Why Do We Need to Bail Out Banks That Made Dumb Loans?
I generally try to remain on topic on Atomic Insights, so please forgive me or simply move past this post if you do not want to read about something outside of the energy field.
For the past couple of weeks I have been struggling to understand just why my country’s leaders are working feverishly to buy worthless paper based on promises that people like me and my children will pay for it. Even though I am old enough to have built up a little nest egg of stock investments and that nest egg has taken a pretty substantial hit in the past 9 months, I am not happy about the government stepping in to “provide liquidity” by buying up complex financial instruments that traders have decided are too hard to value.
The housing bubble and mortgage crisis are not acts of god; they are the result of countless bad decisions and stretching for maximum returns. They were caused by people who were paid incredible salaries, supposedly for their intelligence and financial acumen.
There is an effort going around to blame the crisis on “poor” people who bought homes they could not afford with mortgages they could not understand because the federal government “forced” banks to loan the money to them through the Community Reinvestment Act. That notion does not explain the abandoned McMansions, the failed luxury condo projects in Naples or Ft. Myers, or the hundreds of professionals at the Pentagon who are one set of orders away from potential bankruptcy.
When I first arrived in the DC area, I was what the military called a “geographic bachelor”, meaning that I left my family in our previous home when I transferred. Both of my daughters were in good high school situations that I did not want to disturb.
By the time my wife and I sold our home in Florida and were looking for a place together, it was early 2003 and I had been riding elevators for a couple of years overhearing stories of people making a ton of money by flipping properties. I heard about bidding wars, and about people who were desperate to buy before the prices moved up even higher. The conversations sounded almost identical to the ones I heard in 1998 and early 1999 regarding technology stocks. I was too scared to buy a house in that market – we have been renting our home ever since.
I have been a home owner in a market where the local economy did not support rising home prices, so I knew what kind of risk was involved in a high leverage investment with a not terribly liquid nature. When I was transferred from Charleston, SC in December 1990, we had a beautiful, well-maintained home in a convenient neighborhood. It sat on the market for more than 6 months and we dropped the price at least 4 times. We ended up losing several thousand dollars even after owning the home for 3.5 years and investing hundreds of hours of sweat equity. Fortunately, we had a fixed rate, transferrable mortgage with a large down payment, and I had a good job that allowed us to carry the mortgage.
The reason the market was bad in Charleston was that the BRAC process had selected the Charleston Naval Base and Shipyard for closure. No one wanted to buy our home because there were plenty of other homes on the market and because there were more people leaving the area than coming to the area.
Changes like that happen. In this current crisis, the problem is widespread partially because there was so much fun being had on the way up. People thought that the business cycle had been fixed and that there was no place for home prices to go but up. They forgot that people without jobs cannot afford increasing payments, that a country that is borrowing constantly might have to increase interest rates to convince foreigners to invest, and that ever more distant neighborhoods full of enormous homes designed to impress the Joneses were completely dependent on cheap energy.
It would be a good thing for the credit that supported that bad behavior and lack of foresight to dry up. It would be good for savers if interest rates went up a bit. It would be good for all of us if we shifted our investment focus to areas that are a bit more productive than personal residences outfitted with all of the latest gadgets that China can produce.
I have some sympathy for the people employed in the construction industry, but I have a lot of optimism that the people who have good skills will find lots of work that needs to be done in building productive capital like roads, bridges, factories and emission free nuclear power plants. A good recession would help redirect capital and commodities to those kinds of projects because they are more likely to have inherent value than a building that is only valuable if it provides shelter to someone with a job and the ability to pay for the building. A recession WILL reduce the cost of commodities and lower the pressure on people purchasing for big capital projects.
It would also be somewhat satisfying for those good people in towns and cities all across American who were not invited to the parties in financial capitals to see some of the decision makers having to declare personal bankruptcy and learn a skill that makes them competitive in a global market for talent. After all, those decision makers have been telling the rest of us to just suck it up for years as they moved spreadsheet numbers around the world to keep line level workers in a constant state of job insecurity.
