Apparently our politicans’ behavior is rubbing off on us. Last week, The Wall Street Journal featured an article titled “American Dream 2: Default, Then Rent,” featuring Americans who had decided to stop paying on their mortgages and instead rent a house. This is a trend that is rapidly increasing in frequency across the nation as homeowners are realizing that their house wasn’t a particularly great investment. According to the article, analysts at Deutsche Bank Securities expect 21 million households in the U.S. to owe more than their mortgages are worth by the end of 2010.

With the collapse of American International Group last year, the government has worked feverishly to point their fingers at corporations and executives. Let’s clarify – AIG sold mortgage-backed securities, or investments which relied on the value of mortgages to stay afloat. As homeowners defaulting on their mortgages started to spike, the value of the securities plummeted. AIG suddenly owed far more than it could pay. Ultimately, foreclosed-upon homeowners lost. AIG and its employees and shareholders lost. Innocent American taxpayers lost.

Tragically, from taking out a loan to paying our taxes, we are all funding this behavior. Interest rates in part provide insurance for the lender. There will always be people defaulting on loans – the interest rate then builds in a little extra pad to compensate for those losses, and so we pay more to borrow. Additionally, many loans have been insured by the federal government, and that number is steeply increasing. The Federal Housing Administration now insures tens of millions of mortgages. If a homeowner defaults on an FHA loan, the American taxpayers foot the bill.

Here’s the kicker – AIG used part of its government bailout to award its executives multi-million-dollar bonuses, a luxury that, thanks to our representatives in Washington, was even specifically afforded to them in the bailout deal. We as a people are somehow furious with AIG but much less vocal about the politicians and other individuals who assisted in precipitating this disaster. Schoolteacher Shana Richey’s home in Palmdale, California, is now worth $200,000. Her monthly payment on her $430,000 mortgage was $3,700. Since deciding to default on her home and rent, Ms. Richey has used the extra money to buy season tickets for the family to Disneyland, plan a Carnival Cruise to Mexico, and purchase an $1,800 dining set [1].

Capitalism is a system built on risk-taking. Anyone who believes a commodity can inflate but not deflate is lying to himself. This has been noted by many other pundits, but privatizing reward while socializing risk only encourages more reckless behavior, leaving behind those of us forced to cover those losses. Our founders envisioned a nation based on personal responsibility.

1. “American Dream 2: Default, Then Rent,” The Wall Street Journal, December 10, 2009.

Our President can’t be serious. Really, this must be some sort of sick joke. On Monday, President Obama met with financial leaders from around the country in an effort to promote economic growth. The plan involved re-regulating banks and encouraging lenders to refinance mortgages and open credit to more businesses [1]. Certainly, the plan does have some advantages. However, there are still many concerns which still exist.

The mortgage bubble really began in 1977 with the Community Reinvestment Act which allowed the government to veto bank mergers and other major banking decisions. In the 1990s, Attorney General Janet Reno harassed banks into making more “community investments” through the use of studies aimed at proving racism in the lending market. However, the studies managed to only judge loans based on the borrower’s race, failing to factor credit scores as a part of the equation. Ultimately, banks were pressed to either make risky loans or be labeled as racists.

Then-President Clinton later began the bank-bail-out culture, from which Fannie Mae and Freddie Mac, formerly just housing assistance companies, were now free to make risky loans insured by you and me. As the government pushed creditors to lend through the 1990s and into the next millennium, more and more persons with poor credit were given high-value loans on low-value properties. Sadly, we all know what happened next – the market bubbled and collapsed and the taxpayers were left with the financial burden.

Yesterday, I talked about President Obama’s recent interview aired on CBS’s “60 Minutes” on Sunday night. The President aggressively blamed the banks for the financial mess, saying “[n]othing has been more frustrating to me this year than having to salvage a financial system at great expense to taxpayers that was precipitated, that was caused in part by completely irresponsible actions on Wall Street” [2]. While Wall Street did make some stupid moves, our government is the last institution which should be pointing fingers. It’s like Bernie Madoff calling someone unethical.

Unfortunately, beyond all comprehension, the President is – again – telling creditors to lend beyond their comfort level. Riddle me this: if the market bubbles – again – and we bail out creditors – again – will Obama – again – blame the lenders? Creditors don’t just sit on money if they could be lending it; lending is how they make their money. There’s a natural balance between risk and reward, and when that balance is disturbed, well, you know the rest of the story.

Moreover, no government has the right to force creditors to lend. President Obama certainly couldn’t walk up to your front door and say, “Hey there, Bob across the street needs help. He’s having financial problems, and I noticed you have $2,000 in your savings account. I know that amounts to your entire savings and that you have it set aside as a reserve in case you lose your job or have an accident, but you really need to think about Bob’s needs, too.” That would be silly, right? Banks are merely organized groups of people, and when they fail, real people (investors and employees) fail, and thanks to the government’s reckless actions, so do the taxpayers of the United States.

The writing is on the wall. When will we bother to read it?

1. “Obama to Banks: ‘Rebuild Our Economy’,” money.cnn.com, November 14, 2009.
2. “Transcript: President Barack Obama,” cbsnews.com, November 13, 2009.

If you’re Senator Christopher Dodd (D, CT), your version of the Heimlich maneuver is to choke the poor bloke until dead and replace him with a scarier guy with even greater esophageal problems. The Senator has been hard at work drafting new legislation to strip the Federal Deposit Insurance Corporation and the Federal Reserve of their bank-supervision powers, handing over control to a new council of regulators, overseen by an “independent White House appointee” [1]. No, really, you’re not imagining things. There are a multitude of things wrong with this scenario, but let’s focus on two of them:

Firstly, introducing more regulatory groups creates issues when the remnant groups still exist, even if in a lesser capacity. Sociologists refer to this as “diffusion of responsibility.” Let’s not forget the post-9/11 firestorm about the relationship between the CIA and FBI and how the existence of the two departments, no matter how codified their distinct responsibilities were, created holes in the system [2]. If you’re in a restaurant with only one other person and that person starts choking, what is the chance you will assist with the Heimlich maneuver (the real maneuver, not the Chris Dodd version)? How likely are you to help in the same situation but with one hundred diners in the restaurant?

Furthermore, one would assume we had learned from the housing bubble that politicizing anything, let alone banking policy was a bad idea. Allowing the White House to appoint a single person to be in charge of the monetary oversight is like letting a child decide what’s for dinner. It’s probably not going to be good for you. In the late 1990s and 2000s the federal government pressured banks to lend to people who were less likely to repay their loans – look what has happened and what is about to happen with the Option-ARM mortgages. We see foreign policy change with each new administration. We see energy and social policy change with each administration. Banks shouldn’t have to retool their sails to handle the political winds of each new administration. It’s not healthy for banks nor its customers, not to mentionl the financial stability of the country at home and worldwide.

We do agree with Dodd’s intentions of consolidating some responsibility, but this isn’t the right way. Why retain the empty shells of the Fed and the FDIC, causing more opportunity for gaps in coverage? Why take the responsibility away from semi-independent groups and place it upon the shoulders of the presidential administrations? Why ask the FDIC to insure banks subject to someone else’s rules instead of its own?

Today’s call to action: Let us know in the forums how you feel about this new legislation.

1. “Clash Looms on Banks,” The Wall Street Journal, November 5, 2009.
2. Davisson, Shawn P., “Spooks Vs. Suits – the Ultimate Sibling Rivalry: CIA/FBI Interagency Competition, Communicative Failures, and Effects on U.S. National Security,” 2004.