When the Foxes Come Home to Roost

That the economy is in the toilet should be obvious to anyone who speaks, reads or understands English. And I’m quite sure it’s obvious to many others who do none of the above. And what should be equally obvious is that the entire situation was avoidable.

The mortgage meltdown finds its home in a single event, repeated over and over again by companies that did not see the value of accurately determining the credit-worthiness of the people they were giving money to hand over fist. And all too often with no up-front investment from the buyers.

Milton Friedman said long ago that there is no free lunch. That hasn’t changed, but mortgage companies told people who either didn’t know any better or were trying to work the market by flipping property that there was. “The real estate market is a giant buffet, all you can eat, every day for as long as you want.”

What they didn’t foresee, for whatever reason, was that when the buffet got too expensive, the customers would just go somewhere else. Never mind that they had already committed to eating in the same place for 30 years.

A lot of times, they just went into hiding from the mortgage company doing it's best to track them down and make their lives miserable.

And now we have a mess. A total mess that was preventable.

Requiring lenders that have any connection to the Federal Reserve in any way what-so-ever (and most do in one way or another—if they have a bank account, they have a tie to the Fed) to have enough cash on hand to meet their obligations for continuing operations after they make an allowance for bad debt would be a starting point. But certainly not the end of the story.

Another step would requiring lenders to verify the lies that people tell to get loans. Also requiring that new owners have a substantial stake in the property. And mandating clarity in closing documents so that people understand that in so many months, their payments will quite possibly go up and explain what those indices that determine their new payments are.

From airlines to banks to mortgage companies, the on-going experiment in deregulation has been a nightmare. Now it’s investment banks that are hip deep in quick sand. Their risky investments have come home to roost.

It’s like the fox in the hen house who ate one too many bad eggs.

If those were your chickens, would you rush that fox to the emergency room to make sure he was ok? Pay for his lengthy hospitalization? Sit up nights worrying about him?

Doubtful, but that’s what’s going on right now. We’re all paying (or will soon be paying) for other people’s bad judgment. From bailing out Bear Stearns to trying to subsidize people in over their head on their mortgages, we’re all paying for other people’s bad decisions.

I'm not sure that it's either morally or ethically supportable to subsidize bad judgments. They made their nests. Now let them lay in them.

These days, it ain’t the chickens who’ve come home to roost. It's the foxes.