Revisiting old assumptions in assessing how to dig ourselves out of this mess

OK, so now profound upheaval in that credit bridge is proceding apace. Millions of abandoned and ailing mortgages are still clogging the system and a large part of the still performing ones represent upside-down assets - houses whose current market worth is less than the principle still owed on them - effectively chaining owners to homes in areas from which they can't move.
Long-term economic damage - caused mostly by a severe dirth in available credit, formerly based on presumptions of increases in home equity, now debunked - has spread to most economies of the world where that kind of bank activity took place. In many cities and towns, nearly five years after the demise of Lehman Brothers, the bottom in home values hasn't been reached yet. The knock-on effect has been a significant drop in consumer demand. The lower levels of the world's work forces have been hit the hardest by this, in no small way because management in many businesses has adapted to the slack off in demand by investing in initiatives and equipment that allow reductions the number people on payroll, even as net profits rise. The resulting drag on levels of gainful employment has had blow-back effect on many of who invested in large amounts of high-risk mortgage-based securities - individuals, funds, banks, even nations. With respect to financial institutions, more than a few did not survive. Though the worst of the initial wave of failures may be over, the situation in the general economy is still pretty dicey.
Here at home, the Obama campaign's erstwhile rallying cry of "Yes, we can!" now rings somewhat hollow against the persistent tide of economic distress. Taking a page out of King Canute's book, President Obama now acknowledges he doesn't have a definitive way of waving a wand and stopping the overall tide of economic gloom. Nor does he pretend to know how much more of the general economy the tide of financial gloom will ultimately drown. What he does know is that there is little that he - or anyone else - can do to effect a quick repair and that it will have to run its course before things can improve. But doing "little" is not the same as doing "nothing", and to the extent that doing "little" amounts to doing "something', whatever "something" happens to amount to, he should do it.

While the bulk of the damage was first concentrated in the world of large and sophisticated financial organizations, it has now spread to the humblest corners of life and the furthest ends of the planet. Greece groans under draconian austerity measures. Spain lists toward the tipping point. Portugal hangs on by its fingernails. Italy trembles in dread. What will happen to purveyors of other kinds of credit is anybody's guess. No doubt, there'll be challenges to the sector as people attempt to keep up with the combined cost of their monthly mortgage payments and life's other critical needs at precisely the same time that businesses are looking to be less dependent on labor and putting the squeeze on so many people's earning prospects. In particular, there is the issue of the tertiary education debt that many people (mainly younger adults, but not exclusively) now take on in an effort to maximize their chances of staying out of the ranks of the unemployed or the underpaid. School loans can easily excede what it would take to buy a serviceable home in any one of a thousand economically depressed urban communities across the country. Once they graduate, it's a fair bet that the number of jobs available in the disciplines they studied for will be fewer than those seeking them. How will those who fail to find the work they were aiming to get repay those loans? And what kind of displacement effect will the repayment load of school loans have on the credit-worthiness of the nation's next generation of potential first-time home buyers? Will the price of homes have to drop even further to be able to tempt them into taking the plunge? Add to that, the imposition of mandated health insurance premiums and the prospects for another great slump seem possible, if not probable. There are many other unknowns, but if past consumer crises are anything to go on, these new developments are likely to generate a lot of personal hardship. Only so much belt-tightening can be done. And if belt-tightening doesn't work, there's not much more a person can do other than turn to the last resort of bankruptcy protection.
Chapter 11 is no magic wand, however; it simply distributes one person's difficulties among those to whom that person owes money. This works with the occasional individual who gets into trouble owing to circumstances peculiarly his/her own. But when a great many are experiencing roughly the same type of hardship, the widespread use of bankruptcy protection can act like an avalanche that precipitates ever widening circles of ruin.

There's always quantitative easing of the currency supply but the reflexive traditional opposition to it is deeply entrenched. The fact that a certain rate of quantitative easing is a necessary ongoing function of the central bank of any economy in which the gross value of all forms of property is growing seems to have been overlooked by many who rail against the issuance of new money. In fact, the failure to inject sufficient money to keep the wheels of commerce rolling in a growing economy can be just as harmful as injecting too much. For the while, however, it is unlikely that further top-down cash infusion (essentially, government assistance to banks) will work to prime the uptick in economic activity that a true recovery would require. Banks have long ago abandoned the kind of micro lending that new businesses need to other, mostly smaller, economic entities, ranging from friends and family to credit unions. The years of high-roller lending cultivated an appetite for big returns that has made it almost impossible for banks to return to the business practices of yesteryear, and given the new rigor (and expense) banks are applying to assessing creditworthiness, smaller principles just don't seem worth lending.

Selective bottom-up infusion by government would be better than top-down but it's rather late in the game for that now. The government's wad is too depleted and too impeded by congress for it to be of much help to the national economy.

