Coming Depression

[freein05]

Although there probably weren't any guns involved, the Community Reinvestment Act did require lending institutions make "risky" mortgage/business loans in order to remain in compliance with the law. Fannie Mae and Freddie Mac were also tasked with ensuring that loans with favorable conditions were available within "high risk" and "at risk" communities.

Banks then did what banks do, they managed that risk by blending it into other investment vehicles. There are always unintended consequences of social engineering and this seems to be a pretty good example of a one.

I was the Chief Compliance and Community Reinvestment Act Officer for the last bank I worked for. There is absolutely no requirement in the regulation that requires banks to make risky loans. The last five years I received an outstanding CRA rating. Employees volunteering in community focused groups qualify as CRA credit as does investments and loans to corporations or groups that support low to moderate income people. My bank made loans to housing authorities that not only qualified for CRA credit but the loans were solid and safe.

A lot of people say what you said that banks were required to make risky loans to meet CRA regulations. That is totally false. Even if a bank got unsatisfactory on it's CRA examination all that would happen is when the bank posted and published it's CRA examination it would show unsatisfactory. That is it nothing else happens. The examiners will encourage the bank to do better but there is nothing in the CRA regulations that calls for regulatory action or punishment. What may happen is the bank may lose public funds deposits. Housing Authorities look at CRA reports in deciding who they will bank with. Cities and Counties also do this. So a bank could lose public funds deposits and that could mean millions of dollars in deposits.

I need to add that a banks CRA rating is used as part of the approval process of the regulators when a bank wants to open a new branch or buy another bank. There are five things the regulators look at before a bank is allowed to expand and CRA is one of them of the 5 it is last in priority. Capital is number one.

[puglogic]

Well, coming Depression or not, I think it just makes sense to be completely debt free, learn how to garden, raise chickens, keep bees, home canning and preserving, basic sewing, basic first aid, and many other old fashioned skills.

+1 Well on our way! When our mortgage is done, I won't be too worried about finding a way to make it, just as my debt-free grandparents had no problem weathering the Great Depression. I do worry about others in inhospitable climates, with no growing space, and limited mobility...they will not fare as well. Not too interested in whose fault it is -- it's obvious to anyone with eyes that this has been building for many years. More interested in keeping the deer out of my potato patch.

[Gregg]

I would ask what can anyone or president do to fix the economy in 2 years. It took over 10 years and a big war to come out of the Great Depression. I think we are heading into round three of the recession because of public sector job cuts. These job cuts for the most part are being caused from lack of tax revenue from the housing sector.

Until the housing sector recovers the overall economy won't recover. I would add don't blame the home buyers. The so called expert bankers out of greed approved and sold these worthless loans as bonds to make even more money for themselves. No body held a gun to the bankers head to force them to make these loans. I was in banking at the time and could not believe the loans that were being made.

No fix can be made in just two years. It is not entirely Mr. Obama's fault that the economy is in the doldrums or that the recovery is not more robust. What can be done, and hasn't been in the past two years, is to define the problem and begin to implement solutions that will help lead the economy out of a recession. If we were ten years from full recovery in 2009 we are still ten years out in 2011.

While there are multiple reasons the housing bubble burst the buyers are absolutely to blame for part of that. I'm certain no one held a gun to their heads when millions of them bought houses they couldn't afford. The predatory lending argument is hogwash. Did it exist? Yea, probably, but how many people really fell victim to it? Certainly not all the millions and millions that were snatching up suburban McMansions as fast as they could be built. Greed, arrogance or stupidity (or all three) on the part of buyers is what put those buyers in those expensive homes with time bomb mortgages. The banks were just as greedy and should be held accountable for their part as well, but we always seem to concentrate on the corporate side with discussions here. The banks didn't do it alone. To let the buyers off the hook is just inviting the game to start right back up. Individual accountability, what a concept.

