jeudi, février 09, 2006

Bye Bye Al

I started working in the mortgage industry in 1999. At that time, Bill Clinton was our President, and our company's biggest challenge was finding and retaining qualified customer service personnel. Our unemployment rate was so low that jobs were widely available, and any person who could get to work everyday was a hot commodity. If you understood a PC and how to work in a windows based environment, you could write your own ticket. Hiring and retention bonuses were common. At our company, we lowered our standards to the point where we would take any person who could just show up and try (the "on time" part we weren’t all that picky about).

Soon thereafter Clinton left, and in his place the Supreme Court appointed a jackass and a fool. The new guy slept through important presidential daily briefings (like "al Qaeda Determined to Strike U.S. Targets"), and made other huge mistakes. However, one thing he did for continuity (like so many of his predecessors) was keep Alan Greenspan as his Fed Chairman.

Now that Greenspan is retired, a lot of publications are analyzing his legacy. The Economist (ironically) basically panned him. I have to admit that when the tech bubble popped, he did a fine job of keeping the explosion at a minimum. But Greenie lost me, when he basically handed Bush an artificially inflated economy (and helped him with the 2004 election) by keeping short-term interest rates low. You may notice that he started to raise them a quarter point here and a quarter point there right after the 2004 election. Prior to that he kept interest rates low so that the economy would seem like it was thriving. We were, all of us, irrationally exuberant.

More proof of how Greenspan swayed with the political winds, can be seen in how he worked with Clinton. Clinton’s priority was deficit reduction. Greenspan worked with his Treasury Secretaries to accomplish the goal. I wonder sometimes how he felt when Bush came in with tax cuts for the wealthy and a plan that would build up the deficit Clinton erased. I wonder if he got whiplash or if he felt like a child who destroys his own sand castle right after making it (the tax cuts were lousy economic policy but sound political policy – people don’t care about deficits, but they LOVE tax cuts –even when they (read: middle class taxpayers) don’t even get them).

Over here in mortgage, people were getting rich. Very rich (your humble author excepted). Recent college grads were taking Loan Officer jobs with top 20 lenders, sitting at a desk and waiting for the phone to ring (and boy did it ring). They’d answer, let a computer pick the best loan and rake in origination fees like nobody’s business. Often I heard of 24 year olds making $300,000 a year without breaking a sweat. It was easy money. Interest rates were low, home prices were rising, but who cared. If you had a home, you sold it for more than it was worth. If you bought a house, you probably paid too much, but you didn’t fret. Prices were going up, up, up. You knew you’d recover your losses in about a month or two.

People were refinancing every year. They took their equity out and went to Home Depot, or the local Ford dealership. The whole economy was sustained by the mortgage industry. The mortgage industry was propped up by a lie, and the biggest liar of them all was Alan Greenspan.

And now, I have a feeling we’re going to pay for all that bad policy. Everyone talks about the housing bubble (tech bubble, housing bubble, fragile spheres both). Interest rates are rising. Lenders are writing fewer loans everyday. Houses are staying on the market longer. Sellers are lowering their prices. When you ask realtors if this is a buyers market, they laugh and tell you it has been for months. All of the sudden, things are returning to normal - which is to say: all the sudden you can't on housing to save the day.

With one exception. A lot of the loans the computer picked were interest only loans and ARMs. Out there are a lot of hidden balloon payments and ARMs about to give way to higher interest rates. People bought extra house (or extra fancy) counting on things always being easy and grand. Now that they’re not, foreclosures are at an all time high, and the worst is not even here yet.

If there's a collapse. Just remember that the retired Fed Chairman had a role in it.