Essentially, from the administration's point of view, they're still in triage mode, trying to decide what needs to be saved with what they have and what they have to abandon for dead.

As for the lowering of interest rates by the Federal Reserve to encourage mortgage payers and their banks to arrange for lower monthly payments, it will be of help to some, no doubt, but as far as the more troubled mortgages are concerned, it will do little more than defer the day of reckoning. Social justice notwithstanding, the math, the state of the economy and time are all against them. Moreover, ill-advised moves of that nature could actually deepen the malaise by kicking the can down the road where the means to correct the overall economic situation may be even less available. The long-term effects of this recession seem to be worse than most economists were willing to predict. As loathe as they may be to do it, many are going to have to let go of what they thought they owned, take their losses and retreat to more tenable financial positions that they can more easily service.

While many of those so affected may have been imprudent in their choices, there is, nonetheless, a great injustice in the way these circumstances befell them. By and large, it will be the hapless, the gullible and the naive who are punished the worst for the snow job that was done on them by people they were encouraged to trust - people they believed were helping them but who, as we see now, weren't at all.

What to do about it?
No approach is going to be perfect. Still, there are ways of softening the ultimate social impact by spreading the burden of absorption among all the parties who were responsible for letting this giant train wreck occur. None should be let off the hook in helping to make better what went wrong. They include:
1.) the people who were beguiled into thinking they could afford what relatively simple logic and math showed they could not;
2.) the companies that encouraged mortgage agents to go out and find anyone willing to sign on to home-purchase contracts deliberately structured to create the illusion of affordability without the substance thereof so that these intermediaries could build portfolios of this kind of debt to sell to larger investment outfits;
3.) the companies who bought those bundles of mortgage in order to repackage them as shares for sale on the stock market, thinking they could make money, in the balance, by trading such debt;
4.) the shareholders who bought into the operations of those companies without really examining the fundamental mechanics of those instruments;
5.) government across the breadth of the nation that had every resource needed to be able to assess that the present and future earnings bases that were supposed to support the housing market were wholly insufficient to sustaining the mortgages being cooked up to get people into those properties; government that failed to act because it was so taken with the more immediate gains derived from property taxes on soaring real estate values and excise taxes from purchases fueled by home equity extraction that its representatives couldn't resist being breathless cheerleaders in the march toward disaster; government that has consistently failed in its constitutional obligation to serve the renting public's interests as conscientiously as it serves the owning public's and thus, was clearly complicit in driving unhappy renters into the cut-throat clutches of industry operatives peddling mortgages that buyers had little chance of carrying to completion; government that, though alerted to the danger looming from unregulated derivative trading and mixing ordinary banking with financial speculation, willfully acted to prohibit government regulation of that market, setting the stage for the staggering collapse that subsequently occurred;
6.) real estate professionals who, for personal gain, knowingly did things they knew to be unwise, unethical or just plain illegal;
7.) not least, by any means, those whose relentless diversion of this society's product away from their subordinates and into their own pockets laid the ground for all of the above by forcing the compensationally shorted classes to adapt to a life based on debt and financial risk.

Each of the above has a part to own in the final reconciliation of this mess, either through direct involvement or indirectly, through tax-based support of remediative action; and to the extent this new government can find ways for them to be held accountable, they should oblige them to chip in for what must be done to stop this train, take it back to where it got off course, and get it going on the right track again. The greater part of the responsibility for doing so must not be allowed to fall on the shoulders of our children or our grandchildren, while, in the interim, a massive public debt obligation and failure to serve steals their prospects and bleeds them white.

So what to do about it? As mentioned, holding all parties responsible for the home credit meltdown to account would be a fitting first step but it should not be mistaken for a longterm or comprehensive fix of any kind nor is it of substantive help to what we might need to do. For that to be the case, those responsible would need to be made to contribute financially to the cause.

An excellent place to start, I think, would be for us to formally resolve that one epoch of mistakes will not be allowed to lead to another of a similar nature. This will require making tough choices (one of President Obama's more frequently used sentences).

