In recent history, governments have nationalized banks when the pressures of internationalized financial markets and international competition have made it difficult for them to control and stabilize their finances and currency. During the last couple of decades, countries as different as Mexico, France, Sweden, and Japan carried out partial or more or less complete bank nationalizations to regain control of the financial situation.
In an attempt to overcome the present credit crisis, the U.S. government is using taxpayer’s money to bail out large corporations. The government has already swapped its sovereign guarantee for equity in Fannie Mae and Freddie Mac, the mortgage finance institutions, and American International Group, the insurance giant.
Sweden faced a similar crisis in the early 1990s – a banking system in crisis after the collapse of a housing bubble, an economy hemorrhaging jobs, and a market-oriented government struggling to stem the panic.
Sweden was able to overcome the crisis. How did they do it? Can the United States learn something from the Swedish crisis?
Financial deregulation in the 1980s fed a frenzy of real estate lending by Sweden’s banks, which did not worry enough about whether the value of their collateral might evaporate in tougher times. Property prices imploded. The bubble deflated fast in 1991 and 1992. In 1992, years of imprudent regulation and shortsighted macroeconomic policy left its banking system almost insolvent. The Swedish government not only rescued the banks and financial companies by taking over the bad debts, it successfully extracted equity from the stock holders before writing the rescue checks in an attempt to keep the banks and financial institutions on the hook while returning profits to taxpayers from the sale of distressed assets by granting warrants that turned the government into an owner. The government took a hands-on approach, pumping cash into the banks deemed to only have temporary problems and letting the ones believed to have no prospect of viability go under. Two banks were taken completely over by the state, which in turn offered a blanket guarantee for all creditors, but not for share holders.
Once the crisis was over, the Swedish government sold off nearly all of the nationalized bank investments, getting back most of the money that had been pumped in to rescue the banks.
The Swedish government took over insecure loans during the crisis worth around $9.9 billion of taxpayer money, but eventually got most of it back through dividends and later reselling the nationalized bank assets.
There were proposals in the United States that the government extract equity from the bank for the bailout they receive. But the proposals did not get any serious consideration.
By extracting equity from the banks and financial institutions for the bailout packages, the government could swing the public opinion in its favor. Using taxpayer’s money for bailing out large corporations without offering anything in return is not likely to find much public support. The bailout package appears to favor stock holders without much prospect of the tax payer’s money ever being reimbursed. If the banks survive, the stock holders’ holdings will still be there but the tax payers will have to foot the bill.
The Federal Reserve was created 95 years ago to prevent banking crises as an independent agency whose Washington-based governors are appointed by the president of the United States and confirmed by the Senate. Its officials usually steer clear of the most heated political debates in a bid to protect their freedom to make the tough decisions required to keep inflation under control. There’s a good reason for giving the Federal Reserve so much independence. Decisions about the stability of the financial system often require quick decisions in times of crisis.
Ever since the credit crisis started in August 2007, the Federal Reserve has been engaged in a few political actions involving tax payer risks: asking Congress to approve Treasury Secretary Hank Paulson’s $700 billion bailout plan, agreeing to lend $85 billion to American International Group, taking on $30 billion in illiquid Bear Stearns assets to facilitate its take over by J.P.Morgan Chase, and helping engineer the federal takeover of Freddie Mac and Fannie Mae, which could cost the Treasury over $200 billion.
The political role being played by the Federal Reserve is setting a dangerous precedent: unelected officials deciding, without congressional votes, which companies and industries should be aided by its nearly $1 trillion balance sheet and which should be left hanging. The Federal Reserve is committing so much taxpayer money on its own rather than having Congress or the executive branch commit it. Its new roles of overseeing Wall Street investment banks and the AIG loan portfolio, among them, may bring it into conflict with the job of managing monetary policy.
The Federal Reserve has been using government funds and its credibility in its attempts to end the credit crisis. This increasing political role of the Federal Reserve could put its hard won independence at risk. Its independence is crucial to setting the interest rates that guide the economy.
The Federal Reserve probably did not want to be seen in a political role, but it had no choice – charged with maintaining the stability of the financial system and the economy, it had little choice but to take aggressive action in the face of a potentially devastating crisis. It was watching a falling knife and had to grab it before it landed on somebody’s chest.
