I have a plea for government:
“Please – please – stop trying to help us! You’re doing more harm than good.”
Seriously, I don’t know how much more of government’s help we can take.
They tried to help the average and below-average worker buy a home by making home loans more affordable through government-backed agencies that secured those loans. Yes, we got a strong advance in mortgage lending and home buying from the 1990s onwards. And yes, by 2006 home ownership had advanced from 64% to 69% into 2006.
But that was only possible by allowing the average household to borrow at 9.2 times their pre-tax income in early 2006 (versus the norm of 3.3 times). In whose world does that make any sense? How is that even remotely financially responsible?
Are we nuts?!
Did the banks go nuts?!
Actually, yes… on both counts.
Most of those extra 5% that got those new houses couldn’t afford them. So they defaulted and caused a national real estate subprime crisis. Many have been kicked out of their homes. They’ve seen their credit ratings destroyed. These people would have been better off if they’d stayed in their trailers!
Government didn’t really help them at all. They actually just made things worse. All because they tried to screw with Mother Nature!
It started with Bill Clinton’s administration deciding that more people should share the American dream of home ownership and appreciation. That sounds good, even laudable. But home ownership requires some down-payment. It requires property taxes and repairs and maintenance. It requires accepting the risk that home prices might go down.
Not everyone is equipped to deal with – or even afford – all of those requirements.
So I ask you with tears in my eyes: why did government and lending institutions believe it was a good idea to reduce the amount of the down payments need from 20% to 5%… or remove the need for a down payment altogether?
How about letting government-sponsored agencies like Fannie Mae and Freddie Mac take over and implicitly guarantee such loans to allow them to be offered at even lower interest rates than those available for more affluent or higher credit-quality borrowers…
Then, for the loans that did not qualify for that, let Wall Street package mortgage securities so diversified, collateralized and insured that they created the illusion that they were as safe as Treasury bonds… and were actually approved as such by the best credit rating companies in the world (S&P, Moody’s and Fitch)…
Oh, and the Coup D’Etat was Wall Street (through a bunch of smart-ass MBAs like me) creating new derivatives that would guarantee any risks of default for such increasingly risky loans. A creation they called credit default swaps, which was really nothing but B.S. insurance because speculators would guarantee losses with no collateral.
This made the whole lending and investment industry feel like there was no risk in an increasingly risky world of loans, securities and bubbling home prices. It allowed all types of banks and financial investment firms to take unprecedented risks at higher and higher leverage with the one assumption that real estate would never go down!
Ultimately, it created the greatest real estate bubble in modern history.
It was all utterly short-sighted!
The bubble has been collapsing and wreaking financial havoc ever since, slowing the economy down to a crawl.
And what’s the government’s answer to the current state of affairs? Obama Care and an increase in the minimum wage to $9!
At this rate they’re going to help us to death.
Obama Care will NOT reduce healthcare costs because it’s bringing more people, who will have even less responsibility for their costs, onto the rolls. And now that there is the ability to sign up to receive healthcare with no exemption for health problems, many may pay the small penalty and wait to get on the program later.
Also, both the new minimum wage and Obama Care programs will incentivize more employers to either not hire low-end employees (the ones most hit by this crisis), and/or to outsource overseas where possible, with less healthcare costs to boot.
There are definitely improvements we can make to the most costly healthcare system in the modern world, and improvements that would make our workforce more competitive, but these recent programs are not the solution!
The bottom line is this: right now we need government to get out of the way, well-intentioned or not – and let nature take its course. We need a great, bone-crunching crisis that will ultimately produce real longer-term solutions.
Until we get that, don’t bank on anything recently proposed to work down the road.
Ahead of the Curve with Adam O’Dell
First, it’s a victim of its own success. Until around 2008, no one cared about the Fed. It was the nerdy kid that never got invited to the party… The market snoozed through its policy briefs….