Friday, April 24, 2009

Up To Now

As an initial post, I want you to know how I feel about the situation we are in and my view so far. I know this is a little long, but give it a read.

If you listen to one political side long enough, you start to believe that the other side created the mess we are in today. Democrats blame President Bush for too large of deficits and not enough regulation of the financial industry. Republicans blame the Democrats for easing lending standards, especially with Fannie and Freddie. Or how the Democrats blocked significant legislation during the 2006-08 congressional session. I think Washington politics have become a playground full of children: "Ooh, he did it!" Blah blah blah.

The real people who did this were everybody, me included. While I do not have a subprime mortgage, maybe I didn't do enough as my responsibilty as a citizen to elect those who I see fit to serve. But let's take another layer off.

In President Bush's first term, he pushed for more Americans to live the ultimate American dream: home ownership. An honorable thing and an innocent comment from the President. However, the banking system saw an opportunity, as any profit taking organization would, which was to make serious money.

After the 2001-02 recession, money was cheap because of the monetary policy laid out by Alan Greenspan. All large corporations were well capitalized (that's why GE got into the lending business). But the result was that sub-standard loans were made. Using the "How Much House Can I Afford?" model, traditionally people were able to qualify 28% of their monthly disposable income as to how much of a payment was affordable. But banks decided this was too strict, and loosened the standards to 35% and 38%, being able to qualify people who originally could afford a house that was $200,000 now qualify for a $350,000 with no money down. On top of it, some banks started "No Doc Loans" in which borrowers didn't even have to prove their income. This just looks like a disaster waiting to happen, doesn't it?

Than of course the banks would then sell off these loans, pool them together with others, and sell them off in pieces as Asset Backed Securities (ABS) or Collateralized Mortgage Obligations (CMOs). The thought was that when the interest rate would go up (because some people could not qualify at market rates) the house could be refinanced until, whoops, the bottom fell out of the housing market because of too much supply, then people are foreclosed upon, and then the bonds in which people had bought go bad and on and on. Just like dominoes. The Credit Default Swaps (CDS), or an insurance policy that an infinite number of people can buy that insures a security, that AIG held with little cash reserves then bankrupted the company when all of the purchasers tired to collect. Or all the MBSs that Lehman Brothers held sunk the company because the expected cash flows did not come. They still had payroll! And Lehman was not the only company that this happened to, but it’s the one that really hurt the market when the Fed decided to let it go.

This just didn't apply to homeowners, but corporations too. And the rich. The rich had to have a bigger yacht (which now are being repossessed like crazy), a bigger jet, or maybe that second or third house in Florida or Switerland. The simple fact was that money was being given away on a grand scale with no restraint, because Congress did not want to attack the issue. On top of it, there had been no new regulations in over 20 years to regulation financial derivatives which just made the problem bigger.

Now with the TARP out of control and President Obama's spending bills, the math does not add up. The government cannot continue to spend $10 for every $1 that they take in. Raising taxes will not solve the issue or instituting a Cap and Trade (read Tax) program to solve our deficit. Unfortunately, government (both sides) will continue running our economy worse than an eight year old running a lemonade stand.

What must happen is a real freeze in government spending. Tax increases will create havoc on our economy. Consumption will plummet in our industry. All extra disposable income would now be paid to our government who feels that studying the migration patterns of birds is more important than saving real jobs.