The failure of Lehman Brothers and the resultant freezing of the credit markets sent shockwaves throughout Wall Street in September, intensifying the troubles of other giants like AIG, Morgan Stanley, and Goldman Sachs. These were the pillars thought to be fail-safe. How could they suddenly become so shaky? The short answer is too much debt—for individuals, corporations, banks, and now … the U.S. taxpayer.
A longer answer begins with U.S. government. Wanting to create an "Owership Society," the government encouraged banks to make reckless, high-risk mortgage loans to borrowers whose ability to repay was at best questionable. Able to sell these loans to government backed Freddie Mac and Fannie Mae, banks gladly made these loans to borrowers without proof of income, or even a job. Down payments were likewise unnecessary.
Banks even loaned more than the value of the homes, reasoning that home values were rising. Of course they were. When money is cheap, the market compensates by charging more. In order to keep the rising
prices "affordable" some banks even offered a 50 year mortgage.
Packaging these loans into mortgage-backed securities, they were sold, and companies, like Lehman Brothers, gobbled them up. Betting heavily on these securities, they borrowed huge sums of money to buy even more. Unfortunately, they bet wrong. Home prices rose out of reach for most families. Adjusting interest rates and higher payments resulted in foreclosures and home prices plummeted. Companies, over-leveraged and invested in these mortgages, suddenly found themselves in trouble.
Hindsight, it's said, is 20/20, but was it really that hard to see what was coming? Yet, when warned four years ago by the Fed, Congress did nothing. Rather they encouraged Freddie and Fannie to do more to "make housing more widely available." And now in a panic, they've passed a $700 billion bailout package, "buying" those losses from the banks and corporations and passing them to taxpayers.
In other words, the gains made on Wall Street stayed private, but the losses became socialized. Financial institutions were incentivized to continue their risky behavior, while nothing was done to correct it. Instead of addressing the real problem of being over-leveraged and too far in debt as a nation, we further leveraged the taxpayer to the tune of $700 billion, and the markets as of yet are no more stable than before. In fact, one could easily argue that the bailout has created more uncertainty in the market as investors now wonder if banks are indeed stable, or if their current liquidity is nothing more than a short-term effect of the bailout.
Even worse, this bailout puts a major portion of our economy into the hands of the government. Looking back on the Great Depression of the early 1930s, economists today both liberal (Galbraith) and conservative (Friedman) consider the government's involvement in the economy misguided and counterproductive; taking what began as a relatively minor recession in to the worst economic crisis in our history. In regards to the present crisis, Fed Chairman Bernanke said, less than 18 months ago, that the total fallout from subprime mortgages would be contained to $50 billion—a fraction of estimates today. Likewise, as investment banks began to leverage themselves 20 and 30 times beyond their holdings, U.S. Treasury Secretary Paulson argued on Capitol Hill that they should be allowed to leverage themselves even further.
Our "experts" who think they understand and know seem to know less than they think they do. They may indeed have more knowledge and insight than the average taxpayer, but they cannot possibly know what the market collectively understands, and I fear this bailout will prove counterproductive as well.
Rather than letting interest rates rise, which would encourage less debt and more savings and liquidity, the Fed has continued to lower rates. Congress has also refused to cut capital-gains taxes which would further encourage savings and investment. The "infusion" of $700 billion into the economy will certainly create inflationary pressure, encouraging more spending and discouraging savings.
Meanwhile, Utah's largest banks, Wells Fargo and Zions Bank, have remained strong as they did not involve themselves in subprime loans. As well, Utah is one of only five states with a triple A (AAA) bond rating: our revenues are healthy even in declining economic times and the state's savings accounts are filled to the brim. In fact, Utah was named the Best Managed State in the Nation, under our Republican leadership.
From banks to governments to individuals, those who, in the words of Gordon B. Hinckley, chose "to live within our means,… to be free of debt, [and] to have a little money against a day of emergency," will make it through this "stormy weather."
Republican Steve Clark has done just that as he owned, operated and made payroll as a contractor for over 29 years. He has continued to do so as the Chairman of the Business/Labor Committee in our legislature.
Vote for Republican Steve Clark on Tuesday to continue to keep Utah's "house in order."
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