Two original thoughts

As the title says, I have two original thoughts on this. One will come as no surprise to people who read this blog, the other, I think is new.

#1: Banks and the Housing Bubble…

So, the biggest problem underlying everything else right now is the bursting housing bubble. We’ve got way too much housing built in this country right now, 18 million vacant units according to the latest census figures.

A lot of that housing was built as speculative investment. Now, what I wonder is: why were *any* banks lending money to homes that were built as speculative investments?

We keep hearing that people are now upside-down in their loans (ie. they bought the house for too high of a price, the value of the home has dropped, and now they owe more money than they could likely sell the house for).

How did they get upside-down? Prices were severely inflated. Now, what I’d like to know is why the banks were issuing loans on inflated housing stock? Why aren’t the banks scrutinizing the fundamental supply and demand, saying “that’s too high of a price” and not offering the loan?

Really, people get worried about speculation in the markets, but most speculation has at least some debt component, and that’s why we’re in this mess! The banks are failing because they gave money to people who put it on things that were over-priced, and they couldn’t make the payments in the end.

Ok, so that’s the original thought. I don’t know yet what I would do to try and fix that specific problem, but I can’t help but think that there needs to be some accountability by banks as to the real value of a home before a loan is issued for it. More specifically, I have a hunch that banks should not be issuing loans that exceed the construction price of a home, because that’s about as much as they’re likely to get for it if they have to sell in foreclosure.

Without that massive flow of debt, housing prices wouldn’t have skyrocketted, affordable housing wouldn’t be such a phenomenal concern for people, and we probably would’t be in this mess.

When a business asks for a loan the bank scrutinizes everything: income, expenses, payroll, business plan, commodity prices… all of it gets a careful look. Why isn’t the same process applied for home loans?

#2: The problem is debt. There’s one way we could all live in a lot less debt… but nobody’s talking about it.

Overall this entire problem boils down to this: our entire economy is over-extended. Badly. We have way too much personal debt, too much business debt, and way, way, way too much government debt.

Looking across those lines, business debt is by far the smallest problem in our current economy. In fact, the biggest challenge we’re facing is that the failures in personal debt are drying up credit, which is hurting businesses that depend on a responsibly managed flow of credit to stabilize their operations.

Now the government is probably going to end up buying the vast majority of this shaky personal debt, add it to the already gargantuan national debt, and try to figure out a way to pay for it. Or, more realistically, continue to defer that incomprehensibly huge problem for our grandchildren to solve.

The problem with houses: people paid too much. People paid more than they could afford. The bigger problem: the houses aren’t worth what the buyer paid for, and if the price goes down everyone is screwed.

What other asset are 90% of Americans upside down on? Their cars.

Cars are the most rapidly depreciating asset everyone owns. Nobody would buy a car for financial reasons. Nobody with a brain buys a new car. It’s financial stupidity. You’re upside-down in it the moment you drive it off the lot, and the value will absolutely always 100% of the time GO DOWN.

Not only does the value of the asset drop precipitously, the cost of ownership is very high, and getting higher. Gas is just a fraction of the cost. Interest on the note is a huge factor, and maintenance becomes a bigger issue the older a car gets. If you’re not paying tons of interest because the car is finally nearing the end of its note, it’s likely that you’re starting to shell out notable ammounts of money each year maintaining the car.

Cars suck money straight out of the economy. On a personal level they do it by draining people’s wealth. On a national level they do it because most of our fuel is imported, and because increasingly the cars themselves are imported. Even “American” cars aren’t made here anymore. They’re made in Mexico.

What we need in this country, right now, more than anything else in the world, is a total lifestyle shift. We need to quit basing our economic propsperity and personal worth on the size of our McMansion. We need to live in compact communities so that schools, parks, and utilities can be more efficiently provided. We need to live in compact communities with walkable centers, so that transit service can be practical. We need to think of a car as a piece of machinery useful for certain types of household work (shopping trips, especially for groceries, being the biggest). And we need to use NEW and BETTER systems for our other daily travel.

This lifestyle is unsustainable, and the 10% drop in the markets that has happened in the last two days is only the most recent pile of evidence for that.