As we finish the last day of 2008 the reality of the matter is that 18 months have passed since red lights came on and warning sirens sounded in the summer of 2007. Letting the air out of the mortgage bubble, and subsequently starting the collapse of Wall Street, the summer of 2007 was only a prelude to bigger unthinkable things to come.
We cautioned our friends about shares of Fannie Mae and Freddie Mac, warning them to dump all investments. Instead, we were told that our predictions were overly cautious. We told our son to refinance his adjustable rate home loan as soon as possible, which he did. By August 2007 I told my wife that stocks would settle out around 8500 after all was said and done. For years I said 12,000 was too high and not sustainable. The Dow will start 2009 at 8780, more or less.
Finger Pointing Continues
Finger pointing continues as we end 2008, and no doubt will be part of New Year’s eve discussion at parties. Brokers, predatory lenders, investors, securities dealers, speculators, and regulators all share the blame. Don’t forget ratings companies, wholesale lenders, and lawmakers while toasting those responsible. It was a period of gluttony unhampered by professionalism, and a time for self-enrichment unimpeded by ethics or good business sense.
As we looked forward from early 2008, my wife said credit cards would come under more pressure. I remember saying that 2008 might bring the nation back to the 1970’s, when decent credit rewarded people, and others could not get a credit card, buy a car, and would never dream of buying a house. Is that such a bad thing?
The United States embarrassed itself in front of the world, spreading tainted commercial paper around the world. In previous years people were rewarded for higher education, often obtaining a better job, stability, and greater earning power. With those benefits came better credit.
Subprime and Education – An Analogy
We all receive spam email offering a college degree for cash. Consider it the subprime of education, if you will. While in college, some of us saw people who cheated their way along, learning little in the process, but receiving the same degree as their peers. Each cheapens that for which we worked long and hard. I shall attempt to classify each.
Predatory lending is the spammer offering to sell a college degree. Subprime is the cheater that was actually in college, but sought the easier and less honest approach.
Officials tasked with accreditation of the college or university are the “Friends of Madoff” group. Often too chummy and very secure in their tasking, nobody looked for cheaters and spammers. The focus was on the institution, not the students. (In business we call them customers, borrowers, or clients.)
Admissions standards dropped as appraisers implied that anyone and everyone was qualified to attend Harvard or Yale, or any other college or university.
Bond raters implied that all graduates, including cheaters, spammers, scammers, and the like, were fully qualified to be graduates of Ivy League schools, and those schools were perfectly accredited.
Predatory lending became acceptable, and with it came a new name. The word Subprime was even added to the dictionary. With such shallow and stupid blessings, people were told to believe that everything was legal, sanctioned, inspected, approved, and very proper. Nothing could be more wrong or farther from the truth.
Solutions in an age of instant gratification became one of selling what the market – and investors – were buying, and for which they were paying top dollar. Morals were sacrificed as ordinary people sold America. Higher earnings could not last, as those who aided in the fleecing of America would soon discover. Had they simply left it alone, the real estate bubble would have be confined to California, Arizona, Nevada, Virginia, Maryland, and Florida.
Perhaps it is unfair to use an analogy such as higher education when discussing housing, home loans, and finance. It is a good analogy, when those of us with a college degree, be it a Doctorate or undergraduate degree, see our education cheapened and made worthless over time. That is what happened to the pensions, investments, and home equity of many people.
Final Thoughts – Mortgage Blues 2008
Perhaps we should not feel bad for those who knew they had no business buying a home. Perhaps we should rail against bailouts for those who supported and enabled such stupidity.
In the end some will stand out from the others, shown for what they really are, and while exposed and shamed, they will offer to sell you a college degree at a reduced price, all the while proclaiming how they will not deny you three times before the cock crows.
(Mathew 26:34,74-75) – “Jesus said to him, “Truly I say to you that this very night, before a cock crows, you shall deny Me three times . . . (74) Then he began to curse and swear, “I do not know the man!” And immediately a cock crowed. (75) And Peter remembered the word which Jesus had said, “Before a cock crows, you will deny Me three times.” And he went out and wept bitterly.”