LOOKING FOR A BOTTOM IN HOUSING

            In looking for the various causes of the devastating housing decline and the financial system’s accompanying ills, most Americans have generally followed the equally blind news media or, in some cases, self-interested pundits or politicians in trying to find a scapegoat. Though we could list dozens of such real or imagined culprits, we’ll quickly categorize them generally as follows:

            POLITICIANS -- The average person has long since forgotten that the main impetus for the effort to get Joe Sixpack and Sally Housewife into their own home was caused in Washington D.C. Way back during the Clinton Administration, that president together with both parties in Congress were determined to use the tools at their disposal to make home ownership possible for everyone. The various government-sponsored lending agencies were dramatically bolstered and, in general, the edict went forth that all should own their own home. This effort was especially geared to bolster home ownership among minorities.

            Lest you want to put all of the blame at the feet of Bill Clinton, don't forget that President George W. Bush himself aggressively endorsed and added to these efforts (remember the “Ownership Society?”)  The thoughts were all nice; but, as always, the politicians in Washington knew little and cared less about how these lofty ideas would be implemented. The politicians can certainly be blamed for their usual idiocy and incompetence; but they cannot be said to have caused the housing debacle.

            “PREDATORY” LENDERS -- Next, we have the mortgage providers themselves—and delicious targets they have been. Much of what we have watched in recent months is reminiscent of the French Revolution-like atmosphere that immediately followed the bursting of the stock market bubble in 2000 and 2001. Back then, the primary ogres were the executives of the Enrons and WorldComs of the world (never mind that they were enabled—and encouraged—by that master of all bubble blowers and speculators, Alan Greenspan.

            Now, we have “predatory lenders.” Everyone—and we do mean everyone—has been quick to point a finger at those believed to have abused their position as a lender to homebuyers. There have already been several high profile instances of people called into the public square to answer for their supposed misdeeds. Exactly a year ago, the Justice Department unveiled what it called “Operation Malicious Mortgage.”  Here, 406 people were initially charged nationwide in an effort described by FBI Director Robert Mueller as, “Our obligation…to protect the consumer and stabilize the economic markets.”  USA Today, in its June 20, 2008 issue described the Feds’ dragnet as having “… targeted a mix of attorneys, real estate agents, developers, loan brokers and appraisers who allegedly profited from housing scams scattered throughout the country…”

            Most recently, the Securities and Exchange Commission filed civil fraud charges against Angelo Mozilo, the former head of Countrywide. He, together with two others, were led to have misled investors about the financial condition of the mortgage company in the months leading up to its sale to Bank of America. 

            Just as with the public humiliation and prosecution of men like Kenneth Lay and Jeff Skilling, going after these types--while entertaining, and serving to distract the public--is but a diversion. All of these cases are little different from affixing primary blame for loan sharking and its associated evils on the drivers of the bag men's cars as they escort the bag man when a collection needs to be made.

            SPECULATION--Next, we have “speculators.”  The trouble is, few have any real idea of whom they are talking in this context. Sure, the attribute sounds sufficiently sinister; but who specifically speculated, and on what specifically?

            Most of the time, speculation on home values is thought of in the sense of people--often, those fairly well-to-do--who took advantage of their own financial position as well as copious borrowing from banks to artificially drive real estate prices higher in many areas of the country. This, in turn, led to home builders getting too far ahead of themselves to the point where we now see scattered amidst previously hot markets (such as the Desert Southwest, to pick one prime example) massive uncompleted housing developments.

            We ourselves know of people in both of these categories.  But here again, we're not properly “pinning the tail” on the main culprit(s). Indeed, in this case, about what we're doing is now blaming the gasoline station attendant who filled the tank in the above-referenced bagman scar!

            JOE SIXPACK HIMSELF--Sadly, many have quite ignorantly placed a good share of the blame for the fallout of the housing mess in particular on the shoulders of Joe Sixpack himself. As always, it serves the Masters of our economy well when they are successful in getting the populace to fight with one another; or, in this case, blame one another for ills that the public in no way created.

            Are there people who bit off more than they could chew? Of course. But don't lose sight of the fact that the lending industry itself alternately encouraged and, yes, even strong-armed the public into buying homes which many have now found they cannot afford. Harkening back to the early 1980s, we had a similar phenomenon, which, at that time, affected only the farming community. Encouraged by the same kind of cheap credit and surging commodity and land prices, bankers scoured the countryside to find farmers willing to take on more debt. The sales pitch was that rising inflation would make the farmer rich, if only he would borrow from the bank to buy more land on which to plant more crops. Rising inflation would more than compensate for the cost of the loan.

            Of course, the same banking system that created and enabled this environment--and both developed and supported the sales pitch--later pulled the rug out from under Farmer Brown. Interest rates were raised dramatically, and the inflationary environment, which may well have made this whole arrangement work, was killed. And Farmer Brown was foreclosed on.

            Similarly, Joe Sixpack accepted much the same kind of sales pitch as the housing bubble grew. Here, it was the notion that real estate prices would go up both perpetually and dramatically; this is what would make what would otherwise have appeared to be in on wise decision a wise one. As with Farmer Brown, Joe was likewise encouraged by the banking system to do something he now regrets--and now realizes was wrong.

            So, please don't blame Joe. That would be like blaming the guy who gets kneecapped by the bagman!  (It would also be quite contrary to the analysis of such a problem--and the proper identification of the true culprits--we read of in Scripture. At your leisure--no, make that at your next possible opportunity--reread the Book of Nehemiah, especially chapter 5.)

SO, WHO IS TO BLAME, WISE GUY?

            Before we get to the most correct answer to that question, let us look at how the various banks and mortgage companies themselves indeed did--at least, initially--muddle up the traditional way in which their own industry operated. . .

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