Democrats Own the Financial Crisis

Democrats, however well intentioned, have led this country into the chaos we see in the Global Financial crisis. The case is overwhelming that for the purposes of both good intentions and maintaining political power, the Democrats have used the resources of the Federal Government to put credit unworthy people into houses that they couldn't and wouldn't pay for.

The economy blossoms with new home building. The construction trades are rewarded with good jobs, the Realty business is rewarded with increased sales, the local lending institutions prosper, demand for housing increases housing values, increased property values put more money into state and local coffers, the furniture and appliance people benefit from increased sales, and the home buyer gets to be the proud owner of a new home. Then there are the manufacturers who supply all of the goods that go into a new house - tools, lumber, appliances, furniture, brick, electrical wiring, and different cements and mortars. I might have left somebody out, but I hope you get the idea.

The demand for new housing helps just about everybody. The wheel of progress continues only if the people who buy the houses pay for them. Like all commodities, housing values depend on demand. When foreclosures become excessive, we get empty houses. Empty houses decrease in value as their numbers increase. The mortgage holders have invested in a house at market value, but now, that value has dropped so the mortgage holder is holding the bag for a home that is not worth the loan value originally made for the home.

Another reason for the decline in home values was people known as 'house flippers'. House flippers took advantage of the relaxed credit lending rules and bought with no down payment on the expectation of reselling the house at a profit because of the upward trend in house values. When home values went stagnate, they simply allowed those houses to revert to the lender and quit buying. The 'flippers' had very little money involved in the transaction so it was easy to just wash their hands of the purchased property and let it go into foreclosure. The result of their actions was two-fold. By shutting down their purchasing operations, the 'flippers' helped weaken demand and by their allowing foreclosure on their purchases, the result was more empty houses on the market to drive down home values.

The Democrats defeated efforts to clamp down on the chaotic housing markets. Democrats would have none of it. They favored continuation of making loans to people without the usual safeguards of good lending practices. As long as Freddie Mac and Fannie Mae (the largest but not the only underwriters) kept underwriting those loans, the primary lenders kept loaning. Some of their loaning techniques and instruments used to make a loan were odious at best. Teaser rates, 2-28, 5-25, interest only, no down payment, and adjustable rate loans were just a few of the means that the lenders used to attract borrowers. And, with the sales of CMO created bonds booming, it looked like the pathway to financial nirvana. But there was a fly in the soup.

The nexus root of the present mess was the Democrats and their desire to have poor and minorities have homes. Institutions such as Fannie Mae and Freddie Mac persuaded the politicians in Washington with financial favors and sweetheart loans to maintain the status quo. The Democrats stayed in lockstep preventing any meaningful regulation that would have prevented or at least dampened the collapse that was inevitable.

The big lesson from the mess we are in now is that people with bad credit have those ratings for one reason only. They don't pay their bills. No matter how unfortunate their circumstance or your feelings about the poor, using the Government to solve such problems will always make matters worse. Eventually, somebody was going to have to pay for those bad mortgages. We as Americans can pay for them, or those institutions that bought and sold those Mortgage Backed Securities can just suck it up and take the losses. But there is a question of fairness. The Federal Government started this ball rolling by encouraging the relaxation of lending rules. Coercing the primary lenders into making bad loans, and then having the loans underwritten by Fannie Mae and Freddie Mac and others was bad policy. Those remarkable loan instruments and securities were in response to the wishes of the Democrats who were responsible for creating those opportunities. What may have began as a sympathetic cause for the underprivileged, only provided us with another reason why socialism just doesn't work. We should be glad that home prices stopped escalating or the mess would have been even worse.

Democrats start out with a flawed premise. Good hearted but flawed. To begin with, people, no matter their race, do not have any reason to appreciate something that they haven't got a stake in. I learned this lesson in the freeze-dried coffee business. At the time, the company I worked for sold coffee dispensers and freeze-dried coffee for offices. Our objective was to set up accounts for the continuation of sales for our coffee. The dispenser was just the vehicle for the convenient use of our products. The account and subsequent coffee sales was the valuable part to us. In the beginning, we gave the dispenser to the customers just for their account. But when we serviced those accounts, the dispensers were mistreated, especially if it had ran out of product. But at the time, the customer had no vested interest in the dispenser so it came under rough treatment. To instill appreciation for our dispensers, we began selling the dispensers to the customers. We set a price high enough to cover its cost and to convey to the customer the pride of ownership for the dispenser. It made a lot of difference. The results were amazing. Fewer trouble calls for broken dispensers meant lower expenses.

If you do not believe what I am telling you, take a good look at public housing. No, public housing isn't like owning a home, but the residents who live there do not appreciate and take care of the units. They have no stake in them and even resent living in them. Acquiring a house with no down payment with a 5-25 mortgage is a recipe for disaster. (2-28 and 5-25 are loans that feature a teaser rate or interest only for the years of the first number, and then jumps up to a higher rate for the remainder of years, the second number.) Since house payments seem a lot like rent payments, when things get tough, they can just leave or not pay for the house and wait for eviction. They have no stake in the property. The person with a 20% down payment in his new home has a stake in the home and the home is 1/5 his. Not many people walk away from that much of an investment.

Remember, if there is no top of the heap, then the bottom has nothing to aspire to.
Below are some topics to search for if you want to learn more about the housing bubble and crisis.

collateralized mortgage obligation (CMO)
collateralized debt obligation (CDO)
collateralized fund obligation (CFO)
Mortgage Backed Security (MBS)

Cheers,

-Robert-