Friday, March 06, 2009

The Economic, Banking, and Family Crisis

I think most of us are experiencing the current economic situation with a kind of "deer-in-the-headlights" response. We hear something bad coming but we can't see the 18-wheeler behind the high beams. We've been talking about the "housing bubble" ever since the "" bust and unfortunately no one could get the US out out of traffic and off the highway.

How we got here
According to Maya Angelou, to understand where we are now requires that we look back at where we came from. When the US emerged from the Great Depression and World War II, the US was the most powerful nation on Earth. Eisenhower was president, the Dollar was backed by gold, and the "Greatest Generation" was raising large families, moving out to the suburbs, buying cars and dishwashers from US companies. So what happened?

When the our parent's parent's bought a home, their mortgage only accounted for a small percent of their gross income. In 1949, mortgage debt was equal to 20 percent of total household income; by 1979, it had risen to 46 percent of income; by 2001, 73 percent of income (Bernstein, Boushey and Mishel, 2003). So, now almost all US family income is consumed to cover housing and travel expenses alone.

But there are other factors here that this paper doesn't tell you. Now that US mortgages consume 73 or more percent of our gross income. What we need to realize, is that number includes both incomes from the husband and wife. When the data was first collected, very few women worked outside the home. Now, in many cases, women are forced to stay in the work place to cover basic housing costs. What all this pressure has produced is a new class of middle-class poverty called "house poor."

Additionally, the housing crunch is limiting house size and family size. But not in the way you would think. Despite having ever-smaller families, the size of the average American house has doubled since the 1950s. Average house size now stands near 2,349 square feet. Bigger homes require more money to furnish them. And this additional pressure on the family budget leaves little room to fill rooms with kids instead of "stuff."

The Result
And what is the result? With more money devoted to basic necessities, there is no money left over for savings and growing the economy. Also, with both parent's working, children and spouses are increasingly not getting their emotional needs met and instead turning to the addictive behaviors of substance abuse, sexual promiscuity, emotional eating or shopping to escape their stress. When family members face stress, the best way to deal with it is through our family relationships. But if no one is home, then it is tempting to turn to harmful and destructive behavior to cover the pain. And what we are left with are Americans who are overweight, divorced, substance addicted people with huge credit card debts.

Illegitimacy is one of, if not the major cause of poverty in America. Since the sexual revolution in the 1960's, the US is suffering the grave consequences of extra-marital sex which has now become a socially acceptable and expected behavior. My wife went to an inner-city school in Atlanta, GA. She said something very insightful concerning teen pregnancy. She told me, in many cases, the girls who got pregnant in high school didn't get pregnant because they didn't understand how to use birth control. Many got pregnant because they wanted to be pregnant.

Why would a teenage girl want to be pregnant? One of the major needs of the human soul is to feel loved and valued. The family is designed to meet that need and all other needs of its members. But if the family is broken, there is a natural force to look to gangs or pregnancy to fulfill that need for identity and belonging. There is no greater validation or sense of belonging that a human experiences than becoming a parent. But we shouldn't become parents to fulfill our needs. We should become parents when we are ready and able to fulfill the needs of children.

That said, not every single mother gets pregnant on purpose. Despite what the literature tells you, birth control has documented failure rates which are even higher when used by immature adolescents. And the same reasons young people should not be having sex is the same reason young people cannot be expected to use birth control responsibly. Abortion and feticide is not the answer. The psychosocial and spiritual strain and guilt of killing your baby follows women throughout their whole lives.

Why This Happened
Knowing what is happening does not answer why it is happening. The housing bubble was caused by our current banking and home mortgage system. The system places a huge weight on US families and homeowners. When a family borrows money from the bank, they agree to pay back the bank at a certain interest rate. That's fine. The lender barrows money from the US government at a certain interest rate and they lend it to families at little higher interest rate. The margin is the profits that allow the bank to stay in business.

The problem is not the interest rate. The problem is the amortization schedule of the mortgage. It turns out that on a typical 30-year loan, it takes 18.5 years before more than half the house payment goes to paying down any significant principle on the loan. Before that time, most of the house payment goes to pay interest. That means building equity requires that the home price goes up. And now that families are more mobile than ever, and going from job to job and house to house, home prices over-inflated to the point that the bubble has finally burst. US families can no longer afford to pay what is being charged for homes these days. And so we are experiencing a correction in the market and many poor and rich alike are defaulting an their mortgages now that their homes are now worth much less then what they purchased the home for. The falling home prices creates negative equity which means that even if the homeowners were to sell the home, they wouldn't make enough on the sale to pay the original loan amount.

"You either pay interest or earn interest." The loan and interest system between creditors and debtors is a system that enslaves people and nations, creates a class society between debtors and creditors, and prevents the easy generation of wealth. When a family (or a nation) gets a loan, nearly all the money that family generates goes immediately to interest. It can take 20 years for a family to begin to significantly pay down the principle on their mortgage and begin to earn equity. On the other hand, when a family chooses to save, the interest system is totally the opposite. It takes nearly 20-years for that money to begin to earn any significant interest. The deck is staked against the people to keep them from generating any significant savings and wealth. Instead, all that money is being pumped into the pockets of the world banks who own the majority of our T-bills and national debt.

The Perfect Storm
US Mortgages account for 10 trillion dollars in total value. The federal government during the Clinton years encouraged lenders to extend loans to risky or sub-prime borrowers. Instead of fixed-rate loans, these sub-prime borrowers were given adjustable rate mortgages (ARMs). The value of USA sub-prime mortgages is estimated at $1.3 trillion, about 10-20% of the total. When the rates increased on these loans, many homeowners with these mortgages could no longer afford their monthly payments and defaulted on their loans and gone into bankruptcy and foreclosure. By 2008, approximately 25% of sub-prime adjustable rate mortgages (ARM) were either 90-days delinquent or the lender had begun foreclosure proceedings. These ARMs represent 43% of all defaulted loans. The banks who offered these loans are left with a home that they are forced to sell at a considerable loss. Insurance companies like AIG who back these loans with private mortgage insurance (PMI) are being hit hard because they can't pay the $756 billion in defaulted mortgages (this is where the 700 billion number came from I think).

