Welcome to the November Money and Investing issue of NorthBay biz magazine. And a timely issue it is, given what’s transpiring with the economy both nationally and locally. We’re fortunate that the North Bay is home to so many strong financial institutions that serve their local, state and national customers’ needs so responsibly. Our cover story, “The Bear Essentials,” deals with the current struggle between the Bulls and Bears for control of the market and how best to manage your investments in this kind of financial environment. Plus, more stories, features and columns in the North Bay’s only locally owned business publication—NorthBay biz.
As I write this, Congress has just passed its revised version (this time loaded with “pork” to make it more palatable and attract more votes) of the financial bailout package. It seems the people largely responsible for creating this “crisis” in the first place want us to trust them to solve it. Apparently, all it will take is suspension of common sense and hundreds of billions more of our money.
To better understand where we stand today, let’s look at some of the history that got us here. So many of the so-called experts in Congress and in the media are quick to blame the housing and ensuing credit crisis on deregulation. They conclude that if only the government hadn’t been asleep at the switch and had been more involved, all of this mess could have been easily avoided. What a joke! Junk subprime and Alt-A loans are the root of the problem. Guess who demanded that these loans be made?
Thirty years ago, Congress passed the Community Reinvestment Act that required lenders to make more loans to people who didn’t qualify under prevailing underwriting practices. Banks protested that these types of loans were too risky and, if made on too large a scale, could undermine their entire industry. So they dragged their feet; subprime loans were made, but slowly. But something else was happening—starting in the late 1990s, a housing bubble was inflating—and eventually everyone wanted in on this get rich “sure thing.” Housing markets were heating up with yearly double-digit appreciation.
Enter Fannie Mae and Freddie Mac. In the early 2000s, both agencies were caught up in accounting scandals and were subject to Congressional investigations. The deal that was struck let both Freddie and Fannie off the hook in exchange for agreeing to exponentially increase their purchase of subprime loans. This created a ready buyer (implicitly backed by the government) for all the risky loans companies like Countrywide and IndyMac could produce. As this snowballed, everybody was happy. Everybody was getting rich. Wealth was being created overnight as housing prices kept growing year after year.
In the meantime, Alan Greenspan, traditional bankers, economists and even a few fiscally responsible members of Congress were sounding alarm bells. These clear-eyed realists insisted that, by forcing mortgage lenders to issue loans on such a vast scale to so many unqualified buyers, the moment the housing market cooled, interest rates rose or home values fell, these high-risk buyers would no longer be able to service their debt or even bail out by selling their homes. Congress ignored them and their warnings, stating unequivocally that everything was fine. In its eyes, it was far more important to promote unprecedented lending to millions of unqualified buyers than guard against the potential risk of imploding our entire financial system. And now that the crisis is here, that same Congress is blaming everyone but itself for the crisis it created by its promotion of the unfettered growth of subprime loans. And in its arrogance, it wants us to trust its members to solve the problem they created—with our own money.
Alarm bells were being sounded here in California, too. Back in 2005, the PPIC (Public Policy Institute of California) issued a 16-page report titled, “California’s Newest Homeowners: Affording the Unaffordable.” A couple of conclusions gleaned from the report point out the slippery slope the mortgage market was on as long as five years ago. From 2003 to 2005, 20 percent of Californians who bought a home assumed debt that represented half of their household income. Further, the report showed those households with income of $60,000 or less faced the highest risk of defaulting. And of the households with annual income of $30,000 or less, more than 72 percent spent more than 50 percent on their housing costs. Such a precarious financial obligation is a surefire recipe for economic disaster. Why take on this kind of impossible debt? Well, interest rates were at almost all-time lows, loans were being made that required no down payment, incomes weren’t being verified and everyone else was getting rich, because if you did own a home, its value was appreciating at a record pace. If you have little at risk, why not join the gravy train?
Personally, I’m a firm believer in the “free market”—which, if allowed to operate, has always resulted in prosperity. Are we on the path to only let it operate unfettered when the results are positive and, when they’re not, we expect—no, demand—the government to intervene? Certainly it doesn’t work that way for all the small businesses here in the North Bay. If we have bad results, we must deal with them ourselves—or should we now expect Congress to write each of us a fat check when we take a risk and come out on the short end?
If we end up nationalizing the banking system, it’s good-bye capitalism and hello socialism, and we can all expect the country’s first “five-year plan” to be published soon.
That’s it for now. Enjoy this month’s magazine.
