Wow! What a week. Since last we spoke, the earth has wobbled on its axis.
First, there’s Hurricane Ike. Here at KTBB we prepared for the worst right here in Tyler but in fact, we suffered very little.
Not so in Houston, Galveston and along the Texas Gulf Coast. Those areas got hammered. Galveston was the wealthiest city in the United States in 1900 when a devastating hurricane killed as many as 8,000. The city never fully recovered. Now, it appears that Galveston has been devastated again.
Next came the demise of Lehman Brothers, an investment banking firm that dates to 1850. The firm’s Monday bankruptcy filing eclipses Worldcom as the largest bankruptcy filing in U.S. history.
Within hours, another household name fell. Merrill Lynch & Co. has been around since 1914. Their logo today includes a graphical bull, from the days of their advertising campaign that said, “We’re bullish on America.” Merrill Lynch was sold in a fire sale to Bank of America. The shareholders of the company were essentially wiped out.
On Wednesday, the Federal government took a controlling stake in American International Group, aka “AIG,” in return for an infusion of $85 billion. The 89 year-old company is the 18th largest corporation in the world and, but for an infusion of your cash, would have likely gone bankrupt.
What’s going on?
Well, here’s what I think. Consequences suck. And they particularly suck when you’ve come to believe that you’re entitled to live a consequence-free life.
Way back in November of 2007, I said, in predicting the coming election cycle, that instead of voting on this or that candidate or party in 2008, we would, in fact, be voting on us.
I believe that even more firmly now.
So, who are we and what do we believe?
Well, first, it appears, we believe that we can have what we want, when we want it and only pay when it’s convenient. So, even if we can’t really afford a house or, based on our income and credit history, we shouldn’t go into debt to buy a house, we have done so anyway. Many of the loan instruments we used to trick ourselves into thinking we could buy more house than we could afford have now caught up with us — just as the inflated price we paid for the house has cratered. The result is a train wreck. The companies of which we just spoke that own or insure the millions of mortgages that cannot be paid are being effectively wiped out.
And yet, you hear from politicians, mostly Democrats but more than a handful of Republicans, that we should declare a moratorium on home foreclosures. That will only make things worse. If lenders fear that their recourse in event of non-payment will not be available to them, their only rational response is to loan no money at all. With no mortgage credit available, not only will home prices never recover, your own home will become a completely illiquid asset. You won’t be able to sell it to anyone who needs to borrow money to buy it.
Second, it appears that we believe that we are exempt from the laws of nature, or more accurately, are entitled to be indemnified against them.
Hurricanes are not new. They’ve been coming to the American east and Gulf coasts for thousands of years. What’s new about hurricanes is how many people now live in their paths.
As people have flocked to the coasts, so have the consequences of hurricanes. And yet, our government tells us with a straight face that billions will be spent helping residents of the hurricane-ravaged areas recover and rebuild. Billions of dollars will be paid by insurance companies, far in excess of the supporting premiums, to rebuild homes that when completed, will be in the path of the next devastating storm. Your homeowners premium will go up, count on it.
I’m not telling anyone where to live. If you want to live on the coast and run the very high risk of losing everything to a storm in return for the delights of coastal living, have at it. Where you lose me is when you think someone else should pay for the inevitable consequences of the choice you freely made.
Nothing is without consequence. Nothing is free. Everything comes at a price.
The crises of the past week have demonstrated these truths while holding up a mirror to who we are.
How do you like what you’re seeing?