Wednesday, October 01, 2008

My Take On The Financial Crisis

"An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today." ~ Laurence J. Peter

In a previous post, ER questioned why my posters and I were wasting our time commenting on meaningless polls when the Government is about to go bankrupt. Obviously, he was referring to the current economic crisis.

The short answer to his question is this:

I don't know a lot about economics. So, I try not to comment very often.

ER knows this. ER also knows far more about finances, economics, and mortgages etc, than I do, so, if I try to comment on it with any authority, he will no doubt excoriate me with extreme prejudice.

That said, I will offer my own uneducated opinion on the crisis, with the disclaimer that I admit I am not an expert:

It would seem to me that the cause of this situation is a logical progression stemming from Liberal "do-gooder" ideologies. It began with the Liberal-based philosophy of leveling the playing field.

In my humble opinion, leveling the playing field is a worthy goal, but why does leveling the playing field require that we bring the "haves" down to the level of the "have-nots? Wouldn't it be more practical to try to bring the "have-nots" up to the level of the "haves? Every person with any heart at all would like to insure that every American has a car in every garage and two chickens in every pot, but that, like it or not, is an idealistic pipe dream.

It's never going to happen. There are just too many variables among the people in this country. Some people are ambitious while others are lazy. Some people live very frugal lives while others are extravagant. If we took all the money from every person, pooled it, divided it equally, then gave every man, woman, and child in America an equal amount of starter money, within the first year there would again be wealthy people and poor people. That's just the way things work when we leave such a diverse population to their own devices.

But I digress.

This "fairness" philosophy, alluded to above, resulted in legislation that outlawed the common sense practice of what Democrats call "redlining", which was a fanciful line that Democrats claimed mortgage companies drew on maps (in red) tacked to the walls of their backrooms. That line is believed to outline neighborhoods (usually predominately black neighborhoods) in which the mortgage companies, as a matter of policy, would reject any applications for mortgages regardless of credit.

The idea behind that practice was, if anyone in those neighborhoods had good credit, they wouldn't live in those neighborhoods.

Acting upon the idealistic principle of fairness to all people, the Liberal Democrats pressured Fannie Mae and Freddie Mac to guarantee loans to "poor people" which is code for people who can't afford to make the payments. This was, as I mentioned, another way of leveling the proverbial playing field. The Liberal Democrats, as usual, used the proverbial "race card" to guilt these two institutions into defying common sense and sensible, sound, business practices by implying there was racism involved in the final decision to reject mortgage applications applied for by high risk applicants. They used the stereotype that most poor people are black (which isn't necessarily true) to advance their agenda.

Counter intuitively, this stereotyping, in fact, is the epitome of racism itself because it implies black people do not have the intellect or ambition to use their own resources to achieve their goals.

That, of course, is ridiculous. The fact is, blacks have achieved racial equality since the Civil Rights act of 1964. (an act, I might add, that was opposed by the majority of Democrats in the legislature, and only got President Johnson's signature because of pressure from the Republicans)

It's the Democrats that insist they haven't acheived equality. While racism still exists in the persistent, ignorant attitudes of a relatively few Americans, incidents that demonstrate that attitude are not nearly as prevalent as the Democrats would have us believe. Nevertheless, as long as some Americans blindly accept these charges, the Democrats will continue to use this lie that blacks are still an oppressed minority.

As long as it works to their nefarious advantage.

In legislating this "affirmative action" type policy in guaranteeing mortgages, the Lawmakers either inadvertently or purposely created a situation in which money was lent out to people who could ill afford to pay it back. So many people defaulted on these mortgages that eventually, the outflow was greater than the incoming.

Anytime that happens in any kind of business, failure of that business or institution is inevitable unless some major miracle comes along to stave it off.

Now. I may be dead wrong on my assessment, but I can't see how Fannie Mae and Freddie Mac could possibly run out of money unless the money was mishandled in some very egregious way.

We know that Mortgage companies were forced to approve applications for mortgages to high risk applicants in spite of no evidence of any means to make the payments. We know that. It is a matter of record.

It seems logical to me that if more money is going out than coming in, that creates a deficit.

It works that way at my house.

We also know managers of the two institutions were "cooking the books" in order to increase the amount of their bonus. We know that, too. That is also a matter of record.

I don't really understand the meaning of the term, "cooking the books", but taking it from context it appears to mean someone did some imaginative accounting, creating profits from thin air and making debits magically disappear.

That means someone deliberately broke the rules. Someone had to knowingly break the law. Someone should pay. Will someone?

Who are these someones?