Any proposals to change the Federal Reserve’s role would face fierce opposition. Because of the actions it has taken so far in trying to save Wall Street firms, if it comes under attack, Wall Street will be among its main supporters. It will also have the support of an army of loyal bankers around the country.
Everything depends on how the economy emerges from the present credit crisis. If it stages a steady recovery, it will increase the credibility of the Federal Reserve and there will be less concern about its political role.
On October 1, 90-year-old Addie Polk, distraught over her home’s impending foreclosure, shot herself twice in an attempted suicide.
Fortunately, Ms. Polk’s attempt was unsuccessful. Even better for her, Fannie Mae – which had taken possession of her mortgage after numerous missed payments – forgave Ms. Polk’s debt and signed the house over to her, free and clear.
What part of this story makes any sense? A woman shoots herself after falling behind on payments she agreed to make, and, as a reward, she gets a free house? Since when did Fannie Mae, now essentially a wholly owned subsidiary of the U.S. government, get into the Extreme Makeover: Home Edition business?
In 2004, Ms. Polk took out a 30-year mortgage for $45,620 at 6.375% interest. That same day, she also took out a line of credit for $11,380. Four years later, her inability to make her payments had reached the point of foreclosure. Police had made 30 attempts to evict her before the October 1 shooting incident.
Now, you can feel sorry for Ms. Polk all you want. But the fact of the matter is that she took money and agreed to pay it back, and she didn’t. Yes, the lenders may have “taken advantage of her” – only because they knew the government would step in and bail them out if Ms. Polk and others like her couldn’t pay – and yes, the Federal Reserve System creates money and credit out of thin air, which is “predatory” by its very nature. But these were the rules of the game when Ms. Polk took out her loans, and if she didn’t know them, she had no business playing.
What message does Fannie Mae’s forgiveness of this loan send to other people facing foreclosure? Attempt suicide, and if you’re lucky enough to survive, you get a free house? This story is a fitting microcosm for a corrupt system in which lenders are criticized for making loans to people who couldn’t repay them and then are rewarded with a $700 billion bailout as “punishment.”
Under a free market, interest rates would be set by savings and investment. No entity would have the power to create money and credit out of thin air and, as a result, no “predatory” lending could take place. When companies made bad loans, they’d suffer the consequences, and when people took secured loans they couldn’t repay, they’d lose the underlying properties.
The free market is self-correcting. But what we have in America is far from a free market. As one Republican congressman put it, we have “capitalism on the way up, and socialism on the way down.” In order to maximize utility and respect individual rights, we must return to a more laissez-faire form of capitalism where the people who take bad risks – both mortgagor and mortgagee – are made to bear the consequences of their actions.
The Federal takeover of Fannie Mae and Freddie Mac has not put an end to the woes of these two companies. The two companies have now received subpoenas from federal prosecutors in New York seeking information on the companies’ accounting, disclosure, and corporate governance. The two companies have also received requests from the Securities and Exchange Commission that they preserve documents.
The investigation focuses on activities starting in 2007. The bookkeeping practices of the two companies have always been questioned by critics. In fact, a Fortune magazine story said new accounting procedures at Fannie Mae masked potential losses on bad loans.
Accounting irregularities are nothing new to Fannie Mae and Freddie Mac. Both have had to restate earnings in past years following discoveries by federal regulators of irregularities on the companies’ books. Few years back, both companies were forced to restate billions of dollars in earnings after federal regulators discovered accounting irregularities at both companies. The scandal led to the replacement of the companies’ top executives. Freddie’s former chief executive, Gregory Parseghian, was ousted in December 2003. Fannie Mae CEO Franklin Raines and Chief Financial Officer Timothy Howard were swept out of office a year later.
Fannie Mae has also paid a record $400 million to the SEC in 2006 to settle charges that senior executives fraudulently used “cookie jar” reserves and other accounting gimmicks to hide $10.3 billion in losses from 2002 to 2004 to maximize bonuses.
Freddie Mac paid $125 million in fines in 2003, while earnings between 2000 and 2002 were restated after it discovered derivative-related errors after replacing one of its former auditors, Arthur Andersen. At the time, regulators charged that the company manipulated its accounting to push about $5 billion in earnings to future quarters.
