I got a well worded letter from a good friend of mine today. I say good friend with the loosest of definitions considering he comes from the second rate school of the Air Force Academy which we all know is enormously inferior to my own school in Annapolis. Nevertheless, I digress. My friend is a stock brocker or a financial manager. I'm not sure what they call themselves these days, but what I like about him is he is fairly conservative with my money.
His letter sort of described the turmoil we are in, and I cannot help but find myself giving him ideological high fives. I wish we could line up the people who got us where we are today and physically torture them to our heart's content. Without a doubt, we have thousands of morons in the financial sector and government today. Thank God I do not rely upon them directly to get me out of bed in the morning; otherwise, I would have found my bed somewhere adrift in the middle of the Pacific Ocean.
I will take the liberty of giving some people a short lesson in economics that begins with supply and demand. People are just like you and me; they buy things that they need when they need it only if they can afford it. When prices get high, people buy less, and when prices dip, they naturally buy more. It all makes perfect sense because each person as an individual will most of the time manage their own assets better than someone else: dope dealers, gang bangers, and societal leaches excluded.
What does supply and demand have to do with our current situation you ask? The answer to the question lies in the application of supply and demand to the lending market. How so? It's very simple. Mortgages are products just like apples, and a bank earns money with each mortgage product it sells. If a bank wants to grow, it has to generate more income, and as the Fed lowers its own interest rates in an effort to speed up the growth of the economy, the bank borrows more money so that it can lend money cheaper. How does this earn the bank money? Simple, half the banks don't even keep the mortgages that they make, so they sell them within a year of making them. They make their money on the loan origination fees along with a premium they place on the mortgage when they sell it to a higher tier financial organization: Lehman Bros, Morgan Stanley, Fannie Mae, Freddie Mac, etc. The kicker is the loss of accountability that goes with the sale of the loan. What does the loan originator care if the home owner defaults on the mortgage?
When you add the government's own stated policy of ensuring everyone in America can afford a home regardless of income, you have a recipe for disaster in the growth driven banking industry. I remember when I purchased my first home in 2002. My credit union required 20% down payment, no questions asked, as well as an appraisal. If the house appraised for less than the asking price, there was no loan. Contrast their standards to the way that the entire industry shifted their practices during the years following 2002. You could get 100% loans even on investment properties where you would never live. It is a beautiful world. Knowing that they could sell the loans to the next highest bidder, out the window they threw common sense and standard lending criteria: steady income--no bother, steady homelife--why worry, no collateral--who cares.
Where did the money go? I'll tell you where the money went, but first you have to hang with me because I've been working on this theory for a long time. It is a wild goose chase, but it does have an ending as abstract as it may seem to you. But I know I'm right. Let's say for starters that a developer starts with 10 units that he wants to offer to the market for $100K apiece to give him a gross of $1M. He would do this if the units actually cost him $50K to build per se. Since the buyers bought at preconstruction, they got a "deal" in that they avoided the final selling price of $150K. A bank is more than willing to give them the $100K to buy the unit. Later, they flip the unit for a quick profit of $50K and sell at $150K. The first bank gave $100K to buy the unit originally and is paid back by the second bank if the mortgage hasn't already been sold yet. As the units grow in popularity due to the rising demand for new units, each successive owner flips it a few more times, with each bank being out progressively more money, as they pay the previous bank back the loaned money, and the previous owner his profit. Are you following me? At some point, a company like Morgan Stanley bought a $250K mortgage on a unit that cost only $50K to build. Some kind of equity there huh? Talk about being upside down.
Why would Morgan Stanley do something so stupid? Because in a booming market, the $250K mortgage that they purchased ordinarily would be worth a larger and larger sum as the property appreciated. Even if the owners defaulted, the mortgagor could still sell the unit at a profit and recoup the cost of the loan in the process. Interject a bubble popping. Like a morbid cake walk, all these investment banks had bought up all the loans, that all the little banks had made using high risk methods, because all the big banks were buying anything and everything on the market. Back to the supply and demand model, the big banks were the customer and they were buying feverishly. The little banks did their part as the loyal supplier by loaning every dollar they could and selling it to the big powerhouses.
So where is the money? It's in the local banks, especially the ones with very conservative lending procedures. How can this be? Remember, there are two sides to every transaction. When the buyer of the overpriced unit made the purchase, he gave his money to the seller of the overpriced unit, and the seller of the overpriced unit did one of three things. He either reinvested the money, or he put it in the bank, or he spent it in the local economy. If he reinvested the money, you have to see the above to see where he ended up, but if he bought another property, some other lucky guy deposited the money in the bank. If he deposited the money in a bank, it is still there, albeit probably overlent out again. If he spent it, some small business owner perhaps put the income into his own bank account to pay the bills.