Well, we already know who some of them are. Raines, Gorelick, Johnson, etc, were the ones who cooked the books. Democrats all. But who else is culpable? Which legislators are we to blame for this mess?

To determine that, we have to look at the motive. What's the motive? Well, on the surface, the motive appears to be an altruistic attempt to offer a hand up to the disadvantaged in our society. Most people would agree that is a wonderful, empathetic gesture, and in my opinion, it is. But there are problems inherent in this action. These, I've already enumerated.

One can't blame the mortgagees who defaulted because they couldn't make the payments. One cannot blame them because they allowed themselves to be lured, by overzealous real estate agents and mortgage firms, into making a bad decision. Would a starving man turn down a free sandwich?

Conservative Republicans want to help the poor, but they also understand you can't rob Peter to pay Paul indefinitely. Eventually, that strategy ends up costing both Peter and Paul, so naturally, Republicans are called insensitive, mean, and greedy, because they don't happen to think that kind of money management is sensible.

Democrats are never shy about their desire to help the poor by taking from the rich and handing it over to the less fortunate. They call this "Patriotic". Democrats are called sensitive and friends to the poor, because of these outward demonstrations of generosity.

So, logically, who is more likely to introduce legislation that effectively takes one man's hard earned money and gives it to a man who hasn't earned the same amount?

Now. I said, "on the surface". But what of the underlying motive? Is there one? If so, what is it?

I don't know.

It would be unthinkable that someone might start the ball rolling downhill on purpose. Could there be some Representatives and Senators who would knowingly and intentionally put this country in financial crisis?

It's hard to imagine anyone would be that sinister.

On the other hand, it's equally hard to believe that any Senator or Congressman would be so ignorant and totally lacking in common sense that they would not know their actions would create such a consequence.

As I write this, the Senate has passed the revised "Bail-out" bill. I, personally don't think our government should bail out anyone that got themselves into financial straits by making such colossal blunders either on purpose or by accident.

Listen: The Government giving money to institutions who have already demonstrated an inability to be a good steward of the funds is akin to a doctor treating the symptons of a disease but not the disease itself. The symptons will go away or at least lessen, but eventually they come back over and over again until the disease kills the patient.

It is a temporary fix at best. It is economic suicide at worst.

I suddenly find myself screaming into deaf ears, "NO BAIL-OUT!!! To no avail.


Trader Rick said...

I think that the conventional wisdom is that the bailout is horrible, but no bailout would be worse...

Les said...

"One can't blame the mortgagees who defaulted because they couldn't make the payments. One cannot blame them because they allowed themselves to be lured, by overzealous real estate agents and mortgage firms, into making a bad decision. Would a starving man turn down a free sandwich?"

Didn't you say you had a foreclosure once, Mark? Who's fault was that? Democrats'?

Mark said...

It was my fault, Les, and I've never said it wasn't. I made a poor decision.

But the mortgage company didn't turn me down, and indirectly, that was the Democrats fault. They were the ones that ordered the mortgage companies to accept high risk applicants, which is the whole point of my post.

As I said, would a starving man turn down a free sandwich? The analogy is a little trifling, I admit, but it illustrates the way poor people look at the opportunity.

Mark said...

Fact is, my circumstance was unique, and I'm sure unique situations abound throughout America.

When I got my loan, my credit wasn't bad, although I didn't make a lot of money, my income was steady, as I had been employed at the same company for over 13 years. The problem happened a month after moving in to my house. I got sick, and had to leave my job. I themn tried to change occupations which is harder than I thought. I got behind, and a year later, I had to move.

Les said...

Let me give you my take on this incredible mess, Mark. As I'm a mortgage broker by trade, I think I might have a perspective worth considering. In addition, since I believe political parties are the bane of American government, I can assure you there are no partisan agendas to which I'm beholden. I'm a moderate liberal, nothing more.

"... would a starving man turn down a free sandwich?"

While I get the point of the hyperbole, this statement is a telling insight into the American psyche. Whoever said we were starving, so to speak? As we evolved into a nation built on credit card debt, our notion of the so-called "American Dream" somehow morphed into an illusory, out-of-reach concept that we in no way could ever afford. I, for one, believe avarice and hubris are the culprits - avarice and hubris propagated by decades of what could be perceived as excessive jingoism and nationalist propaganda. When one believes and lives as if one's way of life is indestructible, one is sure to fail.

That being said...

"When I got my loan, my credit wasn't bad..."

