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Reflection on Foreclosures
What puzzles me most about the current financial crisis is that my mom's realtor told me this was going to happen in...2004.
In 2004, she explained how banks had let many people take out interest only loans that would balloon in five years on the theory that they could refinance, but, as she explained to me, prices were not going to keep rising forever. What she told me was so horrible--people losing their houses-- that I started praying about it and kept praying since them.
But, and here is my question, if this nice lady knew about this in 2004...why didn't the bankers and lawmakers notice?
Nor is she the only one, my economist friend from Arizona says she knew from about 2004/2005. She was part of an economic round table that John McCain sometimes visited. (She despises McCain for Arizona related scandals that don't make it to the rest of the country.) McCain apparently listened, because he tried to introduce legislature about that time to slow down the subprime loans...it was called 'racist' -- since subprime loans were thought to be helping the poor -- and defeated.
Granted, neither of these people (the realtor or the economist) predicted the Wall Street trading on sub-prime loans and what that would do...but just the foreclosures alone would have been bad enough. This just makes it worse.
So...my mom's realtor knew, economists knew, and some lawmakers knew...so how did things get so bad?
Greed, would be my guess. Greed, and short-sighted people who thought, "Aw, who cares? The future will take care of itself--let's make money now!"
I may have rather a cynical view of things....
Capnflynn, I see we posted within a minute of each other. Consider mine, as my pastor would say, an amen.
Wishful thinking: "That won't happen because I'd be really upset if it did." This shows up in a lot of areas of life.
Combine with the cult of the expert: there were people who seemed to know what they were talking about, who claimed that new techniques meant that we were better at handling financial risk than we used to be, so that a higher proportion of bad loans could be inserted into the system without making it all melt down.
Combine with the fact that doom predictions spent a while not happening: _The Economist_ of London* has been saying that the U.S. was in a housing bubble since the first years of the decade (maybe since the late 1990s) -- and for years it kept not popping. This made the apparent experts look like they knew what they were talking about.
(* the official newsmagazine of the international business class, more or less. I'm not sure whether they talked about the subprime problems as much: I stopped reading them round about 2004.)
I think Greed is too simplistic a way to look at this situation.
There has long been a trend among society to nudge people to living outside their means. To not make decisions based upon the money you have in your pocket today, but instead on the money you *should* have in your pocket tomorrow.
I've seen it time, and time, and time again. I've many friends who came out of college not just with student loans, but maxed out credit cards, and large car loans to boot. And they will loan you the money. (Or rather would.)
I recall, when I applied for my first mortgage talking with family about how much a loan should I get, and the consensus was between 2 1/2 to 3 times my annual salary. And under no circumstances should my housing costs go above 1/3 of income. But the mortage lenders wanted to qualify me for up to 5 times my salary. One lender even *more* than that. If I hadn't started the process by talking carefully with family, would I have accepted what these "professionals" were telling me? Quite possibly.
I believe that at the root, because we as a society will not talk about money, not with friends, often not even with family, we make decisions in a vaccuum of our own experience and knowledge. We don't make use of the wisdom of our friends, and relatives, and the experiences good and bad of those we otherwise respect.
Instead we live in a culture that idolizes consumption, particularly consipicuous consumption, and then we wonder why the house of cards is coming down around us.
It's actually even worse than that. The entire economy has come to depend upon people living beyond their means in order to keep buying things so that people can continue to be employed making and selling them. No one wants to think about the long-term sustainability of the consumer economy, which depends for its perpetual growth upon constantly opening new markets for more and more goods and services.
Nobody seems to be able to feel satiation any more. I always loved Marion Zimmer Bradley's acerbic "I can only wear one fur coat at a time" with which she responded to people who asked why she chose to use her royalties to fund pay-forward projects like her fantasy magazine.
When I read the list of expensive stuff the court was trying to seize from convicted fraudster Bernie Madoff, I was simply croggled -- I mean, does a meal really
taste that much better when it's served on a $1000 imported china plate than when it's served on a buck-fifty Corelleware plate? Sure, nice china gives a table a touch of class (my mom often gets Grandma's heirloom china out for Christmas dinner), but there's a point at which the additional expense no longer translates into a real and discernible increase in quality. It's just showing off.
We're going to have to rediscover the habits of thrift that got abandoned in the big boom of the 1950's and 1960's. I'm currently working on a project called Grandma's Depression Memories
which will cover some of those forgotten skills. The site is just in its begining stages right now, but I'm hoping to get a wide variety of materials on it in the next few weeks andmonths.
If you want a recipe for ice-water chocolate cake (it's low fat, too) let me know.
Yes, please send me a lj-mail with it. And let me know how you want your contribution credited and whether you have a website you want promoted with your contributor link or if you just want me to link to your livejournal blog.
If you want more yet, I'll see what my mother has...
