All I’ve been hearing about lately is this whole economy thing. Apparently there’s been some trouble? People keep blaming this organization or that bank, or the President or the head of the SEC…and while there’s plenty of blame for all of them (though no consequences, apparently), the real culprits are you and me. But, Erik, how do you figure? I’m glad you asked.
I’m no economics major (oh, wait…yes I am), but it breaks down into several key steps. The first is the banking deregulation at the end of the
Americans became overly dependent on credit in the last two decades. I can count myself in that group, as I lost my first house because I’m an idiot. As lending institutions lessened restrictions and more and more Americans were getting credit, the scarcity of homes increased. With homes more scarce, the value of homes also increased. So every year, Americans who couldn’t afford it were taking out more and more in loans from banks which knew the loans had a great chance of default. That sounds smart, yes?
Enter the brokerages. These companies bought mortgages from smaller banks, and used them in mutual funds. Sounds like a good deal, right? The value of homes always goes up, right? So why not invest in a fund with a guaranteed rate? The brokerages then took the investors’ money and bought more of these “sub-prime” mortgages. You see how this is playing out? Now, not only do we have homeowners who can’t afford their homes, but millions of people riding their retirements on you making your house payment. All of these things, however, were not enough to start the disaster we are seeing, today. The straw that broke the lender’s back? Oil.
When oil prices started to increase, it took inflation with it. Fuel, well, fuels the economy. At first, it was isolated effects; people who were already struggling to make ends meet couldn’t keep up, and many lost their homes. Higher gas prices led to higher food prices. Higher food prices led to less people eating out, closing many mid-priced restaurants, resulting in lost jobs. Restaurant jobs are unique in that they allow uneducated workers, with a female majority, to earn well above the minimum wage, via tipping. A large, single-parent demographic began loosing their homes. American car makers, long dependent on the large truck/SUV market, saw sales plummet as buyers demanded cars with better fuel economy. Lots full of vehicles went unsold, as small foreign cars took the market. Thousands of auto workers, used to $28 an hour, saw their wages cut in half, and jobs eliminated. The economy was now in a tailspin; as the housing bubble bust, banks were left with homes they couldn’t sell; investors sold off stock in the banks, as the value of subprime mutual funds crashed. Millions of Americans are left holding their dicks, and what does the federal government want to do? Reward the banks that took high risk loans while raping the little guy. The stockholders and fund-holders get nothing.
There are many alternatives to the proposed bailout. One idea is for the government to take control of some mortgage-backed securities -- most likely by buying them from financial firms -- and then work to restructure the underlying loans into something homeowners could afford. The value of the securities, both those bought by the government and those in private hands, could improve as foreclosures and late payments drop. If so, financial firms holding mortgage-backed securities could see a recovery in their balance sheets. Other plans include eliminating the capital gains tax to boost securities on Wall Street, and using the Treasury as a hedge fund, loaning to banks at reasonable interest rates, instead of outright buying the shitty securities of the banks.
According to Lawrence Summers, former Treasury secretary, the government might have to try multiple approaches. "If you have hypertension, you're way overweight and you're in the process of having a heart attack, what's your most fundamental problem? It's really not that useful to distinguish between them," Summers said at a Brookings Institute forum. "They're all components of the situation, and you're not going to get to a very satisfactory place unless you address all of them. That's how I think of our financial reality right now."
The real tragedy is that this could, and should, have been stopped at any point along this procession. But the blame lies with us. For too long Americans have lived to excess, buying gas guzzling cars and over-sized homes with loans we couldn’t afford. Sure the outline above is way oversimplified, but the bottom line is that we need to be better consumers, and cut our dependence on credit as we cut our dependence on oil. Not to sound preachy, as I struggle to make my mortgage payment by working 70+ hours a week, but perhaps we should redefine progress to mean that just because we can do a thing, it does not necessarily follow that we must do that thing.
And yes…I totally stole that from Star Trek.
