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 in 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 zillow.com, 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 from 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 think (in their right mind anyway) would buy it at that price?

That we are now in a financial crisis, built on bad mortages, should really 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 investments, 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.