Let Us Be Clear

Is anyone else sick of hearing that our current economic state is due to over de-regulation? A couple of important regulations were changed, not altogether done away with that helped create our current situation. This was not, however, caused by the end of the Glass-Steagall Act, the strengthening of and then subsequent weakening of the Community Reinvestment Act, nor was it started by Fannie and Freddie (they opened the flood gates after changing its policies in 2004). Run away government spending didn't cause this economy either. A combination of bad government policy and incompetent executives did.

At the heart of what lead us down this road was the lack of political will to turn a deaf ear to the financial industry on the subject of credit default swaps. Of course the reason no political will existed to actually regulate credit default swaps (something that had never been regulated because they were created in '98) for what they are, insurance policies, is simply Wall Street effectively took over all financial aspects of our government. We had nothing but Wall Street insiders over seeing economic policy in both the Clinton and Bush administrations. We currently have nothing but Wall Street insiders over seeing our economic recovery as well (Bernacke and the FED notwithstanding). Has anyone heard President Obama or Sec. of Treas. Geithner talk about regulating credit default swaps? Neither has so much as sneezed at the topic.

At the start of our current economy, we had less than 10% of homeowners in trouble -specifically in terms of being in danger of foreclosure or already having lost their home. Today we have over 10% but less than 15% of home owners either in foreclosure or about to be or paying more than their home is worth.

Common sense would tell you that 10% of anything couldn't possibly bring down everything. Ah, but here is where common sense wasn't so common: The insurance that was taken out on these irresponsible groups of mortgages was done in such a way that if one group of mortgages had a few go into default, you had multiple companies getting paid out for the same mortgage. Not only that, many would get paid a 30% profit above the amount that the mortgage defaulted for. See how 10% brings down the other 90%?

All of this was and is of course legal. None of this is regulated and of course none of it is in danger of being regulated. Who knows, maybe the Wall Street insiders running President Obama's economic policy will actually come to realize that part of helping Wall Street remain a free market and successful entity is regulating it from making horrible decisions and not implicitly trusting them. They've certainly talked like they understand this but until actual plans are released, we won’t know.

One of two things, when it comes to mortgages, need to happen: Either we regulate that no investment money can be used to create the funding of mortgages, that they go back to being strictly funded by deposits there by forcing banks to focus on the long term stability and profit of the loan rather than the profit at time of equity OR investment money can be allowed to fund mortgages but they cannot be allowed to be split up into tiny little pieces, end up on four different companies balance sheets, and have a 30% above value pay out if it defaults. Either way, you're forcing the financial industry to treat mortgages like they should've always been treated and that is, as a long term investment that makes a sustained profit over time.

Hedge Funds
There is talk of regulating hedge funds. Hedge funds of course were always left alone because if one failed, it didn't hurt everyday American's like those who have failed in the past year did. The reason they hurt everyday American's this time was because people got the brilliant idea to put people's retirement money/401(k)'s into them. What makes more sense than regulation of hedge funds themselves is regulating what cannot be added to hedge funds. If wealthy traders wish to take risks and get huge returns (or huge losses) on their investments, let them. Just, let us not let them do that with people's retirements'.

What Should Concern Us
It seems to be the primary logic of our congress, our President and his administration, as well as TV pundits that we should better regulate the business practices that created and then busted the housing bubble. The problem with this of course is that it wasn't lack of regulation of bad policy, it was bad policy itself. You can't better regulate the SEC's decision to allow banks to carry 30:1 Debt: Capital ratios. Individuals that run debt up to 30% above their income, for the most part, end up in bankruptcy. What made the SEC think banks would be different?

You can't better regulate stated income mortgages -allowing that in any fashion should be done away with. You can't better regulate sub-prime mortgages -the truth is people with sub-600 credit ratings should not own a home. People don't start out with bad credit ratings, they create them.

It takes time but if one truly wants to own a home, it shouldn't be too much to ask someone to work for it. Every bank and/or credit union in this country has free services to help people clean up their credit rating in order to help put people on a path to home ownership. Frankly, there isn't anything wrong with renting either. If someone makes enough to have a family but not enough to own their own home, that shouldn't be seen as a bad thing.


"In all things, one must consider the end." ~John Adams