Weathering the financial crisis
Categories: Money & work, In the news
Welcome to Red Mom Blue Mom, ParentDish's special coverage of the 2008 Presidential election. Each Tuesday through November 4, columnists Rachel Campos-Duffy (Red Mom) and Ada Calhoun (Blue Mom) will take on issues relevant to parents on both sides of the aisle. You can find past Red Mom/Blue Mom posts here.
Red Mom: Stop living a lie!
by Rachel Campos-Duffy
I tried to boycott Oprah after she wouldn't invite Sarah Palin to the show, but I didn't last very long -- only three days, I think. So last week, back to my weekday ritual of watching Oprah while making dinner, I chopped vegetables while financial counselor Suze Orman ripped into a nice, middle-class couple who were in total denial about the state of their finances. Just as I began to wonder if these people would ever recover from this public lashing or venture out in public again, Suze turned, looked right into the camera and directed her words at all the home viewers who may be using credit cards unwisely: "Stop living a lie!" she yelled.I thought a lot about Suze's words this past week as the nation's financial crisis unfolded. While many American families spent the week revising their budgets and preparing for leaner times, our "leaders" came up with yet another scheme to continue living the lie: a $700 billion tax payer-funded bailout that does nothing to reduce our $9 trillion dollar annual budget deficit. What a joke!
Common-sense Americans know that in government and families, debt is at the heart of this problem. Couple the de-stigmatization of debt with an American sense of entitlement -- "I deserve it!" -- and you start to see how we got here. The one thing the rich, poor, and middle class all have in common is a penchant for charging everything from clothes to family vacations. And on these trips, no one packs the minivan with a cooler anymore. It's drive-thrus and restaurants for America's most pampered generation.
In 1995, the Clinton administration expanded the "Community Reinvestment Act" in its eagerness to offer everyone, even those who couldn't afford it, a piece of the American dream. In exchange for boasting rights to a "more broadly shared prosperity," one of Clinton's favorite claims, the act incentivized high-risk lending practices to minorities and low-income communities.
Of course, I would like everyone to share in the American dream of home ownership, but Clinton's policy essentially offered a lie (they couldn't afford the houses!) and resulted in defaults that are the cause of our current economic woes. And while politicians on both sides of the aisle took campaign money from lending institutions, it was Democrats like Rep. Barney Frank, chair of the House Financial Services Committee, and Chuck Schumer, chair of the Joint Economic Committee, who criticized and voted against Republican legislation, co-sponsored by John McCain, that would have reigned in these dangerous practices.
During last Friday night's first Presidential debate, John McCain suggested a spending freeze on non-essential government expenditures in response to the crisis. He was widely mocked by the Democrats and the press for making this statement. But if American families must cut back and live within their means, why shouldn't we expect the government to do the same?
In a plea for a return to the concept of delayed gratification, Oprah sensibly asked her audience, "Remember lay-away? What ever happened to lay-away?" Indeed, bring back lay-away -- for Main Street, Wall Street and Washington!
Blue Mom: Bailing out the bullies
by Ada Calhoun
My favorite explanation of the U.S. financial crisis comes from Rachel Maddow. This bailout analogy casts Wall Street as a sugared-up child left with buckets of Halloween candy and no adult supervision.
It's perfect, because parenting is, in essence, regulation. How much do you get onto your kid to behave a certain way, and how much do you let him do what he wants? Do you step in and clean up his messes punishment-free, or do you make him reap the consequences of his actions?
There are kids on the playground where I spend a lot of the week whose parents are the disciplinary equivalent of small-government fiscal conservatives.
"You just gotta let it work itself out," they say, shrugging and going back to their Blackberries. "I told him not to snatch toys, but he just doesn't listen."
Meanwhile, their kid is running across the concrete with toy cars in every pocket and four in each hand, leaving a small army of weeping toddlers in his wake.
Of course, sometimes things like that do work themselves out. The preyed-upon kids get tougher and hold on tighter to their Tonka trucks. After a weekend at his old-school, no-nonsense Grandma's, the kid starts sharing. The hands-off parents are vindicated.
But sometimes, things don't work themselves out. Sometimes the kid grows into a sociopathic monster with no friends because he never learned how to be decent.
