Wednesday Morning Quarterback — Rate Cuts
October 8, 2008
By David Evans. Britain, Sweden, Switzerland, Canada, and the United States have nearly simultaneously announced rate cuts on money borrowed from their central banks. Ben Bernanke, throwing a change-up that everybody knew was coming, has invited corporate behemoths to use his window for their commercial paper. This is not greatly alarming, Boeing and GE are expected to weather the storm, but the subprime mortgage victims will be washed away under current plans.
“Women and children first,” a noble adage for first mates on sinking ships in Hollywood renditions, barks the order to abandon the vessel and jump, or be pushed, into the cold sea. The meltdown in all its finery, offers an opportunity to exemplify values, as well as governing strategies.
It is probably way too early to speculate on the origin of the world’s banking investment in America’s “widders and urfins,” so here goes.
In a typical mortgage transaction, a borrower with a good credit history and two years of reliable income can get reasonable terms on whatever abode the borrower can put seven percent down on. About five is counted as down payment and one goes to the title company, one to the lender.
Enron’s remarkable accounting inventions were actually preceded by builder’s financing schemes (3-2-1 buydowns, for example), which gave almost-qualified buyers (eager potential renters with a large note obligation and no equity in their purchase) the chance to rent to own.
Walk in to your local rent-to-own place and look at their easy down payments and their terms. Do not patronize these predators. They should be zoned into enclosures five miles from the nearest residential area, school, church, bordello, crack house, or brokerage. Do not feed them.
Once a reasonable person understands that the lifetime cost of acquiring the glossy new toy is about four times the going rate, they will walk away from these tourist traps. For the inexperienced, the deal is worse than the worst used car dealer, televangelist, or supreme court decision offers. Not everyone walks away. Some are ensnared by the prospect of taking it home today.
Home ownership, the centerpiece of the American dream, used to be different, until the hot money wise-guys got involved. Now, it is possible in many areas to buy a home for interest only payments. This is a bet that the escalating market value will eventually allow an equity stake. This only works if the price is agreed to in advance, and if the potential buyer is fully aware that an interest only mortgage is rent, or worse.
California has led the way for thirty years in enfeebling the newcomer while the established profit. A carnie barker named Howard Jarvis sold voters a bill of bads called proposition “pull up the ladder now that we are already on board,” which froze property taxes at current levels. The effect on already overvalued home prices (and local governments) was worse than draconian. A fifty thousand dollar house in your community became a two hundred fifty thousand dollar house in the land of make believe.
Former Californians in Oregon, Arizona, and Nevada can attest to the shortsightedness of the measure, which locked out the funding mechanisms by which state and municipal governments and school districts grow. It is an ongoing curiosity that some hopelessly naive organization, ACORN for example, has never led the drive to overturn proposition “perpetual financial servitude.” There is a thirteenth amendment.
If property taxes on your home were suddenly frozen at their current rate, you would experience a similar explosion of narcissism and myopia in your community. Perhaps it is only avarice, just as deadly.
Hail, hail to those who have paid off a mortgage. In most places, the newly separate payments for property insurance and taxes approximate the mortgage payments, for about thirty years. But in California, thanks to Howard’s scheme, one part of the cost of living was frozen. So was K-12 public education. So were the pothole repair trucks. Library hours were reduced. Gates on the community were the logical next step.
California’s dream did not include equal opportunity. “Dog eat dog and the devil take the hindmost,” is the Jarvis legacy. Sal si puede was a town, the concept became a state. Further institutionalizing the dream’s death was ‘94 prop 187, the “we don’t want any of them around here” initiative. It specified that immigrants had no civil rights and were no longer needed in California. The new barker was a Pete Wilson crony, Ward Connerly, who was just getting his pitch warmed up.
California was in recession in the early nineties. Good governors from NY to FL to TX were endangered by a mid-term featuring a choice between a bad contract and none. A car-salesman governor (also former mayor of a La Jolla suburb) was not replaced in California. Wilson inexplicably won a Senate contest in ‘82, rode incumbency in ‘88, then was told to keep Dianne Feinstein out of Sacramento in 1990. Any sensible voter would have turned him loose in ‘94. Wilson really, really wanted to become the New Reagan, so he managed to hoodwink the electorate into believing immigrants, rather than the Jarvis legacy, were responsible for what the liberal democrats (then the usual suspects) must have caused. There was also a little tech bubble. Some of the silicon implants ruptured.
In the big states, three out of four electoral outcomes did not serve the people’s long-term interest. Only Walkin’ Lawton held off Jeb’s challenge. Elsewhere, a number of catastrophes held gubernatorial balls. Housing prices were not traded much on Wall Street in those days. They had Long Term things to consider.
