Financial Woes

Fair warning that this is probably going to be a tirade against the powers that be in the financial sector.

So I'm certain everyone is aware of the bank crisis we're coasting through at the moment as a country. Beginning with the big-time housing GSEs Fannie Mae and Freddie Mac, things have started crashing down - big time. Following was Bear Sterns, Lehman Brothers, Merrill Lynch (which baited a buyout before things got too bad), AIG, and soon-to-be WaMu.

The root of the problem, in my opinion, is deregulation. The ability of banks to issue mortgage loans to investors who have no business receiving such a loan is ridiculous; a couple with a combined income of $80,000 purchasing a house for $400,000 is utterly atrocious. Who is to blame is not the matter at issue here, but rather who it affects. Jim-Bill and Annie-Jo the investors can walk away; their credit is trashed and they are likely to lose their property, but for the most part they can get away without much repercussion. The large banks backing the mortgage-givers, however, are trapped with bundles of largely useless and worthless properties.

With the ninety's drive for more of an ownership society came what was supposed to be more accessible housing. And granted, the number of Americans owning their own home grew, definitely. The demand kept with supply and the housing market was booming, until demand started outpacing supply due to Average Joe wanting to make a quick buck by tossing money into a second mortgage after paying off his first. Housing prices inflate, and soon enough you have the median home price floating up to $300,000 in areas where the median income is $50,000. What happens? Do people realize that they're not going to be able to "flip that house"? Do they realize that after the first year of "interest only" payments, they're still going to own the property and thus be forced to start paying principle? Did they ever anticipate that the variable rate mortgage might balloon a lot sooner than they thought, preventing them from getting rid of the property?

Of course not. People are greedy and stupid; banks and mortgage lenders are similarly greedy, and you would think they'd be a little smarter. Mortgage brokers, though, don't lend out the money. They check out the lendee (poorly) and make their commission just the same, whether or not the loan ever gets paid back. So people get in over their heads - their rate goes up to the point where they can no longer afford the payments, they have to keep the property too long and have to start paying on principle, or they simply didn't anticipate having to shell out money long-term for the mortgage.

Where does it leave us? The housing market will be in dire straits no matter what. The only correction possible is to let the market correct (or force it to correct) to ensure housing prices lower to non-ridiculous levels. The golden standard seems to have always been about three times the household income of the lendee. Of course, the massive and sudden depreciation of real estate isn't the ideal solution, but it may be the only solution.

What about the bailouts? Honestly, all I can say is "you can't have it both ways." We can't go on privatizing profits and socializing losses. Bailouts are fine, but you have to have something to back them up - windfall profit taxing seems prime here. If a company is making a ridiculous amount of profit on what amounts to a scam, you have two options. Tax the crap out of them, because they're headed south and will need the padding to soften their fall lest they break into a billion pieces; OR regulate them heavily enough that they can't offer up irresistable get-rich-quick scams to the populace.

If it wouldn't drag our economy into, dare I say, depression to let these companies fail, I'm all for it. They squeezed every ill-gotten-gain from the system, and now they depend on it to catch them as they tumble toward insolvency.