Wells Hallmark
Opinion

My Side of the Fencepost

It will be a bitter pill

By Jim Dickerson

I apologize in advance for the dire tone of this column, but I’m upset about the current mortgage banking crisis. The fact is that some of our top government leaders, regulators and Wall Street executives should have seen it coming and didn’t — or else they did see it coming and failed to act in a timely manner.

The more you read about the “subprime mortgage crisis,” the more difficult it becomes to pin the blame on any single entity. As usual, there is plenty of blame to go around.

Those who know the system and have given the subject some thought will usually say that a number of factors, all happening at the same time, caused this investment banking crisis.

It’s important to remind ourselves that “investment banks” like Lehman Brothers are quite different from most commercial banks operating in our local communities. Their main business involves the sale of stocks and bonds to raise capital.

Our commercial banks are well regulated and insured by FDIC to guarantee that our deposits are safe. They don’t take the same kinds of risks.

Anyway, back to my take on the mortgage crisis in layman’s terms. Most analysts aren’t blaming a lack of regulation, but many are blaming federal policies that created a more risky lending environment for investment banks, sometimes creating pressure on them to make loans to borrowers who may not have been stellar credit risks.

At the same time, the housing boom was underway in the U.S. Interest rates were low and home prices were escalating. There was fierce competition between lenders to make loans in a market where values seemed to be going nowhere but up.

New tools called Adjustable Rate Mortgages and even Subprime Mortgages were created. Apparently, in many cases, these tools allowed borrowers to buy more house than they could afford.

In the case of Subprime Mortgages, when credit tightened and interest rates increased, a relatively large group of homeowners found they could no longer make their payments. They couldn’t refinance to a fixed rate loan, and housing demand declined with tighter credit. Falling home prices meant that many could not sell their homes for enough to repay their mortgages. That caused an increase in foreclosures.

Investment banks with large holdings of packaged loans were then in a tough spot. Their asset base was declining with the real estate market, and they had a big liquidity crisis.

Many other factors were thrown into the mix — not the least of which was a new “fair value accounting” method that valued assets at their price in the current market instead of their true economic value.

To shorten a long story, the government took over Fannie Mae and Freddie Mac, and a short time later announced the largest government bail-out in U.S. history to (hopefully) keep the investment banking industry solvent.

 

What will this multi-billion dollar bail-out mean to us in rural Nebraska?

That’s an interesting question. No one knows the full magnitude at this point, but it will have an impact. Anyone who has retirement savings in mutual funds likely already owns a piece of the investment banking pie and therefore will feel the effects.

The one thing I am fairly certain of is this: The simple fact that the federal government is dedicating hundreds of billions of dollars to the bail-out (and thereby to the already huge federal deficit) will devalue our currency. Our dollar will be worth less in future years because of this debacle.

It doesn’t take an advanced degree in economics to realize that a devalued dollar is inflationary. It will take more even more dollars to buy the goods and services we require in the future.

President Bush and Congress have had to choose the lesser of two evils and proceed with the bail-out, because this crisis likely could have triggered even worse consequences without it.

Either way, this is a very bitter pill to swallow while some of the aforementioned Wall Street executives enjoy their multi-million dollar bonuses dating back to those “good years.”