Note 1: Later today (Monday), I'll be writing the first of several pieces about similarities between the current economic downturn and the 1930s. If your parents or grandparents were admirers of Franklin D. Roosevelt, I regret to inform you that most of the things they told you about FDR were false. In fact, he probably did more harm than good. Scroll down to the bottom to see an example. I hope you'll return late this afternoon or this evening to see what I have to say.
[Note 2: Beginning Tuesday, I'll write about some major differences between Gov. Sarah H. Palin and Barack H. Obama in regard to the crisis. Frankly, Obama is surrounded by people like his Treasury Secretary Geithner and advisers like GE's Jeffrey Immelt, who played major roles in causing the financial meltdown. Immelt's GE Capital has $16 billion in bad or questionable loans -- and he's the one whose advice is going to get us back to financial stability? Sarah Palin has no such human baggage around her. She also has a basic understanding of the American economy that Obama clearly doesn't possess.] Scroll down to the bottom for comments about "Conservatives Who Don't Like Sarah Palin"
On the political front, the short -- but incomplete -- answer to who caused the problem is: Bill Clinton, Barney Frank, Chris Dodd, and various other Democrats, as well as the self-aggrandizing people at Fannie Mae and Freddie Mac. All of the above insisted that lenders offer loans to people who now can't afford them.
The longer answer is that the crisis traces back to all those people -- in the public, in the government, and in the urban caverns of Wall Street -- who engaged in, or encouraged, very risky borrowing. One such individual is a man named Tim Geithner. In the run-up to the crisis, he headed the New York branch of the Federal Reserve. He strove to keep interest rates at extremely low levels, which of course encouraged people -- from Main Street individuals to Wall Street speculators -- to go into heavy debt. Of course, low interest levels are fine, but only as long as borrowers don't over-use them.
There used to be an old nonsense game that college guys used to play on spring break drives to Florida. Here's one question: "On the stupidity scale, what's dumber -- a doorknob or a doorbell?" It turns out that the correct answer to that question is: Tim Geithner, the Treasury Secretary who now heads the IRS but didn't pay his taxes.
Let's be clear: It's certainly okay to borrow modest amounts of money, as long as the recipient has a reasonable chance of paying back the loan. However, if the person doing the borrowing can't survive an economic downturn, even a severe one, big loans are a bad idea.
As people try to put their arms around our dismal economic situation, they should start reading an important financial web site: MotleyFool.com. The writers there avoid financial jargon and "WallStreetspeak."
One MotleyFool piece I urge everyone to read is Matt Koppenheffer's provocatively titled essay: "Who Should Go to Jail?" You can find it at the following link: http://www.fool.com/investing/dividends-income/2009/03/06/who-should-go-to-jail.aspx?source=iflfollnk0000001
As you read the following material from Koppenheffer's piece, think of a line from an old song: "Those were the days my friend; we thought they'd never end." Of course, everything comes to an end. Relatedly, as Sir Isaac Newton taught the world long ago, "What goes up must (eventually) come down." That's as true of economic rises and falls as it is of roller-coaster rides.
But who should we punish for economic malfeasance? In Koppenheffer's words, "As the nation’s collective temper flares, we’re all beginning to consider tossing the people responsible for today's financial mess in the slammer and throwing away -- no, melting -- the key. And with our economy in disarray and major banks like Citigroup (NYSE: C) and Bank of America (NYSE: BAC) potentially on the brink of collapse, it's tough to fight that sentiment. . . . .
"Sometimes it just doesn't matter what your IQ is, what school you went to, or what position you hold -- idiocy can creep up and slide into bed with you. Even more irresistible is an idiocy that is supported by seemingly everyone around you. 'What? Home prices never go down?' That sounds fishy, but everyone else seems to think it's true.
"Remember when your mother asked whether you'd jump off a bridge if everyone else did it? Some people, even smart ones, have been jumping off that bridge their entire lives."
Koppenheffer's point is that, in financial matters, there are some crooks -- like Bernie Madoff -- and many fools, a group that includes nearly all of us (including me). As a nation, we jumped off bridges -- by making risky investments and buying houses that are now worth less than we ever imagined.
Can Obama bail us out? Surely you jest. He isn't going to hand over his own fortune to the American people. Remember, he's living rent free in a $200 million home. The only one who can bail us out is . . . us, the taxpayers, and, of course, the foreign lenders from whom we're borrowing trillions. Somehow it doesn't seem likely that a problem generated by over-borrowing is going to be solved by . . . massive borrowing.
But why oh why did we buy a $500,000 house when we could only afford one for $400,000 or less? We did so because the "smart people" (now known as the "dumb people") told us it was a good investment. After all, in a few years wouldn't our half-million house be worth $600,000 or $700,000?
Right now, however, our $500,000 home may be worth $390,000 -- or less. The notion that home prices would not -- could not -- go down turned out to be a foolish notion. The "housing market" ended up pricing itself out of the market.
On that $500,000 home, suppose you put down $100,000 -- one-fifth of the price. Then, suppose, you took out a home equity loan (perhaps to pay off credit card debt) of $60,000. In that case, you owe a total of $460,000 on a home that's worth $390,000 (minus the real estate commission of more than $20,000). You are out a ton of money.With economics, the word "never" (as in, "House prices will never go down") doesn't apply. It doesn't apply if you're Citigroup, or Merrill-Lynch, or AIG.
It also doesn't apply if you're you, sitting nervously in a home that you can no longer afford. You're up the creek, and your creditors are holding the "paddle."
(Note: I'll be writing the rest of the week on the economy, with emphasis on what the Obama [Administration should do -- but probably won't.]
More from MotleyFool.com: "My guess is that a heck of a lot of the problems that we're facing today were born of people doing dumb things. Building a financial model that assumes housing prices will never fall? Dumb. Buying a $500,000 house with 2% down and a three-year interest-only loan? Dumb. Giving a mortgage loan to somebody putting nothing down? Yup, that's dumb too."