Our Country’s Financial Crisis: My Views

Why do my friends ask me about the current financial meltdown of the US economy? I don’t know but there certainly are a lot of them. I get calls, emails, and other such entreaties for my opinion.

First, the quick answer: is it’s the fault of the current administration. That is the failed economic policies of the Bush administration have caused this collapse. I could walk away and you’ll have an answer that was relatively accurate but devoid of any useful insight. Though, I will admit pretty much everything that’s wrong with the world today could, theoretically, be blamed on Bush. But I’ve got plenty of other commentary on that so we’ll just skip over it.

Fannie Mae and Freddie Mac needed to be bailed out. They are too heavily involved with the finances of too many of the homeowners in this country. If a buyer cannot be found Washington Mutual, it too must be bailed out. Washington Mutual is no longer an issue as JP Morgan/Chase bought it last night in a deal brokered by the FDIC after they seized WaMu. The consumers of this country do need to be protected from these things. They can neither control them nor influence their outcomes and the average consumer can’t have any reasonable expectation of seeing disaster coming.

Merrill Lynch? It’s a good thing they found a buyer. They should have been allowed to fail otherwise. I don’t think they would have failed, though. Lehman Brothers? Allow them to fail. Hell, Lehman Brothers caters primarily to other financial institutions like banks and such, the rest being to large corporations. I’m not sure anyone with less than seven figures in assets is even welcomed there. I have no idea, though, so don’t take it as gospel.

The bottom line is that the failure of Lehman, Merrill, and soon Goldman Sachs, has nothing to do with the real-estate market. It has everything to do with corporate greed and irresponsibility. Why should OUR tax dollars be used to bail them out? I don’t favour local governments spending hundreds of million to build stadiums for billions sports team owners. So why, then, would I favour spending nearly ONE TRILLION dollars to bail out private companies? Let them fail. Let the bondholders and stockholders take their losses. The stock market is no different than a casino. It’s a gamble. Let it be a hard lesson. Don’t let them use money that should be spent on education, healthcare, and IMPORTANT issues be spent on a PRIVATE COMPANY.

These companies loaned money to corporations that had no business being approved. The system is flawed. The officer at the low end gets a kickback for every loan approved. So does his manager. There’s no incentive to say unless it’s horrifically bad. This system comes with a price, and this is that price. Let them pay it, don’t shove it upon the taxpayers of this country.

Do I favour helping the homeowners who are in loans they can’t afford? Hell no. If you think you can get a $500,000 home for $699 a month forever, you’re an idiot. Let’s do the math. Same math you learned in elementary school:

You have a thirty (30) year mortgage (360 months) and you put down 5% ($25,000). We’ll assume the loan has ZERO interest to make the maths VERY simple. Of course, even the village idiot knows a loan has some interest in it.

$500,000 price
-$25,000 deposit
-$251,640 payments made (360 months x $699)
$223,360 balance due

Now, Mister Homeowner, if you add up everything you paid, and the balance isn’t zero, you still owe money on the house. Exactly whom do you expect to pay that money? I’ll clue you in. It’s you: it’s your house.

So many people can’t handle this math. And this is simple math. I’m assuming the loan is interest free, and it isn’t. Sometime over the course of the loan, the cost of the home PLUS INTEREST must be paid in full. For that to happen, even the dimmest bulb in the world can see the payment must change. But people are greedy and think they’re getting something for nothing. Very few people are actually stupid enough to fall for this so that leaves greed. I take pity on those who IQ is below 80 everyone else, too bad for them.

And the people who loaned them the money? Shysters, the lot. But that’s not illegal as long as they didn’t misrepresent the loan. And say what you want, when you get your loan packet you get the LEGALLY MANDATED FORM explaining everything you have to pay and for how long. It’s not a surprise. If you were dumb enough to sign for it without reading it, well then it’s just an example of Darwinism at work. All ARM (Adjustable Rate) loans and their ilk (interest only loans, principle only loans, and so on), at some point, adjust so they can cover the balance due based on the current rate of interest. At the end of the 30 years, you have to owe zero. That’s how a loan works. It’s called a loan and not a gift.

But the same corrupt system I mentioned before, all those little kickbacks that go up the chain for goals helped people who simply should not and would not qualify for a loan to qualify. And now they can’t afford them. It’s created a housing crisis. And it is, obviously, affecting consumer-lending organizations. Which, I must point out, is not what Lehman Brothers is or was.

Someone I know sent me an article by William Isaac, former chairman of FDIC, bemoaning the crises, as does everyone. He had an interesting slant. Isaac says, “The Securities and Exchange Commission and bank regulators must act immediately to suspend the Fair Value Accounting rules, clamp down on abuses by short sellers, and withdraw the Basel II capital rules. These three actions will go a long way toward arresting the carnage in our financial system¦. Lots of folks are assigning blame for the underlying problems — management greed, inept regulation, rating-agency incompetence, unregulated mortgage brokers and too much government emphasis on creating more housing stock. The biggest culprit is a change in our accounting rules that the Financial Accounting Standards Board and the SEC put into place over the past 15 years: Fair Value Accounting. Fair Value Accounting dictates that financial institutions holding financial instruments available for sale (such as mortgage-backed securities) must mark those assets to market. That sounds reasonable. But what do we do when the already thin market for those assets freezes up and only a handful of transactions occur at extremely depressed prices?

I agree with his hypothesis. I do think this is part of the problem. But it’s only a part. The greed of the system, the incompetence of the people making the loans, and the outright stupidity of the borrowers created that problem. And it had nothing to do with Lehman Brothers.

There is a theory that if the government buys, through the new Resolution Trust, all the negative mortgages that at some point they won’t be negative anymore because the housing market always recovered. This may, or may not, come to pass. But there are lots of people who will default nonetheless. It’s not going to save your ass if you bought a house you can’t afford.

Again, a prime cause of the problem was these high-cost loans without adequate equity behind them, loans that no one should have ever approved, and when coupled with the drop in housing prices, people were paying loans on properties they couldn’t afford. Of course they couldn’t afford them in the first place but greed outweighed common sense as I’ve repeatedly stated. People always assumed that no matter what, they’d be able to sell the house, but you know what happens when you assume…. The reason some people feel we need a bailout is that, without it, credit dries up; we need credit to finance business growth and consumer spending. Without those two things, we will sink into recession. However, this presumes we weren’t going into a recession anyway. Bring on the recession and let the crap float to the surface so it can be skimmed off. Anyway, that’s why the government is planning to buy them. If the economy turns around, and housing prices rise again, which they should eventually, because demand will one day exceed supply (though we’re talking years away now), then these depressed assets the government is buying will be worth more than they paid for them so the US$700,000,000,000 price tag may be slightly mitigated. But it still isn’t our government’s job to do this. They didn’t create this mess.

If this passes, and it will in some form, we are getting a very large telephone pole shoved up our collective asses without the benefit of Vaseline®. And you can thank the incompetence of the Bush administration who let this happen, and now has a harebrained scheme to fix it. Once again, they have no idea that there is any big picture involved. They don’t care about your future. Yes, it really is the fault of this administration, but you need to understand why. They are the facilitators, for sure, enablers in a co-dependent relationship with an institute of greed.

Again, if you want a future where you, your friends, your family, and your children are not beholding to foreign interests who have the assets to buy our problems, vote for Obama. If you vote for McCain, God will not have mercy on you because it is said He only helps those who help themselves. Think.

(Some edits made around 9am to correct facts due to late-breaking news)

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