Thursday, September 25, 2008

A house of cards

What a mess we’re in. As Chris Dodd put it, we’ve entered an era of privatized profit and socialized debt.

Greed is at the center of it all, greed and lack of meaningful oversight, not just on the part of government regulators but also on the part of corporate elders who should have known better, or should have cared more.

Back in 1984, Marilyn and I bought out first house at a cost of $87,500. It was a definite fixer, an older home with an in-law apartment that had been added downstairs. The couple who owned it were divorcing. She lived upstairs, he was consigned to the dungeon, which he trashed. Termites had built themselves a magical kingdom in the walls. The fireplace was leaning away from the house. Roots from a giant willow tree routinely plugged up the sewer lines. It wasn’t i
n the best neighborhood. But it was just about the last house in Berkeley, CA for under $100,000 and we were lucky to get it, with 20% down and a 13.25%, 30-year fixed loan.

Jumping through hoops to get financing
was expected, and made some sense. The lender needed to know that we could afford to pay the mortgage.

That was back in the good old days, when homes almost everywhere in the country were in reach of people with average incomes. I took a look at, just to see how our first home has fared. Riding a real estate boomlet, we sold it in 1989 for $200,000, a record for the block. The boom steadied and the people who bought it from us sold it in 1994 for $235,000.

They’re probably kicking themselves. By 2003, it was worth around $580,000. In mid-05 the old dump reached its peak value, $818,000. Today, it’s $661,500 and heading south.

How can people pay for such huge mortgages? Smoke, mirrors, and lemming-like behavior. Things like 100% financing, or 80/20 financing, interest-only loans, ARMs fr
om Hell, HELOCs, refinancing, issuing loans to the insolvent, paying routine bills with credit cards, which were passed out like candy.

As Suze Orman has repeatedly pointed out, financial management skills should be a required course in high school. Just because someone offers you something you can't afford doesn't mean you have to take it.

This madness started in California, then spread to Nevada, Arizona, Florida and a lot of other places that were considered desirable. I have been to all these places, have lived in two of them, and let me say here that none of them are THAT nice.

Anyone with common sense could see that this could not continue. Our Berkeley hovel more than tripled in value from 1994 to 2005. Were they thinking it would more than triple again, be worth $2.5 million in another ten or eleven years? And who did they thi
nk (in their right mind anyway) would buy it at that price?

That we are now in a financial crisis, built on bad mortages, should rea
lly come as a surprise to no one. It was almost like everyone, from Wall Street to Main Street, was doing financial crack. Everyone ran on overdrive, pocketing money that wasn’t there.

Now this binge has to be paid for, and we’re all going to suffer. Like most Americans, my visceral reaction to the idea of a $700 billion bailout involves a fair amount of disgust. I don’t like rewarding the avaricious. Especially when this money could be better spent on things like health care, cancer research, and so on.

But I am told that we have no choice. That’s probably the case. We have built ourselves an enormous house of cards, not just in real estate but in credit and investm
ents, things that drive our economy and provide financial security and opportunity. It's a monument to folly that we will be paying for, one way or the other, for a long time to come.


Anonymous said...

I am sparing my time and my temper by not reading this post. I know that David lamblasts Republicans, even though the Democrats in Congress refused to deal with the mortgage mess years ago. The liberal crowd wants society to give free houses to minorities. Let the stupid people who work hard and save, pay for these free houses!

If David were alive in 1860 (maybe he was, come to think of it), he'd be whining about how little Lincoln knew about foreign affairs (why, he can't name the second undersecretary for undergarments in Serbia!!!). He'd be pulling for Stephen Douglas, someone who was willing to let slavery continue forever (consistent with the fact that the KKK was largely Democrats, and Robert Byrd, current Senator, used to be a card-carrying member of the KKK. 'That's OK!' David would say...he's a Democrat! That excuses everything!

Why do you have to run off at the mouth on this clatter trap? Why don't you stick to the reason we all come here, i.e. CLL????????

Anonymous said...

I agree! You write so well about CLL and related issues and I wish you would stick to those topics even though i realize that this is "your" blog, not ours.