The two companies have been in the conservatorship of their regulator, the Federal Housing Agency, since the government seized them. There is increasing pressure on the administration to hold accountable the companies and top executives. Both companies have said that they will cooperate fully with the prosecutors. The Federal Housing Finance Agency, which controls the companies, said that it will work with the companies to assure a smooth and efficient process and will work with the government agencies as they undertake their inquiries.
The Federal Bureau of Investigation is already looking at potential fraud by these two companies and insurer American International Group, Inc. The inquiries will focus on the financial institutions and the individuals who ran them. A number of members of Congress, including several on the Senate Judiciary Committee, have urged the FBI to be more aggressive in pursuing possible criminal charges against major players in the crisis. If the top executives of these companies were cooking the books, manipulating, doing things they were not supposed to do, then every American taxpayer would want them held responsible.
If you watch the news at all these days (and a case could definitely be made for avoiding this habit), then you already know that the United States imports way more cheap stuff from China than it sends over there for sale to the Chinese people. That big difference between the huge amount we import and the tiny amount we export is called the trade deficit, and you’ve almost certainly been hearing for eight years now about how it keeps going up and how that isn’t such a great thing.
What you may not realize, however, is that the recent federal bailout of the mortgage giants Fannie Mae and Freddie Mac stems in part from the strange and delicate trade relationship the U.S. has forged with China; a relationship that consists of lots of imported Chinese goods that Americans buy up with money that is essentially loaned to the U.S. by, you guessed it, the Chinese.
The Chinese do not issue loans directly to the U.S. the way that a bank would issue a loan to an individual. What the Chinese government does instead is buy up U.S. debt, mostly in the form of mortgage-backed securities. The recent tax rebate stimulus package designed to get shoppers out and spending money again to shore up the flagging U.S. economy came largely from this kind of investment by the Chinese in the debt held by American financial institutions.
While it may seem circular and confusing to think of the Chinese actually loaning the U.S. the money to buy Chinese products, the fact is that right now the U.S. government is heavily dependent on this kind of Chinese investment just for the continuation of its day-to-day business. In other words, without Chinese money being poured into the U.S. in the form of securities purchases, our government would experience such a budgetary shortfall, it would have to shut down.
The linchpin in this arrangement, obviously, is U.S. housing values. If the value of the properties backing the mortgage debt purchased by the Chinese remains stable or increases steadily, everything continues to hum along normally (or at least normally on the surface of it). The Chinese have an asset they see as increasing in value (that is, American mortgage-backed debt securities), and the U.S. government has the money it needs for its day-to-day operations. The Chinese make money off of their exports to the U.S. and off of their investments in U.S. housing-backed debt, and U.S. citizens continue to consume the cheap Chinese goods we have grown accustomed to buying.
That’s the U.S. consumer economy in a nutshell, and if it sounds a bit Orwellian, bizarre, and unbalanced, that’s because it is. Nevertheless, that’s how we roll these days, or did, until the housing bubble burst and the values of the properties actually backing all this mortgage debt began to drop precipitously. At first it was only subprime debt that went bad, but that spread to what is known in the mortgage industry as Alt-A debt (which is a notch above subprime and once considered quite a safe risk).
Now even homeowners who are in no danger of defaulting on their mortgages are seeing dramatic drops in their property values due to a badly inflated housing market and the subsequent bursting of that bubble. And as if that isn’t all bad enough, the problem is rapidly spreading to other kinds of U.S. debt: credit cards, car loans, home equity lines, and small business lines of credit.
To put it in just a few words: the actual assets backing U.S. debt are now depreciating instead of appreciating in value, leaving the Chinese holding substantial investments in the U.S. that are looking less and less profitable. The Chinese have been friendly to the U.S. because they are making lots of money from the relationship. With the bursting of the housing bubble, not so much. They have been growing more and more nervous about this fact.
What does that have to do with Fannie and Freddie?
Fannie Mae and Freddie Mac back most of the mortgage debt in the United States, but because they have always had a quasi-governmental status, they have not kept the kind of prudent reserves on hand that a private financial institution would be required to keep to mitigate such losses. As it became more and more clear over the course of the past year or so that Fannie and Freddie didn’t have adequate financial reserves to back the debt they held, the Federal Reserve and the Treasury Department began to talk about a bailout.
