Getting It Right- On the Brink of A Great Abyss...Economic Meltdown

By: Sid Riley
9/25/08

" The potential for an economic "doomsday" for America is very real. It is now time for our "do-nothing" congress to "do-something"!
Historically, when our nation has faced times of great crisis and threats to our revered democratic systems, our politicians have been able to set aside their petty, self serving, political agendas, and are able to function as our forefathers intended for our government to work.
With the existing crew of clowns currently in control, I am not sure they are capable of this feat.
They have been warned by the Administration and our economic specialists that a critical financial condition has developed that endangers our entire economy. Unless they are able to pass needed legislation quickly, without the usual pet programs and earmarks as encumbrances, our way of life is at peril. Already, several of the more foolish leaders have begun to discuss adding other issues, programs, and requirements to this needed emergency legislation.
They are still wasting time pointing fingers at each other, seeking political gain by blaming the other party for the situation.
In my opinion, for either party to attempt to place total blame on the other is utter hypocrisy. The situation is the result of many interrelated components, errors, and ill conceived concepts which were encouraged over a period of decades, some Republican, some Democrat, and some from both.
To place the blame on the existing Bush administration would be like having a farm where one farmer planted a crop, then another farmer took over the farm and cultivated and fertilized the crop, then another farmer took over and harvested the crop. If the crop failed we would then blame the last farmer (Bush) for it all.
As late as the 1980’s only saving and loans banks could make mortgage loans. They were tightly regulated, always required excellent collateralization, and usually 20% of the purchase price was paid up front by the borrower. Then under Regan and the concept of deregulation, many other forms of banks were allowed to enter the mortgage financing market. Then, through the Clinton era, programs were enacted that injected the social issues of the Democrats into the financial picture. Banks were forced to seek out and make minority loans. Fannie Mae and Freddie Mac were created by the Federal government to reduce the risk to mortgage lenders for taking low income, poorly qualified loans. The concept was to make financing so available that almost every American family, regardless of their qualifications, could own their own home.
Habitat for humanity was moving too slow for these social activists, so the financial scene became a vehicle for the "American Dream" home ownership concept for everyone. Thus we entered an era of "creative financing" and "designer loans" that made the only requirement for obtaining a mortgage was the ability to stagger to the closing.
Even President Bush was strutting around for awhile bragging that more Americans now owned homes than at any time in history. What lending rules still existed were poorly enforced and investigated.
Money was easy to get. TV commercials, daily mail solicitations, and many promotions bombarded the public as the entire financial community begged people to borrow money. And they did.
Add to this situation a mixture of economic influences created by the out-migration of the US industry under free trade, the resulting terrible balance of trade that helped create a weakening dollar on the international currency markets, excessive spending and international loans generation by a "spend happy" government which further weakened the dollar, then add the impact of downgrading of the quality of jobs for the blue collar workers because of the loss of good industrial jobs (which made them less capable of paying back a loan), then throw in extreme inflation caused by our total dependence on costly Mid East oil, and finally add a sprinkle of unethical practices, over speculation, and excessive greed on behalf of the financial institutions and their executives and you have an explosive situation.
Which farmer is to blame for all of this bad management?
All of Them!
What should we do now? Well, first we must back away from the edge of the cliff. The proposed bail out of the banking system by having the government assume all of the weak, risky loans that should have never been made is probably a good first step. After all, the government played a role in the reasons why these loans were ever made.
If nothing is done, banks will not be able to lend money and the entire financial and economic system for the nation will fail. No one will be able to buy a house, a car, a boat, new appliances, or do any transaction requiring credit. Business will not be able to get business financing. As a result, demand for products will plummet, businesses will close, unemployment will soar to record levels (unemployment was 35% during the Great Depression), and out economy will shut down. We can not allow that to happen.
During the depression of the 1930’s government did not intervene until the situation had become a total disaster. At least today our government is aware and reactive before the crisis becomes a reality.
After we have corrected the immediate problems, and have backed away from the edge of the economic abyss, we should then restore some logic and sanity to the financial systems and controls.
Mortgage requirements should be strengthened and enforced.
Greater limitations on what types of banks can issue mortgages should be created. Social considerations should be removed from the lending process. For publicly traded corporations there should be controls placed over the allowable compensation for top executives and board members.
The concept of incorporation and public issuance of stocks was built on the premise that the interest of the stockholders would be represented by the Board of Directors. That concept has failed to function as boards have become part of the top level excessive greed in many companies. Top executives and board members should have their allowable level of compensation tied to the profitability of the company. CEO’s should only be paid up to 1% of the net profits, and Board members .1%. Stock options should be included in this value calculation.
Controls over qualification for consumer credit through credit cards must be strengthened. This area of loose credit is also endangering the financial stability of thousands of households.
Then our leadership should begin to attack that long list of related issues including the weak dollar, budget restraints, bad trade deals, energy dependence, and other out of control aspects of our system. It will take decades to restore our nation to what it should and could be. If they will do these things they will be "Getting it Right".
Rudiments: Odds and Ends Worth Mentioning-
♦ I applaud the Jackson County Commissioners for confronting the budgeting process used by County Constitutional Officers throughout the state. Their union-lobbying organization in Tallahassee arranged several years ago to have legislation passed that allowed them to operate outside of the budgeting process used by all other county functions. It allowed shades of grey in areas where sunshine was supposed to shine. This approach is wrong and needs to be corrected by our legislature. Perhaps the attention our Commissioners have brought forward in this instance will be a first step to solving a state wide problem.
♦ The tractor dealership that has been trying for many, many months to build and locate out on highway 90 west has been struggling with several permitting agencies. I hear they are now completely through the permitting process, have placed the project out for bid, and have awarded the bid to a construction firm from Colquitt Georgia. Ground breaking is expected to occur in the near future.