Faces changed in the House and Senate in 1994. Bad ideas were not muzzled as quickly by the Republican revolution. In fact, the reaction seemed to spawn them. Friedrich Hayek became a founding father, with Milton Friedman interpreting his musings to the bemused. Every agency got a new name. So did routine legislation. Il fascisti were in the driver’s seat, and not even Bill Clinton’s left-handed pen were enough to slow them.
Enter our California Higher Ed board member. Ward conned Californians into considering another Wilson vehicle, 209. It said equal opportunity existed and there could be no federal oversight in the land of the nightmare. The cockiness was designed to turn California red, and boost Wilson into the Oval Office.
A renowned Bay Area thinker and activist could not stand the prospect, so he decided not to stay for what he knew would be worse than the Berkeley bloodbath. The “public” in public service. public works, public interest was openly up for bid.
Spring ‘95 and the Mezvinsky lesson learned, the positioning to oppose the Oval Occupant was on. Housing prices were climbing, climbing, climbing. Pachyderm otologists listened for the sacred wisdom of their founders, oozing from the golden throats assembled, eager to pose as the New Cincinnatus. Two previous combatants were the early favorites, then the government shut down. It just stopped functioning except for essential services. Government workers were laid off. Public safety had been auctioned as well. Fifteen years earlier, the controllers had tried to talk a wild pilot down, now a unitary legislative branch was showing its teeth. Housing was not high on the priority list.
Prop 209 was a ruse to put Pete Wilson in a place he did not deserve. He did not deserve to be in Sacramento. The ruse worked but its intent failed. Opportunity zone quarterback Jack Kemp made the cut. The ticket did not deliver.
Do you want to buy a house? The financial service industry, replete with banksters that made the S & L looters look small-time, had purchased a controlling option in one, the people’s house.
All they had to do to complete the acquisition was get rid of the pen in Bill Clinton’s left hand. Unable to find a way to beat him fair, they smeared him. We all knew that St. Bill has an eye for talent, but nobody deserves what he got. The national press corps fled the “Pope and Fidel Show,” to examine the DNA while tsk tsk-ing their tabloid values.
The roaring twenties and the steady nineties were the acid tests for Keynesianism. The ‘29 collapse was remedied by legislative oversight of banks and the firewall, the Glass-Steagall Act, separated investment banks (brokerage houses) from insurers and community banks. Oversight continued until McCain and his gang tried to keep the regulators off of Charles Keating. To be fair, Michael Dukakis found out from his running mate that the RTC might not be a winning issue for the Boston-Austin axis.
As Treasury Secretary, Lloyd Bentsen gave up the Democratic Senate seat in Texas. Lloyd had soundly trumped Bush the elected in a 1970 Senate contest and had sought the Oval Office in 1976. He knew he was trading away a vote that would not soon be recaptured. Second at Treasury was Robert Rubin (D-WS). He was a shrewd trader too. He knew that fabulous government salary was not permanent, yet he protected the currency. He also befriended a ne’er do well named Sanford Weill. Sandy had a South Dakota bank and he needed relief from “them darned revenooers.” So he found a loophole big enough to drive a market crash through and Robert Rubin sent him a resume. It was just one special case.
Everybody with a bank wanted the same deal so Al D’Amato and Thomas Bliley and a conscientious Iowa Republican named Jim Leach wrote the disabling legislation. Like the previous incarnation’s Kemp-Roth, the legislation acquired co-sponsors who retitled it. The firewalls were dismantled in midst of a classic Georgia feint, the mushmouth drawl of “ending depression-era legislation,” while returning to the old deal. In the old deal, Mr. Ponzi was the founding father.
For seventy years, Glass-Steagall worked. New Reagan cut the regulators’ budgets but they never cried uncle, even when McCain came to represent good time Charlie Keating. Now the regulation was merely derivative. Mergers and purgers came faster than you could chase down a chemical manufacturer’s hangover. Insured deposits backed Wall Street bets. All bets were taken.
Product was needed, any old opiate for the masses would do. Tranches were the product of choice, slices of mortgage-backed debt obligations. Like Icarus, they did not know their limits.
Who insures the pensions, other retirement funds, money-market accounts and neighborhood banks that were lured by this rent-to-own scheme? You do. Who will benefit from their sale? Not you.
So there is an election in the Pacific Time Zone, now in late morning as this session is concluded. One of the two major tickets has a candidate from one of the five Pacific states. It is not clear if the choice was more Kemp or Quayle, but such Wassilliness doesn’t play in the lower 48.
There was a debate in Nashville last night between one presidential candidate and the best Republican candidate of 2000.
We will see one more. By then, the Europeans and ANZUS-Seato will have bailed us out, or bailed out themselves. With only one parachute on a disabled plane, Europe and Asia will argue their merits and worth while the US straps on the chute, jumps out of the plane, and yells, “let’s vote on it.”
It’s the American way.
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