It’s a bad thing that housing values are plummeting in the U.S., but it has to happen because they were so wildly inflated during the boom years. That hard correction would be painful for the U.S. no matter what, and we are certainly feeling the pain already in the form of a major economic turndown that looks like it will last at least through the better part of 2009. But what would be even more catastrophic than the pain we are already feeling in our collective national pocketbook would be a decision by the Chinese to pull back on their investment in us. Such a move would literally throw us into a financial meltdown that would make the Depression era look pretty cheerful by comparison.
So, while it may or may not be true that Fannie and Freddie “are too big to be allowed to fail,” what is unquestionably true is that the U.S. government is too big to be allowed to fail, and fail it would without a steady influx of Chinese money.
All of this is more food for thought that I can possibly digest in a single sitting. If you pay close attention to the expressions on the faces of Bernanke and Paulson, you may well detect a hint of dyspepsia there, too.
The day is saved. Again. For now.
And yet once again, in the smoking (and indigestible) aftermath, a familiar and phrase rears its ugly head:
The present financial crisis – probably the worst in decades – is making the lawmakers in Washington, D.C., strongly consider the need to dust off a 1980’s era plan to help save the banking industry and stabilize the economy.
The idea of setting up a government corporation to deal with toxic assets has invoked strong interest among both Democrats and Republicans. Lawmakers are eager to find some solution to the crisis. Eleven banks have already failed this year, and there are questions surrounding the major financial institutions. On September 6, the federal government took over mortgage lending giants Fannie Mae and Freddie Mac as they teetered near collapse. Lehman Brothers has filed for bankruptcy. Merrill Lynch & Co agreed to sell itself to Bank of America. And the government has just bailed out American International Group, Inc., a financial behemoth.
The bailout of AIG, one of the world’s biggest insurers, cost the government $85 billion. Doubts remain whether the bailout will effectively help stem the ripple effect that failing banks and financial institutions are having on the economy. AIG’s cash squeeze is driven in large by losses in a unit separate from its traditional insurance business – the financial products unit, which sold credit default swap contracts designed to protect investors against default in an array of assets including subprime mortgages.
The Treasury Department is planning to sell bonds for the Federal Reserve in an effort to help it deal with the unprecedented borrowing needs resulting from the present financial crisis. And lawmakers are now appearing open to the idea of creating a government entity akin to the Resolution Trust Corporation (RTC). The RTC was formed amid the savings and loan crisis in the 1980’s. The RTC resolved and liquidated the assets of 747 thrifts with total assets of $394 billion.
What is needed is an institution or a mechanism of a supertrustee to handle incredibly large financial institutions which may be allowed to fail and how those assets get managed and ensure they are handled in an expeditious manner. The absence of such an institution or mechanism could in the future result in one failure after another. The failures will keep blossoming. Many lawmakers are calling the creation of such a mechanism a legitimate idea that merits consideration.
The creation of a new federal agency would only put taxpayers at risk for billions of dollars in bad debts. The parallels with the 1980’s are inexact. The mission of the RTC was to dispose of the assets as quickly as possible for maximum value and reduce taxpayer exposure. Unlike now, the government had no choice but to acquire the assets from savings associations because they were backed by federal deposit insurance. The mortgages, which are at the heart of the present crisis, are not backed by federally insured deposits.
In 1932, Congress created the Federal Home Loan Banks to prop up thrift institutions during the Great Depression. Today, there are 12 regional Federal Home Loan Banks. Their main business is low cost loans to their more than 8000 owners, which include commercial banks, thrifts, credit unions, and insurance companies. Like Freddie Mac and Fannie Mae, they are also Government Sponsored Enterprises, entities owned by private shareholders but chartered by Congress to perform a public mission. This special status enables them to borrow inexpensively on the bond market. Because of their special status, investors assume that the federal government would bail them out of any crisis.
The 12 regional Federal Home Loan Banks are among the world’s largest borrowers. They have about $1.3 trillion of debt outstanding. Ever since they have taken on a bigger role in funding banks and thrifts, their debt has ballooned 34% since the end of 2006 mainly because the credit crisis dried up other sources of funds for banks and thrifts.
The present credit crisis has already compelled the federal government to take over Freddie Mac and Fannie Mae. Many are now wondering if the federal government will eventually have to bail out the Federal Home Loan Banks as well. The Federal Housing Finance Agency, which overseas these home loan banks and acts as their regulator, is confident that the federal government will not have to step in.
