Watching the crumbling of the housing and mortgage markets is like viewing a replay of the savings and loan collapse in the 1980s. Back then, hype and greed replaced brains as lenders and borrowers piled on more risk than they could afford.
Those same forces have brought us to our current fiasco as well.
In 1988, Colorado’s Silverado Savings & Loan died an agonizing death, costing taxpayers $1 billion. It took down with it the reputations — though not the fortunes — of some of Denver’s then-leading businessmen, including Neil Bush, brother of President George W. Bush. In the process, it simply became another of the Resolution Trust Corporation’s (the federal entity established to clean up the mess) problems and another drain on taxpayer dollars.
Last year, Colorado’s foreclosure rate was 40 percent higher than in 2006, with nearly 40,000 homes in foreclosure. As this dismal refrain is repeated across the country, it is threatening the nation’s financial infrastructure.
Meanwhile, the Federal Reserve is shoring up banks, but one has to wonder if this is helping those families in foreclosure. Not only do they lose their homes, they also get to help guarantee the bailout of giant Bear Stearns, brought to its knees by excessive risk-taking with complicated securities.
It now appears that neither the participating banks nor the long-trusted agencies rating those securities fully understood the securities themselves and the risks they carried. That, of course, raises the question of how much we can trust the institutions we’ve counted on to make our financial markets more secure.
The Fed’s actions raise even more questions: Where will the bailouts stop? When it comes to saving a bank by guaranteeing its new owner will not have to assume its potential losses (Bear Stearns and JP Morgan), what size is too big to fail? And, what about all the smaller banks that are also in trouble? Will they be allowed to fail because their losses won’t materially impact the nation’s financial security?
Then there’s the question of accountability. If investors and lenders made bad decisions by investing in shaky securities and subprime borrowers, what is their responsibility for the resulting losses? Big institutions made bad decisions, too. The shake-out may doom some of them, along with their employees and investors.
The Fed may save the big guys, but not the local banks in rural Colorado or smaller regional institutions. Understandably, this is not just a question of fairness, but also of making sure the country has a stable financial system. The problem for Colorado is that, just as in the 1980s, we could be left with mostly huge out-of-state players, but fewer local banks.
Next is the issue of the Fed’s dramatically lowering interest rates. That’s intended to put money into the banking system so banks will lend money to businesses and people who will then spend that money and get the economy rolling again. But what happens when that simply spurs inflation, or stagflation, as it did in the 1970s, rather than encouraging businesses to invest in jobs and equipment? With stagflation’s resulting 10 percent unemployment, 16 percent car loans and 15 percent mortgage rates, average Americans bore the brunt of poor decisions made by huge institutions they had no control over.
Finally, if the American taxpayer is going to assume the risk of big losses in the banking system in order to maintain that system, will we also do more to help out the families facing home foreclosures? When the big guys get taxpayers’ money to save themselves, the little guys who are losing their life savings need some consideration, too.
Gail Schoettler (gailschoettler@email.msn.com) is a former U.S. ambassador and Colorado lieutenant governor and treasurer.
