Boy Am I Pissed - And You Should Be Too!

So I was driving home from tutoring a student just now, and in between songs on LIVE 105, I jumped over to 560 AM, conservative talk radio in the area, to hear if anything interesting was being discussed (hold the laughter til later, interesting stuff does come up there, just like it comes up on 810 AM as well). Anyway, a guy named Brian Sussman (the host) was talking about the mortgage mess, and talking to a "conservative" woman caller who was lamenting the fact that she could not refinance her home due to the drop in value of her property because of the number of foreclosures in the area. By the way, the first bit isn't an nCr, but beware of GE.

Here's the story and I got really F___ING PISSED hearing it. She got a loan for her house with a rate that was 5-year fixed then shifting to adjustable with the intent on refi-ing the home before the loan shifted, and adding in a line of credit to cash in on the increase in value of her house. She claims to have done this before ("several times") and also claims that her husband was a die hard 30-year fixed guy who had to be dragged kicking and screaming into the loan. With the number of foreclosures in her area, however, her property value went down, and now the adjustable rate is going to kick in, and she won't be able to afford it because as rates continue to adjust, her payment continues to go up. The host laments with her, she is a good person, and through no fault of her own she can't get out of this mess. She has talked to the bank to try and negotiate a fixed rate loan before the fixed term ends, but her home value is less than the loan value, and she has a history of refinancing and pulling more money out - something they deem as not fiscally sound. So despite her best efforts she won't be able to make the payments.

BOO-F***ING-HOO!!!!! I know that may sound harsh, but she knew exactly what she was getting into. She wanted to trade short term solvency for a long term risk. Any moron knows that no market goes infinitely, unerringly, unflinchingly upward. Yes, it is not her fault that the value of her house went down. It is her fault for taking that risk. She clearly assessed the risk, thought that it was worth it (she had done it before), and took it. She got shafted for making the wrong decision, and it is no ones fault but hers. She will have to deal with the vagaries of an adjustable rate. Tough shit. They are called consequences, some of us learned them when we figured out not to touch the stove when our moms said it was hot (touch it once, you're a skeptic, twice, you are a moron). And yes, my house value has decreased, almost to the point where I owe the actual value of the house, but I knew that was the risk, and I did not set up my loan so that this eventuality would hurt me. I took risks, accepted that fact, but tried to set myself up for long-term success at the cost of short-term comfort. I am unusual in that fact, but having an instant gratification society should not be rewarded with a bailout. If people were fooled into bad loans, fine, they should receive help. But I don't agree with you supergoober, in thinking that evil lenders fooled most consumers. Most consumers willingly colluded. They wanted to be fooled into thinking that their home was an eternal well-spring of free money. Anyone with even the most unsophisticated approach to mathematics can grasp the concept of "fixed payment for x years, the payments will change thereafter" or "this loan means you owe more to the bank each month (negatively amortized) and your house value better grow faster than that debt grows or you are screwed."

You don't have to read all the fine print or listen to all the fast words at the end of a loan add to know if something is too good to be true. Most of us know when stuff is too good to be true based on simple intuition - we then choose to look further or not on our own. If we chose to ignore the risk we find, to ignore the gut feeling in the first place, or to take the risk in a calculated fashion - that doesn't matter. If you signed your name to the contract, you took the risk - you are accountable. Welcome to the wonderful world of being an adult where a decision can haunt you for the rest of your life. We expect people to make good decisions about everything but their homes - let me give an analogy -

Suppose I am at a bar, looking for a date - this uber hot chick comes up to me and says to me that she wants to do all kinds of filthy things with me right then, just out behind the bar. It won't cost me anything, and she doesn't even want to know my name, and no one else will ever know, but she has no protection - she doesn't like it, it is not enough fun for her.

While this may sound fun to most men, even if they are married, most guys would know that they were taking a risk. They might still take it, but they wouldn't be surprised if they ended up with crabs, herpes, festering sores, drugged and mugged, or surprised by something extra s/he had below the belt.

The mortgages being offered had a very similar feel, and it doesn't take a rocket scientist to notice it. Period. End of story. You made that bed, now lie in it mother-f***er, even if it is in a studio apartment instead of your palatial home that you over-extended for.

Warning: This next section will likely piss you off if you have different political ideas than I do. It is partisan (but not excessively so), and it attributes blame where I feel it is due. Read on, if you dare!!!!

(and if you wonder what party affiliations I have, let's just say I chose Red for my warning, not Blue. If you like Blue, you may not like what follows -but come, gentle reader, come into my lair)

So now we come down to it. I laid out in a previous blog what I thought was the cause - I will reiterate some of it and expand a bit. But more I will be going on to the idea of the bailout, the candidates, and some other stuff (yes, I know the grammar is bad, but for the sake of the flow of my thoughts, just go with it, and check out the label, GE, in the sidebar).

It can really be traced back to a bill in 1977, I forget the name, but it was a Jimmy Carter sponsored legislation that forced banks to make risky loans. It pushed them into loans with little collateral or down-payment and low temporarily fixed rates so that high-risk loans would be more common. The thought behind it was to allow more people access to housing and business loans so that people's lives would be better, and more people would have access to "the American Dream". A noble goal, but goals don't mean squat unless the plan you have will actually achieve that goal. They worked a bit - especially for small business loans that needed early capital with low payments that would show profit in a few years, but the track record of success is shaky.

What really happened was that people got locked into loans they couldn't afford, because they were convinced (by the government) that it was a good way to go. It caused a lot of risk for the consumers and the lenders, and a lot of people on both sides got screwed.