Another worrying factor is that some shaky firms like IndyMac Bancorp, Inc., which was seized by regulators in July, also received advances from these home loan banks. But these advances are backed by collateral. When a bank fails, home loan banks have priority over other creditors, including the Federal Deposit Insurance Corporation.
Many experts have always criticized the concept of Government Sponsored Enterprise and called them flawed and unviable. The federal takeover of Freddie Mac and Fannie Mae have only strengthened this argument. Many are predicting that the Federal Home Loan Banks could be next. But it might just remain predictions.
Unlike Freddie Mac and Fannie Mae, the Federal Home Loan Banks have managed to remain profitable despite the present crisis. Their reported combined net income for the second quarter of the year is $718 million. This is a 14% increase from the figure for the same period last year.
But there are warning signs. One of them: the Federal Home Loan Bank of Chicago reported a loss of $152 million for the first half of the year. The loss was caused partly by hedging costs-related interest rate risks on mortgage investments. But the Chicago bank can take heart from the fact that another home loan bank – the Seattle Home Loan Bank – suffered a $9.1 million loss in the last quarter of 2005 but has since returned to the black. The loss in 2005 was also caused by mortgage investments.
These banks do not have publicly traded shares. Only the members or customers own shares in these banks, and these shares change hands only at face value.
I confess I wasn’t happy to wake up Wednesday morning and find out that Federal Reserve Chairman Ben Bernanke and Secretary of the Treasury Henry Paulson had decided to put taxpayers on the hook for up to $85 billion in loans to AIG, the world’s largest insurer of mortgage-backed securities.
I was even more dismayed at the news that the Treasury wasn’t just loaning money to AIG (money it doesn’t really have), it had actually seized AIG, relieved its managers of their duties, and had taken over, at least for the short term. So now, the U.S. owns and runs AIG. Wow.
Was that really necessary?
Early on, the talking points Wednesday were familiar ones: lots of “too big to fail” sorts of statements, along with frequent reassurances by government officials and financial pundits that the worst that could come of the AIG bailout would be an orderly dissolution that would not roil markets as traumatically as a sudden bankruptcy would. In a better case scenario, they assured that there was even a chance that the government could actually make some money selling off parts of AIG, since only the divisions that insure structured investment vehicles and bad mortgage debt are unprofitable.
The reassurances fell mostly on deaf ears.
The Dow dropped 200 points right after the opening bell, swung wildly all day but mostly down, and ended the day down almost 450 points. Down 500 on Monday, 450 on Wednesday, what next? Press Secretary Dana Perino was out in front of cameras expressing confidence in the economy’s ability to withstand these shocks, and John McCain was out in front of cameras trying hard not to repeat the phrase, “Our economy is fundamentally sound,” without, at the same time, inducing further panic.
Carly Fiorina, former (deposed, as in “fired”) CEO of Hewlett-Packard was, I think, hiding in a closet somewhere after telling the press on Tuesday that McCain, Palin, Obama, and Biden were all unqualified to run a major corporation. (Many pundits gleefully pounced on the fact that, apparently, so was Fiorina.)
Fiorina is a McCain adviser. But maybe not for long.
Weirdly, the cable news channels seemed much more interested in who was getting the most political traction out of the queasy atmosphere on Wall Street: the McCain campaign or the Obama campaign. Real, thorough analysis of the day’s financial events was not easy to find. At one point, I did catch a brief televised interview with a member of the Reagan administration who expressed the (rather off the wall) opinion that what was most needed to calm this crisis was immediate corporate tax cuts, and lots of them.
That would have been funny if he didn’t mean it, and the markets weren’t really tanking.
While it may seem trite, the problem, as I see it, is that markets don’t like uncertainty, and right now, no one knows how deep these problems go and how many more financial institutions might fail. The government takeover of AIG sent a message that the situation is now dire, so dire that a bridge loan wasn’t enough; nothing less than a complete government takeover would do. Even though the intent was to stabilize markets by slowing down the collapse of AIG, markets were not calmed by the realization that AIG was collapsing, and that it would have collapsed over the course of a single day without government intervention.
It’s hard right now to take in the magnitude of what is happening, but if we all keep in mind how long this bubble has been building, how disguised all this bad debt is, and how enmeshed it still is in the worldwide financial system, it shouldn’t be a surprise. By most accounts, Washington Mutual may well be next, and after that, it’s hard to take an educated guess who else will fall.
Things could go on like this for another week, another month, another year. No one knows.
