First, so that we’re all on the same page, an excerpt from “Part 1”:
“Over the past many months much has been “pressed” on the subject of the “Mortgage Crisis in America”. This conversation will continue for many more months if not years so don’t look for the dialogue to end any time soon. To aid in the process fueling this great confabulation I’ve decided to put pen to paper and start my own commentary so prepare yourself for a 3 Part series on the subject which I’ve blithely titled “Whose Mess is This Really?”
This series will be defined, from the layman’s vantage point, simply by a fundamental discussion of (1.) What is the Mortgage Market, (2.) The Mortgage Industry and Consumer Practice, and (3.) The Resolution . “
Now, let’s begin! The Mortgage Industry and Consumer Practice conversation is a topic that could consume volumes if we took a career making approach! I don’t intend to make that mistake so I am making the choice to be quite selective in the discussions depth and duration and focus on my on personal observations in the realm of cause and effect, primarily.
Though not unique to the American form of Capitalism/Finance, the U.S. is clearly the domain of the extreme practice of the art form, always hold to the understanding that the life blood of this concept is the flow of Capital and its control. Regardless of the medium, be it housing, heavy industry, technology, military expenditures or whatever course it may take, the fundamental underlying cause is the flow of capital and who controls it. Finance and its facilitator, politics/government have evolved to the point that the lines of demarcation are no longer distinguishable! If one doubts this observation, look at the money that goes in to the political election process and the true donor list!
In its most base and vulgar form, think of it as an opium farmer that understands he/she needs addicts to improve the profitability of his “farm”. The Farmer is not in the least concerned about the devastating consequence of addiction, it is simply a means to whit profitability is obtained. Very, shall we say, mathematical in its precision!
In the world of Finance, were the game is defined by the benefactor(s), the rules are then created and then enforced by the political system and the unwitting “addict” becomes entrapped!
The battle over currency control has been waged in the U.S. since its inception. Currency was to be ( Constitutionally) controlled by the Treasury and only in denominations identified as in either/or gold or silver. Debt was not to be a means with which to create economic vitality nor was the fractionalization of gold or silver (or market manipulation) to be effected to expand money supply. In short, the Constitution lost! Andrew Jackson (if I recall my history correctly) in the 1830’s attempted to return monetary policy/control to the government however influences made this an unsustainable ambition. In 1913, the Federal Reserve was created and we live and create the history of this result. The Government, abdicating fiscal responsibility, has become the “bag man” for the Financial Industry and that’s all there is to say about that!
The result of all of this is the continuous march in to financial expansions and contractions (economic) that are the pulse of a “fiat” money system. Debt is created to expand the economy to its breaking point, the economy “resets”, debt is “vacated” ( clinically referred to as “monetized” or “restructured”) and the process starts all over again. In this system, inflation creates wealth which is financed by debt, deflation “clears the decks” of the burden known as debt! The “system” wins on either trend! Great field of play don’t you think! Remember, the currency is created out of nothing, the borrower pays the creator for its use, when the debt can no longer be “serviced”, the borrower surrenders the “asset” to the Creator (particularly in the Real Estate arena) and the debt magically disappears! Or in the case of “derivatives”, they simply loose their investment and write it off as loss!
Here’s a real twist for you! When you hear the “blues” about the losses in the Financial System, remember this, the asset that secured the underlining debt (the Asset), still exists! So what has really been lost? Particularly in a “fiat” money system that has no underlying value! The answer is, in effect, NOTHING but the income potential to the investor who was counting on a rate of return. As an aside to the astute individual: yes, this is an incomplete conversation and does not address the Markets creation and trading of Financial Derivatives ( a completely unregulated segment of the Market) which, by the way, is were, in my opinion, the major fault resides.
The System has long been directing itself to the consolidation of the Monetary System not only here in the U.S., but world wide as well. The last great “play” of the System (until now) was the calculated destruction of the Savings & Loan Industry which finally resolved itself in the mid-‘80’s. Short version: S & L industry was accounting for an intolerable share of the System’s business and it had to go. Legislation was introduced expanding the Lending Scope of the S & L’s, this was taken advantage of by an explosion in Lending practices by this Industry that was, at best, reckless (predictable). The net result was the S & L”s could no longer sustain the expansive lending policies as the financial market contraction of the period took its toll on their Loan Portfolio’s, Loans began to default and so did the S & L’s. The Government, on the advise of the Federal Reserve, stepped in and in effect sent the entire Industry into “receivership”. The Resolution Trust was created to liquidate the remaining Assets of the Industry and, as I said before, this “clears the decks”!
You might now ask, what does this have to do with Mortgage Industry and Consumer Practices? I’m sure you know the answer but let me just give it to you straight! The Mortgage Industry is the Farmer, the Consumer, is the Addict! To be sure, the Mortgage Industry, although not the System in its totality, it is, in effect, just another component that, like the S & L’s, is completely disposable (and most likely will be characterized as obsolete). Do not be surprised that the net effect of all the current chaos is a complete restructuring of Mortgage Lending Practices that places ultimate (complete) control in the Banking System. There’s already been a very subtle indicator of this likely scenario. Who is it that stepped in and “bailed out” Countrywide? Why yes, it was Bank of America! Surprised? You shouldn’t be!
The truth of the matter is that like it or not, there is, either by defined intention or stupidity, an even larger crisis that is looming which has been in play since the Nixon era and perhaps even into the later years of L.B.J.’s reign (truthfully, even further back). I simply refer to it as the “economic disintegration of the U.S.A.” There’s no mistaking the fact that we are no longer an industrial power! (see my article “View from the Mid-West”) Personal income (adjusted for inflation) has been nearly cut in half from what it was in the 1970’s. We’ve substituted the creation of wealth by productivity for the creation of wealth by Inflation and we fund it by the creation of debt! If you’re a “middle American”, dare I say, and on down – then you get hit in several ways. You loose purchasing power due to inflation, you believe you’re gaining wealth by the same toxin (inflation) so you borrow money on/from your inflated asset to subsidize your loss in purchasing power (which further fuels the economic “peak” as you buy, buy , buy from your borrowed funds), you pay for the use of the borrowed funds from your already decreasing purchasing power, then, when the collapse comes, you either are expected to pay it all back (to preserve your credit status – sarcastically emphasized by me!) or you give back the collateral! The ultimate spiral with no safe landing zone! Unless of course you’re the System who ends up with the Collateral and retains the ability to create more debt/currency!
The System needs more candidates for Addict status! The gift of wealth through inflation is an alluring vulture! The creation of aggressive Loan Programs were not the policy of conscientiousness! No, they are the product of a system that operates on a boom or bust mentality and uses any means to enact this ambition. From the simplest designs of the basics, e.g. of lending money to make money, to the completely absurd notion of malignant government mandated “affordable housing programs” (and they ignorant Bureaucrats who implement then) which have far reaching effects on the housing markets!
In the final analysis, as Ayn Rand said “…if you perceive a conflict in my logic it is only the result of your not pursuing the concept to it’s obvious conclusion…”
Rest assured, I’m a capitalist, but I’m first and foremost, a purist! I firmly believe in the ideal of each according to his/her own ability! Or, in more simplistic terms: You work for it, you earned, you deserve it, you keep it! If, on the other hand, you don’t because you choose not to, well, that’s fine with me too! That doesn’t, however, entitle you to what I’ve worked for! For those who are unable, I’ll rush to their aid!
My great fear is also a fundamental truth! “When silence stills the conscience and thinking mind, the object of promise sees not its way!” A powerful truth in deed!
Stay tuned for “Part 3”! Until then,…stay well, prosperous and Blessed!
Curtis C. Greco, Founder