After nearly a half-century of life, I probably should not be so amazed at how quickly people rush to what they think is an easy or painless solution. Note the Obama phenomenon, how not only voters but the media and those who should offer critical opinion simply embraced Barack unquestioningly. First, let me make it clear that I have always hoped we would have a female or minority elected President. As an American, I am especially proud of the diversity of our country. It was easy for many to be caught up in the idea of a young and energetic President with new ideas.
But there is a danger in allowing sweeping changes that will have long term consequences to be pushed through without sufficient discussion or forethought. There should be real debate before committing trillions of dollars we do not have to a stimulus that will not solve the problem. Politicians want to be seen as 'doing something' and always love to tell people that they are going to give them something they want.
But let's be clear. Our current economic crisis was brought about by too much credit. The interference of the government - artificially supressing interest rates, guaranteeing loans and ignoring nearly a century of prudent lending standards - led to too much credit given on terms that were not sustainable. Very few 'zero down', 110%, Pay Option or loans that were 5, 10 or even more times the borrower's income would have ben made if these loans were not being purchased by Fannie and Freddie (private institutions chartered by the federal government). Likewise, the market for Mortgage Backed Securities and derivatives could not have grown were investors not desperate for a reasonable return on investment - since insured bank deposits paid rates far below the rate of inflation, investors looked elsewhere.
All this easy credit led to massive levels of consumption and what appeared to be ever-increasing real estate prices. As previously discussed, those prices were not sustainable. The policies being pursued by the Obama administration and their allies in Congress are geared toward stopping the decline in home prices and somehow trying to return to the 'glory days' of real estate. Witness the foreclosure moratoriums, forced loan modifications, giving taxpayer money to anyone who will buy a home. These geniuses think that if somehow everyone will just buy these houses, all will be well.
I have news for everyone - the 'glory days' are GONE and they are not coming back.
In the name of 'affordable housing', they pushed lenders to make more loans to those with marginal credit and incomes. They eliminated the credit risk to those creating the loans by purchasing huge numbers of mortgages, no matter how poorly underwritten. They ignored the warnings about Fannie and Freddie's business practices. They ignored the warnings of the housing bubble and the systemic risk posed by MBS and derivatives.
They want you to believe that the problem was caused by greedy lenders and a lack of regulation even though our economy's blood is all over their hands.
Those who raise the issue are accused of being obstructionists or 'preferring to see the country fail rather than allowing the president to succeed'. The sound bites castigating lenders sound good (and don't get me wrong, their are lenders who acted like dirtbags and deserve punishment) and they are reassuring all those poor 'victims' that the government will help you out. The next time you hear one of these opportunists spouting off on the subject, remember they are taking YOUR money and giving it to someone who does not deserve it. Someone with an income of $60,000 who borrowed $500,000 they could never hope to repay. Someone who refinanced their house for double the original mortgage and blew the proceeds on fancy vacations, $5,000 televisions and a Lexus. Someone who showed no common sense and now refuses to show an ounce of personal responsibility.
Allowing people to avoid the consequences of their mistakes only enables them to make the same mistake again. But in this case, the rest of us who act responsibly and pay our bills on time are being forced to pay. Worse yet, the unprecedented debt being racked up by our new ruling party will bring the nation to its knees.
The housing crisis will only end when the bad debt is worked through, the homes sold to willing buyers at a low enough price to justify the purchase and when lenders are willing to lend without incentive or pressure. The best way for this to happen is to let the market function - prices should be allowed to fall without interference. When the prices are low enough, people and companies will buy. The homes will be lived in, either by the purchasers or by tenants. Rents will go down. Savings will go up. Those who already own homes will be sad to see their supposed 'wealth' of equity is gone, but hey, if they were responsible in their borrowing they can afford their mortgage payment anyway.
Back to our irresponsible leaders.
Many people assume that the government sets the interest rate at which the federal government borrows when selling Treasury bonds. For those who don't know, these bonds are sold at auction and the prices bid by the purchasers (global financial institutions, sovereign wealth funds and investors) determine the interest rate. Because of the AAA rating of US government debt and the belief that the US could never default, the interest rates are among the lowest anywhere. Many assume that there will always be a buyer for this debt no matter how large. But the day is coming where the low interest rates paid on US government debt will end. Already there are rumblings in the international community about the size of the US deficit and real questions are being asked about the ability to repay. Even the AAA status may be at risk. The ongoing devaluation of our dollar is another concern for the holders of our debt. Being repaid in a declining currency hurts and the best way to make up for it is to charge more interest to offset the loss in purchasing power.
So even if it does not bother you to saddle future generations with crippling debt, you should be concerned that our government may be cut off from its supply of cheap credit.
It should concern you even more that if this happens, the Treasury and the Federal Reserve's ability to set interest rate policy evaporates. Any possibility of sovereign default by the US would send tremors the global financial system. An actual default would have catastrophic consequences unseen in modern financial history.
Some might think I have a political ax to grind. I don't. Politically, I am an independent, largely libertarian. I believe in a strong national defense, an (adequately but not excessively) regulated free market, and equal rights for everyone under the law. I am color blind on the issue of race agreeing with Dr. Martin Luther King that what matters is the content of your character, not the color of your skin.
