"In the sudden rush to blame the crooks in DC and on Wall Street, we should first take a long look in the mirror."
- Victor Davis Hanson
About 18 months ago I lamented America's lust for debt on another blog with a post titled, Where There Are Long Term Loans There Are Problems. I completed that post with the following statement.
"Here's the bottom line. Everyone makes choices. Sometimes we make bad choices. You can't always blame the companies that make the risky loans available. And you can't always curse the system. But somewhere there needs to be the intersection of personal responsibility and corporate consciousness that makes sense. Given the financial situation that many people are in today I have to say that we're not there yet."
Corporations have faltered as well. The financial companies that we see failing today are where they are because they bought debt with debt. Only the corporations either didn't know what they were buying or knew but simply bought more than they could afford. This turns into a vicious cycle because as the debt they bought goes bad, the people who lent the corporations money to buy the debt in turn want their money. It's a real house of cards.
Let's not leave the government out of the fools party either. The government sponsored enablers of this mess are called Freddie Mac and Fannie Mae. Bloomberg columnist Kevin Hassett weighs in with a very simple opinion that gets right to the point.
"Fannie and Freddie did this by becoming a key enabler of the mortgage crisis. They fueled Wall Street's efforts to securitize subprime loans by becoming the primary customer of all AAA-rated subprime-mortgage pools. In addition, they held an enormous portfolio of mortgages themselves."
"The problem was that the trillions of dollars in play were only low-risk investments if real estate prices continued to rise. Once they began to fall, the entire house of cards came down with them."
Consider the house of cards officially down. Fannie and Freddie, whose unlawful accounting wizardry is the stuff of legends, did their part to wreck the system. Aunt Fannie and Uncle Freddie bought junk debt from financial institutions so that financial institutions could buy more junk debt. We might as well call the Fan/Fred monster and the financial institutions dumb and dumber.
So how do we turn the ship around? I think step one involves taking steps to reduce the thirst for debt at all levels. Individuals should not look to credit cards, home equity loans, student loans and risky mortgages as a solution to remedy getting things they want. Businesses need to learn to build slowly and grow organically on revenue rather than loans. Financial institutions need to lend and invest in a way that considers all the risks involved. And the government needs to shut down Fannie and Freddie. The government should not be enabling private industry to take on more debt, period.
Can we turn the ship around? I really don't know. Real positive change requires discipline and a desire to learn. Real positive change also requires good teachers who can show everyone how to survive, and ultimately thrive, without using debt as a tool. The best teacher I know on this subject is a guy named Dave Ramsey. Dave sells books and seminars but you can also download the first hour of his radio show as a free podcast every day.
I do know one thing. The proposed government bailout of lenders treats a symptom but doesn't eradicate the illness. Most people who get bailed out when their debts go bad turn right around and get back into debt. We hope that people would learn lessons. But how can people, businesses or governments learn lessons when there's always someone there to rescue them before the consequences of those mistakes are felt?
Maybe there's a greater irony in play here. America's thirst for debt has lead to the government requiring that Americans support the people that sold and guaranteed the debt in the first place buy purchasing the bad loans.
The situation reminds me of a quote from the movie Boiler Room where a young stock salesman says to a client something like this, "I liked this stock at $10 and I love it at $5." Well, I didn't like the debt they were selling at $10 and I hate it at $5. I say don't buy it at all.
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