The Economy, Part I: What the Fuck Happened?!

The world is full of idiots. It’s possible you already knew this. If you’ve read any of these columns, you certainly know I already knew this. Nope, nothing new here. Idiots are all around us- definitely all around me- and for the most part their mindlessness, short-sightedness and minimal, two dimensional thinking-on-life-support is to be simply tolerated and ignored, their irrelevant opinions left to pass unobstructed through our ears, much as the wind does through Matt Damon’s.

But every now and again, one stumbles across some gem of pure idiocy so inane, so intellectually vacuous, that a thinking man cannot help but feel the grinding of it on his nerves. The only thing worse is if he hears it over and over again. Of course right now, as you may have noticed, the U.S. economy is having a bit of a hiccup, and when that happens, repetitious idiocy knows no bounds, especially for those of us who watch the news.

And it’s not just normal, standard variety idiocy either. No, it’s that extra special blend you get when you mix one part panic, one part anger, two hundred ninety-eight parts I-don’t-know-what-I’m-talking-about and one large cup of maybe-this-will-make-me-sound-smart.

So today, I mean to shatter it all. Today I will identify the idiocy, debunk it, correct it, and write a column that will probably be really, really long. By the time you finish reading it, you will understand the basics of our economy, why it’s currently as fucked as a billy goat in Georgia, know how to correct it, and possibly fall asleep.

Now the first piece of idiocy I’m thoroughly sick of hearing, is perhaps the most pervasive. I hear it everywhere on talk shows, in newspapers, on TV talking head shows, even from the poor fellow at the bar three weeks ago who sat and cheered haplessly for the Baltimore Ravens, as the Great and Mighty PITTSBURGH STEELERS!!! [cue choir of angels] marched past them for the third time this season, and onward toward their destiny of winning their sixth Superbowl ring and claiming their rightful place as the single greatest team in the history of the game of football, forever and ever, or at least until the Cowboys or the Niners pull off another one. This particular jewel of ignorance goes as follows:

“George W. Bush singlehandedly wrecked this economy.”

Bullshit.

I’m no fan of W.. The man is a fuck-up to the Nth degree, who lacks any concept of governmental restraint, the necessity of borders, the proper role of the military, or the function of the veto pen. But this isn’t his bag, at least not solely. He certainly didn’t help matters any, but no one man, not even a president, makes or breaks the U.S. economy. What impact he does have is seldom good, and is not always felt right away. Such is abundantly evident in the recent bursting of the housing market bubble, which is at the root of this entire economic quagmire.

Here’s how you make a seemingly vibrant housing market fall apart overnight:

First, you have someone go to take out a mortgage loan that he clearly cannot afford to pay back. Next, you have a loan officer for a bank or lending institution, whose income is dependent on the commissions he receives from writing good loans, write one up for the guy who can’t pay it back. Then you have a bank agree to loan the money to the man who can’t pay it back. After that, you’ll need an outside entity to buy that bad debt, the one that won’t be paid back, an take it off the bank’s hands at their own expense. That entity must then bundle numerous mortgages into a single note- bad loans mixed indiscriminately in with the good- a mortgage backed security, which they sell like a bond to an investment firm (those Wall Street guys of whose oh-so-evil ways we are constantly reminded) at a rate of interest slightly lower than what they themselves are getting from the loans. Mr. Wall Street is buying these securities with his investors’ money (foreign investors, often as not), and paying them back a return slightly lower than his own.

So everybody turns a profit, and everybody’s happy. For the moment.

But sooner or later, the guy who couldn’t afford his mortgage loan is going to default. This is inevitable. If he’s the only one who does, it’s no big deal. But if thousands of people default, or go into bankruptcy, or have to renegotiate their loans for a substantially lower amount of money, then the shit hits the fan. Houses get foreclosed, leaving the debt holder with a property which they need to get rid of as quickly as possible, which means selling cheaper, which devalues not only that home, but all the homes around it. When property values in general go down, those securities go right in the toilet, and every single person along that chain gets crunched.

“But Whiskey!” you may be crying out in shock and disgust, “That’s the stupidest fucking thing I’ve ever heard! Risking all that money on a guy who can’t afford his mortgage loan... why, it’s financial suicide for everyone involved! How could all of those people possibly do something that asinine?!”

Glad you asked. Actually the recipe for all of this is quite simple: Instant boondoggle, just add Federal Government.

Let’s travel back to a magical time called the seventies. In the seventies, bad clothes were in style, gas lines were long, the Orioles actually played in the World Series, and I was born. In 1977, President Jimmy Carter signed into law the Community Reinvestment Act. In a nutshell, banks were given a CRA rating based on how many mortgage loans they wrote in low income neighborhoods in which said banks did business. The thing is, residents of low income neighborhoods tend to be, well, low income. This means that the majority of them, perhaps a vast majority, will be bad credit risks and/or lack the income necessary to qualify for a mortgage loan. That’s not to say that a bank can’t still provide needed services in those areas. People can still take advantage of checking accounts, interest bearing savings accounts, maybe CODs and shit (I’m really not an expert on banking services). But the majority of applicants for mortgages will not qualify.