David Arenson said...

That first comment is really odd. I wasn't lambasting anyone in particular, just everyone in general. No mention of Bush, Republicans, Democrats, etc. No mention of free houses for anyone -- in fact I was blaming homebuyers for taking out mortgages they couldn't afford. The comment is just off the wall if you actually bother to read my post.

As to writing solely about CLL, I realize that is the primary purpose of the blog. By and large I stick to it. Occasionally I write about other things, some innocuous, some controversial. There is a reason the subtitle of the blog is "Living with chronic lymphocytic leukemia, and everything else."

The point here is that we are not only our CLL, not only our disease, but also people with other interests. I think it is perfectly OK -- even healthy -- for CLLers to forget about CLL for awhile. So the fact that I go off the reservation will sometimes comes with the territory here. Sometimes for our mental health we CLLers need to get off the reservation.

Not everything I write, even about CLL, will be of interest to everyone. But I'm interested enough to do it, so I'll keep on keeping on.

Anonymous said...

"The liberal crowd wants society to give free houses to minorities. Let the stupid people who work hard and save, pay for these free houses!"

"clatter trap"

Anonymity suits you just fine, whoever you are, because you embarrass yourself whenever you post here. The depth of your ignorance is truly awe-inspiring.


Andy said...

Happy Birthday David.

Best wishes from Andysnat.


I hate those cowardly anonymous commenters

David Arenson said...

Thank you Denny, and thank you Andy!

Anonymous said...

I agree that I check this blog several times a week because David writes interesting posts on CLL.

I find the political stuff to be terribly not interesting.

I would suggest starting a left-wing blog, or posting on Daily Kooks or something, when you want to post on divisive topics.

We are all threatened with this terrible disease. The last thing we really need is to be all riled up.

Anonymous said...

First, I happy belated birthday here on your blog. You made it to another one! Secondly, I so agree with your sentiments about everyone from Wallstreet to Mainstreet being on crack. Who ever said that just because you are born in the good ole USA that you can put zero down for a home mortgage and then finance at 100% interest only? Who ever said that just becaues you are born in the good Old USA that you should all be driving $70,000 cars?
Let's get back to the basics. Work hard, save up that 20% down payment for your home and start looking at used cars driven by grandmother's. All of us need to take our medicine. But in particular, the Bush administration. And before you staunch Republicans answer anonymously---answer this question. "Are you better off financially than you were 8 years ago?" If you answer yes, then I have just uncovered one of the idiots who have been giving out bad loans.

Jenny Lou Park (full name)

Pat said...

I visit CLL Diary for lots of reasons not the least of which is that I value your straight thinking and writing. I appreciate both whatever the topic of your day.

So here we are 8 days since you wrote this post; the bailout is now real. I was opposed; I am opposed; I went on record by writing letters and emails.

If the difference between a pit bull and a hockey mom is lipstick, then the difference between a democratic economy and socialist economy is a 700 billion dollar government bailout. When the government purchases toxic assets that private investors won't touch, that is one great move towards a socialist economy and national indebtedness for eons.....
Thanks David for using the run-away valuation of your first home as a case in point.

Anonymous said...

Darn right, Pat. Once a week I have lunch with a group of writers, who vary from liberal to libertarian. They ALL favor this "bailout." I was shocked. I disagreed with them. One said, "If we don't do something, it could all collapse." I said, "Fine, let this sick capitalistic materialistic system of ours collapse. It will be a healthy purgative. Maybe the system that gets built in its place would be healthier." The question now is what will happen when/if it all collapses after we "the people" have had another 700 million stolen from us.



David Arenson said...

And what's happening now is that bad behavior is being rewarded -- the carrot in capitalism is profit and the stick is loss, which is what is supposed to be the self-correcting mechanism for stupid decisions and foolish choices. Now failure is impossible, at least for those at the top who make poor decisions (as opposed to those who invested in their enterprises). So there is no punishment for failure and, ergo, little reward for good judgment. We have left capitalism and entered some sort of financial Twilight Zone.