The common perception about the current mortgage crisis is that clueless first-time home buyers were conned by dishonest savvy lenders. An article in the LA Times reports that first time buyers make up only 10% of the borrowers involved in the mortgage melt down. The other 90% were already homeowners.
Some of these homeowners bought bigger homes and financed them with a sub-prime mortgage. However, a majority refinanced their homes to draw cash out of their equity. Who doesn’t remember getting the direct mail offers from lenders to refinance “100% or even 125% of the equity in your home” at incredibly low interest rates.
Most people saw through the hype knowing that if it sounds too good to be true it probably is. They saw it would put their wealth and their future at risk. Many who found themselves caught between the rising price of day-to-day living and lower wages saw the cash out refi as the answer to their problem of not being able to maintain a certain life style or even make ends meet. To some, it was the only way to hold on to the American Dream.
Many viewed their equity as the only place to get the money that wasn’t available in the job market. The logic that the equity was theirs to do with as they please supported the idea to borrow against their biggest asset to finance the good life that they and their family deserved.
But now those homeowners are in a situation far more precarious than when they refinanced. For now they are looking at loosing the biggest asset they ever had and probably ever will have, their home.
One can speculate about what goes through the minds of people who sign documents literally giving away the life they built, but what does it say about the larger picture of things in general in this country? For a large number of homeowners to conclude that housing prices will always go up and that it is okay to borrow against the most important asset in your life requires a "group think" on a very large scale. So what is it that spawns such a massive collective mindset?
I have worked in the film and television audio post production industry for 25 years. My job is to help storytellers get their point across to an audience. In doing this I have learned from these producers and directors some of the basics in establishing group think. The idea being to direct the attention of an audience to certain visual and sonic elements in order to get the point across that is important to tell the story.
I have also identified these tactics in less benevolent forms of communication. If an idea that is false in it’s foundation is repeated often enough from a source deemed noble that reaches a large enough group, eventually the false aspect of the idea becomes less and less noticed and the idea just becomes part of the mindset of the group. The reasoning behind going to war in Iraq will probably go down in history as one of the all time best manipulations of group think.
The idea that the “consumer drives the economy” began to surface in the late 1990’s. The consumption of goods and services “is the foundation of this economy” was heard on CNBC and promoted with expensive advertising campaigns selling every conceivable product under the sun.
It was, and still is, repeated over and over through large media outlets to drive home the idea that you must buy things to do your part for your country. Even our fearless President Bush reiterated the idea when he told America to go out and buy things to make themselves feel better after the 9-11 attacks. The United States is a nation of consumers being constantly bombarded with the advertising of endless products and services on sale at the mall and online.
A very big problem with this one particular group think is the fact that unless an economy has the ability to produce the goods it and the world at large needs, it must purchase those goods from other economies. If an economy sells fewer goods than it purchases it incurs a trade deficit. The United States has maintained a massive trade deficit for several decades.
Under this trade deficit dollars are given to foreign manufacturers and energy sellers in exchange for goods and energy consumed in the U.S. These foreign manufacturers and energy sellers exchange those dollars for the local currency and the banks of these foreign countries must then invest these dollars in something with someone that will take dollars.
The dollar is most liquid in the United States. So, generally the investment is made in the United States, although a portion of these dollars are used to buy oil since the price of oil is in dollars.
While a good percentage of the dollars flowing back into the U.S. purchase U.S. manufactured goods and services, the deficit dollars are invested. These investment dollars flowing back into the U.S. invest in a number of things but the most important thing they invest in are the treasury bonds and notes issued to finance our national debt. Outside of that, foreign interests have the option to invest in anything that U.S. law deems legal for them to invest in. Real estate, existing companies and corporations, and venture capital for businesses. In other words, hard assets.
With respect to financing the national debt, the overall result is that the United States is in the process of borrowing more and more money to finance the American Dream while printing more and more money.
What backs up the value of a currency is a nation’s gross domestic product. If the growth of the money supply exceeds the growth in GDP then the currency becomes less valuable. At the same time, real U.S. assets in the form of real estate, businesses, and corporations are being bought up by the foreign companies and banks. After all, they have to put those dollars somewhere before they loose value and hard assets are generally a good investment.
Now I could be wrong but I see a strong parallel between the good folks who mortgaged away their castle and personal wealth to hold onto the American Dream, and with the U.S. economy mortgaging the value of it’s currency and a sizable portion it’s hard assets to hold onto the American Dream.
Recently there have been blogs and news concerning the plunging value of the dollar and it’s status as the currency of choice for the valuation of oil.
President Mahmoud Ahmadinejad of Iran has labeled the dollar as a worthless piece of paper. Iran has increasingly been selling its oil in Euros as opposed to dollars.
While this may be political posturing there has also been speculation that Iran plans to drastically lower its price of oil but demand payment in Euros.
While Iran is a member of OPEC, it could certainly break from any agreements if it served their best interests.
What nation would not jump at the chance of cheaper energy? This would have a devastating effect on the value of the dollar and the American economy. Perhaps similar to the German mark post WWI.
A steep decline in the value of the dollar on the world currency exchange would produce panic selling of US 10-, 20-, and 30-year treasuries causing interest rates to skyrocket and the economy to come to a screeching halt. As with the sub-prime borrowers who mortgaged their houses to sustain their American Dream, the lenders of U.S. debt would line up to foreclose… only this time it’s not just tract homes. It’s much bigger.
What brought down the Soviet Union was not an invading military force. It was economic collapse.
There are U.S. corporations that are making huge profits under the current economic scenario and they want to keep things just the way they are. They lobby the key people in federal and state legislatures to maintain the situation.
These corporations are also very involved in supporting people who run for public offices across the nation. This puts them in a debatable position of whether or not their best interests are also in the best interests of the nation.
But that is another blog.