Ok, I knew we were in a pickle when my brother told me with (presumably) a straight face (we were talking on the phone) that he was getting most of his background in what was going on in our country politically and financially by watching “The Daily Show”. Now I am definitely out of the loop since my exposure to TV is limited to what is offered across the airwaves. I don’t see non-network TV on a regular basis, but in this week that I’ve been staying at my daughter’s house I have been watching it every day. Wow! and here I’ve been limiting myself to the Wall Street Journal for my information. Straight shooting and no bias on “The Daily Show.” Yeah, right. Is there some truth to what Jon Stewart talks about? Of course.
So people ask – how did this happen? How did our country’s finances get to this point where the toilet is up? Is it really so hard to see? Remember back in 1986 when Congress passed the largest tax reform bill and Reagan signed it into law? One thing that the “reform” did was to drop the deduction on the interest paid on consumer credit for those of us who itemize our taxes. This lost deduction was designed to slow spending. Yeah, right. Shortly after that, the inevitable loophole was found. That loophole was to use the equity of one’s home as a personal line of credit, which at the time was limited to 70 or 80% of the assessed equity of the home and commonly used for home improvement. How many people took advantage of the equity of their homes to pay for consumer debt only to acquire more consumer debt on credit cards? Lots. How many times were people encouraged to leverage non-collateral debt against their homes? Lots. Not only that, various mortgage credit companies continue to act as though it’s business as usual, when it clearly is not.
Not everyone was able to avoid the temptation, and when the mortgage market “opened” to the place where people were able to borrow against “future” value of their homes – more then a home’s present worth – well who wouldn’t want to take advantage of “cheap” money? Moreover, many thought (rightly) what lender in its right mind would put its assets at risk by gambling on future values and someone’s questionable ability to pay? This led to a false sense of security. With the full approval (mandate) of Congress, lenders flattered the high risk borrower, and sold off the questionable loans to investors looking for a quick return on what was (apparently) perceived as a bottomless pit of growth, even as new home starts were slowing and homes were being foreclosed upon in areas of economic slowdown. To add to this hot mess, mortgage brokers working on straight commission who had no incentive to screen applicants; more than likely a huge incentive to fudge the numbers. In other words, there are no “victims” in this fiasco. People bought more house than they could comfortably repay based on flattery and the hope of repaying, and then borrowed against an over-valued home. Lenders led borrowers to believe they could repay while charging risky borrowers enough interest to make it worthwhile to the lender. Lenders, in turn, sold high risk debt to someone else until the whole hot mess collapsed. Don’t let anyone tell you this mess lacked oversight. There was plenty of oversight – by people who chose to look the other way.
Now we, as a nation, appear to be close to getting the opportunity to bail out the lenders and perhaps some of the borrowers if Congress can put their collective minds together and come up with something most of them can agree upon. Don’t make the mistake of believing this is a long-term solution. This is nothing more than a band-aid.