I turned 60 years old on January 1st. When I was a kid someone aged 60 was a relic. But I don't see myself that way--now. When I was a kid I did respect older people. But I don't know if young people respect older people much these days. The youth culture (defined as anyone under age 30)has pretty much taken over the way this country functions. And maybe that's part of the problem with the economy as a whole and the real estate market in this little blog.
Age and experience help teach us how to do things correctly so that we do not have to correct costly mistakes. Here is an example: I used to do commercial loan workouts. I was the muscle guy in the back office that delinquent borrowers had to deal with when they defaulted on their loans. Over the years I learned the stages of borrower default and the gimmicks they come up with to try to avoid litigation, repossession, foreclosure, or bankruptcy. Interestingly I also learned about lender misconduct in making some loans or in trying to hide a delinquency from bank management in the hope that the borrower would somehow turn his loan around or that the lender would find a new position elsewhere before the bad loan was discovered. Some very ingenious defense attorneys successfully defend cases on the defense that "the bank should have never loaned me that much money because they knew I couldn't pay it back." And that is true in more cases than you could imagine.
Banks reward young lenders that "produce" by giving fancy job titles, good salaries, and bonuses based on loan production. The more one produces, the more one makes. It's all about the numbers and the perception. Non banks like Countrywide and American Home Mortgage book loans (mortgages), repackage them and sell them to institutions like Chase, Bank of America, or Citicorp. As a lender (or underwriter) the more you produce, the more you make. Production rules.
So it is no surprise to me that we have another bank crisis on our hands. The downturn in the real estate market is now taking its toll on the some of the banks or quasi-banks such as Countrywide and American Home Mortgage. Today the Dow tumbled again on news after mortgage lender American Home Mortgage said it could no longer fund loans and was considering liquidating its assets. That reminds me of how the S&L meltdown started. What we had back then was a bunch of greedy banks doing risky deals to make a quick buck. When the U.S. economy hit the skids in the mid 1980s, the S&Ls risky investments collapsed. The problem was not that the S&Ls had lots of non-performing residential loans that went bad. Rather it was that the S&Ls risky investments tanked as the U.S. economy turned down.
I have talked to several people who have home loans from Countrywide that are in foreclosure or that are nearing foreclosure. They all report that Countrywide is consistently inconsistent and very difficult to deal with. Countrywide and American Home Mortgage are not the issue. But they may be the omen of worse things to come.
On July 27th President Bush stated "And so I want the American people to take a good look at this economy of ours. The world is strong -- the world economy is strong. I happen to believe one of the main reasons why is because we remain strong. And my pledge to the American people is we will keep your taxes low to make sure the economy continues to remain strong, and we'll be wise about how we spend your money in Washington, D.C." At the same time the National Association of Realtors was reporting dismal existing home resales and sluggish new home sales. Ten days ago the Dow was at 14,100. Today it sank to 13,200. He did not mention the "imbalance of trade" with the Chinese or how we are going to have to deal with it. He did not mention that we are eventually going to have to pay for the wars in Iraq and Afghanistan. And that repayment will come from taxes!
We went through all of this hoopla forty years ago. We were in a different war and had a different President, but the political jawboning was the same. The hawks said that if we left Vietnam that the communists would takeover all of Asia. It did not happen. The Vietnamese people reconciled after the U.S. left similar to the way the East and West Germans did after the East German government collapsed in 1989. Likewise, the U.S. military ran up a huge war debt that had to be repaid. A Cornell University study placed the overall U.S. cost of the Vietnam War at over $200 Billion. The Congressional Budget Office estimates the War in Iraq is currently costing $9 Billion per month. The numbers are so large that they lose meaning to normal people like me. But I understand enough to know that eventually the U.S. will have to raise taxes to pay the debt or that we will have to forgo something else (new roads, new schools, health care, social security reform, improvements to a failing infrastructure or some other worthy cause).
Thirty years ago (1978-79)there was a a major crisis of confidence in the dollar. U.S. interest rates were more than 20 percent in the early 1980s, leading to the deepest recession in the post war period. That was the time period when I was doing commercial loan workouts. I remember it well. But I wonder if the MBA schools teach about that time period.
I believe in the validity of the saying "those who do not learn from history are doomed to repeat it." I think the youth culture dismisses history as being irrelevant to the present. At the beginning of today's blog I said "Age and experience help teach us how to do things correctly so that we do not have to correct costly mistakes." I don't think the youth culture has time or inclination to consider the value of history.
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