Friday, September 26, 2008
I talked with a banker this morning. He explained the current crisis in terms even I could understand. Bottom line, it's all about sub-prime interest rates on mortgages, and the insurance institutions that guaranteed them. Think interest rates as low as 1% which were actually issued.
People who could afford a conventional mortgage for a modest family home were offered the opportunity to go for the "look at me" structure that carried a temporary interest rate below the prime rate offered to the best business credit risks. The rate hikes were built in, and when the interest rate went up to 5%, for instance, there was no hope the borrower could afford the mortgage. The crisis is being triggered by those rate hikes kicking in.
Now I understand how it has been that I've watched people like me move into houses that I couldn't afford even in my wildest dreams. Now I understand why I'm seeing abandoned housing around here, even sometimes very expensive abandoned housing. Now I understand why gated-type communities were started, but only a couple of houses were built, and those houses now sit in the middle of empty fields.
Consequences of this, according to my source, are defaulted mortgages on homes for which there are no buyers, and a tightening credit market that means there are likely to be no buyers in the near-term. There are some bargains out there, but who has the credit to grab them up?
Meanwhile mortgage brokers, even a local one, who worked with investment banks like Washington Mutual, in securing these sub-prime mortgages find themselves holding defaulted mortgages. Washington Mutual went belly up because they hold primarily these sub-prime mortgages that are in default, and don't have a diversified list of investments to help off-set the defaulting mortgages. In other words, put all of your eggs in one basket, and you are out of business when the basket starts to break.
Greed, to a large extent, has fueled it. Greed on the part of the investment bankers who have lent money at sub-prime rates with the expectation of watching their income rise with the rise in interest rates. Greed in the form of a disregard for standard credit checks, and instead loaning money on merely the word of the buyer who could claim an income of $200,000 per year on paper, while having an actual income of far less. Greed on the part of home buyers on an ego trip and willing to lie to get the glitzy digs.
There has been enough of these mortgages lent out to topple the economy. Now that banks are doing more thorough investigations into mortgage seekers' finances, there is no market for the defaulted homes. There are people who no longer qualify for the mortgage that they would have qualified for three years ago. So the sub-prime buyers who are finding themselves with an albatross around their neck when the higher rates kick in that they cannot afford, can't sell the house for what they owe on it. Now the inflated prices on all housing that has been fueled by this circus is starting to drop. Who is going to pay the bill for the construction that has been completed?
Fortunately for America, many banks did not issue sub-prime mortgages, so the direct cause of the crisis does not necessarily affect the particular bank where someone has their savings. Long term, can the foolish bring down the prudent? The banker I talked with wouldn't venture a guess.
I asked if this is the result of the attempt to salvage the economy after 9/11? The banker's first response was no, it preceded the terrorist attack, but on further reflection he acknowledged that the low interest rates became lower still after 9/11.
Meanwhile senior citizens counting on their interest income have borne the brunt of this greedfest as they saw their interest income plummet. A sound economy can't be built on future profits, whether it's the family financial strategy or the nations.
I have far more sympathy for those who counted on income from their life-long savings effort than I have for the home buyer who bought way above his means. But who is the bailout going to benefit? The hard working senior who saved his money? No, the perpetrators of the greedfest who are now crying in their crystal palaces might actually get to keep them thanks to the generous gift of Uncle Sam. Meanwhile who gets to pay their bills?
As I was listening to my banker's explanation, I couldn't help but think about the Randian economists who subscribe to the glorification of greed. The powers of evil may glitter and shine in the short run, but in the long run modesty, humility, charity, the cardinal virtues, win out. We are not supposed to invite our neighbor's envy.
Credit, which arguably propped up our economy after 9/11, would seem to be the cause of many of our financial woes going back even as far as the Great Depression when credit caused the market to crash. Credit on something that is a relatively sure income earner (a business) is one thing. Credit on something that does not earn income and has built-in obsolescence, is much riskier, and needs to be much more carefully approached from either the lender or the buyer's point of view. Taking possession of something you probably won't be able to pay for is the equivalent of stealing in the long run. Being encouraged to take it by a slick financier through your own ignorance is a shame on you, and a far greater shame on the financier who talked you into it.
Bottom line, we all need to learn to live within our means and practice prudent money management. We all need to resist the one-upsmanship that leads us to acquire stuff we can't afford in order to make ourselves appear better than our fellow man. And dammit, it's about time that people who practice those sound financial strategies stop being penalized.
Ok, now I'll turn this over to you readers who probably have your own viewpoints on this crisis.