Your Sunday Required Reading
Today's required reading is actually from last Sunday, but I've been traveling and catching up this week and am thus a bit late to comment on it. It comes from Andrew Bacevich, in last Sunday's Washington Post. The more I hear him speak and read his books and columns, the more I admire his thinking on the challenges we face as a nation and the pitfalls in the way we have confronted them to date.
The title of the column says it all, "He Told Us to Go Shopping. Now the Bill Is Due." Well, almost all. Here's a key excerpt:
From September 2001 until September 2008, this [oddly business-as-usual] approach allowed Bush to enjoy nearly unfettered freedom of action. To fund the war on terror, Congress gave the administration all the money it wanted. Huge bipartisan majorities appropriated hundreds of billions of dollars, producing massive federal deficits and pushing the national debt from roughly $6 trillion in 2001 to just shy of $10 trillion today. Even many liberal Democrats who decried the war routinely voted to approve this spending, as did conservative Republicans who still trumpeted their principled commitment to fiscal responsibility and balanced budgets.
Bush seems to have calculated -- cynically but correctly -- that prolonging the credit-fueled consumer binge could help keep complaints about his performance as commander in chief from becoming more than a nuisance. Members of Congress calculated -- again correctly -- that their constituents were looking to Capitol Hill for largesse, not lessons in austerity. In this sense, recklessness on Main Street, on Wall Street and at both ends of Pennsylvania Avenue proved mutually reinforcing.
This excerpt captures what I was trying to express in my Marketplace commentary last week. We have used debt in every place we could to avoid having to make tough choices. That strategy can work for years, particularly if everyone is in on the con. But it eventually fails when the bills come due. We will find our way out of this mess when we learn that we cannot systematically get something for nothing and should not be organizing our society around that flawed premise. Bacevich's writing is the clearest voice on that issue I have encountered. Read the whole thing.
"Huge bipartisan majorities"
"Huge bipartisan majorities" conveniently obscures the reality. These actions were driven by Republicans. The war and the credit hyped-economy (not to mention relaxation of oversight)were part of the Republican agenda.
The Democrats lacked the courage or political support to stop the Republican agenda, but make no mistake or obfuscation -- this all was driven as part of the Republican agenda.
Another factor in the complicity
Many democrats were much more afraid of being labeled a "traitor" or someone who "hates our troops", "Leaving them to die in the desert", etc., than they were thinking, "let's keep spending to bolster the economy." The best thing about this election cycle is that the "traitor" label is not working with a majority of voters anymore...
Let the consumer decide?
Bush response to 9-11 was to tell consumers to go shopping. Rather than assessing the economic needs for alternative energy and conservation and making investments or policies favoring investments in those areas, Bush told Americans to go shopping. However, shoppers can only purchase what the market delivers and shoppers bought big gas guzzlers until high gas prices took away all their new car money. Now GM, Ford and Chrysler have tanked because the consumer has decided enough is enough.
Bush and Greenspan actively encouraged people to take on more mortgage debt than they could afford. Large numbers of Americans are in favor of the "Drill Baby Drill" slogan having been misled into thinking that increases in production can fill all the demand for oil.
We refuse to invest in health care for everyone, but willingly pony up bailouts for emergency care to those who did not take care of the health when costs would be less. We are hearing, let the consumer decide. That path is about to shut down as credit tightens and defaults become more common. It is necessary as a country to prioritize areas for investments and set policies that will provide consumers good options.
For the past 8 years, our government has promoted an unsustainable economy based on consumer debt. That economy has just crashed. It is time for a more sustainable approach.
Ridiculous
Because Bush advised people to visit Disney World, people speculated in real estate?
The housing boom can be traced to a really amateurish Boston Fed study, in the early 90s, purporting to show racial discrimination by mortgage lenders. The study was shortly demolished, as being filled with errors, but that didn't stop the (mostly Democrat) politicians from using it to badger lenders to make loans to people they wouldn't otherwise have considered.
The resulting real estate boom/bust would have taken place regardless of what Bush chose to do in response to 9-11. It would have happened even if there had been no 9-11 attacks.
Apr 5, 2004 Alan Greenspan's
Apr 5, 2004
Alan Greenspan's Call to ARMs Could Put You in Great Financial Danger
By Suze Orman
Greenspan's Gambit: When Federal Reserve Chairman Alan Greenspan speaks, the entire financial world listens. His opinions, policies, and cryptic hints are dissected all over the world, and have an immediate and often dramatic impact on the course of the monetary markets. If Warren Buffett is the Oracle of Omaha, Greenspan is the Wizard of Washington.
That's why I was so shocked a few weeks ago when Chairman Greenspan let loose with a real doozy: he asserted that homeowners could save a ton of money if they took out an adjustable rate mortgage instead of a fixed rate mortgage. For his evidence, he pointed to what would have happened if you had taken out an ARM 10 years ago. Back in 1994, fixed rate mortgages were around 8 percent and adjustables were in the 6 percent range. Since then, rates have been on a strong downward trend: a 30-year fixed rate currently carries a 5.5 interest rate, while an ARM can be 4 percent or lower. So if you took out that adjustable 10 years ago, every time the ARM rate came up for an adjustment - back then you had your ARM rates reset every 12 months based on the then current rate - chances were slim that your payment would increase, since rates were falling, not climbing.
Now I am a big fan of history, but I cannot believe Chairman Greenspan used the past to make his argument. All due respect, Mr. Chairman, but as the investing maxim goes, "Past performance is no indication of future performance." And my friends, when it comes to your mortgage - typically the biggest investment of your life! - it's the future path of interest rates that matters, not the past.
And let's be very clear. Rates right now are at historical lows. There is just one way for rates to move: up. Plain and simple. They could stay where they are for a few months, or even a year or two. But at some point rates will go up. It's just the natural cycle. We are near the end of the downward cycle. It's just a matter of time before the up cycle kicks in. If you are holding an ARM and rates start rising, you are going to see your ARM payments head north, too. And that could make a mess of your financial house.
So before you go off and follow the Wizard's advice, let's make sure you understand the risks of taking out an ARM and how to smartly navigate the world of mortgages.
housing
about twelve years ago I was nosing around the FMHA web site and found a report that said over 50% of HUD homes in the midwest; Ill and IN in particular were in default. I knew we were about to hit the fan way back then. Was my assment wrong? Why didn't anyone see it comming?
Suze's the doozy
That's some really bad analysis. She needs to quantify how much the borrower saved--and invested--over the ten years of lower interest rates against how much the eventual higher rates (on a lower principal) would cost.