Predatory Lending Practices

So there you are, a patriotic citizen of the Great Republic, dutifully guarding your horde. You didn’t save cash, because we needed to keep spending to make the recession go away. After 9/11 Bush came out and actually said it, “Keep spending America! So the Arab extremists and their managed economies know that they can’t dampen the American spirit or our ability to spend our foes into oblivion.”

When the money ran out, the government “put more money into the economy”. But let’s define our terms, the government can’t really put money into the economy. Well, a government can physically print more money, but that’s not always helpful. It was tried in Weimar Germany and look were that got them: up to their thick pale necks in worthless currency, state bought guns and butter, and crawling with NAZIs.

What our government did, in fact, was kept your own money swirling about in the economy. The Fed ensured cheap credit was available to all, as long as you kept spending. But you weren’t going to be an idiot about it. You bought a real asset with all that lose credit. And with the steady rise in the real estate prices, that was, on paper at least, giving you much better returns than your 401(K). So you bought as much house as your banker told you that you could afford and waited for the appreciation to grow into a dream retirement home of the not so distant future.

“The tide has to go out to see whose swimming naked.” Warren Buffet famously said. The rates went up and like some lunar pull the tide went out. What it exposed was the flaw in the plan: with all those interest-only teaser rates and home equity loans, that horde in which your future depended was not, in fact actually yours. You owed it to the bank.

Now that the rates have inched up to stave off the threat of inflation because everything was going so well. Your rate, that clever adjustable rate mortgage you scored, has just reset and a number you can’t possibly pay.

You could do the smart thing and sell the McMansion and downgrade to a smaller house, but with no equity and your street littered with brightly colored “For Sale” signs like the week before election day, it’s a buyers market. So you, dear homeowner, owe more that you can possible get out of the house. You’d have to pay to get this two story Georgian albatross from around your neck. Well, hell, that’s what savings are for, emergencies. Hold on a moyour house, that underwater two story Georgian albatross is your savings.

Then the defaults that you are desperately trying to avoid send a few mortgage firms down the toilet and the sub-prime foolishness start to be this season’s financial boogieman. The banks, once so syrupy sweet, look at you like a wayward child asking for more lunch money because you “lost” yours. You can’t borrow any more and neither can that charming couple on whom you’d like to hang your albatross. Why can’t they? Because while these previous lines might have been written about you, they might just as well been written about them as well.

So what are you to do? Well to call this multi-faceted problem a product of a perfect storm would not be hyperbole. A number of conditions came together in just the right (or wrong) way, to create conditions greater than the sum of it’s parts. Like weather, the conditions didn’t just come out of nowhere, but built and grew and moved in other forms before merging with other conditions to become this that that is terrifying the crap out of all of us. But unlike weather, this rout in the markets is the result of conditions brought on by our own actions (environmentalists can hold their tongues, we are talking about 1.2 inches of shoreline a year this in the Mississippi River drying up over lunch).

We, good patriots, spent money we didn’t have in order to ignore a recession. The banks made ill-advised loans to people with little ability to pay it back. Don’t feel too bad, there is very little individual wisdom can do once the mob has spoken: try and make your money and don’t go to far.

Because we were all part of the mob, we’re all going to feel the pinch on our collective asses. A lot of money is being written off, disappearing into the either. Bloomberg News carried a heart-rending story about the poor Wall Street bankers who, for the first time in five years, were going to see a decrease in their bonuses this year. Last year the average bonus was a quarter million dollars, this year, they lament, will be, well, less.

The old banking saw is never loan money to someone who needs it. The banks shouldn’t have made the loans because it was bad business. The charges of predatory lending, though, is political bluster an attempt to play the race card in the one sector of America that truly is color blind. The same congress that is levying the charges that minorities were targeted is the same body of men who, a short decade ago where charging discrimination at the financiers for not targeting minorities. Making the “American Dream” of homeownership available to minorities and the poor was a stated aim of Allen Greenspan. And he was lauded for it.

Regarding those poor hapless home owners, perhaps a exhibition of poor haplessness of this magnitude should disqualify someone from home-ownership. No one can argue that buying a house you can’t afford is prudent move no matter what the rates and credit market does. The rating agencies that labeled as AAA securities that had the credit worthiness of a burning trailer park, are surely to blame as well. Surely they were in bed with the banks that were paying them huge fees to rate their bonds.

But like Voltaire said: There is nothing new under the sun.

Even a vaguely cognizant investor could have seen this coming. And even if you swapped your common-sense for a higher yield, the news had been harping about this for a year now.

If you can extend your memory beyond the turn of the century, and for Wall Street, that is no mean feat, you’ll recall the bloodbath that was the tech bubble. Ad If you’re really sharp, you’ll recall the all the chicken littles who were mocked for not jumping on the dangerously stretched Tech Bubble. The one that leaps immediately jumps to mind is Warren Buffet of naked swimming fame.