[dmc]

I think we've been in the Great Depression part II for 3 years, that being said, I'm wondering what changes everyone is seeing out there.
I hear people enjoying the simpler things, I'm hearing folks who no matter what their purse looks like agree to help someone in need.
No one seems so judgemental about giving up cable TV or cutting back to one good car, shopping at the second hand store.
There's a young group of housewives and new mothers who've discovered coupons, and savings. Leftovers have become quite chic.
And packing your lunch...the newest and smartest thing.
What are you seeing...
Mrs.B

Ive noticed a group of very simple livers on the north side of town. They are living in tents under the railroad tracks. Ive never noticed them before this year. I'm sure they will have fond memories of the Age of Obama.

[Mangano's Gold]

I think that what has been happening for the past 30 years is just becoming more visible. Over-investment in technology in the 90's and housing in the 2000's helped mask the underlying structural changes that are occurring in American work-life.

We are seeing a clear fracturing. For the smart and ambitious, times are good and will stay good. The super-smart and super-ambituous now have a worldwide playground to treat as their oyster. But it is a different story for the commoner, if I can borrow and perhaps misuse an English term.

Economic security for people who punch clocks, metaphorical or not, is diminishing and will continue to diminish. Technological advances, globalization, and their cohorts have conspired to make the work of most Americans relatively less valuable. There is no easy fix, and there may be no fix, but it presents interesting public policy challenges.

[Catwoman]

Off topic, but to reply to M's Gold...don't you think that the cessation of teaching trades in Texas High Schools, i.e., auto mechanics, plumbing, etc., has a lot to do with this? We put such an emphasis on everybody going to college and we have shortchanged a great portion of students in Texas...Those who punch clocks would have greater economic security if they were able to learn a trade in high school instead of relegated to flipping burger...my soapbox as a Texas educator..

[Zigzagman]

then I'll believe that we are going to get serious about our economic problems. I do fault the public for living well beyond their means but in defense of some, no empathy, they bought into the HGTV marketing scheme of flipping, building, and totally thinking that they could afford to live HIGH with very little effort. After all the house became the bank account for many and many thought that it would never end - well, not everyone.

I honestly believe that our investment banking system is responsible for the moral hazard that was created in the decade of the 90's. They invented financial instruments, they did predatory lending, they do not today or then resemble anything like most people think of when they think of a bank. The multimillion dollar bonuses continue even today as the FED continues to feed the revenue with no cost and allows the banks to clean up their books. I quite sure the Freein05 can tell that story much better than myself.

Even Europe is complaining about the American system of greed and understands that unless we somehow bring back some sanity to our banking system then the problem will only temporarily get better with an even bigger problem later - TOO BIG TO FAIL is still in place.

I personally think that it is time to nationalize the banks but I suspect that the economics will have to get much worse before people can accept the ideological conclusion that the free market is not serving us well, nor is it free but rather taxpayer and debt subsidized.

There is definitely a place for government in this economic downturn but the FED and the pompous self serving elitists in the banking community are not supposed to be the government - but they own it on both sides of the political isle.

No sure what is going to happen but I don't think our problems will be about entitlements or anything like that - they will be about corruption, hedge fund casino gambling, and really all that we can do is vote and the choices are all very similar. But hope is not the answer (I loved this article contributed by Puglogic)

With the economic downturn, climate change, and lack of opportunity for many I think we have left a very challenging word for our children. I would love to see a rebirth of simplicity in this country and it might just happen sooner than we think - it will be different but I don't think it will be apocalyptic. I do think a social revolution is in order - enough of this ignorant greed and corruption by business and government. Time to look back to the 60's movement and learn some important lessons.

Peace

[Mangano's Gold]

Off topic, but to reply to M's Gold...don't you think that the cessation of teaching trades in Texas High Schools, i.e., auto mechanics, plumbing, etc., has a lot to do with this? We put such an emphasis on everybody going to college and we have shortchanged a great portion of students in Texas...Those who punch clocks would have greater economic security if they were able to learn a trade in high school instead of relegated to flipping burger...my soapbox as a Texas educator..

