I discuss politics with a lot of wingnuts, and I have yet to come across one who actually comprehends the scope of the current financial crisis to any degree at all. It simply stumps them. Invariably, their understanding of this crisis begins and ends with the fact that people who shouldn’t have qualified to buy homes in the first place are now about to lose theirs.
But this crisis goes far beyond the people who are losing their homes. This crisis actually affects the entire economy, and will continue to do so for many years to come, especially if no one does anything about it. Throwing money into the situation relieves bank pain on the front end, but it does nothing to resolve the actual crisis.
Here is an example of what I mean, from this morning’s New York Times:
Auto lenders and banks, closing their wallets, have prevented hundreds of thousands of consumers from obtaining the financing for a car. Home equity loans, which had been used in at least one of every nine deals, when lenders were more generous, are no longer a source of easy money for many prospective buyers. And used-car prices have fallen nearly 6 percent as repossessed cars and gas-guzzling trucks and S.U.V.âs flood auction lots.
Those forces, on top of the softening economy, are putting enormous pressure on the American auto industry as it faces what may be its worst year in more than a decade. About 15 million vehicles are expected to be sold in 2008, down from 16.2 million last year, as sales reach the lowest levels since 1995, according to the marketing firm J. D. Power & Associates.
The impact on the broader American economy could be profound. Not only is the car a consumer’s biggest purchase after the home, but the auto industry remains one of nation’s most important economic engines. With less money available to bolster the industry’s growth, the businesses that support it are also facing the prospect of a sharp slowdown.
Our entire economy has been built on credit, ever since the neocons took it over in 1980. If the average American looks around, he or she will notice that almost every large purchase made has been on credit. The house, the car, the kids’ braces, college tuition — it’s all debt-laden. In other words, our "high standard of living," which we think is the "envy of the world" is largely the product of borrowing money we don’t have yet.
There is nothing inherently wrong with that, of course, as long as everyone involved plays the game fairly. No one should borrow money they can’t afford to pay back, and lenders shouldn’t be lending other people’s money to people who are of greater than average risk. That has always been the case. No one making $30,000 a year should be able to borrow $400,000 for a home; it just doesn’t make sense. Likewise, no one should lend $400,000 to someone who’s only making $30,000 per year.
That is where government regulators come in.
You see, there is a nifty little codicil in the country’s founding document, the Constitution, that REQUIRES that Congress regulate banks and interstate commerce. They stopped doing that a decade or so ago, and crooks were allowed to run the mortgage business, with the Republican Party’s blessing. As has been GOP tradition for some time, and especially in the last eight years, there was no oversight or accountability in the mortgage business. Now, you’ll note, in the article above, that buying a car is the second-biggest purchase the average person makes, after a house. That means brokers and financial institutions were lending YOUR MONEY to people without oversight. The result was people with relatively low income getting loans they couldn’t afford to pay back, often for amounts greater than the actual value of the home, and scraping the excess cash off the top. Then, to make matters worse, the mortgages themselves were sold and resold so many times, no one knows who owns the note on many of them, which makes it difficult to impossible to recover the money.
This affects a lot more people than just those who are dealing with foreclosure. A lot of people who can afford their home are so upside down in their mortgage, they are choosing to walk away rather than pay more for their home than it will ever be worth. A lot of people who took out home equity loans honestly, for a useful purpose, are not finding that the equity they borrowed against is no longer there. And financial institutions are suddenly finding themselves awash in unsecured credit, which they have to secure, meaning the pool of available credit is shrinking, and shrinking fast, as you can see above. Given that our economy depends on the sale of consumer goods, often through credit, this situation will be devastating for quite some time.
I will be writing a lot on this in the coming months, because this is a huge deal; much bigger than the press would have you believe. This is what’s causing the recession, this is what’s causing the dollar to decline, and this is a large part of the reason why gasoline prices are about to hit $4 a gallon and could be $5 within a couple of months.
This crisis is huge and getting huger. Don’t let anyone tell you this is just a foreclosure crisis; anyone who says that doesn’t understand the implications at all.