It got much, much worse under Bill Clinton in 1994. He and his attorney general and federal chairman got a lot of credit for freeing up a lot of capital by loosening up a lot of strictures on how loans could be made, and by exerting pressure on banks (especially Freddie Mac and Fannie Mae) to assume more and more risky debt. He has no problem denying this - he took credit at the time, but claims a "lack of oversight" under the Bush administration led to the current crisis.

But there is a huge problem with that story (and this will really piss off all you Dubyah haters out there - keep in mind I have no love for the man, he hasn't done well on a lot of issues I hold dear, but he was spot on with this one). He was pushing for reform of Fannie and Freddie in 2003. His claim was that the risks that they were assuming were too great, and that they would ultimately collapse. While many may insult his intelligence, he does have an MBA, and that means a little knowledge of economics (and probably the ability to tell the negatives from the positives on an accounting ledger; I have grave doubts as to whether most politicians on either side possess this skill). McCain joined in on this in 2005.

Democrats were staunchly opposed to increasing regulations on the banking industry in general, and Freddie and Fannie in particular. In fact, Barney Frank said (about two years ago) that even if Freddie and Fannie were to fail, the market would quickly recover and there would not be much impact. Obama was opposed to fixing any of the regulations as well (and here I thought the Republicans were notorious deregulators - guess the Dems had to try their hand at it, too). In fact, most of the key opponents to the reforms were people who were getting largess in the form of campaign contributions from Freddie and Fannie, mainly Dodd, Frank, and Obama.

Now, I know many of you think that it is not the time for the blame game, that we must put all that aside and fix the problem. Wrong, wrong, wrong, sorry you couldn't be more wrong. If a mechanic f***s up my car so bad that the engine falls out on the highway and I have to sue him, I don't go back to that guy to get my car fixed. But that is precisely what we are doing. Look at the two most outspoken figures on this $700 billion bailout - Frank and Dodd. Plus Obama is running on the fact that his policies are not George W. Bush's, but his policy of taking scads of dough from Fannie and ignoring them contributed big-time to this mess. Do I think he did it intentionally - of course not - but the lack of foresight involved in his decision-making is astounding.

Now to the bailout - McCain took time out to head back to the senate and *GASP* do his job, while Obama had that elitist statement of - I'll be there if they need me, right when someone calls me - that's not the exact quote, forgive me, I am working from memory. Was it politicking on McCain's part - maybe. Was it an unwise statement on Obama's part - almost certainly. Which one has more of the characteristics of a good leader - the guy who shows up because he knows it is the responsible thing to do, or the guy who waits for his boss to call him in to work to deal with a problem that he already knows about - you decide. Either way, they are both there now, and debating a $700 billion bailout. And this is where it gets dangerous.

Most Dems, and many Repubs, too, want a bill by tomorrow so they can go on break, campaign for the election by saying that they did something. It doesn't matter if the something was meaningless, it is just an election issue (like buying off voters with a "stimulus package"). The package as written had a bunch of fluff and riders about a whole bunch of crap, and also set up the buyout of not just homeowner debt, but also of credit card and auto loan debts.

We should not rush into this. The reaction needs to be swift, yes, but jumping off a cliff is swift - it just doesn't get us where we want (unless we want to be smashed to bits on rocks, and on my worst days, that seems a reasonable option). It needs to be measures and carefully planned. There are three main strategies I will detail below:

• The current plan - throw a bunch of money at problem, hope problem goes away, get many votes, feel better, and bury head in sand. Needless to say, it ain't a good option as far as I'm concerned, and it is currently much vaunted by Democrats who want this as an anti-Bush election issue. Talk about politics as usual (I thought Obama was a candidate for change)
• Excessively conservative plan - try to inspire a bunch of free market investors to buy up bad loans (a la Warren Buffet) let them make scads of cash, hope that the free market fixes problem. Again, not a great option, no real reason to believe the new purchasers will be any more responsible than the old, encourages class warfare, sets up a real "rich get richer" scenario, just like the Dem inspired setup for the bailout.
• Balanced plan - Selectively buy out loans, let some foreclose and have the US act like a big-ass bank. Not bad, but has some ethical issues that make me flinch: most notably is do we really want the government to also own our mortgages? Yes, it will lead to the government making money on the bailout rather than pissing taxpayer dollars down a rat-hole, but I do not like the idea of the precedent of a government owning supposedly private property until you can pay of the loan - that sets up a really large risk for bad abuses of power. It might be the best of a bad bunch of ideas.

However, if you moderate the last idea with cutting capital gains tax, so people who have to sell and then move in to apartments don't get as huge a hit, plus lower corporate tax rates, you have a recipe for economic vibrancy. Since capital gains have never been indexed to inflation, there are huge amounts of invested capital that people will not sell if their gains have been largely inflationary - a tax on inflationary gain cuts into the original value of the investment, and just slams the brakes on an economy. It needs to be gotten rid of - the middle class will benefit immensely, as they pay the lion's share of it (contrary to popular opinion), or at least have the rate lowered and indexed to inflation.

Imagine if you got your COLA raise and it bumped you into the next tax bracket - you would be earning the same amount (definition of that type of wage increase) but being taxed at a higher rate. It was called bracket creep in the '70s, gotten rid of in '81 when the tax brackets were indexed to inflation, and yet we never did this with capital gains (which are really just a tax on money that you already paid taxes on, invested, and because your investment increased, you are taxed again - some people think that this is reasonable, I don't - that's just a philosophical difference that cannot be bridged for people on the opposite sides of the issue).

Okay, I feel a little better now, I guess finishing at 9:44 pm for the 1 hour and 31 minute rant helped. I am going to go lay down and watch poker on TV, to get in the mood for the tournament this weekend. More on that, later.