Maybe. I think you still run into the same supply/demand issue you do with most things. If you increase the number of auto mechanics, you can expect downward pressure on wages for auto mechanics. There is a fairly fixed amount of auto repair work to be done. Ditto plumbing. Scientists and engineers, on the other hand, have a much more open arena. They aren't playing in a zero sum game. But obvioulsy we all aren't cut out to be scientists.

The Germans seem to make apprenticeships work, though. And manufacturing in a high-wage country.

As a Texas voter, I'm totally open to trying new things in education. If the School Board wants to try something new, chances are they have my support.

Thanks for teaching our kids. My brother-in-law is an elementary school teacher, and his wife (my wife's sister) is a counselor in Texas public schools (Title I, 90%+ Hispanics, as are a bunch here in TX).

[jp1]

I think that what has been happening for the past 30 years is just becoming more visible. Over-investment in technology in the 90's and housing in the 2000's helped mask the underlying structural changes that are occurring in American work-life.

We are seeing a clear fracturing. For the smart and ambitious, times are good and will stay good. The super-smart and super-ambituous now have a worldwide playground to treat as their oyster. But it is a different story for the commoner, if I can borrow and perhaps misuse an English term.

Economic security for people who punch clocks, metaphorical or not, is diminishing and will continue to diminish. Technological advances, globalization, and their cohorts have conspired to make the work of most Americans relatively less valuable. There is no easy fix, and there may be no fix, but it presents interesting public policy challenges.

On Planet Money a few weeks ago they talked about this very topic. I don't remember their source, but basically the statistic they mentioned was that the unemployment rate is distinctly dependent upon one's education. IIRC, people with masters and doctorate degrees had something like a 2.5% unemployment rate, 4 year college degree people a 4.5% unemployment rate, high school diploma 9% and no high school diploma substantially higher still. That's comforting to people like me with at least a college degree, but the majority of the American population is not in that group, and that's a major problem for the economy and society overall. Obviously the manufacturing jobs that have left the country are not likely coming back. At least unless the dollar severely drops in value and we can compete for non/low-skilled jobs with other much lower wage economies. The answer, it seems to me, would be that we need to focus on developing trade skills that can't be exported. Things like energy efficiency jobs that require someone in a specific (American) location to install insulation and weather stripping or solar panels, for example. I doubt that we will/can generate enough jobs like this to bring back the working class to previous living standards but every little bit will help.

[jp1]

With the economic downturn, climate change, and lack of opportunity for many I think we have left a very challenging word for our children. I would love to see a rebirth of simplicity in this country and it might just happen sooner than we think - it will be different but I don't think it will be apocalyptic. I do think a social revolution is in order - enough of this ignorant greed and corruption by business and government. Time to look back to the 60's movement and learn some important lessons.

Peace

I agree with you that major change is coming down the pike, and probably a lot faster than people realize. With the rapidly ballooning government debt, quantitative easing, and the ongoing ponzi profit structure of wall street there are simply too many things that could happen to trigger a massive crisis, that it seems likely we'll eventually have it.

I pray that you're right that it won't be an apocalyptic disaster here. However, I just finished reading "When Money Dies" by Adam Fergusson, which is basically a blow by blow history of germany from the end of WWI to the late 1920s, so I have a pretty pessimistic outlook at the moment. As the Deutsche mark collapsed as a result of massive government borrowing during the war followed by massive money printing after the war chaos eventually took over German society, which had up to that point been quite stable and prosperous. The horrible suffering that so many went through would have been just as unthinkable just a few years earlier, as it is to most of us in America today, yet it happened. When farmers refused to accept the mark in exchange for their produce and people in the cities were seriously going hungry looting of farms near towns and violence against farmers resulted. Our current situation is different, of course, (unlike Germany after WWI we're still the most powerful country the world has ever seen) and surely not nearly as far along as the trouble Germany was facing in 1919, but unless we make some significant changes it's not out of the realm of possibility to see us go down an equally awful path at some point in the future. If I thought the politicians on either side of the aisle were serious about fixing things I wouldn't worry so much, but from what I see our "leaders" are only concerned with their careers, not with the needs of the American people who elected them.