All of which spells a rough ride for financial markets for the foreseeable future. I don’t think there is anything that will soothe these troubled waters anytime soon. But I’m pretty certain of one thing: these bailouts will not play well on Main Street. People were already upset over Fannie Mae and Freddie Mac. Now we’re taking on AIG, the auto industry has its hand out for $50 billion, no one knows how many banks will fail after that, and ordinary people are getting really fed up.
Wall Street may be in shock. Main Street saw this coming a mile off.
On Monday, the Dow Jones Industrial Average – the bluest of Wall Street’s blue chips – lost 4.4% in a single day. Fannie Mae and Freddie Mac have been “seized” by the government. Oil continues to drop while gas prices rise. Inflation runs high while jobless claims continue to soar and gold falters. What a strange economic cocktail! Let’s look at the issues one by one:
First, “Black Monday.” It was prompted by the announcement that investment-banking giant Lehman Brothers would be filing for bankruptcy protection. This, after a weekend spent trying to negotiate a government bailout. For once, the government blinked. A week earlier, the markets soared on the news that the feds had “seized” control of the mortgage industry through Fannie Mae and Freddie Mac. Smart traders who hadn’t already taken the hint knew that those gains were illusory.
Now how is it that oil can continue to fall while gas prices have been on the rise? Two words: Hurricane Ike. It threatened refining capacity, which has nothing to do with the price of crude oil but everything to do with your pain at the pump. The real question is why does oil keep falling? That’s actually a troubling sign given the inflation being felt elsewhere in the economy. And the answer is: demand is softening…even in the face of monetary expansion. That does not bode well.
Is there really any question why consumer prices continue to rise? It can’t be blamed on OPEC (oil is dropping), or greedy corporations (profits are down), or labor unions (they hardly exist anymore), or the greatest scapegoat of them all, illegal immigrants (they’re moving back to Mexico!). No, instead, we’re finally confronted with the reality that the Federal Reserve creates “price inflation” (higher prices) through monetary inflation (creating new money). Just this past Tuesday, they unleashed another $70 billion into the economy. Think that won’t find its way into the price of your milk? Think again.
That jobless claims continue to rise shouldn’t confuse anyone unless they’ve had an economics class recently. Just three years ago, when I was taking introductory Micro- and Macroeconomics courses, my professors still taught the widely discredited Phillips Curve – the Keynesian idea that there’s a “trade-off” between inflation and unemployment (i.e., if you have high inflation you should have low unemployment and vice versa). Of course, this was objectively destroyed by the 70’s stagflation, and we’re headed there again.
But how is it that gold, presumably a measure of the dollar’s value, is falling even as dollar-denominated consumer prices rise? Well, as I stated earlier, it’s because gold was overbought – with Fed-created fiat money – and became its own bubble. As the Fed continues to inflate, though, look for gold to rise.
OK, I know Lehman Brothers just tanked, Fannie and Freddie have been seized, and AIG has been taken over by the Fed, but can we put all that aside for just a few minutes and talk about me for a change, please? I have liquidity problems of my own, and that being the case, I only have so much patience for Wall Street melodrama anyway anymore. It’s getting exhausting. I mean, seriously, what are are you and I going to do about it right this minute? Won’t things still be totally, terminally screwed up tomorrow? Am I right? Of course I am. So let’s take a little “me” break today for a change of pace.
Here’s what’s going on this month in Evelyn’s life:
Last Friday, I got a letter from the escrow department of my mortgage company letting me know that the dying, rust-belt city where I still own a small house in a bad neighborhood (because I couldn’t sell it after I moved to another state to take a job) has decided to hike my property taxes by $610 a year, thus causing a shortfall in my escrow account. I now have a choice. I can send the mortgage company $610 today, or I can pay an extra $50 each month on the house payment for the next twelve months.
The city, which is in northern Indiana, was once a major manufacturing center but has been decimated in recent years by the fall of the U.S. steel and auto industries. The government there is now in serious financial trouble. The tax base has eroded, companies have moved overseas, businesses are failing, unemployment is off the charts, and now, thousands of people are losing their homes to foreclosure.
Because the situation is so dire, and because the city has already cut essential services to the bone and still can’t generate the revenue needed to maintain normal operations (not public services, just day-to-day government operations), the city has seized on an opportunity and is hiking property taxes in the poorest neighborhoods so that the owners will be forced into foreclosure and the city can then sell the property back to the mortgage companies for pennies on the dollar (plus the cost of the back tax bill).
