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There's been a lot of talk about how lax lending standards helped blow up the housing bubble. Talk about short memories and logic disconnects, though; apparently Massachusetts Congressman Barney Frank and New York Representative Anthony Weiner are trying to pressure Fannie Mae (NYSE: FNM ) and Freddie Mac (NYSE: FRE ) to lighten up a little and relax condo lending practices. Um … I think we've seen this disaster flick before.
This is the type of thing that's been bugging me for a long time about our recent economic problems and policymakers' response to them. I've often had a hard time wrapping my brain around all talk of wheedling and forcing banks to lend because it sounded an awful lot like trying to cure our problem with exactly what has ailed us. (That was how I felt about the TALF plan.)
Given the nature of the beast we've created, banks need to be a lot more prudent about who they lend to. Otherwise, we'll end up right back in the danger zone. But the word on the desire to lower some standards hints that forces at work may tempt us all back into the same black hole.
Welcome to the ugly reality
The reality that many American consumers (and companies) are already overly indebted does not bode well when it comes to who exactly banks will extend credit to as the Federal Reserve continuously attempts to grease the wheels of lending.
There's a real paradox at work: Lax lending has been a huge problem, but without it, we've lost a heck of a lot of economic activity. I'm not sure that it's a welcome connection to realize that a significant amount of spending wasn't tied to actual employment income.
Welcome to the world of slippery slopes and more chutes than ladders. Meanwhile, there is still a major glut of housing inventory out there, and if nobody can or will buy, that's not going to change anytime soon. And of course, given increasing job losses and mounting foreclosures, it's not too hard to imagine that a bottom in the housing market may not come as soon as optimists would hope.
When the dot-com bubble popped with few Internet start-up survivors, a mild recession followed. The questionable answer was low interest rates and that brand-new inflating bubble to replace the old one, which certainly helped with that whole "mild" part (although you might call that instead a temporary fix).
Flash forward, and people were using their homes as ATMs and gorging on debt like home equity lines of credit and wallets bulging with credit cards from the likes of Visa (NYSE: V ) , MasterCard (NYSE: MA ) , and their banking partners, and this helped pump up our entire economy (and government tax revenues and stocks) artificially. Everyone from Starbucks (Nasdaq: SBUX ) to Toll Brothers to banks like Bank of America (NYSE: BAC ) (and its acquisitions Countrywide and Merrill) all bubbled up, too. And of course, many corporations -- a high-profile example might be Sirius XM (Nasdaq: SIRI ) -- also gorged on debt in so-called good times, which as we can see, all probably seemed reasonable when everyone was doing it … until the party stopped.
Let's not roll the dice again …
Our economy needs to correct and our culture needs to get past the speculative, artificial, bubble-hungry mindset that we've relied on for too long, where easy credit gave too many people just enough rope to hang themselves with.
However, Frank's move underlines the concept that politicians are going to have a heck of a time doing the logical but painful thing. Letting the correction happen hurts in the short term, and just like corporate leaders, there's a huge temptation to make the short term look good even if it's not sustainable. Logic says it could take years to recover from this mess (and my Foolish colleague Morgan Housel points out that our debt binge started before the housing bubble). I don't think the political types are willing to take the logical route here, but instead are desperately looking for bandages so that things don't feel so much worse on their watch.
Motivations for lowering condo lending standards supposedly are that the housing recovery could be slowed, and that the tightened standards could endanger the "viability" of some condo developments, but that just says to me they weren't viable to begin with, except under the absurd and fantastical models of an out-of-control bubble mindset.
All the chit-chat about how regulators and government can make everything right may appeal to people emotionally right now, but I think we're increasingly seeing plenty of rational argument for why there's plenty of blame to go around, and government policies that mess with markets are fraught with economic peril.
Recent reminders that often-quoted economist Paul Krugman was OK with the "solution" to the previous recession that led to the housing bubble, and that Fannie and Freddie were both major parts of our disaster and were highly regulated, political entities can make you question some of the assumptions right now. And of course, Barney Frank was a force in some of the loose mortgage lending practices to begin with; the quote going around at the moment is how he said Fannie and Freddie should "roll the dice" for "affordable" housing back when the housing bubble was starting to take on some air.
Hold on to your hats, folks. This news sounds like a red flag; it suggests that we are again making the same mistakes while calling them the solutions. Free market policies may frighten a lot of people, but politicians' meddling in the economy -- complete with short-term "fixes" to charm voters and the public -- are really bad medicine for what ails us.