For the past eight years, the Bush administration has been the worst kind of laissez-faire parent, letting Wall Street and predatory lenders and oil companies and a lot of other grabby kids do whatever they wanted. And things worked fine, until they didn't at all.
Now all the good kids, bruised and battered and toy-less, have to break their piggy banks to help the bullies. The government has to step in -- we have to step in -- and insist on a higher standard of behavior, not just because we love our plastic fire trucks, but because we don't want to support a culture of greed, selfishness and fear.
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Reader Comments (Page 1 of 1)
EK 9-30-2008 @ 10:36AM
Rachel, I'm so pleased that you're not stuffing Sarah Palin down our throats this week. After the Katie Couric debacle in which she showed her extreme lack of readiness to lead the country, I'm happy you found important issues to focus on instead of the hysteria surrounding this lame duck.
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justjojo 10-03-2008 @ 7:38PM
And still, EK, Rachel needs to stay out of anything political because she has no freaking clue!!! She is completely uneducated and illiterate when it comes to politics. She is a disgrace and I've said it before and will say it again here, she only has this forum because she has a pretty face. PERIOD!
Chris Koffend 9-30-2008 @ 10:49AM
This may be one of the best written, most accurate articles on this topic that I have read in the past several months. I am what would be considered the middle or upper middle class. I missed qualifying for the government rebate/incentive/"vote for my party" checks by a few thousand dollars.
First, I think it is great that the levels of available credit for both companies and "mainstreet" is going to be reduced. Second, if one cannot afford to pay cash for something, then it is very unlikely that they can afford to make the purchase. Three, virtually nobody* declares bankruptcy if they don't have excessive debt or any debt for that matter! Too many people have borrowed money foolishly and beyond their ability to pay it back - factoring in having an emergency fund and responsbile saving.
Many of the people with the sub prime mortgages unfortunately deserve what they had coming to them. They tried to take a short cut, the tried to bank on the concept that home values would continue to rise at unrealistic rates. They tried to take a short cut to prosperity. They over extended themselves and then tried to take out second mortgages on homes that they had zero equity in to begin with.
For all those that are about to tell me that buying things on no interest, no payment plans plans is just smart purchasing I can agree only under one condition! When you make said purchase you deposit 100% of the cost of the item into an interest bearing account/CD/etc. . . so you can earn interest on this purchase for the extended period. Did you know that the average interest rate paid on no interest, no payment purchases averages over 12%! That means that over 50% of the people making these purchases did not even manage to pay off the item within the alotted time to reap any potential benefit.
I am not Bush supporter and recognize him for what he is, a poorly informed President who does not seem to have the intelligence to make logical, long term beneficial decisions. However, to blame Bush for the mess that too many American businesses and tax payers are in is rediculous. If you are seeking a president to blame, much more of this blame should be owned by the Clinton Administration as clearly outlined. In 2002 Bush tried to repeal the 1995 legislation under the required 7 year review of the legislation (which was part of the original bill in 1995). Bush tried to increase regulations in the mortgage area, but he was laughed at at the time for being silly. Everybody could see then that the huge risks were paying off as Americans went further and further into debt as home prices rose unrealistically. Believe it or not, Bush was right in 2002.
The political and minority activists faught long and hard to encourage the 1995 legislation stating it was unAmerican that low income and minorities couldn't get mortgages and live the American dream. What they didn't recognize then was that this mass of people couldn't get mortgages not because of their race, but because they couldn't afford them and couldn't pay them back.
The pandora's box was open and the business world replied by giving the people what they wanted - mortgages, regardless of the cost to the borrower. The mortgage company's were smart enough to charge high rates so that they could be assured some profitability when the obviously under incomed borrowers would eventually realize they couldn't afford the house.
The problem was, after collecting interest only at rates of 7-15% for 2-5 years from these people, the houses were no longer worth more than the principle amount of the loan, in fact were worth less. Had they properly handled the collected interest payments, the ability to move these houses at 75-85% of fair market value would have been a wash.
We have this situation due to poorly managed financial institutions, American taxpayers making stupid decisions and living a life of debt, and the inability of huge masses of people and organizations for not recognizing that the spiraling upward home prices could not be maintained. The only difference between this and the dot.com crash was that it was only the "investor class" that suffered the losses of that crash. Anybody who understands the most basic business model could see that these dot.com company's with virtually no income generating capabilities could not be worth the combined stock values that they were selling at. But people made money for a couple of years, lots of money, and when everybody finally realized the "king's wearing no clothes", these stock prices corrected themselves based on what almost all of these non-producing income companies were really worth.