So how does it all add up? The large regional banks traditionally had the major capital to fund the expansion of any market in the US. When the real estate expansion started going strong, they shotgunned their money out on bogus, worthless mortgages. The money did not disappear, but it was definitely fragmented into a very decentralized system. You cannot track it, but you know it is there. Unless some mogul took it all overseas, the money resides in numerous banks across the country because everytime an overpriced piece of property was sold, the seller had to do something with the money. Even if he bought again, someone else became the seller, and so on.
Which brings me to my conclusion... Why would we bailout these large regional banks when they pushed the lending market to hand out more and more money with less stringent rules and regulations? I'll leave that up to you to decide. The results that we see today are not altogether different from every other time personal responsibility took a back seat to materialistic comforts.
Monday, February 9, 2009
Sunday, February 8, 2009
An Excerpt from "Common Sense" by Thomas Paine
Some writers have so confounded society with government, as to leave little or no distinction between them; whereas they are not only different, but have different origins. Society is produced by our wants, and government by our wickedness; the former promotes our happiness positively by uniting our affections, the latter negatively by restraining our vices. The one encourages intercourse, the other creates distinctions. The first is a patron, the last a punisher.
Society in every state is a blessing, but government even in its best state is but a necesary evil; in its worst state an intolerable one; for when we suffer, or are exposed to the same miseries by a government, which we might expect in a country without goverment, our calamity is heightened by reflecting that we furnish the means by which we suffer. Government, like dress, is the badge of lost innocence; the palaces of kings are built on the ruins of the bowers of paradise. For were the impulses of conscience clear, uniform, and irresistibly obeyed, man would need no other lawgiver; but that not being the case, he finds it necessary to surrender up a part of his property to furnish means for the protection of the rest; and this he is induced to do by the same prudence which in very other case advises him out of two evils to choose the least. Wherefore, security being the true design and end of government, it unanswerably follows, that whatever form thereof appears most likely to ensure it to us, with the least expence and greatest benefit, is preferable to all others.
Society in every state is a blessing, but government even in its best state is but a necesary evil; in its worst state an intolerable one; for when we suffer, or are exposed to the same miseries by a government, which we might expect in a country without goverment, our calamity is heightened by reflecting that we furnish the means by which we suffer. Government, like dress, is the badge of lost innocence; the palaces of kings are built on the ruins of the bowers of paradise. For were the impulses of conscience clear, uniform, and irresistibly obeyed, man would need no other lawgiver; but that not being the case, he finds it necessary to surrender up a part of his property to furnish means for the protection of the rest; and this he is induced to do by the same prudence which in very other case advises him out of two evils to choose the least. Wherefore, security being the true design and end of government, it unanswerably follows, that whatever form thereof appears most likely to ensure it to us, with the least expence and greatest benefit, is preferable to all others.
Saturday, February 7, 2009
A Reflection Upon Current Politics
Recently, I checked out a copy of Thomas Paine's works: "Common Sense, The Rights of Man, and Other Essential Writings," and what I read utterly astounded me. For one thing, I cannot stand American politics; after all, what reason do I have to be positive at all? Every politician profits from their experience, and they all want something in return for their support. They call it compromise. I do not say that compromise is bad; however, compromise of ideals is alarming.
As a young kid, I took pride in my school work. It wasn't necessarily the work itself that I took pride in, rather it was the ideas that I picked up and fell in love with. True principles of liberty and capitalism enthralled me. America as it existed before its creation and during its creation seemed to be the purest form of liberty and capitalism--at least from my teenage perspective.
Can you imagine living in the time of George Washington, John Jay, Alexander Hamilton, Benjamin Franklin, Thomas Paine, and John Locke, among others? They were men among men, and yet what does the average adult even know about these people? What a bewildering thought to be immersed in the revolutionary time of so much independent thought. They envisioned a perfect society and endeavored to create it. What person today, who claims to be American, even knows one original idea or thought from these men?
I have no goal other than purity of American wisdom. I began to think of this thought as a seed of truth in a desert of insolence. One drink of attention, and the seed can grow roots. May the roots go deep, and may a tree sprout forth to encourage other young people and independent thinkers. I hope they refuse to sell their souls to the system, and I hope they consider the passions of our forefathers and rebuke the fallacies of the current system.
Thomas Paine penned at the end of "The Crisis": "So far as my endeavors could go, they have all been directed to conciliate the affections, unite the interests and draw and keep the mind of the country together; and the better to assist in this foundation-work of the revolution, I have avoided all places of profit or office, either in the state I live in, or in the United States; kept myself at a distance from all parties and party connections, and even disregarded all private and inferior concerns: and when we take into view the great work we have gone through, and feel, as we ought to feel, the just importance of it, we shall then see, that the little wranglings and indecent contentions of personal parly, are as dishonorable to our characters, as they are injurious to our repose."
When was the last time we saw a truly selfless politician? I cannot think of one. In fact, I shall delve deeper into this in another post, but it occurred to me that today's political system must be farcical with respect to the views of the Founding Fathers. Has it gone too far, and is it time to pull it back? More importantly, is it possible to regain the ground that we have lost? I do not know.
