A View From the Cheap Seats

October 1, 2008

Not as Bad as it Seems?

Franklin Raines - Disgraced Former CEO of Fannie Mae and Barack Obama's advisor on "Housing and Mortgage Issues"

Franklin Raines - Disgraced former CEO of Fannie Mae and Obama adviser on "Housing and Mortgage Issues"


By Rich Trzupek

While we would be the last to get in the way of good, old-fashioned American panic, there are several reasons to believe that the financial crisis gripping the nation is not quite so bad as we have lead to believe. Consider a few salient statistics.

– When the stock market tanked on September 15, in the wake of the AIG fiasco, there were a chorus of voices predicting doom, a la a Great Depression disaster. That was hardly warranted, and hasn’t panned out in any case. The 504 point drop was, on a percentage basis (which is all that counts) the 96th biggest drop in U.S. history. Moreover, the market quickly corrected itself.

– The nation’s Gross Domestic Product (GDP) continues to climb. The GDP of the United States rose 3.3% in the second quarter of 2008, which has been pretty much the average for a couple of decades. A recession is officially defined as two consecutive quarters of falling GDP. We’re a long way from that happening.

– The mortgage default rate sits at about 2.75%. While that’s a little more than double the typical rate, it’s a long way from the 50% default rate experienced during the Great Depression. It is, in fact, about the same as the default rate the nation suffered in 1985, and – much like that time – it’s centered on a few states, like California, where home values had spiraled so high, so quickly, that they were disconnected from reality.

– As of this writing, 12 banks have failed in 2008. During the savings and loan crisis of 1991 – 1992, we had 832 bank failures. The vast majority of the nation’s 8,500 banks are in sound fiscal shape, according to the Federal Deposit Insurance Corporation.

– The personal savings rate in 2008 is higher than it was in 1999.

– Six years ago, the Dow Jones Industrial average was about 7,700. Today, it’s over 11,000. While a drop of about 20% during 2008, to get us to 11,000 + is nothing to write home about, the growth of the last six years is unprecedented.

– Democrats have abandoned plans to push for an extension of the offshore drilling ban, once the current ban expires on October 1. While there will still be regulatory obstacles to overcome before we can start to increase domestic energy production further, energy markets are sure to respond after October 1. Expect continuing drops in gas prices as we move into fall, which will give the economy a corresponding boost.

This is not to say that we don’t have problems. Certainly we do. We have lenders who built loan portfolios on a house of cards, and who provided “no down payment” mortgages to borrowers who blatantly lied about their qualifications for a mortgage. We have investment houses whom used a significant portion of their portfolios to invest in such lenders.

Neither the President, nor Congress, was willing to step in, until it was far too late. It’s not like there weren’t a chorus of voices out there, warning the politicos about what was going on. But how many politicians had the guts to shout “stop!” when more Americans than ever were realizing the dream of home ownership, and home ownership on a grander scale than they could have ever dreamed?

Still, while we have a problem, and while we will continue to have a problem for the immediate future, the scale of that problem has been blown far out of proportion. We are not in danger of a depression. A recession? Possibly. But, given the right amount of surety, that’s probably not going to happen either.

What is the “right” amount of surety strikes to the heart of the matter. Your humble correspondent can not begin to claim to be a financial expert, but it certainly seems that there should be some middle ground between bailing out every idiot, and doing nothing that ultimately makes sense.

We may also take heart in the knowledge that some of the big dogs in the financial world were not idiots. J.P. Morgan Chase, for example, played it smart, stayed strong, and is thus in a position to make prudent investments to help bail out certain institutions that weren’t nearly so thoughtful.

While we may be in for somewhat tougher times, as a result of this “crises”, we will not suffer disaster. The degree to which we undergo a degree of discomfort will depend on how prudently our government acts. If our elected representatives can put their personal, and electoral, interests behind them – as they have traditionally done in times of crisis – then the duration of the difficult times will be minimized. If not, we’ll still get through. It will just take a little longer.

The other half of the issue, of course, is the “how did we get here?” The short answer, for the mainstream media, is “George W. Bush’s failed financial policies”, or words to that effect. That is, in the view of your humble correspondent, a truly remarkable statement. Fannie Mae and Freddie Mac, more than any other institutions, are at the center of this debacle. And which party, do you think, was angrily defending Fannie and Freddie, when the opposition was pointing out just how big a house of cards the two institutions were building?

If you’ve got the courage and intelligence to answer that question (and we’ll recognize up front that most of my liberal friends are lacking in one category or the other, or both) you can find a bit of enlightening educational material here, and here, and here, and – by the way – here.

Fascinating viewing, no? And, despite all of those facts, one Presidential candidate will insist that the credit crisis is all the current President’s fault.

Don’t get me wrong, the current President bears responsibility here. He should have done more to call out the frauds running Fannie and Freddie, and those members of Congress defending their schemes. But, in the final analysis, one candidate for President should be ashamed, for attaching himself to people involved in the scam and for being part of the party that defended the scam. And the other candidate can hold his head high, for he saw what was coming and tried to do something about it. And, more to the point, somebody should have guts to point out the difference.

How’s that for change?


1 Comment »

  1. Thanks Rich for helping everyone to avoid the shiny object syndrome here. Well it’s fun to debate who is at fault, I appreciate that you are focused on the questions of real concern which are where are we headed and what should be done. One of the right indicators at the moment to keep an eye on is the LIBOR rate which is the interest rate banks use for lending money between each other. It’s an important measure for 2 reasons. As this rate increases, it highlights the scarcity or value of those monies and the premium to have access to that liquidity. Second much of the credit available to consumers and businesses is pegged to that rate and as it increases the ability for small and large businesses alike to obtain credit to invest in their businesses becomes more expensive. The same holds true for the average individual looking to buy a home or finance a home improvement project or vacation. Part of what the US fed chief and treasury secretary are trying to do this week is ensure that the liquidity of these markets is sufficient to fuel the pace of business and keep the economy on track. This is not an exact science and in the process some of the culprits who placed bad “bets” will be let off the hook (and many of these “bets” were from a risk protected perspective not so different from your weekend swing to Vegas). I don’t profess to have the silver bullet nor know how much is required to shore up the credit markets, I do wish however that at least for the coming weeks our policy makers channel their energies into getting this answer close to right. There is plenty of time for dolling out the political blame later and ensure that columnists like yourself have plenty of material to keep us coming back each week.

    Comment by Lucky — October 1, 2008 @ 2:32 pm | Reply

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