Why a nation of speculators always loses to a nation of producers.
So, it seems, yet another major mortgage lender is on the ropes. But what makes it different this time from Bear Stearns is not only is it one lender but two of the countries major mortgage lenders, Fannie Mae and Freddie Mac. What also separates these two from Bear Stearns is the nature of their business and the history behind their creation. Fannie Mae was developed under FDR to rekindle and even expand the mortgage market after the Great Depression. It was then privatized under LBJ as a means of unburdening the federal budget of funding for life-sustaining entities like homes so that we could, instead, increase investment in funding for life-threatening things like bombs. Shortly afterwards, it was joined by Freddie Mac to discourage Fannie Mae from monopolizing the home loan market. Still both operate under a sort of half-public/half-private status which freed them from all kinds of normal regulations. They both are exempt from paying local tax, they have no SEC oversight (meaning their books are closed to the public) and their funding is backed by the US treasury (meaning if they fail the federal government, or as you may commonly refer to it as YOUR TAX DOLLARS, bail them out). And not a bailout like the generous little incentive that the Bush administration has given to Bear Stearns but "Bail Out" as in our taxes cover the shortfall that Fannie Mae and Freddie Mac is about to endure. The question then becomes does the federal government, once again, simply take control over Fannie Mae and Freddie Mac (effectively deprivatizing them) and, if not, what happens to the 42% of the mortgage market currently controlled by the two?
But still this new hurdle is just one in the many that have come along since the collapse of the sub-prime mortgage market or, as I like to call it, the debacle that came from over a decade of lenders saying, "Hey Buddy, wanna buy a house. It's probably much more comfortable than the cardboard box you currently live in." Giving people houses with little to no money down just to spur on the economy is one grievance example of the kind of backwards thinking that props up our current economic mindset--speculation just for the sake of speculation. Do not get me wrong, I am not against investment (be it private or public) into technologies and commodities that the masses either desire or that will ease the day-to-day living of the average individual. But there was a time when the bulk of investment in America was done for the good of the creation of products that were new to most Americans and had a viable sustainability. For example, investments in the early part of the 20th century led to the oil boom which propelled the auto industry and the expanded development of America. Similarly, dot com investment at the end of the century led to creation of information technologies and led to increased communications capabilities and portability and speed of business transactions. These are but two examples of a form of speculation that had real results toward how the future was and is to be developed. In other words, these investments led to the creation of products that did not exist or utilized before these investments were made and that, in turn like a domino effect, led to the further expansion of the market into other, often, unforseen realms.
But now, the focus of our speculation markets is on antiquated fuel sources like oil and on an already overgrown housing market that relies on far too many other factors (unemployment rates, interest rates, heating costs, etc) to be reliable in the long run. Oil and privately-owned homes for everyone (whether or not everyone can actually afford one) are not innovative commodoties anymore, at least, not in America. They may sustain some portion of the market (ie, cars with oil, and lumber and building supplies and contract labor with housing) but they do little to effect the larger picture. To encourage a speculation market based on these two commodities was only bound to doom our lenders into this current deep fiscal crisis that we are now only in the early throes of.
This crisis will only grow if we do not change some of our ideas about the business models that we accept as THE WAY instead of seeing them for what they are, works in progress that need to be constantly re-examined, finessed, or, in some cases, done away with because of the utter failure of certain ideas. As it stands, we have an economy that is greatly influenced by the outlook given to us by Wall Street. We accept, without question, the methodology that the only measure of success is constant growth. Every investment must be seen to aid an economic progression forward. We measure this progression with stock prices and the daily Dow Jones report. But something happens when the public views progress through this very trite prism. We allow investors to dictate to us what the meaning of "success" is and, we open the door for people who had very little personal toil invested into the creation of that wealth to claim ownership over it.
