After months of hearing commentators and pundits on the right rail about the lack of experience that supposedly fills the “empty vessel” that isBarack Obama, I decided to do my own research to find out when and if Barack Obama had really predicted this catastrophe that is the “mortgage crisis of 2008”. Could they be right about his “lack of judgment?” There were so many wiser financial experts, in government and on Wall Street saying that our economy was strong. Which leads me to another question, how could so many experienced policy wonks be unprepared for this enormously, expensive “screw up”? Do we have any responsibility in this matter?
As I began with the first part of my question, I found a letter sent by Barack Obama to Ben Bernanke and Henry Paulson on March 22, 2007, begging the Fed Chairman and US Treasury Secretary to read the tealeaves on the potential mortgage disaster looming. He warned of the perfect storm that was vast approaching. But no one took him seriously because he wasn’t an “expert’ in this field. He couldn’t possibly understand the intricate backroom politics being made between lobbyists of the banking industries and policy makers.
It was almost as if he had a crystal ball into the potential mortgage debacle that we are currently now facing. I think it’s safe to say his judgment was on target.
So, let’s move to the next question. How could so many experienced people get this one so wrong? When I began to research this very question, I was opened minded to the thought that maybe this crisis really did sneak up on the Fed Chairman and Treasury Secretary. I wanted to believe that someone was watching the increase in foreclosures that had slowly began seeping into the market almost two years ago. I was taken aback by what my research had uncovered. If you thought Watergate was bad, then fasten your seat belts for this one! The best way to describe it is to tell you what I uncovered. Sometimes experience doesn’t always equal good judgment. But you decide for yourself. I also encourage you to research as well. This election is too important not to. So here is my “Cliff Notes” version.
Shockingly, everyone on both sides of the political aisle, Wall Street, lenders, overseas investors, lobbyist, community groups, and worst of all the very people who signed the documents at the closingtable (the consumer), are all to blame for this mess.
Beginning in 1977, the 95th Congress and President Jimmy Carter had a genuinely noble idea. Offer credit throughout entire residential markets and end “redlining”. Community action groups, churches and watchdog groups noticed that banks that serviced certain communities were not offering homeownership to everyone in these communities. Only the wealthier neighborhoods were benefiting from loose lending guidelines. Lenders would take maps out and mark red lines through certain districts that were populated with low or middle-income families. Thus the term redlining, derived.
Congress added very few regulations to the lending arena, and gave banks free reign to regulate them. To put this in simpler language, imagine leaving your teenagers at home alone with the car keys and the liquor cabinet readily available. Now also be under the assumption that they will be responsible and not drink or drive while you are away.
Anyway, three years later (1980), the savings and loan crisis hit, no big surprise there, right? With little regulation, the children ranwild.
Following that billion dollar bailout, the experts in the 101st Congress and President G.H.W Bush, took a stab at the problem and came up with the Financial Institutions Reform Recovery and Enforcement Act (FIRREA). This act (earmarked “reform”) was intended to increase public oversight of the process of rating banks. But they failed or couldn’t foresee that this act would create such a firestorm over 20 years later. This bill allowed everyone and anyone to have a say so in the de-regulating the mortgage market. Fannie Mae and Freddie Mac were given the green light to unload subprime loans into the secondary markets. These pools of loans are also incorporated in 401K retirement funds and other investment funds. Over the next few years, several other Acts were passed, by experienced lawmakers, to help feed the slow growing beast that was spreading on Wall Street.
But one noteworthy contribution to the beast came from the fiscally experienced mind of President Bill Clinton in 1993. He asked regulators to reform the 1977 Community Reinvestment Act? He wanted there to be less paperwork and more “gold stars” for well behaved lenders. He also encouraged the “tattle-tail” rule. This rule gave community advocacy groups the power to turn in lenders who wouldn’t lend in low to middle income neighborhoods, even if the foreclosure risk was high. Subprime mortgage lenders began to pop up all over American towns like fast food franchises. It became the “Gold Rush” for any entrepreneur who could get a mortgage broker license and hire a few dozen used car salesmen to SELL…SELL…SELL! Mortgage companies wanted to be given their “gold star” and financial perks for lending in these “high risk” areas. “No Income, No Problem” loans were given to anyone one walking down the street, and with the governments blessing.
