Fran likes to tell the story of our first home mortgage loan, lent us by Joe Krier out at the new Town & Country Bank back in 1973. This was after an officer at one of the other banks had marked our answers to the loan application down in increasingly deeper shades of red, (from his collection of red pencils), and then informed us, rather sharply, that we could not afford to buy a house. This despite our clutching, in hot little hands, the 20% down payment, $4,400.
It was a $22,200 purchase, and it seemed to us quite the palace back then. I still like to drive by it today, over on Dakota Street. We persuaded Joe to make us that loan by pointing out that the monthly payment would be little more than half what we were paying in rent on a house and an office at the time, and our fledgling business had already generated the down stroke. This was about as risky a home loan as anyone made around here in those days and the bank, if we forfeited, would have made out fine with the 20% in hand. Of course, if too many of Joe’s loans had failed, he would have been fired.
Recently, an overheated real estate market has collapsed and sent the American and world economies reeling. I went, with fear and trembling, to the Internet at 12:30PM today (Friday) and saw the stock market down another 418 points to just over 8,000. Many are predicting it will go as low as 7,000, an unprecedented 50% loss in less than a year from last year’s high of around 14,000. (And some fear worse.) Put very simply, a loosening of loan standards, years of low interest rates, and the implicit backing of the U.S. government through the giant quasi-federal banks known as Freddie Mac and Fannie May, fueled a housing bubble which has burst.
Years and years of bad mortgages, packaged and sold to the huge banking houses, are not only worth less than book value, but are impossible to cash for any amount of money, at least at this point. There is no Joe Krier to fire, nor cute little Dakota Street bungalow to resell. Huge banks have failed, or required government bailout, unable to meet daily cash obligations, and world credit markets are in a state of discombobulation (forgive the technical term).
The federal government has stepped into this mess with an additional $700 billion bailout, and hardly anyone understands how it is supposed to, much less will, work. Now, many believe this has become part of the problem, merely adding uncertainty to a muddled and frightening situation, preventing the decisive action necessary to settle down the private marketplace.
How did we get here? You will note that liberals and Democrats in Congress are pointing a finger at rich Wall Street “Fat Cats” who glided away on “golden parachutes,” their usual sort of demagoguery, absent any decent excuse. But the bad loans and lending policy that are at the heart of this crisis did not emanate from Wall Street or Big Business. Rather, they were mandated by Big Government, back in the days of the Clinton administration when it was decided that the federal government should see to it that more minorities and poor people should become home owners.
This was, of course, a noble and worthy goal, but they skipped the part about how its beneficiaries would acquire the wherewithal to make the payments on their mortgages. The 20% down payment went out the window, credit and income history was ignored and, backed by the credit of the Fed, these shoddy lending practices spread into the broader markets. When the shaky loans could no longer be bolstered by wildly appreciating home values, the whole house of cards collapsed. We do not know where it will end.
But don’t worry! According to a story in Friday’s Minneapolis Tribune, Congress is reported to have another stimulus bill in its bag of tricks. The Democratic proposal would funnel the biggest part of it, some $150 billion, to state and city governments to “sustain their everyday spending.” (For those many who will think I am making this up, check pg. A12, “What’s left in Congress’ grab bag?...”, paragraph 8.)