So, for example, a local energy start-up specializing in wind power is able find a way to harness wind power and, even, build the infrastructural means to deliver this power to the local community. Now one of the big energy companies who does business in these local area feels threatened by this new technology and, at first, makes an offer to buy out the company. Failing that, this major company may try to use state and federal regulators to wrestle away ownership of this company or annihilate the competition all together. But say, eventually, this small start-up, by hook or crook, gives into this major power player and sells. Now, of course, the umbrella company, a publically traded company, is not owned by any one person, it is owned by the stockholders who are many times removed from the original owner who conceived the idea so they may not have as much emotionally invested into the project and are unable to see firsthand the positive effects the effort might have on the local economy and environment. All these stockholders see are quarterly reports with figures that either go up or down. If the figures go up as fast as, perhaps, they are used to with the major power company, then they might keep their stock; if they go down they will sell and perhaps the bigger company might put the kabosh on the project all together potentionally ruining a perfectly sensible and progressive company because it could not or would not play by the rules that Wall Street culture had imposed upon it. And not to put too much of an ideological spin on all this but, the ruin of the original wind-power company would be a result of what Marx would label "removing people from the means of production."
When the governing boards of a publically-traded company makes decisions, these are not like decisions that are often made by individuals or the government, for example. They do not always take the long-term rewards into consideration. An individual may decide to pay thousands of dollars now for an education that will pay off in 20 years time or a government may make a policy now that will not reveal it's full effects for many decades, but that does not prevent them from making those decisions.
Most corporations do not work under those terms (at least, not so much anymore). With the mass inclusion of day-traders and foreign investors, many new investors do not know nor do some care to know about long-term investment strategies. They want a return on their money and they want it now. Too many people treat Wall Street like the Vegas Strip, put money on this stock, let it ride for a week or so, if nothing comes of it, they move on to another slot machine, as it were.
So what does any of this have to do with the collapse of the housing market? Well the same people who invest in all other stocks invest in the housing market through lender shares. And these same people, like in the wind-power start-up buyout scenario have no particular loyalty to the American housing market. The know that the reason the American housing market was so hot, for a time, was not because everyone all of the sudden had more money to throw down on major purchases like homes. The '90's was when the housing market began to sizzle, and although it was a decade that was "BERRY BERRY GOOD" to a lot of people, it wasn't all that for most. The difference was in the loan details. Lenders were giving people what seemed to the average individual as more affordable loans. But then, of course, those people did not read the fine print. When a lender gives people a loan that requires less money down and, perhaps, even smaller monthly payments extended over a longer period of time, the lender makes more money and the lendee pays a lot more in the end. So people were thinking that, all of the sudden, their house was now worth a $1 million when it was really only worth the basic interest rate and a then some that the loan was for. The higher the interest rate (configured not by the arbitrarily lowered rate set by the Fed by by the arbitrarily high cost of the home set by the mortgage market) and the longer a lendee takes to pay off these loans means that the lender will bank far more than if the majority of loans had stricter criteria for acceptance and required more money down. So the BANK BANKS big time UNTIL something gives. By reducing monthly payments to what someone can minimally pay, the ability of the lendee to pay back the mortgage on time and fully depends on all other living costs remaining relatively low. BUT when a slight skew in the market happens, say gas and heating costs or health care premiums go up, then all of the sudden the $1500 or $2000 or so set aside each month for a mortgage gets eaten into by the costs of other basic ammenities and then what? Then all of the sudden people, many of whom should have not been given the mortgage loan in the first place, cannot make even the minimum payments. When it happens a few times, the lenders can pad the losses, but when it happens en masse, then OH OH SPAGHETTI-Os.
So what does that mean to the future of the American housing market? Well, since investment is an internationally game and the American housing market is all but a fruitless venture, investors start to look to other markets. UNTAPPED MARKETS, markets in ascension and not in decline, and this is where a little bit of Marx comes in, again. I'm talking about China, maybe a little India; a continent and then some worth of folks who have a different idea about home ownership. They ain't got 'em but they sure as heck want 'em. And, here's the catch, many are starting to be able to afford them, thanks in part to the lenders who are pulling their funds from American banks and placing them into Asian banks.