As much as we might like to be compassionate toward Americans with home mortgage problems, where fully justifiable and reliable loan restructuring cannot be done, we should not waste public money pretending to do so, purely for the sake of political appearances. Going too far in trying to keep failing purchasers in their homes could well create instability in other areas. Nor should we undermine credibility in our government by giving people false assurances that they will be rescued, only to disappoint them even worse later. Let's not forget the many millions of still renting Americans who have long yearned to get into a home of their own but could never quite afford the financial leap required. How long would it be before they too demanded a comparable level of financial assistance from the government? After all, do they not pay taxes, as well?
At the very least, those whom we can help with loan restructuring should not be able to emerge from the process with 100% of the purchased equity in their homes. Whatever agency helps them should own a portion of the total equity in the property for which the part owner/occupant would pay a cut-rate rent, over and above the morgage payment on the balnce of the equity. If the house were sold, the assisting agency would hold a first position lien that would have to be satisfied for the sale to go through. If we don't reduce the equity stake of rescued home buyers, we will be tipping the wealth odds against the other half of the public that, for one good reason or other, has opted to continue putting up with renting and resisted the urge to act imprudently. If we can show show that those who receive public aid in hanging on to their mortgages will have to wait longer to be free-and-clear, it will help to restore normalcy in market conditions and blunt charges of favoritism toward a prominent sector for political purposes. The elimination of such bias would reduce opposition and allow rescue programs to go forward more easily.
One way we can restructure loans without writing down the original principle amounts is by inducing lenders to void existing contracts, go back to the original date of sale, and retro-actively offer low fixed-interest mortgages over terms longer than thirty years. This would lower buyers' monthly payments but it would also slow the rate at which they accrued equity, putting them somewhere between a conventional buyer and a renter and defusing criticism on the part of those who held back. Payments already made would be applied to the new regimen.
Another way would be for the government to assume temporary responsibility for the unaffordable, inflated portion of the mortgage contracts that government was a principle party in encouraging and allow homeowners to pay off that portion at an interest rate close to zero or below zero, over an extended term, while designating the balance to be dealt with under new terms by the original mortgage servicer. The owners would not be allowed to receive money from the sale of such properties without first paying off the balance of what they owed the government. By this method, net monthly mortgage rates for the country’s most overpriced homes could be significantly lowered, saving many from foreclosure. With an astute piece of gentle arm-twisting, the Obama administration might even be able to get America’s richest to help sponsor the fund needed to make such a system operational through the sale of very low-yield bonds. We should not be oblivious to the fact that many of those richest made an enormous amount of money, not just through real estate, but also through short-selling and credit default cash-outs in recent months.

We also have to keep in mind that the only way most financially-astute renters who have been waiting in the wings will ever have of owning a home of their own in the context of a functioning economy will be when the cost of buying home real estate drops to less than around 30% of what they earn (the FHA's standard 29/41 ratio, the front end denoting a recommended percentage-of-income limit on housing expenses and the back end, the limit on total debt servicing - reader, if you don't know it, look it up). We have seen the costs to the mainstreet economy of a bigger bite being taken out of individual earnings for housing costs and we can't go back there. So how are renters supposed to make that jump into home ownership if Congress uses public money to, in effect, keep real estate values propped up artificially, while doing nothing to lift the ordinary person's take-home pay?
Making plans to aid millions who were ill-advised to buy in a way that effectively stiffs tens of millions still patiently waiting for their own shot at more justifiable opportunities may be a tempting PR move but, in reality, it would just be more junk policy adding fuel to the fire of our general dissatisfaction with the state of things.

Not that the distressed, whoever they may be or however they came to be that way, should be left to sink and drown once the consequences of their decisions have played out. At that point, society's safety net should be helping them stay materially and psychologically stable and safe in a condition that is sustainable so that those who still have it within to lift themselves up once again may have a shot at doing so. That's part of a conscionable country's obligations to those under its wing when it gives its citizens a risk-fraught society to live in, and if any money is to be spent addressing this terrible housing disaster, that is where a decent portion of it should be going.
Even then, it would be naive - if not downright disingenuous - to suggest that the bulk of those forced to go through such a jarring rearrangement of their hopes and dreams will be able to get back to where they were before the great meltdown. Take it from someone who went through much the same process in the early 1990's; once brutalized on the losing side of the social see-saw like this, most never regain the same sense of exciting life potential they had when they entered the world of adult realities. From that point on, the average person lives on the defensive, plagued by shadows of uncertainty that dog each and every prospect of a better future. If there is such a thing as a reliably faithful life companion, PTSD, occasioned by personal ruin, has to be it and PTSD in the wake of having lost one's home (or livelihood) to the designs and dealings of people more powerful or more circumspect than oneself is all too common a mental condition.

To have a true recovery, we will have to have new blood in the economy, new generations of graduates into adulthood whose dreams can fly without ever having been burdened by the baggage of past trauma.
In light of the above then, it may sound counter-intuitive for me to say that we ought to allow some social damage to occur before stepping in to help with public money. Nevertheless, for the reasons I've outlined above, I'm firmly convinced that keeping people in material situations that their financial circumstances can't justify would ultimately hurt more people worse, especially the young who now face the added hurdle of having to apply for credit under the harsher loan conditions of a chastened financial industry in a world of downsized dreams.

Over the past months of crisis, we have seen the federal government almost randomly pump huge amounts of public money into troubled banks and insurance houses. A great deal of that money went straight into the hands of investment firms and insurers whose dealings with banks and hedge funds were in danger of total implosion.
Many who are more in-the-know than I am are on record as saying that, while these interventions may have been sold as being in the longterm public interest, they may yet prove to do less than was hoped for to improve the general economic picture. Such large-scale help from the government rarely occurs without the introduction of unpleasant side effects.
A shortlist of the kinds of setback that can ensue includes:
1.) a weakening of the market processes that control the cost of vital consumer commodities (such as petroleum-based fuels and products, natural gas, manufactured goods, staples like rice, coffee and tea and housing),
2.) an accompanying inflation-driven erosion of both the effective yield and purchasing power of interest-supported retirement annuities, leading to even more strain on government services forced to respond to a corresponding rise in levels of social distress among retired people and the elderly,
3.) a bald-faced exacerbation of the wealth divide as the luck of the richest Americans is artificially propped up while those at the bottom are left to absorb the grittier impacts of economic contraction.

Significant devaluation of the dollar, caused by pumping money into the economy, would also make it even harder than predicted for generations of adults yet to come to grapple with future fiscal responsibilities that will, almost certainly, be passed on to them by today's baby boomers for ultimate reconciliation.

These interconnected impacts and the ways we might tackle them are complex to understand, tricky to predict and difficult to lay out on paper. There are so many present and future unknowns. But one thing is for sure: they are not something we should think we can indefinitely put off coming to grips with. The population's future prospects wobble on a knife edge right now and, given some new shock, conditions could deteriorate faster than most could ever imagine, let alone deal with.
For some, economic Armageddon has already arrived, very often in the form of an ostensibly helping hand. When people have difficulty obtaining even the most basic goods and amenities, as is the case in some areas of the country right now, it becomes that much easier for profiteers, hucksters and opportunists to fleece them in their hour of difficulty.

A word needs be said about the Bush administration's tax give-back economic stimulus approach at this point. While it was clearly an ad hoc measure taken on the fly without a whole lot of consideration as to how it could have been more specifically targeted to stimulate consumer spending, it did at least reach the bottom and, as such, may well have been a superior stimulus instrument than the top-down infusions conducted by the Obama administration, a large share of which was simply absorbed into the asset bases and bottom lines of very big companies in the financial sector.

Such infusions, done very occasionally and very astutely can provide a vital assist to the momentum of the general economy in the wake of some massive setback but, almost invariably, they come at a price of some kind.
If the source is borrowed money, public infusions levy a longterm drain on future budget capability and saddle future generations with having to pay off that debt. Further, by obviating widespread damage, they also preclude the kind of opportunity space that a revolutionary upgrade in social conditions so often appears to need in order to be given a chance to work. The danger is that the useful and the harmful are simply patched together again, with nothing systemic having been done to preclude similar cycles of ruinous activity (like real estate speculation) from reoccurring in the future.
If, on the other hand, the source is the national mint, and the money printed fails to create a broad base of lasting real value, inflation will result.

Lest I leave the impression that I think that failed homebuyers should simply be left to their fate because that's the name of the game in our system, let's remember, people were told, ad nauseum, that there was little by way of a dependable public back-up behind them for the years ahead and that they should do anything they could to build equity that would act as a hedge against being wiped out. Over the past decade, it was general consensus among wonks and pundits that banks should pull out all the stops to help buyers achieve home ownership and those interested in a more secure future should do whatever it took to find a mortgage provider that would accept them.
"There's a mortgage plan for everyone!" went the old saw. It was the mantra of the century for the real estate industry, along with such gems as, "Houses will only get more expensive in the future." The implication, of course, was that if you had reached 35, or so, and still didn't own a home of your own, you had to be some kind of deadbeat or chump. I know; it was what my wife and I were told when we were dumped out of our rental home so the landlord could capitalize on the improvements we had made over seven years of living there by selling the property out from under us. He made a cool $200,000 profit from selling the house. Our protestations that perhaps we deserved something for our pains were met with incredulity that quickly turned to sustained hostility on his part and passive complicity on the part of participating real estate agents. The position we found ourselves in, they said, was ultimately our own fault for not having bought our own house: anyone who really wanted a home could afford one. The math, however, showed us we could not.

Given that kind of social pressure, should they who betted so badly then be saddled with the lion's share of the blame and the material misfortunes for having taken the advice of the experts, gambled on a purportedly sure thing and lost everything as a result? I think not. A part, yes, but the whole blame, no.

Actually, with this writing, I'm much less interested in who should be faulted for this mess than in how the system could be fixed to produce more middle-class earners (with the exception, perhaps, of this feckless system of government that has so consistently under-performed in defending social equity, relative to other developed countries - a government that seems all but incapable of building safety net systems worthy of the nation it is charged to serve and protect from harm).

One important point worth remembering is this: Once the dust has settled, as long as those causal earning differentials I'm concerned about remain in place, what better option will people have than going right back to gambling on high-priced real estate, fueled by debt, to secure their futures, all over again?anks