Busted: Bankers and The Global Economy

July 28, 2008

Banking & Lending Standards Threaten Economy

Pollster financial consulting firm Deloitte LLP has discovered that two out of three Americans have finally decided that getting a mortgage is more difficult. This fact creates quite a conundrum for financial authorities that want easy answers. Henry Paulson, U.S. Treasury Secretary correctly believes that without mortgages, there is essentially not a housing market. Paulson wants to jump start the ailing economy through the devastated U.S. housing market. That is why Paulson is so adamant about protecting mortgage cousins, Fannie Mae and Freddie Mac at all costs. They currently guarantee roughly 80% of U.S. mortgages and secure the future in the eyes of conventional wisdom.

In fact, without Fannie and Freddie, the U.S. government has little chance at stopping the bleeding in the mortgage and financial markets unless authorities were to reinvent the wheel. Unfortunately for the economy, bankers are no longer free-wheeling loans, making it tougher all the way around for good customers to buy a home. Why? Bankers are playing by the rules or “stricter standards”, which threatens to upend the entire economic recovery plan by the Treasury and Federal Reserve.

Now that the party is over, bankers are typically demanding a 20% down payment and have been slowly ratcheting up interest rates to customers to the tune of half-a-percent in just the last week in many cases. A marvelous credit score and a well-established proved income are now required, unlike the heady days of the accelerating mortgage boom. The situation has arguably returned to days of old, before the bankers went wild and crazy with lending standards.

Where the problem really lies in the entire process is the expectations of the bankers, institutions and government moneychangers. In the days of good old grandpa, simple interest was the banking standard. With the advent of compound interest, the cost of buying a house with compound interest can more than quadruple the cost of a home over time. Bankers have grown accustomed to this kind of money, as well as nearly of decade of creative financing measures and other usury that they are loathe to give up.

The entire economy has become dependent on mortgages, as well as the idea of financing everything. As financing became unaffordable, as is often the case with automobiles, leasing became the tour de force to keep the market going. As a result, almost everyone is in hock to their eyeballs and fully dependent on financing because wages have failed to keep pace with the expense of living, including mortgages.

The reality, according to Henry Paulson’s recent expression, is that finding a way to release more credit to the U.S. citizen and consumer is the only way out. The finance junkie U.S. economy has finally collapsed and hit the pavement in a nearly comatose state. The common wisdom of Henry Paulson dictates that best answer is more banking and finance drugs for all to jump start the entire economy. It’s the heady stuff of dreams if you’re an addict.

While Paulson’s solution is a reasonable effort for correcting a portion of the loan problems of the recent foreclosure run in the economy, his solution is not the answer for an ailing economy. For years, mortgages and financing have supported rising prices and profits for many. Higher prices for capital goods or real estate can no longer be supported through an artificial financial means like financing, especially at the rates that bankers and credit companies expect to make. The government and business has become entirely reliant on the largesse of the consumer. Unfortunately, the consumer is simply tapped out.

The government and bankers find themselves in an untenable situation. They are looking for a fast way out of their fiscal misery and cannot find one aside from using more of the hard core banking and finance techniques of the past coupled with more borrowing, ultimately from the Federal Reserve. The people simply aren’t financially ready to return old ways. The customers that are still viable are still paying plenty for having the luxury of borrowing money from banker types. Those customers that aren’t viable aren’t going to get a free ride except to the streets. The only beauty of the situation is the corrupt bankers may actually be on the hook in many cases. The harm they have done cannot be truly calculated. The stupidity of authorities that want a quick solution using the same insanity is almost as incalculable. ~ E. Manning

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