Other banks and financial institutions are being squeezed because a large portion of their worth is tied up in paper derivatives called mortgaged backed securities. These pieces of paper trade like stocks and bonds but derive their value from US mortgages. For some reason, despite the warning signs, investment firms were giving these mortgage backed securities their highest ratings (AAA). Banks are usually ultra-conservative with their investing and had been buying these securities in great numbers. However, since the Enron fraud, the Security and Exchange Commission has forced companies to account for these securities and others like it according to "Mark to Market" principles. This means that the value of the note is based on what you can sell it for today and not what you project it could be worth in 30-years when you plan on selling it. But, derivatives can be very volatile. And when the housing bubble burst, these securities became more worthless that the paper they were written on. So, many banks and companies lost money.

That set into motion another problem. And that is that banks do not borrow all the money they lend. Banks in the US operate and lend money on a principle known as leveraging. Leveraging means that for every $1 they own or borrow from the government, they lend $50 or even %100. The problem is that when a bank loses what little capital they have, it reduces the amount of money they can lend 50- to 100-fold. So, after the MBS's tanked, banks lost capital and became greatly limited in how much they could lend, investors got spooked and took their money out of the stock market, people's 401Ks took a huge hit, people stopped buying stuff, companies began losing money and can not find lenders to lend them money until the economy turns around, and many companies like the auto makers have huge pension plans and health care plans that they still are responsible to pay but no one is buying their cars causing them to run out of cash. Companies are now being forced to cut production, benefits and jobs. And these job cuts are adding to the already over-extended unemployment, Social Security, Medicare and welfare system in our country. That bubble is next to burst.

What should happen
There is not one simple answer to solve this problem. Our current economic and family crisis is caused by multiple weaknesses which have combined to create a catastrophic system failure. So, to solve this problem, we must avoid laying blame on any one thing, but look at how individual citizens, banks, and the government can change to get us out of this crisis. Only the application of a common-sense, principle-based approach will work.

The Family
People are our greatest resource. All people deserve the opportunity to be educated, develop their God-given gifts and talents and become contributing members of society. How many potential Einsteins or Mozart's have lived and died; their talents and abilities untapped and undeveloped. The family is the cornerstone of our society and is the only institution that can adequately meet the emotional, and psychosocial needs of its members. The family must be empowered to fulfill its fundamental purpose.

Civic leaders need to speak out against any extra-marital sex. Children have the right to be born into a home with both a mother and a father. Illegitimacy is the number one contributor to poverty, drug use, crime, and gang activity. I don't want to go back to the days of the scarlet letter, but we need to recognize that what the Bible calls fornication weakens our society. Extra-marital sex needs to loose its social acceptance.

Women should be encouraged to be college educated but to stay home with children while keeping their skills current if possible. Educated mothers result in highly motivated and goal-oriented children. But children need the nurture only a parent can give. The dollar worth of a stay-at-home mom has been estimated to be over $120,000 per year. Unless she is making more than that, it doesn't make dollars or sense to have both parents work. With mom at home, children are taught proper diet and health practices and how to care for babies and children. The transmission of these basic life skills and knowledge will result in a healthier population and less strain on emergency departments that are overrun with the responsibility to trying to educate people on the most basic and fundamental life and health skills.

US Families should be encouraged to have a good number of children. Grandparents are not supposed to be raising grandchildren. Children should be able to find employment close to home. Parents who have children close by have a built-in care-giving system in place when they get older and require it. Elderly parents do better when cared for by family instead of being institutionalized. 2/3 of money paid for health care is spent in the last 6 months of life. If we created a culture and tradition as other countries do where family cares for its own, and those family members are better educated on end-of-life care, health care costs would significantly be decreased. Elderly patients in Nursing Homes will end up in the hospital and back to the Nursing Home much more than patients who stay at home with family. Home health, hospice and respite services should be further developed and expanded.

Banking and Government
1. Get rid of the Fed and sell your own bonds and print your own money.
2. Immediately pay off all debt by printing the money.
3. Get rid of the banking practice of extending loans on leveraged capital which will prevent inflation by creating a demand for all the newly printed dollars.
4. Revamp the interest system so that borrowers are able to immediately pay off a greater portion of their principal and begin earning immediate interest on savings. In other words, do away with the amortization of debt repayment or change it to a flat rate.
5. We need to be more self-sufficient and produce and buy American products.
6. Do away with the idea of pensions and any idea which puts financial burden on a future generation. Again, let people save today by earning better interest rates.
7. Carbon dioxide is not a significant greenhouse gas, realize the theory of man-caused global warming is a fraud and allow 3rd-world nations to industrialize and create electricity with coal.
8. Extend education and business loans to developing countries using our fair interest system and allow them to create their own wealth and produce and buy their own products.
9. Work to gain energy independence as well as economic independence which means limit borrowing and buying from other nations as much as possible if we can build it here.
10. Get rid of derivatives for sure. Allow companies to issue bonds to raise money at better interest rates (remember that only the federal government should print money).

Maya Angelou shared the following wisdom, "I looked up the road I was going, and since I wasn’t satisfied, I decided to step off the road and cut me a new path.” I think it's time in America to follow this wisdom and cut ourselves a new path that removes the chain of debt around the neck of our country and the American people and puts the family first.

No comments: