We are rounding out a dry September with hackberry leaves turning to dust in the sunshine. I've got Jimmy Buffet playing "When the Wild Life Betrays Me" on my iTunes - seemed like the right song for the moment. I love this time in Tennessee. This and our spring make the "suicide weather" winters and chokingly hot summers worth it. I've been re-reading Robert Penn Warren's essay "Democracy and Poetry" and stumbled across a line that he cites from Melville:
"Power unanointed may come-
Dominion (unsought by the free)
And the Iron Dome,
Stronger for stress and strain,
Fling her huge shadow athwart the main;
But the Founder's dream shall flee."
Dominion (unsought by the free)
And the Iron Dome,
Stronger for stress and strain,
Fling her huge shadow athwart the main;
But the Founder's dream shall flee."
Melville wrote this poem, "The Conflict of Convictions" shortly after the Civil War. He harbored the unhappy suspicion that the Waah (as we refer to it here) and the resultant expansion of the Federal Government held consequences that were not consistent with the republican ideal the nation had been founded upon. As I look at what is going on in Washington as I scribe, I fear the same. A $1 TRILLION transfer of wealth from the U.S. taxpayer to the Feds with the hope that somehow they will be able to return our money by buying assets and selling them later at a higher price simply seems to push the limits of sanity beyond the edge of the universe.
In a very simplistic interpretation of what happened, let me see if I can sum it up for you:
1. In 1974, during the hamstrung Ford administration, the Community Development Act was passed. The premise was that lenders should not discriminate based on a person's ability to repay the loan. (Wait - what?) OK, I shortened it a little, but that's basically what it said. AND IF you discriminated and got caught "redlining," as it was called, well YOU Mr. Banker were in big trouble.
2. Two "GSE's", or "Government Sponsored Enterprises, " Fannie Mae and Freddie Mac were in place. A GSE is privately owned and operated by shareholders, but they are protected financially by the support of the Federal Government. These government protections include access to a line of credit through the U.S. Treasury, exemption from state and local income taxes and exemption from SEC oversight. They created what became known as the "secondary mortgage market." Private lenders could make bad loans and sell them to Fannie and Freddie! What a country!
3. As a former of partner told me long ago, "if you want to understand how people are going to act, follow the compensation." So, if I am your friendly neighborhood banker who gets bonused when my loan volume goes up AND I can do it risk free...yee haw! And if I work for Fannie or Freddie, I also get compensated by growing the business...and the last thing Ineed is for some accountant to come snooping around - I am incented to give big bucks to friends who will keep the accountants away. Where does one find such friends? Well, here:
All Recipients of Fannie Mae and Freddie Mac Campaign Contributions, 1989-2008
Why these are just the people who are working on the bailout! There's Barney and Chris and Barry and Harry...this cabal of elites are exactly where they need to be to protect themselves from the tar and feathers they deserve.
Let me pause to take a question here...umm, you in the back -
Q:"Uh, Perfessor, uh, are you f*&%ing kidding me? Whiskey Tango Foxtrot!!???"
A: "I see you are upset. Don't worry, it gets worse."
4. Now this game works when housing prices are appreciating and supply is just barely out-pacing demand. Let's say you buy a house for $100,000 and with one of those "exotic" instruments dreamed up by bankers trying to shovel more debt into the FredFan maw, you only put 5% down and it's interest only for five years. Sweet! After all, in five years your house will be worth $200,000 so you can either easily refinance or sell and walk away with a lot of money. In the meantime, you can stock your pad with awesome big screen TV's and put a Hummer in the garage because you have a lot of "equity" - your house is worth so much more than you paid for it one month ago! So far so good. As Glenn Frey would say, "The Heat is on!"
5. Meanwhile, back up on Wall Street, some savvy Harvard MBA's are figuring out that EVERY foreigner wants American debt. Hooray! So let's create this new instrument, a "CDO," or Collateralized Debt Obligation - we'll put that exotic mortgage in it, and the credit card bill for the big screen and the car loan for the Hummer. We'll avoid regulation and rating and tell overseas buyers that this thing has a great cash stream behind it. They buy it, Harvard yard gets a bonus, life is good! It's so good, we'll buy up more and more of this junk...bundle it up and sell it. Hell, we'll outbid Fannie and Fred for some of it.
6. Uh oh. The house isn't appreciating. Uh oh. Gas prices just spiked and I can't afford to make the monthly credit card payment. Uh oh. The mortgage is ballooning and there are a hundred other houses just like mine on the market. This is what a train wreck looks like.
Now I left a lot of details out - how Clinton dramatically expanded the program in 1999, how all his cronies profited from the shell game etc. Basically, all of these things started happening at once. There's plenty of blame to go around. Greed on Wall Street...greed on the part of the American consumer. A massive failure of social engineering - the fundamental premise that everyone SHOULD own a home like all centralized policies is wrong. Some people cannot afford it. They should rent. And if they can't afford to rent, there are plenty of social programs that will help them. This is America, dammit, we take care of our own.
Let's be clear. Despite the drumbeat of the leftists, capitalism did not fail. Capitalism got twisted into a weird form of socialism courtesy of the guaranty of Federal backing. Capitalism, left alone, would not have made the bad loans to start with. In it's purest form, capitalism allows for failure and rebirth. Left alone, it is a stern disciplinarian - if you end up renting under one of those social programs I mentioned above, you are (hopefully) not going to like it and will be incented to move up and on. Take it from someone that grew up all over the world - the worst of our Section 8 housing is damned nice compared to a slum in Haiti or a favella in Brazil.
Now I don't know where the geniuses in Washington are going to net out this weekend. For the first time in a long time, I am damned proud of the House Republicans for stopping the rush to fund the Treasury's checkbook with our money. I acknowledge something needs to be done...my business is at a stand-still thanks to fear and lack of credit in the market...I want something to be done. But I would sure like to see a blend that includes items like a cut in the capital gains tax and a replacement of the "mark to market" accounting rules...and for the love of all that is Holy, can we puleeze cut the spending!!
The prospect that the Treasury Department could become the controlling force in residential and commercial real estate is chilling...it is nothing short of the nationalization of real estate. The shadow of the Dome will cast the prospects of a robust recovery into deep doubt. There is one very thin layer of silver in this dark cloud - whatever happens, the implementation of new spending programs will be seriously curtailed.
Rumble on!
In a very simplistic interpretation of what happened, let me see if I can sum it up for you:
1. In 1974, during the hamstrung Ford administration, the Community Development Act was passed. The premise was that lenders should not discriminate based on a person's ability to repay the loan. (Wait - what?) OK, I shortened it a little, but that's basically what it said. AND IF you discriminated and got caught "redlining," as it was called, well YOU Mr. Banker were in big trouble.
2. Two "GSE's", or "Government Sponsored Enterprises, " Fannie Mae and Freddie Mac were in place. A GSE is privately owned and operated by shareholders, but they are protected financially by the support of the Federal Government. These government protections include access to a line of credit through the U.S. Treasury, exemption from state and local income taxes and exemption from SEC oversight. They created what became known as the "secondary mortgage market." Private lenders could make bad loans and sell them to Fannie and Freddie! What a country!
3. As a former of partner told me long ago, "if you want to understand how people are going to act, follow the compensation." So, if I am your friendly neighborhood banker who gets bonused when my loan volume goes up AND I can do it risk free...yee haw! And if I work for Fannie or Freddie, I also get compensated by growing the business...and the last thing Ineed is for some accountant to come snooping around - I am incented to give big bucks to friends who will keep the accountants away. Where does one find such friends? Well, here:
All Recipients of Fannie Mae and Freddie Mac Campaign Contributions, 1989-2008
| Name | Office | State | Party | Grand Total | ||
| Dodd, Christopher J | S | CT | D | $165,400 | ||
| Obama, Barack | S | IL | D | $126,349 | ||
| Kerry, John | S | MA | D | $111,000 | ||
| Bennett, Robert F | S | UT | R | $107,999 | ||
| Bachus, Spencer | H | AL | R | $103,300 | ||
| Blunt, Roy | H | MO | R | $96,950 | ||
| Kanjorski, Paul E | H | PA | D | $96,000 | ||
| Bond, Christopher S 'Kit' | S | MO | R | $95,400 | ||
| Shelby, Richard C | S | AL | R | $80,000 | ||
| Reed, Jack | S | RI | D | $78,250 | ||
| Reid, Harry | S | NV | D | $77,000 | ||
| Clinton, Hillary | S | NY | D | $76,050 |
Why these are just the people who are working on the bailout! There's Barney and Chris and Barry and Harry...this cabal of elites are exactly where they need to be to protect themselves from the tar and feathers they deserve.
Let me pause to take a question here...umm, you in the back -
Q:"Uh, Perfessor, uh, are you f*&%ing kidding me? Whiskey Tango Foxtrot!!???"
A: "I see you are upset. Don't worry, it gets worse."
4. Now this game works when housing prices are appreciating and supply is just barely out-pacing demand. Let's say you buy a house for $100,000 and with one of those "exotic" instruments dreamed up by bankers trying to shovel more debt into the FredFan maw, you only put 5% down and it's interest only for five years. Sweet! After all, in five years your house will be worth $200,000 so you can either easily refinance or sell and walk away with a lot of money. In the meantime, you can stock your pad with awesome big screen TV's and put a Hummer in the garage because you have a lot of "equity" - your house is worth so much more than you paid for it one month ago! So far so good. As Glenn Frey would say, "The Heat is on!"
5. Meanwhile, back up on Wall Street, some savvy Harvard MBA's are figuring out that EVERY foreigner wants American debt. Hooray! So let's create this new instrument, a "CDO," or Collateralized Debt Obligation - we'll put that exotic mortgage in it, and the credit card bill for the big screen and the car loan for the Hummer. We'll avoid regulation and rating and tell overseas buyers that this thing has a great cash stream behind it. They buy it, Harvard yard gets a bonus, life is good! It's so good, we'll buy up more and more of this junk...bundle it up and sell it. Hell, we'll outbid Fannie and Fred for some of it.
6. Uh oh. The house isn't appreciating. Uh oh. Gas prices just spiked and I can't afford to make the monthly credit card payment. Uh oh. The mortgage is ballooning and there are a hundred other houses just like mine on the market. This is what a train wreck looks like.
Now I left a lot of details out - how Clinton dramatically expanded the program in 1999, how all his cronies profited from the shell game etc. Basically, all of these things started happening at once. There's plenty of blame to go around. Greed on Wall Street...greed on the part of the American consumer. A massive failure of social engineering - the fundamental premise that everyone SHOULD own a home like all centralized policies is wrong. Some people cannot afford it. They should rent. And if they can't afford to rent, there are plenty of social programs that will help them. This is America, dammit, we take care of our own.
Let's be clear. Despite the drumbeat of the leftists, capitalism did not fail. Capitalism got twisted into a weird form of socialism courtesy of the guaranty of Federal backing. Capitalism, left alone, would not have made the bad loans to start with. In it's purest form, capitalism allows for failure and rebirth. Left alone, it is a stern disciplinarian - if you end up renting under one of those social programs I mentioned above, you are (hopefully) not going to like it and will be incented to move up and on. Take it from someone that grew up all over the world - the worst of our Section 8 housing is damned nice compared to a slum in Haiti or a favella in Brazil.
Now I don't know where the geniuses in Washington are going to net out this weekend. For the first time in a long time, I am damned proud of the House Republicans for stopping the rush to fund the Treasury's checkbook with our money. I acknowledge something needs to be done...my business is at a stand-still thanks to fear and lack of credit in the market...I want something to be done. But I would sure like to see a blend that includes items like a cut in the capital gains tax and a replacement of the "mark to market" accounting rules...and for the love of all that is Holy, can we puleeze cut the spending!!
The prospect that the Treasury Department could become the controlling force in residential and commercial real estate is chilling...it is nothing short of the nationalization of real estate. The shadow of the Dome will cast the prospects of a robust recovery into deep doubt. There is one very thin layer of silver in this dark cloud - whatever happens, the implementation of new spending programs will be seriously curtailed.
Rumble on!