Today's situation is no different, other than the fact that it is not just the "investors" but many regular old Americans who are feeling the sting. For those people who live a financially responsible life - no debt other than your reasonable mortgage (ie. 20% down at purchase and a monthly mortgage payment not exceeding 25% of your income), this situation will not significantly affect your life and it will be a thing of the past in 5 years when you IRAs and 401K are back up above the point that they were at just one year ago.
Smarten up America. Throw away your credit cards, pay cash, start a savings account and never, ever, ever buy a $15 neckless for only three easy payments of $5.50 per month! How absolutely DUMB is that!
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Monica Farina 10-30-2008 @ 10:02AM
Yeah - someone out there on a blog with some sense -- If only people could figure out that the "I want it now" approach doesn't work. Keep spreading the word. Wants are not Needs.
SKL 9-30-2008 @ 11:45AM
So, who are the "good kids" in the analogy? Those who have been prudent and lived below their means, finished their education and work hard for a living are NOT the ones who are hurting now.
The ones who are hurting now (or expect to be soon) are those who embraced the "I deserve it" mentality, without having any clue or care about those who have worked harder and longer and have a lot less. They have chosen to ignore the clear risks they were taking on, because they felt the less risky options were not good enough for them. I do not feel sorry for such people.
Unfortunately, it's those of us who have put forth the most effort all these years who continue to pay more and more tax to bail out those who never outgrew their "me, now" mentality. Yet we are not the ones crying and whining. We are too busy working.
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Nicola 9-30-2008 @ 12:23PM
I enjoyed both of your viewpoints this week and especially the way that it illustrates the culpability of BOTH parties in this mess. All sides are to blame. The Democrats for their insistence on universal home ownership and for pushing banks to make ridiculously high risk loans. It was a nice thought, but not a fiscally responsible one. The Republicans for turning a blind eye to the mess as it piled higher and higher, for letting it hit rock bottom now and then asking us to "bail out" the big money bullies.
As SKL said, its those of us who have worked hard, lived within our means, and acted responsibly who will now pay the highest price. We will now pay for your sins, for those who borrowed money that they couldn't pay back, for those who live in homes that they can't afford, for those who live on credit. Yes, you're hurting, but you deserve to be hurting. You overextended yourself because you wanted more stuff, more vacations, more luxuries. Thanks. Thanks a bunch.
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Mihir 9-30-2008 @ 12:40PM
on the flipside, when the home prices start dropping, those of us that have been working hard, squirelling away money and living within our means, should be able to get a pretty good deal on a house!
Julie 9-30-2008 @ 2:25PM
Rachel, I don't want to go back and re-read your blog, so maybe I'm mistaken here, but are you seriously blaming Clinton and the democrats for the economic crisis that we're in? When are republicans going to stop blaming Clinton for everything? 20 years from now are you still going to blame him for things? Take some responsiblity. I usually agree with you when you post about parenting styles, but your narrow minded politics are just too much for me.
I have this vague memory of you on the real world in a politic discussion with one of your housemates, who was very liberal, where you were pushing for homeownership for low-income individuals. You're housemate put this idea down and you got mad. Flash foward many years to the present where we now see the turmoil caused by loaning people money they can't afford, and suddenly you've changed your opinion and it's the democrats fault in your eyes.
And by the way, poor people weren't the only ones to get us into this mess. I have plenty of friends making six figures who bought houses they couldn't afford. It's called greed. home sellers were greedy, real estate agents were greedy, banks were greedy, and speculators were greedy. Greed plus a lack of oversight by the government got us into this mess.
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Karen 9-30-2008 @ 3:38PM
Yes, a good potion of the blame should be put on the Democrats and the Clinton adminsitration.
Go back and read the Congressional record. It is pretty cut and dry.
Republicans aren't blameless, but the real problem was the Dems and their insistance that loans be given to people that could not afford them and their ability to throw around the race card if you disagreed.