Today, politicians claim to be Conservative or Liberal, but what does that mean? No one knows what those words mean, and instead of the words being guide posts or navigational waypoints to ground their thoughts upon, the words find many different uses depending upon what the people who claim them decide to perpetuate. Conservatism versus Liberalism is a dueling game of capture the flag in which neither side admits defeat, yet no one gains absolute victory. Surrounded by hypocrisy, the establishment wraps itself in its respective Guide-on to serve its own self righteous purposes. I do believe Thomas Paine would host another revolt.
Thomas Paine knew the meaning of true selflessness. He marched with Washington's army in the dead of winter, and his strength of conviction carried him onward to a new beginning. He understood the meaning of sacrifice, and in his passage he made clear the importance of maintaining impartiality and of subverting self interest for the good of the country. He had no political rancor or personal mission other than securing liberty for a country he was passionate about. He implies that party politics, in his day they existed as Whigs and Tories, were bad for our nationalism because even back in his day, the parties sought to achieve political gain for their efforts. I suppose that since the dawn of creation, man sought in one form or another to gain power and influence, and perhaps it is our downfall.
I took great heart in the passage from Thomas Paine because it demonstrated purity of thought and purpose. In one fell swoop, you see the heart of a revolutionary man who put everything on the line for his country. As a true patriot, he gave up everything to serve a cause greater than himself, and while he wrankled feathers and uprooted institutions, in doing so, he assisted the creation of the greatest country in the world: the United States of America. We can learn alot from Thomas Paine, and we would be wise to remember him.
As a young kid, I took pride in my school work. It wasn't necessarily the work itself that I took pride in, rather it was the ideas that I picked up and fell in love with. True principles of liberty and capitalism enthralled me. America as it existed before its creation and during its creation seemed to be the purest form of liberty and capitalism--at least from my teenage perspective.
Can you imagine living in the time of George Washington, John Jay, Alexander Hamilton, Benjamin Franklin, Thomas Paine, and John Locke, among others? They were men among men, and yet what does the average adult even know about these people? What a bewildering thought to be immersed in the revolutionary time of so much independent thought. They envisioned a perfect society and endeavored to create it. What person today, who claims to be American, even knows one original idea or thought from these men?
I have no goal other than purity of American wisdom. I began to think of this thought as a seed of truth in a desert of insolence. One drink of attention, and the seed can grow roots. May the roots go deep, and may a tree sprout forth to encourage other young people and independent thinkers. I hope they refuse to sell their souls to the system, and I hope they consider the passions of our forefathers and rebuke the fallacies of the current system.
Thomas Paine penned at the end of "The Crisis": "So far as my endeavors could go, they have all been directed to conciliate the affections, unite the interests and draw and keep the mind of the country together; and the better to assist in this foundation-work of the revolution, I have avoided all places of profit or office, either in the state I live in, or in the United States; kept myself at a distance from all parties and party connections, and even disregarded all private and inferior concerns: and when we take into view the great work we have gone through, and feel, as we ought to feel, the just importance of it, we shall then see, that the little wranglings and indecent contentions of personal parly, are as dishonorable to our characters, as they are injurious to our repose."
When was the last time we saw a truly selfless politician? I cannot think of one. In fact, I shall delve deeper into this in another post, but it occurred to me that today's political system must be farcical with respect to the views of the Founding Fathers. Has it gone too far, and is it time to pull it back? More importantly, is it possible to regain the ground that we have lost? I do not know.
Today, politicians claim to be Conservative or Liberal, but what does that mean? No one knows what those words mean, and instead of the words being guide posts or navigational waypoints to ground their thoughts upon, the words find many different uses depending upon what the people who claim them decide to perpetuate. Conservatism versus Liberalism is a dueling game of capture the flag in which neither side admits defeat, yet no one gains absolute victory. Surrounded by hypocrisy, the establishment wraps itself in its respective Guide-on to serve its own self righteous purposes. I do believe Thomas Paine would host another revolt.
Thomas Paine knew the meaning of true selflessness. He marched with Washington's army in the dead of winter, and his strength of conviction carried him onward to a new beginning. He understood the meaning of sacrifice, and in his passage he made clear the importance of maintaining impartiality and of subverting self interest for the good of the country. He had no political rancor or personal mission other than securing liberty for a country he was passionate about. He implies that party politics, in his day they existed as Whigs and Tories, were bad for our nationalism because even back in his day, the parties sought to achieve political gain for their efforts. I suppose that since the dawn of creation, man sought in one form or another to gain power and influence, and perhaps it is our downfall.
I took great heart in the passage from Thomas Paine because it demonstrated purity of thought and purpose. In one fell swoop, you see the heart of a revolutionary man who put everything on the line for his country. As a true patriot, he gave up everything to serve a cause greater than himself, and while he wrankled feathers and uprooted institutions, in doing so, he assisted the creation of the greatest country in the world: the United States of America. We can learn alot from Thomas Paine, and we would be wise to remember him.
Subscribe to:
Posts (Atom)