They say that the difference between mankind and animals is that people can pass their accumulated wisdom from generation to generation. If that's so, then it's important that we all learn from the current economic situation. So far we've looked at the bad mortgages in part 1 and what those of us who didn't get a bad mortgage can learn in part 2. In this final part we'll consider some of the public policy lessons we can learn.
Lesson #1 - Government doesn't do well in 'panic mode'. Their first inclination is to throw money at the problem. Whatever it is. Sometimes that helps. But sometimes it doesn't. And, in many cases, it's actually damaging in the long term.
Lesson #2 - Anything that the government gives to one person it has to take from another. The $700 billion for the bailout isn't money that the government just found in a broom closet. They'll have to borrow the money and eventually repay it with your tax dollars. So what's the point? Let's put it into perspective in the current situation. No one likes to see someone lose their home or to find out that their bank has closed. So it's natural to want to bail them out. But, the bailout does have a cost. That's the higher interest rates caused by the additional government borrowing (i.e. you'll pay more for your auto or home loan) and the extra taxes someone will have to pay.
Lesson #3 - The government shouldn't play 'make believe'. Fannie and Freddie let people think that they had full government backing (when they really didn't). It was a game of make believe. Everyone was expected to act as if those mortgages were insured. And, they did. Including not paying much attention to how good the mortgages were. So no one was penalized for writing bad mortgages. At least until now when you and I are picking up the tab.
Lesson #4 - The government has very limited ability to put people into affordable housing. Not that they haven't tried. Rent controls, subsidized housing, encouraging lenders to loosen their lending rules, offering mortgages through FHA. Quite often the result is far different from what was promised by our politicians. Take the current housing problem. The government and greedy mortgage lenders were willing to encourage people to take out mortgages they couldn't afford. The result didn't help people buy homes, it was to put them through a terrible ordeal and leave them with broken credit. So much for 'government help'.
Lesson #5 - The best short-term answer is often not the best long-term answer. Turn back the clock 3 or 4 years. You're shopping for a mortgage and one is offered with zero down payment and low rates for a few years before the rate adjusts. Seems like a good deal. At least for now. But if you made that decision you're probably in trouble today. And even the government bailout isn't going to erase all the damage that's been done. You'll never get those sleepless nights back. Or the arguments with your significant other about money. You will get a chance to raise your credit score, but it'll take years and until then you'll pay higher rates on your credit cards, auto loans or any other borrowing you do (assuming that you can get a loan at any rate).
Lesson #6 - Follow the money. That's how you'll find out who benefitted from the mess that we have today. And (no surprise) some people benefitted from this mess. Some made plenty of money. Let's start with Fannie Mae boss Franklin Raines. Here's how the Seattle Times reported it:
Raines' total compensation from 1998 through 2004 was $91.1 million, including
some $52.6 million in bonuses, according to OFHEO.
BTW, the article wasn't about his high compensation. The headline reads: "Franklin Raines to pay $24.7 million to settle Fannie Mae lawsuit" Wonder what your performance report looks like when you're convicted of fraud?
Mr. Raines wasn't alone. Many members of Congress got on the Fannie and Freddie bandwagon. They liked to get in front of the cameras and say that they were pushing for 'affordable housing' (even though the housing they were pushing wasn't really affordable). I'm not saying that they sold their votes, but if you'd like to see how much the politicians got from Fannie and Freddie you'll find the list at OpenSecrets.org . Beyond that some of them even received sweetheart mortgages on their own homes (see Conde Nast Portfolio article) Seems to me that we haven't learned our lesson if we don't vote them out of office.
And, there's corporate greed, too! Countrywide Mortgage founder Angelo Mozilo led his company in writing the so-called 'sub-prime' mortgages. And from 2001 to 2006 he made nearly $200 million! (USA Today 4/9/2008) Guess he won't be worrying about his mortgage payment if this mess throws the economy into a recession!
Lesson #7. Greed is ugly. Whether it's greed for money or greed for power. People who sell themselves for greed should not be trusted. They should be treated as outcasts from reputable society. Let's start with those who created this mess.
Lesson #8. Many people are willing to be fooled. The people who took out these sub-prime mortgages are not all victims. Many of them are not well educated and didn't understand the mortgages they signed. But your financial IQ doesn't have to be too high to question why you're suddenly able to afford much more expensive housing. If all you've ever driven is used Chevy's and suddenly someone offers you a new Caddy for the same money, you know that something isn't right. Especially if they wear a smile and an expensive suit or make their living as a politician!
Lesson #9. The government will avoid responsibility. Congress will
hold hearings. But I'd be willing to bet that they don't get to the
truth. Not that the truth is hard to find. It's right there for anyone who wants to find it. But those in
political power don't want you to know that they were a major
contributor to the problem.
Lesson #10. Accountability is important. There's plenty of blame to go around in this mess. And the greed for money and power demonstrated by Raines, Mozilo, members of Congress and others shouldn't be dropped. It is important to hold people accountable. If the CEO's of companies like Countrywide and Fannie Mae did things that were illegal they should be prosecuted. And, if what they did wasn't illegal, then maybe Congress has some work to do. The politicians that set this up should be held accountable, too. Losing their jobs and reputations would certainly be in order. If we don't hold them accountable the next batch of theives will get the message that it's OK to do it again.
You and I have been left with a real mess. And, there's no telling how far the damage will spread. Right now we're wondering whether the world economy is sliding into a recession or worse. It's possible that millions of jobs could be lost before everything returns to something that looks like normal. I don't know about you, but I pray that it isn't too bad and that we learn from the experience so that we don't have to live through it again.
Keep on Stretching those Dollars!
Gary