Julie 9-30-2008 @ 4:30PM
Karen, I'm not suggesting that the democrats aren't to blame at all, but please, republicans aren't blameless. We had a republican president and a republican Congress at the same time for several years after Clinton left office. What did they do to stop the obvious problem that was occuring in the housing market run up? Nothing. Time and time again, Bush commented that our economy was strong. And why was that? The economy was strong because of the growing housing bubble that was creating tons of money for people from nothing. Bush took credit for the "strong" economy during his presidency.
Don't even suggest that republicans are market regulators now and would have regulated the market if not for the pesky democrats throwing in the "race card" as you suggested. A good conservative believes in a free market after all. Or are you like other republicans that change their views when they are proven to be not so worthy?
Lisa 9-30-2008 @ 4:10PM
Rachel- Like Julie, I am surprised to see you blaming Clinton and his expansion of the CRA for the mortgage crisis. Just to review you said-“… Clinton's policy essentially offered a lie (they couldn't afford the houses!) and resulted in defaults that are the cause of our current economic woes.” I have included a brief statement by Michael Barr that may show otherwise. It appears that ~80% of subprime loans were given by institutions not affected by CRA. If that is true how did Clinton’s expansion of the CRA lead to this? Could it have been unregulated greed?
Prepared Testimony of Michael S. Barr
Professor of Law, University of Michigan Law School
Before the Committee on Financial Services
U.S. House of Representatives
Hearing On “The Community Reinvestment Act: Thirty Years of Accomplishments, But Challenges Remain”
February 13, 2008
"More than half of subprime loans were made by independent mortgage companies not subject to comprehensive federal supervision; another 30 percent of such originations were made by affiliates of banks or thrifts, which are not subject to routine examination or supervision, and the remaining 20 percent were made by banks and thrifts. Although reasonable people can disagree about how to interpret the evidence, my own judgment is that the worst and most widespread abuses occurred in the institutions with the least federal oversight."
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Amy 9-30-2008 @ 4:56PM
Yes, Clinton's program encouraged more lending.
Yes, banks shouldn't have given loans to people who couldn't pay them back. And they wouldn't have if someone hadn't figured out that they could sell their high risk loans by packaging them with lower risk loans and pretending that the risk evened out.
Yes, the current administration should have seen this loophole for what it was and stopped the rampant greed.
Yes, those people getting the loans shouldn't have trusted that they could afford the loan, just because the bank was willing to give it.
No, people who were flipping houses for profit couldn't afford to hold a second mortgage when the bottom fell out of the housing market. And yes, they were blinded by their own greed and didn't see that the housing bubble was as fragile as it was.
No, I didn't help create this mess and no, I don't want taxpayers to bail out the greedy corporations.
But, I also don't want to suffer through the years and years that it will take for the economy come back from this hit.
I wasn't around during the great depression, but Wall Street sucked the life out of America and the average American paid the price, even though they weren't the ones buying stocks on credit.
World War II got the U.S. out of that mess, and obviously war is not the answer we want, so if we hit rock bottom, I'm scared that we won't have any rope to get back up.
So, Red, Blue or Purple, I don't care what your politics are, I don't care whose at fault. I just see our way of life flatlining with all the doctors scared to touch the patient. I think the government needs to stop the bleeding. And put the cost back onto those who put us in this emergency situation. And if that means holding the assets (loans) until they are sellable again, then I will close my conservative eyes and pray that Big Government can truly save Big Business. Cause, I'm seeing flashes of a Grapes of Wrath remake in the making.
I only wish that I had a crystal ball to see which candidate might actually be able to get it done, because I haven't heard either sound confident that they know the way back to the good life.
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Laura 9-30-2008 @ 6:35PM
Rachel Campos Duffy's comment on the Community reinvestment Act is completely untrue. Lending institutions covered by the CRA have a lower mortgage default rates than ones that aren't. The CRA did not cause this problem.
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justjojo 10-04-2008 @ 6:16PM
Laura, Rachel's comments are so completely unworthy of our reading and our time. She has NO CLUE!
While Clinton was in office he had to deal with a congress that was aggressively controlled by far right-wing Republicans. His administration was marred by the Republicans. Nothing can take away the fact that he inherited a HUGE deficit when he came into office and he left office 8 years later with a HUGE SURPLUS.
The dream to own a home should be open to every American. That IS the AMERICAN DREAM. And the Republicans couldn't give a crap about "Joe Six-Pack" or whatever ridiculous folksy moniker they want to give the uneducated Americans who are their base. The powers that be in the Repub Party are only interested in themselves and their well-being and the well-being of their corporate friends. They profited big time from these criminal lending practices - To blame the victim here is absolutely morally abhorrent yet totally unsurprising.
