Sarah and Gwen: the Two-Headed Monster

This blog is about everything involving Lexington, KY or anything else we feel like yapping about.

Friday, September 26, 2008


It is nice to know that the Republican candidate’s opinion of Obama’s five step plan to get us out of this financial mess matched so closely that he plagiarized it and announced it as his own. With the two candidates in such close agreement it should be easy to come up with a plan in time for tonight’s debate. Perhaps that is why McCain is so eager to face Obama.

Okay, that wasn’t nice, but the time to be nice is over. With Washington Mutual becoming the latest victim of the meltdown in our housing market, it is time to get serious how we got into this mess and how we are going to have to pull together to get through it.

I know a lot of us are saying “I’m not to blame for this. I don’t even understand what happened.” If you feel a little or a lot confused by the talking heads or in a state of shock by the $700, 000,000,000 price tag being thrown around in Congress. This is a mess of colossal scale. The financial markets are imploding and as they collapse they will take the rest of the economy with them. This is why FDR put regulations on the banks.

Greed is why Wall Street has spent billions getting rid of those regulations in the years since his death. Greed created the housing bubble. Wall Street is no guiltier of being Greedy than Main Street but deregulation allowed them to do it on a larger scale. With deregulation they got the ability to create investment banks in house and literally write loans to themselves.

When the Great Depression started, only two percent of the population was invested in the market. Two percent brought the markets to a halt and crashed the economy. I heard one of my coworkers talking about how all she had was a savings account and that was insured. Not so! With two or three questions, I was able to determine that she has a retirement account heavily invested in stocks and she has a mortgage, one high enough that if she or her husband were off from work for more than a few weeks they would be at serious risk of defaulting. How did we all get into this mess?

Let’s talk about Main Street first, since it is the easiest to understand. Most of us want a home of our own and, being greedy, want the best house we can afford. When the local banks and contractors tell us that they have a great deal on that mortgage we believe them. These guys are our neighbors, hometown folks like us, right? No! Your bank is owned by another bank, which is owned by an investment bank or holding company. The little guy you were talking to has been bought and sold so many times he or she has little or no control over the type of mortgage offered.

What they do know are the terms of your mortgage and probably didn’t tell you or at least they glossed over the fine print. They also didn’t mention that as soon as you sign the deal their parent company is going to sell it to another company who, in turn, will sell it again and again until the mortgage ends up in the hands of a company that will package it with thousands of others and sell stock in the mortgages as if it were a company. You payment has just gone from being a bank loan to being a dividend on some holding company’s stock, and that stock has probably landed in your grandparent’s retirement fund where your house payment becomes a dividend supporting their retirement.

All this doesn’t sound like a bad idea, your bank is making money, the builder is making money, the holding company makes money, and so is Grandpa. Everybody wins. Except: the fine print of that mortgage is still looming over you.

Maybe you didn’t understand that your mortgage had a lower rate for three or five years, or a balloon payment. Maybe you took advantage of easy credit to buy a house you could fix up and sell. A few years down the road down the road a nasty surprise shows up in your mailbox. That rate that sounded good three to ten years ago just became your worst nightmare.

Maybe you did understand it but hey, the economy was booming, you were expecting to be doing better by now, or you had a touch of greed that made you think you could get a second or third house, fix it up, then sell it for more money than you paid. The mortgage would then be renegotiated by a new owner.

The builders got a little greedier, and built more houses than the market could support. In 2005 the market topped out and we have had three years of declining housing prices. Those builders that made lots of money are now in trouble. “Flip This House” is not an option any more, More and more houses sit empty while the owners still have to shell out mortgage payments. Defaults keep going up and those banking stocks supporting grandpa’s retirement cut or end dividend payments. Stock prices drop and one by one the mortgage lenders start going belly up.

Those regulations that FDR fought so hard to put in place are gone. Today, a sell off on Wall Street isn’t just going to affect two percent of the country. When the Great Depression started, your corner bank was trading in stocks, involved in investment banking, offering insurance and financing all of it through offering credit to itself. Sound familiar? Does the word “leverage” ring a bell? (SarahG: leverage=getting a loan based on a loan.) The answer is yes. The stakes are much larger today. We’re no longer talking about small independent banks, but huge conglomerates with customers across the world. Every time you hear the bell ring for the close of the Stock Market, millions in paper wealth has changed hands. The Wall Street Casino has closed for the day and the gamblers playing with your money have gone home to their mansions. After all, they make their money off of trading, not off your profits or losses.

Wall Street cannot police itself any better today than it did in the 1920’s. Only this time, when the Street crashes more of us will suffer. Those regulations against the excesses of a free market that McCain worked so hard to get rid of are looking more attractive now. I don’t blame him for not wanting to debate tonight. I wouldn’t want to have to defend his economic record, either. The Great Depression will be a footnote to what is about to happen this time: in 1929 we were not saddled with trillions in debt that is owned by other countries.

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