Part of why this happened is that the people making the loans then bundled them up and sold them to someone else. So the people making the loans didn't have to worry about the end game. They all got out of the business as soon at it headed south, with all the money that they had made. It was the banks that had purchased the loans and the people who were promised that they could refinance in five years who got hung out to dry. I'm quite angry with how the entire thing went down. We bailed out the rich and let the not so rich lose their houses. Most of the banking people who took the government bailout money are the kind of people who complain about the so called welfare queens who take subsistence checks to feed their kids. How is this different, or how is this not even more morally reprehensible? But the thing that galls me the most is that we didn't just convert all of the subprime loans to prime. That's what they did during the depression. That allowed people to stay in their houses and it saved many banks because these people could then pay their loans and the banks had money. It also lowered the number of foreclosures thus putting an end to the glut of foreclosed homes on the market that were driving down the price of real-estate and exasperating the problem. We have historical prescience for what works here, but as a culture we seem incapable of looking to the past for solutions, even when they are clear. And as a country we are way to willing to bail out the rich and ridicule the poor.
My mom told me that in the late Sixties or early Seventies (she couldn't remember quite when.) There was another incident something like this one where no one could pay their mortgages.
The bank just let them go without paying for six months or so, because it was so univeral, then things got back on their feet and people started paying again. My family was one of those who did not pay during this period.
One would think that the banks would be eager to refinance and to give people leeway in a situation like this.
The banks didn't want to refinance because they got bailed out during the savings and loan scandal of the 80s and decided they'd just get bailed out again. To hell with their customers. We need to stop bailing out banks and force them to act in their own self interest.
There were a few voices decrying this.
But they were ignored.
There are other economic factors, too. With the stagnation of the middle class, refinancing their houses has been a way for a lot of people to not only "get ahead", but just to stay even.
Such a House of Cards was destined to end. Your mom's realtor was not the only person to see it--but few *wanted* to see it.
And, now,hHindsight, is unfortunately 20 20
|Date:||March 31st, 2009 02:31 am (UTC)|| |
It's all in Sowell!
There are two kinds of entrepeneurs: those who exploit social/economic niches (like Starbucks or Amazon.com) and those that exploit, erm... governmental niches. It's merely that the latter has come to be as, if not more, profitable than the former.
With predictable results.
Re: It's all in Sowell!
Another dichotomy that's relevant to the current mess: there are entrepreneurs who look toward building a long-term sustainable market share, and those who merely seek to strip-mine a market for short-term gain and then move on.
Unfortunately, the attitude of "I've got mine, stew you" has become far too prevalent in these United States over the last few decades. And the whole housing bubble just fed on that attitude, until the consequences of selfishness came home to roost.
A couple of reasons, I'm sure, but one is that in this area at least, real estate was basically a giant pyramid scheme. The thing to do was buy a house or three, then sell them at a higher price. Then the guy who bought them from you would sell them at an even higher price, etc.ad infinitum. A new house that was sold for $250,000 in the mid-90s might sell for $400,000 less than a decade later.
When we bought our house, a lot of people criticized us for not buying the most expensive thing we could possibly get our hands on "because in two years you can sell it for even more and make a profit!" Like all pyramid-type schemes, everyone depended on being the guy not left holding the bag when it all came crashing down. And those who did get out of it entirely after a few years did end up with a nice profit. However, since this was one of the fastest growing areas in the country, more and more people got into it instead of bailing out, even though it should have been clear that the price of houses could not go up infinitely.
It also didn't help that one of the biggest developers in the area ended up under investigation because their agents were literally altering (or making up) client's incomes on loan applications, and not telling the buyer's they were doing this, so people ended up with mortgages they couldn't afford. Even after the story initially broke, thanks to some investigative reporting on the part of the local paper, the feds initially refused to even look into it. They did eventually, but I don't know that anything ever came of it, especially given that a large number of local and state-level politicians were heavily involved with various developers. (At a town meeting I once attended, a state senator was there representing the developer. This was when he was in office, and here he is officially representing a developer against the residents.) So I think that outright corruption on the local and state level is also a part of the picture, and probably a bigger piece than most people realize.
My friend in Arizon had been telling me for years that 40% of houses out there were investment purchases...which meant no one was really living in them.
I subscribe to several business newsletters, and one of them is constantly touting the virtues of real estate as an investment vehicle. They've gotten a bit more conservative in the last few months, shifting their emphasis to long-term investment in multi-unit properties such as apartment buildings and strip malls (so that if one tenant goes away, you still have others pulling in enough money that you can pay your expenses), but before the meltdown, they were really pushing the whole "fix and flip" thing. It made me uncomfortable even then, because it seemed to be way too much emphasis on quick bucks through rapid turnover without any regard for the longterm health of the neighborhood, rather than really investing in a community and building it up.
Politicians don't really get much out of averting crises. If they're successful, there's no crisis, which means they have nothing to point at and say "I did this". I mean, if they go around saying "Something worse would have happened if I hadn't been around", people aren't going to consider that the wildest of commendations, you know? A PC atmosphere in which labels trump actual thoughtfulness about what's best for everyone doesn't help either.