We can’t leave out the G.W Bush administration and their fine appointment of Henry Paulson, Treasury Secretary. This character was the head of Goldman Sachs. Who are they? They are one of the privilege few major players on Wall Street. At his and other experienced brokerage houses request, they lobbied the Security and Exchange commission to “de-regulate” from holding reserve capital which put limits on their risk exposure. Let me explain in simpler terms. Imagine your teenagers asking to drive your car anywhere they want, without a driver’s license or insurance. Then they invite some of their friends to convince their parents to do the same. All along they are telling their parents that they are tired of “rules”. The teens say that your rules keep them from having fun. Sounds insane…right?
I can go on and on and give you more examples or I can now place the probing mirror of shame directly in front of the biggest culprit, the consumer. The idea was that every American, regardless of personal responsibility or lot in life, was somehow entitled the right to own a home. Even though our parents and grandparents had to work a very long time and save every penny they could to buy a home. The entire mortgage debacle could never have happened had we (the consumers) not bought into the mayhem.
In this case our greed got the best of us. We received flyers in the mail claiming that if we were renting, we were losing out. Why rent when you can buy? And so we began the senseless shopping spree of finding our dream home. We did not put any effort into saving for a down payment, we had not been employed for longer than 5 months, we had not paid any of our creditors on time, we borrowed money from the local “pay-day” advance store around the corner, we had no money for home repairs, we couldn’t afford the neighborhood the realtor showed us. But hey…why shouldn’t I have my dream home?
Our experience in life should have told us that if it sounds too good to be true, then maybe it’s not. But we signed our name on the dotted line on the mortgage documents, even though the first page of the Note Disclosure said “Adjustable Rate Mortgage”. We ignored the Federal Truth-in-Lending document that showed the initial payment of $500.00 for 24 months and then the next 336 months showed an estimated payment of $1200.00 per month. We took the keys from the realtor and drove our families to their brand new home. HAPPY DAYS FOR ALL!!
We didn’t pay much attention, over the years, to our fragile housing market even though some of us knew we shouldn’t have qualified for our own home. We wanted to believe that the housing market was a priest, able to wash away the sins of the greedy and irresponsible. We wanted to trust the “policy priests” full of experience. They would never be out for their own best interest. We were told by President Bush, Dick Cheney, Donald Rumsfeld and Condoleezza Rice in the Bush administration, that the “war on terror” was the more pressing matter.
Republican presidential hopeful, Senator John McCain (the experienced maverick) said two weeks ago when the crisis began that “the fundamentals of our economy are strong”. Shortly after those words the stock market tanked. His answer to the crisis was to suspend his campaign and rush to Washington to prove his leadership abilities, but instead all he did was wreak havoc on the process. He left Washington with nothing accomplished. And then after realizing he was only in the way of ongoing tedious negotiations, he returns to the campaign defeated, desperate and on full attack mode targeting Barack Obama’s character. Does this erratic behavior demonstrate profound leadership qualities? I think it is safe to say no.
What about our responsibility in this matter? Shouldn’t our experience in decision making also come into question, this year? After researching this mortgage crisis, we should decide to modify our definition of “insanity”. Let’s proclaim that making the same uninformed voting decision this year, but expecting a different result, is truly INSANE! We should demand that candidates not be “like us”, but have exceptional judgment based on facts and not fiction, have a calm demeanor, and the ability to surround themselves with intelligent and differing viewpoints. If we choose to have a beer with someone, can it just be a neighbor… and not our president… this time?
