I’m fortunate to have a couple of friends who are as involved in politics and economics as I am. On any given day I can have a discussion with Les, who is single, childless, fiscally conservative, ethically aware, agnostic and on the verge of a very tenuous retirement. Also on any given day I can have a discussion with Dave, who is married, the father of five small children, fiscally conservative, ethically aware, strict Roman Catholic and a long way from retirement. We discuss the future of the United States from very different perspectives based on our situations, but we all have a couple of things in common:
1. We all earned what we have through work and saving rather than speculation and gambling.
2. We all play by the rules imposed on us by our government and laws- despite what we may think of them-as well as our own ethical code of the ‘Golden Rule’.
3. We no longer trust in our political, governmental and financial institutions.
Les is an intelligent guy who could have easily manipulated the system to gain wealth but didn’t because of his ethical compass. Instead, Les will have to rely on the government and politicians, who, in my opinion are directly responsible for our predicament, to provide him with reliable Social Security benefits and increases in payments that will meet the cost of living changes that will certainly occur over the remaining years of his life.
Dave will have to hope that the same government and politicians will suddenly and unexplainably ‘see the light’ and make the hard, painful, and unelectable decisions that will turn the country’s economy around and provide an economic environment in which he can earn an income sufficient to care for his family.
Who’s responsible for creating this mess? Here’s a brief breakdown of my opinion: everybody but the three of us and those who live on our income as we do. We buy what we need. We pay as we buy.
The government is hopelessly broken and corrupted. Lobbyists buy influence, we don’t. Dave blames the American people for being uninvolved or only involved in their own economic interests. He’s right, but it’s irrelevant at this point because it began generations ago and corruption is institutionalized now. Dave still believes (I think it’s more of a hope) that the ‘people’ can turn this around. I’d be making alternate plans if I were Dave.
Les and I have been predicting this outcome for many years and at least this debacle makes us look well informed. Here’s how we arrived at this crisis.
Interest groups (like ACORN) decided that the mortgage system was racist (rather than economically driven) and that home ownership should be available to all, no matter what their ability to repay a loan was. This began in the 1980’s and peaked in the ‘90’s during the Clinton Administration when banks were pressured (by lawsuit) to provide loans to people whom had little or no possibility of repaying their loans. ‘Predatory lending’ is the term given to the practice of providing initially cheap loans with no downpayment or proof of earnings that quickly become very expensive. It implies that the banks know they're backing a dead horse and that borrowers are too simple minded to understand their own loan provisions and their ability to earn enough to make their payments. These lousy loans would bury the banks (and no banker I know really thought the housing upswing would continue forever) so regulations were relaxed, allowing the banks to sell these debts to financial institutions. Follow the enormous growth and depth of the problem, just in terms of Fannie Mae, just one of the principal originators of these low-income loans:
1992-1 Billion Dollars
1999-80 Billion Dollars
2003-600 Billion Dollars
The SEC made it possible for banks to leverage their lousy loans by allowing them to only require 10% of the capitol needed to repay the debt and letting them sell the debt as investment instruments. The rapid growth of housing values temporarily hid how bad the situation was, but what goes up must come down, and the banks and financials are now exposed.
Let’s summarize. Greedy, weak or stupid politicians were pressured to change the rules to force bad loans to be given out, knowing it was the wrong thing to do. Greedy or stupid people took bad loans that they couldn’t afford; knowing it was the wrong thing to do. Greedy banks got special rules from greedy politicians to let them take more bad loans and then spread the risk to greedy financial institutions as ‘investments’ knowing they couldn’t pay up when called on. Folks with no equity in homes who can’t make payments on their loans walk away or are foreclosed on, leaving homes which have only a fraction of their original loan value, which leaves banks with gigantic, uncollectible debt (loss) and financial institutions (many of whom also run insurance branches and investmant divisions) with worthless ‘investments’. The problem is so system-wide that the failure of any one of these institutions has a domino effect on the others, including the bank that ‘holds’ your money, your retirement portfolio, your IRA, even your home and car insurance! That’s why we’re seeing ‘government bailouts’. There have been other bailouts in the past, using the same faulty reasoning. The result is that a patently wrong situation is condemned to repeat itself at an ever-enlarging scale in order to insulate the people actually responsible. The same could be said for Social Security, Medicare/Medicaid, and deficit spending. ‘We the People’ have no say in these decisions, the system insures that. We can only stand on the shore as the tidal wave washes over us. Our politicans make it easy for us to let it-and themseleves, slide. Taxes will be paid in the future to pay for the problems. Bonds will be issued and probably bought by people who want even more influence over our country in the future. These mistakes are all missing the critical aspect of learning-they aren't instantly painful. As a child would you take your hand from the burning stove top if you didn't feel any pain? Would you learn not to do it again? There would be outrage if there was even the slightest pain associated with this behavior. What would happen if the feds announced that to pay for the bailout of their mess they'd take away every American's cable and dish t.v. for the next decade but make them keep paying the monthly payments to help cover the costs? How about cancelling all professional sports events but letting the government hang on to the money you prepaid for tickets to help pay for it? Allowing these companies to fail would cause pain to be sure, but pain is a powerful incentive to make people get involved and learn. No one wants you to learn from this history, so we are condemned to repeat it until it can no longer sustain itself.
Sorry Dave, this country’s unraveling won’t have anything to do with social or moral problems like abortion. The average citizen's willingness to pass along debt shows that he clearly doesn't understand or care about his own childrens' futures, much less the unborn. It's decay will hinge on greed, fear, bankruptcy, corruption and personal survival. It’s not our fault my friend, but that tidal wave I spoke of is approaching. Surviving this mess? We will survive, but with less and less of the life we've known and come to expect. Personally, I’m now out of the stock market, I’ve erased my debt and own what I own. My money is all in banks that allow me quick access and I monitor those banks health very closely. Even so, the value of that money is dropping and could temporarily collapse in a worse case scenario (which is now more of a probability than ever). Now I’m looking into stable, tradable commodities and currencies that can be physically owned. How to survive this mess? Either take your money and run, or stay with a sinking ship whose occupants, crew and officers have torpedoed themselves. They’ll all tell you that ‘someone will surely bail this boat out’, but only look out at an uncaring sea. Most won’t know how the sinking happened, others won't have the ability to avoid it, and still others won’t believe it’s really sinking even when the water’s up to their eyeballs.
Please don’t look for help from the Captain of this sinking boat; he and the officers will have already taken all of the lifeboats to their well-provisioned private island to watch as you all drown in a sea of debt.
