Mr Greenspan's delusions

Thursday, 2:13 pm

By Kate

Mar

22

2007

I just read James Kunstler’s weekly post, which began with the following blurb:

From the Florida Sun-Sentinel:

BOCA RATON – Retired Federal Reserve Chairman Alan Greenspan, speaking at a Futures Industry Association annual conference here on Thursday, said the problems of the subprime mortgage market had more to do with home prices than easy credit.

"If we could wave a wand and housing prices go up 10 percent, the subprime mortgage problem would disappear,” he said.

Kunstler’s reponse to that statement was less than polite. And I’d agree. This is about the stupidest statement I think I’ve ever heard come out of the mouth of a ‘well-respected’ economist. It’s what I’d call not dealing well with reality. Because, Mr. Greenspan, there are no such things as magic wands.

The reality is...housing prices are going down and adjustable rate sub-prime mortgages are now adjusting up. Way up. People are getting screwed left and right. And losing their homes while still retaining their housing debt. I’m not defending the poor choices of those getting screwed, but for a supposedly bright man to make that kind of stunningly stupid statement, it’s breath taking.

As my dad used to say, “If wishes were horses, beggars would ride.”

Yes, Mr. Greenspan, the problem has very much to do with easy credit. If lending institutions were not in massive greed mode, they would have continued the same sensible lending practices that were drummed into my head when I was a banker. Good times, they come and go. Loans stick around. When lending to someone, the banks USED TO take worst case scenarios into account before doling out the dough. Some still do and those are the ones who will still be here when the dust settles.

It’s easy to blame the consumers who bought into the whole sub-prime mortgage scheme. But the lending institutions do have the responsibility for protecting their long term interests as well. A few million very large mortgages going belly up in a crashing housing market are not in anyone’s best interests. Markets go up and they go down. When making a loan, the lender is responsible for making sure that the borrower is not already over-extended while the good times are rolling. No matter how tempting it is to cash in on the good times. That’s lending responsibility. Period.

I was fortunate to be the daughter of two people who came of age during the Great Depression. It marked them for life, but in a good way. It made them cautious and made financial security very, very important to them. My Mom and Dad lived by a few simple rules: Live beneath your means. Save for a rainy day. If you don’t have the money, don’t spend it. When you buy a house, put enough money down on it so that the mortgage will never be higher than the value of the house. Not even in the worst of times. If you can’t do that, you have no business buying a house. When you get a mortgage, make sure the payment will never be more than 25% of your current monthly income. Make sure that you have enough saved to cover the mortgage payment for a few months if times get tough. And always pay extra on it every month.

My parents were married in 1933 and they didn’t own their first house until 1946. They didn’t enjoy renting all those years, but that’s what they could afford, following their very sensible rules. Their first mortgage was for half the selling price of the house. It wasn’t easy. They scrimped and saved. They did without many nice things while scrimping and saving. Worked out well for them and their contemporaries of like mind, though, I must say.

Those are basic rules that make a lot of sense. They are rules that have held me in good stead, as well. They are Rules To Live By. Reputable lending institutions know it, too.

The bottom line is...no matter how desperately you want it, don’t buy it if you can’t afford it. It’s hard when you want a house so badly. But it’s just plain self-preservation to follow those rules. Do not listen to lenders who offer you the moon and the stars on a silver platter. They are lying through their rotten teeth. And so is Mr. Greenspan.