It is frustrating watching our economy suffer needlessly, as the stock market tanks, banks shut down, and housing prices fall. Just wait until you hear the retailers moan this Christmas. Any of you who believe that the government is there to help you ought to take a good look around and see what government has wrought. There are two things which have caused this economic debacle…energy prices and an accounting rule. Both represent government at its worst, as it tries to impose ideal rules in an imperfect world.
The accounting rule is very simple. Banks have to maintain a certain capital ratio; that is, the debts of the banks can only be a certain percentage of the assets of the bank. Fall below the number, and the bank goes under. Among the assets of the banks are certain mortgage backed bonds, packaged and sold by mortgage lenders. At a point in time, it was clear that there was going to be a slight increase of the default rate of the mortgages backing these bonds, and people began to panic. Nobody knew how many or how much, although even today it is less than 1 ½% of all outstanding mortgages.
However, after the collapse of Enron, the government changed how companies have to value assets on their books, including these bonds. The rule is simple…if you don’t know what they are worth, you value them at zero. So even though the vast majority of the mortgages are performing, the banks who hold these bonds still have to value them at zero, dropping the amount of their assets, messing up the debt to asset ratio, causing the banks to have to raise billions upon billions of dollars to make up for the artificially valued at zero bonds. In the process, they do not have sufficient capital on their books to loan money to homebuyers. Folks can’t get loans, and the values of houses goes down, and that aggravates the bond situation at the bank…and you end up with an Indymac bank failure.
No matter how well intentioned the regulators were in trying to prevent another Enron, they caused a problem much, much worse…and we are paying the price now. The good news for the banks: as these bonds continue to perform month after month, the banks will move portions from the nonperforming asset column to the performing asset column. Great for a year or two down the road, but tell it to the depositors, and the shareholders, of Indymac Bank, or National City Bank. A more realistic rule takes care of the problem…but you are dealing with the government, and they are here to help you. Instead, what we have is a snowball rolling down the mountain out of control, turning an iffy situation into a full blown crisis.
The other side of the equation is energy prices. There is no free market in energy. It has been regulated to death in the United States, and held hostage by OPEC. To make matters worse, countries like India and China, who are responsible for the dramatic upswing in demand for petroleum, have their oil prices subsidized by the government, and hence have no incentive to conserve.
Couple that with a “green” movement in this country that has taken on the characteristics of new national religion, it is wonder we have any energy at all. Again, while our Congress is concerned about how the Europeans view the United States, blocking any and all energy development, alternative, oil, or otherwise…China and India are rapidly becoming the environmental cesspools of the world, and nobody says a word to them.
Balance has not entered into the green discussion. No one points out that environmental issues were among the causative factors in the disappearance of the local steel industry, and much of the American heavy manufacturing base. I remember the Mayor of Youngstown saying back in the late 1960’s when the EPA was here to clean up the Mahoning River… the day the Mahoning River runs clean is the day we will have no more steel mills in the Valley. He was right on the money.
And just to tie things up in a neat bundle…the next credit crisis to hit the banks will be delinquent credit card debt, most of it due to rising energy prices and the cost to fill up your car with gas.
I am not advocating a return to “wild west” accounting and massive pollution of our air and water. But I do believe that it is time to strike a balance, and to be realistic in our approach to our financial system and our energy production. Banks should be allowed to put some value on those bonds relieving the capitalization requirements. Most of them are performing. The government should immediately institute a full blown energy agenda, including drilling, nuclear, wind, solar, hydrogen fuel cell development, renewable energy like ethanol, infrastructure build up to allow for tying into the electric grid and for ethanol and hydrogen pumps at filling stations, coal liquification plants, shale oil development….and I could go on.
Unless we do this, and do it quickly, we can all bend over and kiss our proverbial asses’ goodbye as we go to the poor house.
The accounting rule is very simple. Banks have to maintain a certain capital ratio; that is, the debts of the banks can only be a certain percentage of the assets of the bank. Fall below the number, and the bank goes under. Among the assets of the banks are certain mortgage backed bonds, packaged and sold by mortgage lenders. At a point in time, it was clear that there was going to be a slight increase of the default rate of the mortgages backing these bonds, and people began to panic. Nobody knew how many or how much, although even today it is less than 1 ½% of all outstanding mortgages.
However, after the collapse of Enron, the government changed how companies have to value assets on their books, including these bonds. The rule is simple…if you don’t know what they are worth, you value them at zero. So even though the vast majority of the mortgages are performing, the banks who hold these bonds still have to value them at zero, dropping the amount of their assets, messing up the debt to asset ratio, causing the banks to have to raise billions upon billions of dollars to make up for the artificially valued at zero bonds. In the process, they do not have sufficient capital on their books to loan money to homebuyers. Folks can’t get loans, and the values of houses goes down, and that aggravates the bond situation at the bank…and you end up with an Indymac bank failure.
No matter how well intentioned the regulators were in trying to prevent another Enron, they caused a problem much, much worse…and we are paying the price now. The good news for the banks: as these bonds continue to perform month after month, the banks will move portions from the nonperforming asset column to the performing asset column. Great for a year or two down the road, but tell it to the depositors, and the shareholders, of Indymac Bank, or National City Bank. A more realistic rule takes care of the problem…but you are dealing with the government, and they are here to help you. Instead, what we have is a snowball rolling down the mountain out of control, turning an iffy situation into a full blown crisis.
The other side of the equation is energy prices. There is no free market in energy. It has been regulated to death in the United States, and held hostage by OPEC. To make matters worse, countries like India and China, who are responsible for the dramatic upswing in demand for petroleum, have their oil prices subsidized by the government, and hence have no incentive to conserve.
Couple that with a “green” movement in this country that has taken on the characteristics of new national religion, it is wonder we have any energy at all. Again, while our Congress is concerned about how the Europeans view the United States, blocking any and all energy development, alternative, oil, or otherwise…China and India are rapidly becoming the environmental cesspools of the world, and nobody says a word to them.
Balance has not entered into the green discussion. No one points out that environmental issues were among the causative factors in the disappearance of the local steel industry, and much of the American heavy manufacturing base. I remember the Mayor of Youngstown saying back in the late 1960’s when the EPA was here to clean up the Mahoning River… the day the Mahoning River runs clean is the day we will have no more steel mills in the Valley. He was right on the money.
And just to tie things up in a neat bundle…the next credit crisis to hit the banks will be delinquent credit card debt, most of it due to rising energy prices and the cost to fill up your car with gas.
I am not advocating a return to “wild west” accounting and massive pollution of our air and water. But I do believe that it is time to strike a balance, and to be realistic in our approach to our financial system and our energy production. Banks should be allowed to put some value on those bonds relieving the capitalization requirements. Most of them are performing. The government should immediately institute a full blown energy agenda, including drilling, nuclear, wind, solar, hydrogen fuel cell development, renewable energy like ethanol, infrastructure build up to allow for tying into the electric grid and for ethanol and hydrogen pumps at filling stations, coal liquification plants, shale oil development….and I could go on.
Unless we do this, and do it quickly, we can all bend over and kiss our proverbial asses’ goodbye as we go to the poor house.
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