Getting It Right- Incompetence At The Highest Level

10/2/08
By: Sid Riley

It appears the United States is operating without a legislative element in our government.
If an organizational element existed within a corporation that is as inept, corrupt, self serving, incompetent, ineffective, misdirected, hypocritical, and outright stupid as the collective bodies of our House of Representatives and Senate in Washington, D.C…..they would immediately be fired and blackballed from ever working again. Our "Ship of State" is foundering and sinking, while the crew argues about who forgot to put the plug in.
Folks, our nation apparently has a very serious problem, and we must all become very serious about correcting it…..or we may all suffer at a level we cannot comprehend. It is a time when we must all unite, decide on a course of action, and react. We are all in the same boat.
We can fine tune the remedies as time passes. We can determine the causes of the situation and place blame in the coming weeks and months. We can strategize and politicize the issues after the immediate crisis has passed. But we must immediately restore the availability of credit to our economic system before failures cause a catastrophic landslide that will pull down the entire economy of our nation, and probably the economies of most of the nations of the world.
If our elected officials continue to argue about who caused this mess, and point accusing fingers at each other for political gain instead of dealing with the problem….within a relatively short period of time a downward slide will start that will be unstoppable regardless of what actions they take. They are playing with an economic time bomb in a manner not unlike Nero fiddling while Rome burned.
Cause and Blame:
As is the case with most problems, this situation is the result of several complex, interacting components that developed over a period of several years. Both political groups are to blame.
Some of the underlying causes that have contributed to this financial dilemma are:
♦ Broadening the types of banks allowed to engage in mortgage financing. At one time only Savings and Loans Banks could make mortgage loans. I think this was changed during the Reagan era or perhaps before.
♦ Relaxing bank loan requirements and relaxing regulations. Previously borrowers were expected to pay around 20% of the purchase price as a down payment to secure the loan, had to have personal income and reserves that would support paying the loan, and application data such as stated assets and income were verified prior to the transaction. All of this was changed during the Reagan, Bush, and Clinton periods.
♦ Injection of social programs into the lending market. Government regulators began to force banks to make a percentage of their loans to minorities and low income borrowers. This approach was further enhanced as Fannie Mae and Freddie Mac were created to assist banks in maintaining liquidity and those agencies began to encourage loans to low income borrowers (sub-prime loans). These policies were pushed during the Clinton era and continued until the crisis developed.
♦ Add greed and excesses from an over aggressive financial market full of mortgage brokers, publicly traded banks, mortgage banks, insurance companies, and other financial institutions that began to trade wildly in packages of mortgage loans.
♦ Add greed and excesses from a greedy public full of speculators that tried to make the "quick buck" from "flipping" properties.
♦ Add greed and excesses at the top levels of executives and boards of directors for Wall Street firms and financial institutions.
♦ Add a general weakening in the quality of jobs and pay level of the average blue collar workers as industry left the country as a result of poorly conceived international trade deals. Household incomes fell as the female became unemployed and eventually was eliminated from labor force statistics. These declines made these families less capable of making loan payments.
♦ Add ever increasing taxation, cost of essentials, and cost of gasoline to the declining family disposable incomes, and more loan payments become delinquent.
Finally a day of reckoning comes!
What will happen if our Congress fails to react?
Most factories, retail chains, auto dealers, wholesale suppliers, farmers, firms with large payrolls, and countless numbers of other types of businesses rely on credit to maintain their liquidity and cash flow. Without this injection of cash when needed, they will not be able to function. They will be forced to severely cut back or close their businesses. This will create unemployment levels that could soar to 20% or more of the labor force. Government revenues would fall dramatically. Even governments would begin to lay off employees or would default on their payrolls. (In Russia during their financial crisis at the fall of the Communistic régime, government workers there worked for years with no pay.) Even social security checks could stop since government would have no revenues. We would fall into a severe depression with almost no economic activity……I do not want to experience this!
This is the time bomb those loonies are playing with!
What is the status of lending in Jackson County at this time?
This morning I had a lengthy and informative conversation with one of the leading bankers in our area. I asked him what the status of loans availability was in our community, and what aspects of lending has changed since the "greed seed" led to this "eruption of corruption".
First, he said that loans are readily available. Cars, boats, appliances, home equity loans, and most other types of loans can be acquired. Banks have enough liquidity to make loans, after all, they are in the loan making business. In fact, some funds are being added to savings accounts and bank CD’s as people flee from the wild cycles of the stock market. Also, most people with significant amounts of funds are distributing these among several banks in order to get all of their monies under the FDIC insurance umbrella.
However, you will be expected to put down a significant portion of the intended purchase up front, normally 15-20%. Those 100% and 110% car loans are not out there any longer. Also you must demonstrate that you really do have a job and exactly what your earning and reserves are. All loans will have to be completely collateralized and secure.
While credit has been tightened on private citizens and businesses, it has also been tightened within the banking system itself. Previously, banks could exercise a line of credit from other banks or from the Federal Reserve on an unsecured basis. A bank might have a ten million dollar unsecured line of credit available to it to meet any liquidity needs that might arise if it issued numerous large loans. Now, banks are only able to obtain funds on a secured loan basis. This means they must have liquid assets and securities on hand that can be pledged if they need to borrow against their line of credit. This requirement makes banks be more selective in their choice of who to loan money to.
"Essentially, banking practices have returned to the way it was thirty years ago", he proclaimed. "And really, I feel this approach is ultimately best for our country".
Rudiments – Odds and Ends Worth Mentioning:
♦ Only 30 days until election day! We need astute leaders now more than ever before. Vote wisely and you will be "Getting It Right".
Note: The opinions stated in this column are solely those of the author and do not represent those of Hatcher Publications.