Of course it wasn't. In fact, during the housing boom, there were still people who got denied for loans, believe it or not. Even the villainous subprime lenders had varying tiers of approval eligibility, all based on credit profiles, income, percentage of property value needed to finance, etc. Although loan standards were loose, they weren't guaranteed. You might be surprised to know that conforming (good credit) customers are as much a foreclosure threat as those with less-than-perfect credit. Why? Because overextension isn't limited to lower-income households. Listen to this:

One of the more popular refinance options a couple years ago was something called a "125% program". Basically, this program allowed a borrower to finance their home for 25% more than it was actually worth. Most of the clients I refinanced who opted for this program were consolidating a ridiculous amount of credit card debt by using their home equity, plus an extra 25% that wasn't really there, because lenders were speculating on continued unrealistic gains in property values. The inevitable result of such abandon? Once clients refinanced into the 125% program (which generally consisted of a larger 2 or 3 year ARM loan worth 100% of their property value, plus a fixed smaller second loan worth the additional 25% of their home's value), they simply ran their credit card debts up again. Unfortunately, when it was time to refinance back into a 30-year fixed rate a couple years later, they found their DTI ratios (amount of income versus amount of monthly debts) were now way out of wack, PLUS their property values weren't appreciating as much as they'd hoped. Now they find themselves in a world of hurt, and foreclosure suddenly becomes a reality these formerly good credit customers never in a million years thought they'd have to consider.

So how in the world could banks have become so vulnerable to scenarios like the one I outlined above?

One of the major reasons is speculation. Namely, speculation with YOUR money. How could our banking system - for that matter, our entire financial system - be so entwined with risky securities and paper assets? I asked you at Art's blog what things like Gramm-Leach-Bliley have to do with this financial catastrophe, and I never got a reply. You might want to check it out. Do liberalized lending practices have some culpability here? Sure they do. Do lending institutions who exploited a grossly under-regulated system and swooped in to rake in as much money as possible before the whole house of cards came crumbling down share equal if not greater blame? You bet your bottomed-out dollar they do, Mark.

Al-Ozarka said...

"As I said, would a starving man turn down a free sandwich?"

He might think about not eating it if he thought it might be poisoned.

Especially if he wasn't really starving.

We can point fingers and all, but in fact...if Republicans had not ALLOWED Democrats to poison our economy, we wouldn't be deathly ill today.

The poison (real root cause) is liberalism. Period.

Same goes for our moral sickness in this nation and world.

Mark said...

As we evolved into a nation built on credit card debt, our notion of the so-called "American Dream" somehow morphed into an illusory, out-of-reach concept that we in no way could ever afford.

I think I agree with this statement. I wouldn't say it's propogated on jingoism and nationalist propoganda, though.

Unless you're talking about the flawed nationalist propoganda of the left. You know, the propoganda that says, "the poor and downtrodden in this country are too stupid to take care of themselves so we who know better need to take care of them."

"I asked you at Art's blog what things like Gramm-Leach-Bliley have to do with this financial catastrophe, and I never got a reply."

That's because I have no clue what Gramm-Leach-Bliley is. *sigh* I suppose I'm going to have to google it or something.

Marie's Two Cents said...

There are 2 parties involved in this mess, the Democrat's and the people who didnt read the fine print on their loan papers!

Barney Frank D-NY, Chriss Dodd D-CT, and Chuck Schumer D-NY were constantly pushing for de-regulation on the Mortage and Loan companies so more people who didnt make that much money could afford to buy a home.

And who Profited from the Collapse of Fannie and Freddie? You got it, Dodd and Schumer!

Then the people who applied for a home loan were either to ignorant or were misled into not reading the fine print on their loan papers!

What were these people thinking? Were they truly thinking if they made 30,000 a year they qualified for a 200,000 dollar loan?


John McCain warned about Fannie Mae and Freddie Mac 3 friggen years ago, and said there was a mess about to come down, and sure enough it has come.

Has anyone noticed since the Democrat's have been in control of Congress our economy has tanked?

That cannot be a coincidence.

Rush said he could solve this Crisis with one word:


Dodd And Schumer Benefited

McCain Warned Three Years Ago

Marie's Two Cents said...

S. 190 [109th]: Federal Housing Enterprise Regulatory Reform Act of 2005

Killed By The Democrat Congress!

Ms.Green said...

Life, liberty and the pursuit of happiness does not mean "guaranteed property ownership". That right has to be earned. These people were given mortgages when they had no right to them - because of the federal government - which is also what brought us the huge welfare state we are living in. When something is given to you - and you didn't earn it - you just don't appreciate it as much as when you worked hard and struggled to get it.