How government is like a subprime mortgage borrower
More from my interview with David Walker, the former comptroller general who is now head of the Peter G. Peterson Foundation and star of I.O.U.S.A., a documentary film on the country's terrible debt problem. Washington's decline into $9 trillion in debt and the subprime mortgage crisis are remarkably alike, he says. To wit:
1) There is a disconnect between lenders and borrowers. By dealing through brokers and other intermediaries, Wall Street didn't have a full idea of how just likely subprime borrowers were to almost immediately default on their loans. This was the classical "principal-agent" problem in which the middlemen profited at the expense of the parties they were supposed to represent.
Congress -- the agent for the American people -- is doing its job about as well as the shadiest liar-loan, subprime mortgage broker. Congressmen reap great political capital from spending the next generation's money, and they don't get hit with a either political or financial cost. Generations Y and Z -- the people who will owe all this money when the rest of us are dead -- are lending money for Congress's deficits. But nobody is representing them at the table.
2) Lack of transparency. Even Wall Street wizards had trouble figuring out myriad tranches of mortgage securities, which contributed to their problems. Likewise, Washington fudges its accounts by ignoring trillions in future liabilities in its financial statements -- behavior that would be illegal if done by a private corporation. There is $44 trillion in off-balance sheet federal obligations, Walker says.
3) Despite numerous warnings in both cases, nobody does anything until a crisis forces action. This makes the problem ten times worse than if it had been nipped in the bud. With the national debt problem, "if we wait until we HAVE to act, tens of millions of people will be affected in ways they have never been affected in in their lives," Walker said. Just like the mortgage mess.
Comments
More on this, please. It is impossible to call too much attention to this issue, especially in an election year.
Posted by: Mid Twenties | May 19, 2008 10:36 AM
Thanks Jay!!! Keep up the good work, rome is burning and no one is looking.
Posted by: generation y | May 19, 2008 12:13 PM
It's quite simple, when your principal export becomes digits rather than widgets that are cloaked by opaque veils such as the Mortgage Electronic Registration Systems (MERS) and the Depository Trust Corporation (DTC) and Cede & Co., no one except the bankers themselves know what really is inside the vaults of America and ever American.
When real and tangible "paper" such as promissory notes; negotiable instruments; bonds; stock certificates; and even cold hard "cash" are turned into electronic pulses of energy, then "paper trails" are easy to conceal, alter, change and with keystrokes, as can be witnessed by the Société Générale "trader" scandal, billions in losses can be hidden or gained or "gamed" as the case may be.
Electronic commerce is a great idea and must be encouraged, but not at ANY cost and certainly not at the costs to our nation, ourselves, and future generations.
Let's get back to basics. Let's deal in market reality and not perception or financial wizardry! Let us each "cut back" on our extravagance; reduce our debts; and raise our savings rates in real cash, not paper transactions.
Let's demand full and complete transparency from our government as well as our bankers and brokers. While justification and accountability were the buzzwords of the 90s, let fiscal transparency be the buzzword for today! If not, the only thing that will be transparent will be the losses, pain, and damages to our lives, our nation and our futures!
Posted by: Nye Lavalle Pew Mortgage Institute | May 19, 2008 4:00 PM
Promissory Notes who needs them? All you have to do is pretend to hold them and you can collect money from people that don’t owe you a dime by foreclosing a mortgage that secures a debt that runs in favor of another party. This is precisely the problem with so-called MERS mortgages. 50 Million mortgages recorded naming MERS as a mortgagee. Yet MERS hasn’t loaned a dime to anyone. Nor does MERS hold a single promissory note. It just tells Court’s that it lost them. God only knows who actually holds the 50 million promissory notes that were supposed to be secured by all these “MERS Mortgages”.
Posted by: Kevin Lamson | July 1, 2008 10:30 AM