So here is where I share a little tidbit about myself: when I was in college, I made it a point of trying to live with as many foreign students as I could (as long as they also reached my level of what I considered "cool" or, at least, interesting). One of those roomates was a PhD student in Geology from mainland China called Xiphan. He was a excellent cook and spoke very good English (although, I often had to explain the jokes on the reruns of Saturday Night Live on Comedy Central that we used to watch together). Still, he was very curious about American culture but, at the same time, very forthcoming about Chinese culture and, especially the growing capitalists influence upon it. When he moved into our 5-bedroom home, he ended taking the smallest bedroom, a little 10X10 box with a tiny window which, by Midwestern standards was itsy bitsy but now that I live in NYC, I see as massive and the height of luxury. I apologised to him about the room being so small but he was quick to point out that was more than enough space for him. He explained how, in college as undergrad in China he had to share a dorm room with 11 other students and that when he was growing up in his family home, he lived with his mother, father, and grandmother in a 2-ROOM home, not a 2-bedroom home BUT 2 ROOMS ONLY. He said that his grandmother and deceased grandfather bought the home some years ago and it had taken them 30 years to save the money for it as they were required to pay for it outright. After I finally graduated and moved away, I came back to my old collge town for a visit and ran into Xiphan, still studying rocks and in no hurry to return permanently to China. He told about the good news. He said that his parents finally were able to get a mortgage. At first, I thought "big deal, Americans get mortgages all the time." Then I remembered the story he told me about how long it took his grandparents to buy their own home and I realised that the fact that his parents could get a loan instead of having to wait thirty years to save the money for WAS a very big deal and it was a huge sign of where the lending industry was beginning to focus it's attention.
But it's not just the desire for home-ownership by the Chinese populace that it spurring on this new lending realm of it's economy. It's the fact that China has become a massive nation of producers and much of the wealth of the average Chinese is dependent upon that production. This is, in many ways, reminiscent of another time in America when home ownership began to spike. It coincided with an increase in a well-organized well-paid manufacturing class (of which my parents happen to be members of). The housing development of the post-WWII era also drove the financing industry allowing lenders to make loans to an ever increasing Middle Class for items like cars, student loans, vacations AS WELL AS homes. Still, many would say that as great an increase in home-ownership that occured in the 50's-70's, it is no match for the US housing market of the late 90's and early 00's. Home ownership is as high as it has ever been (until very recently, that is). Yes, but the money paid by the average family for their home during the mid-century boom was more in keeping with real costs and, as I explained earlier, the numbers driving market now are based on figments of the lending industry's imagination. That's not to say that the percentage of Americans who now "own their home" (even though you don't own nothing until you've completely paid for it) is not greater than the post-war housing boom, because it is. But the percentage of money the average homeowner 50 years ago paid for the home out of the totality of their income was far greater then than it is now. This usually meant less people qualified for loans because lenders used far stricter barometers to allow lendees to qualify.
It's useful to examine some facts about how the lending industry has changed between then and now to see how this current quagmire came to be. In the '60's, my father (on top of being a post-WWII member of the manufacturing Middle Class) dabbled a bit in real estate. He said that, for the most part, the formula for determining if someone was eligible for a loan and how much that loan would be set at was based upon the male head of household income on his primary job ONLY. This means if the wife had a job, or the husband had a second part-time job, or one year on his regular job there was a lot of overtime added to his salary NONE of these factors would be considered. The lender took his stripped down basic income and doubled it and that would be the loan amount. So, if in 1965 a man made $10,000 a year, he would qualify for a mortgage loan at $20,000. Now, a typical loan is given to a family that can include within it's proposed income status everything from money from the man's second jobs, wife's job, any and all overtime, etc and then that exaggerated figure based on a family's financial best-case scenario is TRIPLED and then a loan can be approved for that amount. This formula effectively makes the assumption that a family will always have it so good fiscally and it still spreads the loan payments thinner because it will require a bigger chunk of income to pay off said loan, in the long run. AND AGAIN, lenders don't care. They don't make money off the loan, just the principle. The higher they can fabricate the cost of something to be, the more interest they collect.
But it's now time to wake up from that dreamland that somehow allowed people with relatively small incomes qualify for $1 million mortgages thinking that maybe one day they will magicaly pull money from the rear to pay for it (or at least, pay for the interest), lenders within the Chinese market have to take REALITY into account. They are dealing with a nation that knows how to save money and so they don't think twice about putting a lot of money down for something as important as a house. Lenders and creditors don't make as much money when people put a huge bulk of costs down up-front. Additionally, they are a people still trying to wean themselves from the Communist state-funded teat. They do not always realise that when someone gives them money, they are obligated to pay it back. But they'll learn, just like your old pappy who bought that family homestead generations ago learned. And they will balance out this new speculation market seizing it sights on the Chinese housing market and temper it with a nation that still makes physical products. This means that they have a diverse economy that can bear the weight of decline in some sectors. Because as America has come to finally realize all to late, all speculation and no production makes Johnny a dull boy. But increased speculation based on increased production makes Xiphan's parents very happy, indeed.