrt! Wrong. One can only distribute the risk. If you purchase all the junk bonds of a single offering, just because they have been packaged nicely into small pieces of paper, if you hold all the paper you hold all the risk. In essence this is the core of the sub-prime mess. The better than average returns lead a lot of leading financial institutions to think. Duh, one can mitigate the risk because the loans are on small pieces of paper and we are only buying small pieces of paper rather than the risky loans. They are the same thing and the more you hold of the paper the riskier your investment becomes. What were the underlying factors? The factors were greed and the stupidity born from greed.
Why Wall Street didn’t see it is easy to understand. Wall Streeters are a bunch of greedy people who huddle in a big noisy place called an exchange and spend most of their day perpetuating greed. Sometimes they do some good, but most of the people there are just greedy fiends. When they leave that noisy, tense space they typically live in an urban environment that they think is the center of the universe, and because they are typically very well paid they are insulated from the real life world of the common ordinary person. For them it is buy low and sell high and the reasons why there is a low and high don’t really matter to them all that much. Unfortunately in the real world it matters all too much the reasons for things to be low and things to be high, and the go, go economy created by making home mortgages a commodity has very real consequences in the real world. Consequences I might add that can’t be avoided even by the Wall Streeter’s belief that they live in a risk free fantasy world protected by little pieces of paper.
Wall Streeters I understand, live lives of delusion, but what about Washington? Politicians, statesmen, if I dare, should have their hands on the ever so slight change of pulse of their constituency. They should know more than any other kind of person what is going on in their respective districts. If I knew that we were in a serious mess three years ago, and I am not a politician needing to please my people back home to keep me employed, how is it possible that they didn’t know? I probably became aware of the crisis well into the crisis, and I just happened onto it. Where were the personal pollsters, where were the focus groups, where were the notes from the constituents telling them of their need for relief from the bill collectors and bank foreclosure processors? If I learned about what was going on from a conversation with Joe and Jane average Midwesterner, how is it possible that politicos missed it?
Something very deep and sorrowful seems to be happening to our Constitution. What I see is Washington politics is truly leaving out We the People from the equation and substituting just about anything else. Be it conservative think tanks, liberal PACs, special interest groups, or big money interests, the thing missing from that list is We the People.
Now WE are faced with an economic down turn. A recession. It seems to have leaped at us like the clown in a Jack-in-the-Box. Surprise! Recession! Didn’t anyone see this coming? I did and I am not someone who is all that aware of the world around me. People often call me absent minded. At my previous place of work they referred to it as “having a lack of situational awareness.” So for me to have figured-out that once loans were harder to come by and gasoline took a really big chunk out of everyone’s disposable income, the normal thing would happen, that being recession.
You saw the clown jump out of the Jack-in-the-Box. Now watch the clowns talk about how they are going to solve the problem of the clown jumping out of the box recession. Let me backtrack a little. What is causing our recession? The answers are the sub-prime mess caused by the miss use of debt and the belief that if risk is changed into small pieces of paper that risk would be mitigated but wasn’t, and that very high gasoline prices are soaking up all our disposable income. So what are the politicians doing to solve the problem? They are going to give us MONEY. Yay for money! You know money? Money is like an ice cube on a boo boo. It makes it all better. Oh. (sad face) So you’ve lost your home. How sad. (happy face) Here is a few hundred bucks, go buy yourself something nice. Something pretty, because you know as well as I do, (Spanish accent) it is better to look good than to feel good. And where is this money that we are getting, that solves nothing, going to come from? Can you say DEBT? Perhaps they can make the debt into little pieces of paper and therefore be protected from ever having to pay it back? Maybe we can just walk away as a government from our obligations? That would never cause an economic disaster. (If you haven’t stopped the Spanish accent by now you should)
Get real. Please… We the people need to push our politicians to get out of their Washington, DC fantasy land and solve the real problems. The problems are that we need to regulate mortgage lending, especially when it comes to sub-prime rate mortgages and reduce the cost of gasoline and heating fuel. With mortgages there has to be a real affordability scale placed on what people can afford and make it a finable offence if banks and lending institutions violate that scale. This means no lending money to people who can’t afford the houses they are trying to get with out balancing their other real life costs such as food, transportation and necessities. For the time being there should be a 6 t 12 month moratorium on foreclosures on single mortgage holders who are holding that mortgage on their primary and only residence. The moratorium should not be extended to real estate speculators or people who own more than one residence. It should also not be extended to people with substantial other assets that can be used to reduce the loan burden. Rather than throwing money at everyone in a random shot gun approach through the current stimulus package, why not take that money and underwrite those bad loans at lower interest rates, or better yet, purchase a portion of the equity in the homes in exchange for the owner to refinance the rest at a more affordable rate. The home owner would be given a time period to sell the home that might be one to four years in the future thereby providing the Federal Government a return on their investment. I would call this plan a win, win, win approach. The home owners win because they get to avert their crisis, the lenders win because they get payment for a non-functioning loan as well as get a loan payer well able to pay the new loan, and the Federal Government wins because it will solve the sub-prime mess and recoup some of its outlay in the future. If the government would do this, it would begin to lesson the problem of sub-prime mess on the economy at large. I want to add that none of this happens with the current stimulus package.
The government will also have to work on the effect that high fuel prices are having on the economy. This one is a tough one, because no solution will happen over night. In the short run the government can release the Strategic Oil Reserves. It might set oil prices in the direction they need to be going and that is down. All of the other solutions are long term. The reality is we need alternatives to oil. Despite all the arguments to the contrary what ever weans us off oil will be good for the economy. The Federal government needs to mandate that all future automobiles built or imported into the United States must be able to accept alcohol as well as gasoline. The things needed to make ordinary vehicles able to use any mixture of alcohol and gasoline cost less then $100 when installed at the time of manufacture. With all vehicles in the future being able to take another fuel other than gasoline consumers would be able to switch when gasoline prices get too high. This would but an enormous brake on the ability for gasoline to go as high as it has simply because consumers would switch. The government should put in tax incentives for purchasing fuel efficient vehicles, and vehicles that incorporate new technology as well. Electric vehicles and plug-in hybrids should be highly encouraged since they get their energy from things other than gasoline and oil, and all that energy is made domestically. Diesels and other oil derived fuels should be discouraged since they only change the final medium instead of solving the problem, which is simply a too great demand for oil. As you know I could go on and on about these things but suffice it to say, if the United States is going to have any protection for its economy it is going to have to diversify its sources of energy used for moving around. The more choices consumers have the lower the chance of motive fuels inflating and causing a drag on the economy.
In conclusion what I have said here was just a reasonable person’s view of what is and what he hopes will be. The sub-prime mess is the fundamental core of the problem causing our economic down turn. Solve that and you will solve the causes of our recession. High gasoline and diesel prices are also another major drag on the economy. Solve that and you will go a long way to making America’s economy stronger. The Federal Government should stop misusing debt since the misuse of debt is a very large part of how we got ourselves in this mess in the first place. And we all have to leave our respective fantasy lands and remember all bubbles burst, risk increases with every false belief that this time things are somehow different. Beliefs such as, house values will keep rising forever, boats built like this can never sink, go ahead and invest in anything you want and as much as you want we will create a correlative investment that will neutralize your risk, and the one that tickles me the most is, the way nuclear power is done today it is totally safe, we will never have another Chernobyl again. ?!?
Originially posted on the Daily Kos.