That strategy is indeed generating a small but steady stream of revenue for my old home town. It is also creating boarded up, bombed-out slum neighborhoods full of squatters, crack addicts, and meth labs, just like inner Detroit or the neighborhoods in Flint, Michigan. My dying city is literally eating itself to stay alive, and appeals by concerned citizens to turn the trend around fall on deaf ears. When there is nothing else to eat, we eat each other. Just shouting, “Stop it!” isn’t effective in such situations, no matter how passionate the shout may be.
“Scrapping” (the practice of pulling scrap copper and steel out of abandoned homes and buildings) has become a huge cottage industry here, and though such break-ins are illegal and the trade is dangerous, it continues to grow. A few months back, two homeless men were killed by other scrappers who wanted their haul. They stole the stolen scrap from the men, killed them, and stuffed them down a manhole. Such is life in the post-industrial Midwest in 2008.
On the block where my little house is located, fully half of the buildings are vacant and boarded up. I had my house on the market for a year and a half, asking only what was left on the mortgage and offering to pay all closing costs, everything negotiable. Not one person ever viewed the house, much less made an offer. The house has a new roof, a new furnace, new siding, and new appliances, and I couldn’t get anyone to even view it, much less make an offer, and this at a negotiable asking price of $39,000.
After a year, my real estate agent started to get testy. “People want nice kitchens and bathrooms. Why don’t you put some money into these two rooms and see if that helps?” I have no money to put into upgrading a house in a slum neighborhood in a dying city; I can barely pay my own bills where I am, and honestly, if no one is looking at the house, what difference would it make if I installed gold leaf appliances? A house two doors down is still for sale for $8900. Four years ago, when I bought this house, it was in a nice neighborhood. A new grade school was built right across the street in 2005. All that doesn’t matter.
So when my realtor asked me after a year and a half of not showing my house even one single time why didn’t I remodel the place, I said, “Why don’t you?”
That was the end of my realtor.
After flailing around for a couple more months once the realtor fled, I was finally able to rent the house to my daughter’s mother-in-law. She likes it there, and renting to her also means that our kids get to keep their privacy. But now, with the tax increase, I pay more on the mortgage than I take in for rent. I still take the homestead deduction because, if I don’t, the property taxes will shoot up to $4000 a year on a house I can’t sell at any price: not for the $37,000 I owe on it, not for $20,000, and not for $4000.
People tell me, “Walk away. Don’t waste another cent.” But I do still see some good coming out of renting it: one less bombed-out house in my town, a place where my daughter’s mother-in-law is happy, the knowledge that I am not directly contributing to the decay of a major urban center. So for now I will pay the extra $50 a month and pray for the best. But I know it can’t last.
Like a lot of Americans right now, I am always one disaster away from bankruptcy. So, apparently, is our entire financial system. That cheers me up a little bit (as in, at least it’s not personal), but it’s hard to maintain my good humor when I keep getting love letters from the city, the mortgage company, the insurance company, and God knows who else. I get depressed sometimes. And now the bank where I took the job (the one that landed me farther north with an unsold home in Indiana) is on a short list of four or five big regional banks most likely to tank in the near future, right behind WaMu.
So, OK, Wall Street is (once again) having a very, very bad week. That’s a problem. Pundits are all over the TV and radio explaining that this promises to be the worst financial disaster since the Great Depression, and that no easy fixes loom on the horizon. A hard correction is in process, they say, and it won’t be finished this year, next year, or maybe the year after that. (A few weeks ago, these same pundits were saying that it was way too early to call the current economic slowdown a recession.)
Here’s what bugs me today: while Wall Street is having its Very, Very Bad Week, Main Street is having a very, very bad yesterday, today, tomorrow, and what’s more, a fairly miserable foreseeable future. For every Bear Stearns that goes down, thousands of cities lose jobs, tax income, and infrastructure. For every Lehman Brothers that cashes in, millions of people like you and me lose homes, cars, and retirement benefits. For every AIG that goes bust by betting high on the wrong horse, another couple generations of kids can kiss college and all hope of progress goodbye.
So yes, I’m worried about Wall Street.
What I want to know is, when will Wall Street worry about me?