A Sobering Dose of Reality
There is an old adage that “you can live on love until breakfast.” About four weeks ago the US economy confirmed the wisdom of these words.
About fifty percent of America’s families and all levels of government have been living on credit since the mid 1950’s. Prior to this period, credit cards and car loans were unusual. Americans purchased large ticket items with savings. Vacations and restaurant dinners were cash transactions, and mortgage sizes were pegged to 25% of a family’s annual income.
The introduction of revolving credit, after the Korean Conflict, quietly weaned Americans off saving, and instigated the era of instant gratification. Possessions and lifestyle were acquired and sustained with borrowed money and future payments. This mindset eviscerated ground zero of personal financial responsibility. The government was equally foolish and equally culpable.
Offering credit to 300 million buyers requires staggering amounts of capital. Whether it’s a mortgage or a box of paperclips that is charged, the lenders instantly pay the vendor/retailer for every purchase. The evaporation of American savings in our credit driven economy required enormous amounts of foreign capital to maintain the US lenders’ solvency (read their ability to lend).
In effect, foreign financial institutions were investing the savings of their citizens in America. The strength of the US economy provided the ethereal collateral that encouraged foreign investors to finance our credit based economy.
The collapse of Countrywide Financial Corporation, a leader in sub-prime loans, opened Pandora’s Box. It exposed the AAA rated mortgage securities from Fannie Mae, Freddie Mac and over 100 other financial institutions as re-packaged garbage.
This discovery instantly dried up hundreds of billions of dollars of foreign investment this year, which forced the US government to pony up over a trillion dollars to shore up the reserves of the nation’s lenders.
The current economic crisis in the mortgage/housing market was caused by the government supplanting the five “C’s” of lending (capital, character, capacity, collateral and conditions) with social engineering.
The application of affirmative action, to racially balance home ownership, was the straw that broke the camel’s back. The bailout was bound to happen because government love doesn’t pay the bills. Taxes do.
For sixty years the government has abused its power to raise taxes. Like the American consumer, it ignored the fault line beneath entitlements, credit and future payments.
So it’s going to get a lot worse before it gets better. Consumer confidence and thus spending is rapidly contracting, which will reduce inventory requirements. And that’s why unemployment will exceed 8% by next June as companies react to declining sales.
This combination will reduce government revenues, which will shorten the fuse on the Medicare and Social Security time bombs. Now add the interest on the growing national debt to the equation. America is in trouble.
American business needs capital to grow. This is no time to raise capital gains taxes, which discourage investment. And increasing the taxes on businesses already desperate for capital would be economic suicide. This was FDR’s strategy, which sent unemployment to 25% during the Great Depression.
The presidential candidates should be listing the nation’s critical priorities, and advising the nation of which programs they will eliminate to stop the hemorrhaging. The fix will require a hatchet and not a scalpel. Do the math! Forget balanced budgets, expenditures at every level of government must be reduced about 7%.
About fifty percent of America’s families and all levels of government have been living on credit since the mid 1950’s. Prior to this period, credit cards and car loans were unusual. Americans purchased large ticket items with savings. Vacations and restaurant dinners were cash transactions, and mortgage sizes were pegged to 25% of a family’s annual income.
The introduction of revolving credit, after the Korean Conflict, quietly weaned Americans off saving, and instigated the era of instant gratification. Possessions and lifestyle were acquired and sustained with borrowed money and future payments. This mindset eviscerated ground zero of personal financial responsibility. The government was equally foolish and equally culpable.
Offering credit to 300 million buyers requires staggering amounts of capital. Whether it’s a mortgage or a box of paperclips that is charged, the lenders instantly pay the vendor/retailer for every purchase. The evaporation of American savings in our credit driven economy required enormous amounts of foreign capital to maintain the US lenders’ solvency (read their ability to lend).
In effect, foreign financial institutions were investing the savings of their citizens in America. The strength of the US economy provided the ethereal collateral that encouraged foreign investors to finance our credit based economy.
The collapse of Countrywide Financial Corporation, a leader in sub-prime loans, opened Pandora’s Box. It exposed the AAA rated mortgage securities from Fannie Mae, Freddie Mac and over 100 other financial institutions as re-packaged garbage.
This discovery instantly dried up hundreds of billions of dollars of foreign investment this year, which forced the US government to pony up over a trillion dollars to shore up the reserves of the nation’s lenders.
The current economic crisis in the mortgage/housing market was caused by the government supplanting the five “C’s” of lending (capital, character, capacity, collateral and conditions) with social engineering.
The application of affirmative action, to racially balance home ownership, was the straw that broke the camel’s back. The bailout was bound to happen because government love doesn’t pay the bills. Taxes do.
For sixty years the government has abused its power to raise taxes. Like the American consumer, it ignored the fault line beneath entitlements, credit and future payments.
So it’s going to get a lot worse before it gets better. Consumer confidence and thus spending is rapidly contracting, which will reduce inventory requirements. And that’s why unemployment will exceed 8% by next June as companies react to declining sales.
This combination will reduce government revenues, which will shorten the fuse on the Medicare and Social Security time bombs. Now add the interest on the growing national debt to the equation. America is in trouble.
American business needs capital to grow. This is no time to raise capital gains taxes, which discourage investment. And increasing the taxes on businesses already desperate for capital would be economic suicide. This was FDR’s strategy, which sent unemployment to 25% during the Great Depression.
The presidential candidates should be listing the nation’s critical priorities, and advising the nation of which programs they will eliminate to stop the hemorrhaging. The fix will require a hatchet and not a scalpel. Do the math! Forget balanced budgets, expenditures at every level of government must be reduced about 7%.
Labels: 2008 economic crisis, credit, social engineering
posted by David at
8:05 AM