Again, Rachel needs to keep her trap shut on politics. She ought to be ashamed of herself and the crap she spews not only here but on national tv. She is a disgrace. She has no clue.
Eileen 10-03-2008 @ 9:43PM
Justjojo, I really do not understand why you continually respond to Rachels' posts when you dislike her so much. You say her comments are unworthy of your time and reading, so why then,do you not only read them, but take the time to comment on it too.? It makes no sense. You are certainly entitled to your opinion, but you are so hateful towards her, it's kind of hard to see anything other then another hateful rant from you. You seriously need to chill out, take a vacation from your hate of Republicans and Rachel for a little while.
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justjojo 10-04-2008 @ 1:14AM
Eileen,
I take the time because it enrages me that that completely vacant airhead of a woman has a public forum in which to propagate her extremely detestable and absolutely indefensible viewpoints.
It's not that I hate republicans per se. It's just that I cannot stand the fact that this particular woman, who has absolutely no credentials whatsoever, is given access not only to this blog but also to such venues as CNN. She is uneducated and illiterate in matters political and should keep her mouth shut until she attains a level of expertise that is worthy of these forums. I will continue to call her out on her lack of knowledge and expertise as long as she writes here. It is my duty as a well-educated and well-informed American citizen. This kind of "media" is dangerous and as long as I can shed some light on it I will.
Mike K 10-04-2008 @ 2:43PM
I stumbled across this blog and found it interesting and too compelling to resist comment.
For Ana: Your favorite analogy, by Rachel Maddow, is incomplete. What she fails to mention is that it was the "adults" that forced the "kids" out the door and pushed them farther and farther down the block to fill their "candy" containers to an approved level. Take a look at the graph titled "Primed for Disaster": http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=132x4485795#4486280
It wasn't like sub-prime lending was a concept that nobody had thought of before the mid-90's and Clinton's regulatory changes to the CRA. It's that nobody did it because they knew that those loans could be disastrous if they were a large part of their loan portfolio. That is, nobody did it before they were forced to.
To others that seem to think Rachel is misinformed: You should probably take a closer look at things before you start pointing fingers or throwing stones around glass houses. Yes, lending institutions covered by the CRA originated a lower percentage of loans. The operative word here is ORIGINATED. These CRA-covered institutions, instead of originating the loans, would simply have non-covered independent mortgage companies, subsidiaries, or organizations like Acorn originate the loans and then the covered institutions would buy them to meet their CRA credit levels. This is outlined as one of the focus points in this Fordham Urban Law Journal article in Section II Sub-section B: http://goliath.ecnext.com/coms2/gi_0199-1862983/The-CRA-implications-of-predatory.html
Like I said, before throwing that "uninformed" rock around the house, you should probably first make sure that you, yourself, are actually informed.
The following are some statements I would like to debunk:
"While Clinton was in office he had to deal with a congress that was aggressively controlled by far right-wing Republicans."...Clinton's rule changes for the CRA were unilateral and did not require the approval of Congress. The 1999 banking deregulation was supported wholeheartedly by Clinton and he, in fact, took much of the credit for it. The interesting thing is that the banks that are now in the best shape (small or rural) were the ones that were protected from CRA requirements by those pushy Republicans' legislation, some by Gramm in the 1999 deregulation and some in 2004.
"We had a republican president and a republican Congress at the same time for several years after Clinton left office. What did they do to stop the obvious problem that was occuring in the housing market run up? Nothing."...Way back in 2003 Bush requested Congress to put Fannie Mae and Freddie Mac under stricter supervision. He was opposed by a handful of Republicans and a party line of Democrats. Again in 2005, the Republican Senate attempted to do the same thing and again it was opposed by a handful of Republicans and a party line of Democrats. Both efforts failed I can only post one more link before I hit my limit, so I'll post a New York Times article about the 2003 attempt. Barney Frank's comments at the bottom of the article are particularly "insightful" and scary considering he is now the Chairman of the House Financial Services Committee: http://query.nytimes.com/gst/fullpage.html?res=9E06E3D6123BF932A2575AC0A9659C8B63&sec=&spon=&pagewanted=print
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