To whom do we turn?
Extended bull markets have inevitable consequences. Among the most pernicious is the establishment of a thought that over time becomes fundamental that restful days last, that profit is an entitlement. Every corner of an economy, however remote, collects the detritus of such thinking. And yet the reasonable person who dismisses such exuberance suffers alongside those who bank upon it.
A bull market in the housing sector of our economy existed until last year. We all participated in it, whether by the outright purchase or sale of a home or investment property, by the indirect profiting from other people's purchases through a pension's investment in exotic derivative securities, or through our cities' or counties' speculation, thanks to the policies established by the local representatives we elected, that housing prices would continue their upward slope, thus increasing municipal tax collections. We all bought in.
But some ought not to have. Several banks, encouraged by large investment firms that assemble investments with mortgage cash flows, began extending credit to people in financial circumstance who would never have previously succeeded in securing such financing. Yes, home ownership, a leaven to societal responsibility, should be encouraged, but not everyone ought to have qualified for such significant loans. Some would have been denied, but for the diminishing of acceptable creditworthiness. Somewhere along the line, however, the owning of a house became perceived as a right and not a privilege offered based on demonstrated fiscal responsibility, and banks large and small extended their hands to help those without the stable means to purchase a house.
Freddie Mac acquired these less than optimal, or sub-prime, mortgages and created the securities that our school districts and pensions purchased. As overextended home-ownership revealed a stratum of the population that was incapable of sustained mortgage payments, foreclosures increased with devastating effect. Banks and other lenders, stung by walk-aways they were now forced to carry as unproductive "Other Real Estate" assets, began tightening their criteria for acceptable borrowers. And they were required by Generally Accepted Accounting Principles to adjust the carrying value of such assets, and the derivative securities whose values were based on the cash flows from the mortgages extended to purchase such homes, to their actual value, which was falling precipitously.
With a tightening of credit, the number of applicants qualifying for new mortgage loans diminished. Correspondingly, with a shrinking pool of potential home-buyers, the values of homes nationwide began to decline. With an abundance of existing homes for sale, new housing starts fell accordingly, the effects of which were now felt throughout the economy and continue to exhibit themselves in the most startling ways.
Lack of confidence in the economy drove the customers of Washington Mutual Savings Bank to begin a run on cash lasting 10 days, not ceasing until the bank had become illiquid and federal regulators had stepped in to close the beleaguered institution, its holding company declaring bankruptcy just four days ago, the largest bank failure in United States history. Just yesterday financial giant Wachovia, dragged down by its burgeoning overdue mortgage portfolio, was purchased by Citigroup. We are witnessing an industry in agony; we are feeling its tremors throughout the whole of the economy.
Do we turn to our politicians in our distress? They are inadequate to the purpose. Lobbied by the financial sector to swoop in with taxpayer money to lift their industry from the morass these banks and others created, Congress came dangerously close to mortgaging our future. Had our representatives chosen to act, however, it would have been with the commonality of purpose required of such extremity. Thankfully our Congress is incapable of such effort.
The dramatic fall of the Dow Jones indices Monday and the recent failures of financial giants are caused not by a declining economy. They are caused by herd mentality. Do not follow the fear-ridden. Do not place blind faith in Congress or any other political body. Disbelieve and vigorously contest the suggestion that a government bailout is necessary or desirable. It is neither. Let the torrent run its course. Trust in yourself.
- Nicholas Voegeli was a Republican candidate for lieutenant governor in 2006.
Extended bull markets have inevitable consequences. Among the most pernicious is the establishment of a thought that over time becomes fundamental that restful days last, that profit is an entitlement. Every corner of an economy, however remote, collects the detritus of such thinking. And yet the reasonable person who dismisses such exuberance suffers alongside those who bank upon it.
A bull market in the housing sector of our economy existed until last year. We all participated in it, whether by the outright purchase or sale of a home or investment property, by the indirect profiting from other people's purchases through a pension's investment in exotic derivative securities, or through our cities' or counties' speculation, thanks to the policies established by the local representatives we elected, that housing prices would continue their upward slope, thus increasing municipal tax collections. We all bought in.
But some ought not to have. Several banks, encouraged by large investment firms that assemble investments with mortgage cash flows, began extending credit to people in financial circumstance who would never have previously succeeded in securing such financing. Yes, home ownership, a leaven to societal responsibility, should be encouraged, but not everyone ought to have qualified for such significant loans. Some would have been denied, but for the diminishing of acceptable creditworthiness. Somewhere along the line, however, the owning of a house became perceived as a right and not a privilege offered based on demonstrated fiscal responsibility, and banks large and small extended their hands to help those without the stable means to purchase a house.
Freddie Mac acquired these less than optimal, or sub-prime, mortgages and created the securities that our school districts and pensions purchased. As overextended home-ownership revealed a stratum of the population that was incapable of sustained mortgage payments, foreclosures increased with devastating effect. Banks and other lenders, stung by walk-aways they were now forced to carry as unproductive "Other Real Estate" assets, began tightening their criteria for acceptable borrowers. And they were required by Generally Accepted Accounting Principles to adjust the carrying value of such assets, and the derivative securities whose values were based on the cash flows from the mortgages extended to purchase such homes, to their actual value, which was falling precipitously.
With a tightening of credit, the number of applicants qualifying for new mortgage loans diminished. Correspondingly, with a shrinking pool of potential home-buyers, the values of homes nationwide began to decline. With an abundance of existing homes for sale, new housing starts fell accordingly, the effects of which were now felt throughout the economy and continue to exhibit themselves in the most startling ways.
Lack of confidence in the economy drove the customers of Washington Mutual Savings Bank to begin a run on cash lasting 10 days, not ceasing until the bank had become illiquid and federal regulators had stepped in to close the beleaguered institution, its holding company declaring bankruptcy just four days ago, the largest bank failure in United States history. Just yesterday financial giant Wachovia, dragged down by its burgeoning overdue mortgage portfolio, was purchased by Citigroup. We are witnessing an industry in agony; we are feeling its tremors throughout the whole of the economy.
Do we turn to our politicians in our distress? They are inadequate to the purpose. Lobbied by the financial sector to swoop in with taxpayer money to lift their industry from the morass these banks and others created, Congress came dangerously close to mortgaging our future. Had our representatives chosen to act, however, it would have been with the commonality of purpose required of such extremity. Thankfully our Congress is incapable of such effort.
The dramatic fall of the Dow Jones indices Monday and the recent failures of financial giants are caused not by a declining economy. They are caused by herd mentality. Do not follow the fear-ridden. Do not place blind faith in Congress or any other political body. Disbelieve and vigorously contest the suggestion that a government bailout is necessary or desirable. It is neither. Let the torrent run its course. Trust in yourself.
- Nicholas Voegeli was a Republican candidate for lieutenant governor in 2006.
