I will preface this by saying that I am no economist. But I am a thinker. Here are a few of the issues that I see as bringing us to brink of collapse:
- The government making money cheap for banks to loan out to artificially prop up the housing market.
- The banks making risky loans to people who in all reality should never have been given a loan.
- The government borrowing massive amounts of money to pay for huge spending increases in the wake of a tax cut and an epic military campaign in the Middle East.
- The homeowner who thinks they need it all and subsequently borrow more than their house is worth.
- The pending retirement of the baby-boomers.
- The thousands of bureaucrats whose action or inaction has far reaching consequences that they are either to dim to understand or could care less about the repercussions of as long as they get reelected.
- The falling dollar as a result of foreign investors who see an unsustainable economy and no leadership at the helm of a rudderless ship.
- An education system that fails to produce students capable of competing in a global market.
People are defaulting on their loans. House prices are falling. Banks are losing billions. There is panic in the halls of Congress. “We need to do something” they cry. What do they want to do? They want to dust off a 1930’s program called the Home Owners’ Loan Corporation (HOLC). The HOLC was established in June 1933 to help distressed families avert foreclosures by replacing mortgages that were in or near default with new ones that homeowners could afford. It did so by buying old mortgages from banks ... and then issuing new loans to homeowners. The HOLC financed itself by borrowing from capital markets and the Treasury. On the whole this sounds benign enough. But if you were to actually strip the emotion from it and step back and think about it you would come to several realizations: 1) the banks and people should not be bailed out by the government; 2) we have more than $9 trillion in debt and cannot really afford to borrow any more money to bail them out in the first place; and 3) Fannie Mae reported that rising defaults and falling home prices contributed to a $3.56 billion loss in the last three months of 2007 and now we want to put more liability on the taxpayer. None of it adds up. But then again, the politicians are accustomed to fuzzy math; how else could you justify using the Social Security surplus to balance the budget.
The reality is that the housing market was artificially inflated and now we are witnessing the impact of bad monetary policy and piss poor decisions by greedy assholes in the banking sector. Why are housing prices falling? Well in some markets they were hyper-inflated to begin with and in other areas there is too much supply and not enough demand. Hear that? SUPPLY AND DEMAND. Of course falling housing values have other consequences, namely the municipalities that have bet on increasing property taxes to finance public projects will soon find less money in the coiffeurs.
The response from Washington, D.C. is long in thoughtlessness and vote pandering and short in common sense. The sky is falling, the sky is falling. So they pass a $150 billion fiscal stimulus. They talk about things like the HOLC. Not once do they consider the long-term impacts of their policies. Not once do they consider the billions we will have to pay on the $150 billion we had to borrow for the fiscal stimulus. Not once do they consider the long-term impacts of inappropriate measures like the HOLC. They give me the impression that they could care less what shape they leave this country in.
The housing crisis alone would probably not be a deal killer for our country. But the real problem is only a few years away – the retirement of the baby boomers. On the horizon is another fiscal crisis we are not prepared to deal with and that is funding Medicare and Social Security. Add to that the reports that state and local government pensions may be underfunded by $1 trillion or more (Illinois alone has a $40 billion unfunded pension liability). Ouch.
If you want to know why I am so depressed you need to read a book called the “The Forgotten Man: A New History of the Great Depression” by Amity Shlaes. You can literally watch the car wreck that became the Great Depression unfold in front of your eyes. History does not repeat itself but it does rhyme. What we are seeing today is reminiscent of the actions of lawmakers before the Great Depression. I even think the conditions are much worse today than they were back then.
From The Angry Economist:
"I saw a bumper sticker today saying "If you're not OUTRAGED, you're not paying attention". This was on a Toyota Prius, the official automobile of the "Let's Ignore Economics and Do The Right Thing" crowd. I remarked to my wife "I'm outraged, too, but probably not about the same thing. I just want more control over my life." She quipped "Oh, no, they want the same thing as you: more control over your
Photo by KCThinker, alley in Village of Simiane la Rotonde, Provence, France, October 2007