Tuesday, September 30, 2008

The Credit "Crisis" and Zombies

I read an article with a somewhat hyperbolic title, Main Street America angry over credit crisis. Here is an example of how the credit market has tightened in response to the over-extension of credit that has led to our current financial troubles:

David Zugheri, co-founder of Envoy Mortgage Ltd, which has 475 employees in 20 states, has also seen a big slowdown. He said 30 percent to 40 percent of prospective buyers who could have qualified for mortgages two or three years ago are being shut out.

"There has been a mad rush back to the basics and if you don't have the necessary documentation you cannot get a loan," Zugheri said. But he noted that not all credit is dead.

"If you have decent credit, a verifiable income and want a loan for under $400,000 it's business as usual."

Well, I think it's pure scare tactics and exaggeration when the President and the media are telling us that we won't be able to get any credit at all. What is happening now is exactly what needs to happen. The banks need use more discretion and tougher requirements for credit than the free-for-all orgy of credit that has been going on for about the last decade. People will have to learn to live within their means and to stop expecting to get credit that they don't really deserve. What ever happened to the wisdom that credit has to be earned?

The article opened with a story of a guy wanting to buy a new truck with a $3000 down payment. The trouble was that he owed more on the old truck than its trade-in value, and he couldn't get approved for a loan without more down payment. That always happens when you buy brand new vehicles. They are already overpriced, and as soon as you drive off the car lot they automatically lose at least 25-30% of their resale value. This is one of the problems with the auto industry. It costs so much to build the cars because the auto unions demand that the employees are paid $30/hr to make the vehicles. But in the real "free market" of used cars the actual value is much lower than the new ones, and so people always end up owing more than they are worth for several years. The lender knew that the guy with the $3000 down payment would still end up driving off the lot owing much more than what the truck was worth. The bank knew that if they had to repossess the truck then they would be stuck with a loss because they couldn't resell it for enough to cover the loan amount. That is the proper decision of a lender. But people have gotten so spoiled with all the too-easy credit that the banks, for whatever reasons, foolishly extended.

Harsh as it might seem today, I have to say that this whole push by Bush, Congress, and so many supposed capitalists for keeping that kind of credit orgy going is absolutely insane. And as Neil Cavuto described it, they've all been turned into some kind of government bailout zombies:

Neil, you're not all alone in feeling like you've entered into some kind of "Night of the Living Dead" Zombie-land. I feel it too. But there are still others like us, who haven't yet been infected by the zombie virus which apparently morphed from the toxic loans and became contagious.

Well, I guess we are on some kind of precipice to disaster either way. But must we have to choose between two evils? Do we really have to protect all the spoiled rotten people who can't bear to face the consequences of their irresponsibility and orgy of credit spending?

I'm a vicious momma, and that means tough love sometimes. I don't coddle my children and try to protect their feelings too much when they've made really bad decisions. I want them to learn to face the consequences of their freedom. Freedom means being allowed to make mistakes and learn from them. A good parent can't prevent every bad decision a kid makes, and a good parent can't really pay the price for them. If they do, the kids become spoiled and entitled and irresponsible. I love my children more than life, and they love me. We are very affectionate, but they know that I won't excuse a bad decision or bad behavior. They know that they must take responsibility and face the consequences. I don't want them to think that the government will do more for them than I will.

Part of America has become some kind of sub-nation of entitlement zombies. They think that are entitled to as much credit as they want, without having to earn it. They think that they are entitled to college educations, paid for by their parents and/or the govenment at huge expense. They think they are entitled to get a house and cars that they can't really afford. This is not a good economic strategy.

What is wrong with all the so-called free market conservatives who are trying so hard to preserve a totally unsustainable economic status quo by injecting some ungodly amount of money into it? It will only calm the credit junkies for a very short time. I remember when interest rates were in the double digits and when getting a mortgage required jumping through all kinds of hoops. We survived that just fine. We worked hard and earned what we got.

I'm so disappointed in how the world is turning out for my kids who will be saddled with this for the rest of their lives. Some of us are more prepared than others for hard times, but in today's world somehow we are seen as the bad guys or the selfish ones for expecting others to be responsible and prepared too. It's just not right. I have plenty of compassion and empathy for people in truly desperate places, but cruel as it might sound, there's not so much for those who've been reckless and foolish and have expected so many entitlements without earning them.

Whatever happens, it won't be painless. But by God, I'm not letting the zombies eat my brain.

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