September 20, 2008

What Happened to Financial Prudence

When I was young my grandfather instilled in me the idea that a penny saved was a penny earned. Reading articles today about America's economy started me thinking of this idea and several others along the same line. What happened to frugality, to being able to afford something and saving up until you could pay for something.

Immediate satisfaction and debt seem to go hand in hand. I love this idea that if the government buys all of the bad debt these banks are holding that the market will stabilize and miraculously people will start buying houses again. Did it ever occur to anyone that maybe this is not the wisest course of action over the long term. Sure it sounds good and definitely answers those immediate concerns of people losing homes and banks failing, but does it provide a real solution, or another band aid. It occurs to me that putting a band aid over an infected wound simply leads to a greater infection, gangrene, and either amputation or death. First we must address the infection.

The infection in this economic crisis is debt and leverage. Unreasonable debt by homeowners in trying to afford a house they truly can't; in trying to satiate a desire for "nice things" they can't afford. Unreasonable debt and leverage by banks chasing smaller and smaller spreads using greater and greater leverage. It isn't exciting to make small profits and work hard doing good sound underwriting and due diligence; it is much easier and quicker to go with someone's stated income and hand people money knowing you can get it quick and cheap. These are the problems in our economy and these problems won't go away with a 700 billion dollar bail out.

I hope the government, in rushing to save wall street and keep all Americans in homes, jobs, and investments, enacting this "new" government oversight, addresses the infection and legislates something along the lines of how much debt individuals are allowed to take on and how much debt companies and banks are allowed to take on.

It is obvious that the bail out is more likely to make banks more reckless in the future knowing that they will always be bailed out because they are "too big to fail." This being the case, it seems reasonable to require a certain maximum indebtedness and leverage level that these unwise and imprudent banks are not otherwise likely to adopt if they know they will be rescued.

As far as consumers go my guess is that once you regulate banks they are likely to pass the regulation on to the consumer and hopefully you will mitigate a large amount of the problem. It probably wouldn't hurt to specify a "maximum indebtedness" consumers could take on based on ordinary income levels, and for a person to exceed this, either the bank advancing a loan or the SBA would have to sign off specifically that they approve the exception.

It is unfortunate that this type of regulation seems to be required and I am typically totally against government intervention, but in light of the massive amount of political pressure on both sides of the aisle and the seemingly unavoidable regulation that is about to take place I would like to point out that to treat the symptoms of the disease and not the disease is simply to delay the inevitable. The government must do the hard work of slapping Americans up side the head and unfortunately regulate indebtedness and leverage.

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