Wednesday, September 24, 2008

The Financial Crisis

Our chickens are coming home to roost. A central part of the Reagan Revolution in the 1980's was less government regulation. Greed again became fashionable, unchecked as it was by any external controls or oversight. In this decade we have seen the result of this trend towards deregulation and government lack of oversight of the financial market. The litany is long and depressing--Enron, Worldcom, Fannie Mae, Freddie Mac, and now the investment houses which the Treasury wants us taxpayers to shell out $700 billion (that's billion with a B) to bail out. The bailout plan would cost $2 thousand per person in the U.S.!

John McCain all of a sudden says he is in favor of more regulation, after having been against it up until now. He even says the wrongdoers should be behind bars. This is a rather far-fetched statement for him to make, as there would have to be a criminal statute in place that was violated by the exeuctives of these companies. Certainly McCain's party is the party that has been steadfastly against any such regulatons, and I challenge McCain to point to any statute which could be the basis to put an executive behind bars for his bad decisions. If there is any such statute, I would bet the farm that it is one passed by the Democrats and opposed by the Republicans.

It is easy to say the Titanic should have had more lifeboats, after it has struck an iceberg and sank. It is easy to say one was wrong about the Titanic being unsinkable, after it has sunk. I am waiting now for the Republicans to admit they were wrong about deregulation, wrong about how unchecked greed is good for the economy, and apologize to the American people. Somehow I think it will be a long wait.

Just as the Titanic needed sufficient lifeboats, so our economy needs the regulation and oversight which the Democrats have consistently advocated over the years, and the Republicans consistently opposed. Think of any advances which have come about over the past 100 years, whether it be social security, Medicare, mimimum wage laws, worker safety laws, food safety laws, child labor laws, and on and on, they have all been passed by Democrats over Republican objections. And we now take all of them for granted, but we should not forget that they all run counter to the basic Republican philosophy of government staying out of the lives of its citizens.

Those are my comments on the "supply side" of the issue. But I think there is a basic cultural reality, one I have not seen discussed, which has to with the "demand side" of the problem. Ever since the end of World War 2, it seems that the "American dream" has been for a family to own its own house, complete with yard and white picket fence in front. Along with that, it is also part of this ideal for every family to own its own vehicle, a vehicle which gets progressively bigger, more expensive, and more of a gas-guzzler each time it is upgraded or replaced.

This is really the source of our problems. It gets drilled into our heads that a "normal American" will have the house and car as a starting point on the road of adult life. And over the years, this has been expanded to include a car for every driver in the household, perhaps a boat, and perhaps a second house as a vacation getaway. (And we have to live in the suburbs, meaning a long commute to work.) To do all this we of course need credit, and that is where the problem comes in. Credit companies have been allowed to make progressively more and more dubious loans to finance these purchases which people really cannot afford.

I have seen some examples of this in my law practice, of clients who get in way over their heads just because they think they have to have a house which is "theirs". In the most recent example, the borrowers enterd into a contract to pay more than $800.00 a month, when the wife was disabled and the husband made only $11.00 an hour. After they defaulted, a forebearance agreement was entered into calling for $1,000 a month payments until they got caught up, and of course this fell apart. After the inevitable foreclosure, they found a place renting from a relative at only $425.00 a month. In another instance, a client facing foreclosure refinanced by paying a mortgage broker $8,000 to find him another creditor who would pay off the existing balance to save his house. So, he ends up with a loan much larger than the original one (the 8K plus all the costs of originating a new loan with a new lender).

We seem to have lost the abilty to distinguish between our needs and our wants. Or, as Lynn Miller puts it in "The Power of Enough", "contentment is found in knowing what things mean has nothing to do with who you are". Things actually get in the way of our relationship with God and our ability to get in touch with our spiritual selves. We become anxious about security to protect all of our "stuff". We rent storage facilities to store all the "stuff". And on and on.

After my wife and I separated 10 years ago, I moved into an apartment and discovered some things about what a person really needs. Suddenly my utility bills were only a small fraction of what they had been with a house. Rent was substantially lower than a house payment. I was on a bus line so a car was not essential, as it had been. And with limited space in a one-bedroom apartment, I had to be careful about not accumulating too much "stuff".

An analogy to the so-called "war on drugs" might be apt here. Our "war on drugs" consists of trying to eradicate the supply, but we seem unable to recognize that the demand side is also an equally critical part of the problem. Without the demand, there would be no drug problem! Why do we not focus on eliminating the demand from our citizens, instead of trying to dictate to other countries how they should run their business, which is what happens with the supply-side approach? This is the sort of approach with gives the U.S. a bad name around the world--our dictating to others and our interference in their affairs, like a big bully on the playground.

Just as with the war on drugs, an improved attitude about our need for "things", especially the high-dollar items like houses and cars, would reduce the demand for the risky loans which have led to the current crisis. Mandatory high school classes on personal finance issues would help educate people to understand the importance of not gettin over-extended. And better religous training would similarly educate people on the folly of viewing their own self-worth in terms of their possessions.

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