It's Nobody's Fault

The aftermath, or at least middle-math, of the sub-prime debacle and resulting world-wide financial crisis has me puzzled. There's no question that our economy is FUBAR at the moment, and that the Federal Reserve, the congress (small C), and the president (even smaller p) are all flailing around trying to come up with an anti-recession or, god forbid, anti-depression pill. What has me puzzled is that none of these august authorities is crying out for a public hanging of whoever caused this mess - usually, public hangings are in order when a catastrophe of this magnitude occurs.

Some may say that the resignations of a handful of Wall Street CEO's and CEO's of lenders like Countrywide show that a price has been paid. I beg to differ. All these people made out like bandits while the sun was shining, and they've departed for their mansions and a life of leisure. Some punishment!

So, let's look at what really happened. Interest rates were brought down to very low levels following the 9/11 crisis, and they recovered very slowly to levels that never reached "normal". During this period, individuals could purchase homes at very favorable interest rates, so the builders built lots of new homes and speculators refurbed many more ("flip this house"). Then, lenders pumped demand even more by offering interest-only loans, adjustable-rate mortgages with very low initial rates, and "no paperwork" loans, the latter meaning that the borrower did not have to prove income sufficient to cover the mortgage payments. As demand exploded, home prices rose at a record pace. Finally, supply caught up with demand and the unqualified buyers started to have trouble paying their mortgages. The resulting foreclosures glutted the market, created a massive over-supply situation and drove home prices down dramatically, trapping many more regular people and speculators with property they could neither pay for nor sell. BOOM! But who caused it?

Some people think the real estate agents caused it by convincing people to buy homes or speculate on homes that were fundamentally over-priced. Some people think the lenders caused it by loaning money to people who could not pay. Some people think the financial institutions caused it by buying packages of these loans from Countrywide and everybody else, and then peddling the packages as "AAA" investments to unsuspecting buyers. Clearly, all these facets of the real estate industry were at fault. But, did they cause it? I think not.

I think our government caused it, by sins of omission - by failing to regulate the financing industry and thereby slow the runaway train of the real estate market. Neither the Federal Reserve, nor the congress, nor the administration - each of whom had powers sufficient to slow the runaway train - did their job. None of them wanted to be the bad guy when every person on the block was counting up the inflated value of their home, and when every facet of the real estate building and financing industry was earning record profits and paying lots of taxes. So, our government let the train run until it ran off the tracks and into a school full of kids, figuratively speaking. That's why nobody is to blame...it's "look into the mirror" time for the people who are supposed to be protecting our economy.

OK. I've put the blame where it belongs. So what? What does it matter? What can we do if the people we elected to protect us have failed? What if both the party of George Bush and the party of Hillary Clinton have failed us, which they have? What can we do?

Well, we can hope that the short term "get well" programs actually get us well - that is, preclude a deep recession or a depression. But, beyond that and more important than that, we must demand that our representatives fix the generic ills that we suffer from. If we think, for example, that the entitlement funding shortfalls are not even more dangerous than the sub-prime crisis, we are deluding ourselves. If we think that deficit budgets at the federal and state levels are OK, we are deluding ourselves. The fixes are simple in concept: we need to pay more if we want to keep existing benefit levels or the service levels that our governments currently provide. Or, we need to cut benefits or services. None of this is politically popular, and that is why none of the candidates are talking about doing any of it. Maybe this recent melt-down will scare them into reality, but the odds are not in our favor.

I get the feeling that the next big craze will be to move out of the U.S., put your money in commodities or other hard assets, and leave this country to fall on its figurative ass. After all, hordes of New Yorkers have moved south to avoid the high taxes and poor business conditions. Perhaps the next wave will head to protected enclaves of expat Americans in even more hospitable climes. Only the politicians can prevent this speculation from becoming a reality, so go out there and kick their butts!