The other thing, though, is that residents of low income neighborhoods tend to be, well, black. And naturally, cries of discrimination and racism were everywhere. Hand the keys to Congress and the White House over to a bunch of post-Kennedy era Democrats, and you can rest assured they’re going to do something about it, even if that something is wholly unprofitable and serves the purposes of absolutely no one involved, save for their own ability to say “Hey look, everybody! We did something!”

The CRA contained no direct punitive action, such as fines or criminal charges, for banks who didn’t comply sufficiently. Instead, a bank’s CRA compliance record was looked at by regulatory agencies (namely the Federal Reserve and FDIC) and taken into account when deciding whether to allow banks to go through with things like acquisitions, mergers, and opening new branches.

Fast forward to the nineties, and the Clinton administration. This was the first time the CRA was really given teeth. The administration clamped harder than ever on mergers and acquisitions, and also expanded the Act so that it was also used in deciding whether to allow banks to go into other fields, such as securities and insurance.

Now of course, forcing a bank to make bad loans will do nothing except put that bank out of business, in which case no one gets a loan from them. Enter the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Haven’t heard of them? Perhaps you’d know them better by their nicknames: Fannie Mae, and Freddie Mac.

Formed long before all of this, Fannie and Freddie were Government Sponsored Entities (GSEs), which meant that while they were private sector companies, they enjoyed certain perks from the Federal Government that no one else did; mainly, a direct line of credit to the Federal Reserve, and exemptions from certain lending regulations to which everyone else had to comply. There were unofficial perks as well. The big one was that, although it was never actually in their charters, there was always a sort of wink-&-a-nudge understanding that the Government would guarantee their loans in full, and therefore they would never go under. The perfect cash cow.

Their business was securitizing mortgages. They bundled them into securities and sold them to investment firms like AIG, Bear Sterns, and so on. Their stock price was high, and profits were through the roof. They had, and still have, most of the House Financial Services Committee and Senate Banking Committee, and most notably their chairmen (Rep. Barney Frank, D-MA, and Sen. Chris Dodd, D-CT), so thoroughly in their pocket that members of regulatory agencies have been brought before the committees and excoriated, slandered, called everything but a child of God, for so much as noticing that Fannie or Freddie’s books didn’t add up. But they didn’t.

To make matters even worse, during this same period, the Clinton administration eased regulations on the GSEs for buying up high risk mortgages, and put pressure on them to do more of just that. This is how the now infamous subprime mortgage market kicked into full gear, aided by the fact that the same sort of governmental idiocy continued unimpeded during the presidency of George W. Bush, and his naive vision of an “ownership society.”

You see, once you get to this point, the question for a bank making a loan isn’t so much “Is this person a good risk?” as “Can we sell this loan off to Fannie or Freddie?” And since the answer was usually “yes,” you saw a precipitous rise in high risk loans, especially Adjustable Rate Mortgages (the ones where they offer a low teaser rate at first, to get idiots to borrow more money, then jack the rate up a few years later). The loan officer? Hey, what the hell, right? If the bank will go for it, then he can write shit loans all day and roll in commissions. And the homebuyer gets to live in a house far nicer than he could ever really afford. For a while.

But then the ARM rates change, the defaults begin, and the foreclosures go up. Mortgage backed securities tank. Financial institutions fall. Bear Sterns has to run to the feds for a bailout, and many others follow (more on that later). The once mighty Lehman Bros. Holdings Inc. disintegrates altogether. Fannie & Freddie stock tumbles more than 90% in a year. Both are fully taken over by the feds.

Most important though is this: the mortgage industry is the basis for all the rest of the money lending industry in America. Car loans, small business loans, credit cards. You name it. With the cash flow severely constricted, banks are lending less money. This is a huge problem, because Americans are addicted to debt.

Read that last sentence again. Americans are addicted to debt.

I said earlier that the bursting of the housing bubble is at the root of the economic quagmire, and it’s true. But America’s love affair with debt and deficit spending IS the root. The fact is, we want luxury, and we want it now. If we want it, we buy it, right then and there. If we can’t afford it, we charge it or finance it. We’ve grown accustomed to it, and living beyond our means has become the norm in our society. When this happens, the prices of goods and services will always adjust themselves accordingly, and soon things become too expensive to own without borrowing. Seriously, can anyone reading this now actually afford to walk into an auto dealership and pay cash for a new car? If so, please contact me. I’ll probably hit you up for some money.

But we did it to ourselves, folks. Bill Clinton and George Bush were both, in my estimation, egregious in their actions concerning Fannie, Freddie, and the mortgage industry. They did it solely for the sake of their own legacies (“Hey ev’r’body! Look how many people became homeowners on mah wawtch! See what a great pres’dunt Ah wuz?). But really, they just jumped on board to ride the tsunami we made. Wanna know who’s really to blame for our economic woes? Look in the mirror, folks.

You did it. I did it. It’s all our fault.