Fool me twice

Stop me if you have heard this before: Reckless lenders pocket wads of cash on speculative real estate loans while those whose job it is to watch them whistle merrily. Eventually, the sure-fire real estate market flops. Loans go unpaid, and lenders begin going belly-up. The disaster becomes so dire, it requires a bailout by U.S. taxpayers before even more serious damage is done.

If the current subprime mortgage meltdown strikes you as a twice-told tale, that’s because it is. Twenty years ago the savings and loan crisis offered up a similar plot and a similar cast of characters.

No doubt the details of the two events are different – in some cases significantly so. But at the heart of both are avaricious lenders out to make a fast buck and oblivious regulators who failed to slow them down or to let citizens know their country’s financial system on which all else hinges was coming unhinged.

It took awhile, but the current subprime mortgage mess finally has derailed the U.S. economy. Recession looms. While there are other contributing factors – villainous gas prices, leveraged consumers, dormant wages – the collapse of the subprime mortgage industry was the final push that sent the U.S. economy from teetering to toppling.

Recessions harbor no favorites. Every corner of the country – even ours – will feel the sting. President Bush and Congress this week approved a $152 billion plan to soften the fall and to possibly kick-start the economy. Under the plan, the Internal Revenue Service will cut rebate checks and start sending them to taxpayers this spring. Some of us will get $300. Others will get $600 – or somewhere in between.

It is, of course, our own money being returned to us. Nothing in this supposed fix is free.

Washington acts as if this bailout is benevolence. Nowhere in their gushing is an explanation of how hundreds of billions of dollars of home loans could have been made to extraordinarily high-risk borrowers and then packaged and sold as securities to investors worldwide. Mum is the word – just as they never speak about this nation being in hock to the tune of $9 trillion or that for more than a generation, according to the artless Congressional Budget Office, your share of the income in this country, your slice of the American dream, has shrunk unless you are one of its wealthiest.

Both the CBO and the Government Accountability Office have predicted financial apocalypse unless America mends its fiscal ways. If left unchecked, entitlement programs – in particular Medicare and Medicaid – as well as the interest on the national debt threaten to eventually bring the nation to its knees.

Congress elected not to slash spending to offset the IRS rebates destined for our mailboxes or the other measures included in the bill. That $152 billion of economic stimulus, consequently, will be added to the 2008 federal deficit, which will be added to the national debt, which, if we don’t pay it, will fall to our children and our children’s children. That is a real cost to you and me. So are the hundreds of billions of dollars the stock market has shed of late.

Since the subprime mortgage misery came to light several months ago, most stocks have lost all of their 2007 gains and, in certain cases, a good portion of their 2006 gains have evaporated as well. And if what some suggest is correct, we are in Act I of this tragedy. More subprime mortgage loans – if not the majority – are predicted to default in coming months. If that holds true and if the economy tanks as expected, Wall Street could sink like a heartbroken high schooler.

That pain will be as acute in New Effington as in New York. No longer is the stock market the domain of the elite. For millions of Americans, what little they have saved for their retirement is invested in stocks through employer-sponsored 401(k) plans and other retirement plans. Wall Street in our lifetimes has become an egalitarian place where even the proletariat parks its cash. That is a significant cultural change because when scoundrels are allowed to wreak financial havoc as they have done, the futures of honest, hardworking, middle-class people are put in jeopardy. For them there are no savings accounts in the Caymans. No second homes on the coast. No Plan B.

The apparent failure of federal regulators – Congress, the Fed, the Comptroller of the Currency, everybody – to either recognize or respond to danger is perhaps what is most grave in all this. They appear to either be blind to the shenanigans of shady banks and corporations or overmatched. Neither is a happy thought.

South Dakota was more victim than accomplice in the savings and loan scandal. That, again, appears to be the situation. The subprime fallout, however, isn’t finished. An entire closet of shoes – enough to make Imelda Marcos blush – have yet to drop.

The savings and loan and subprime mortgage implosions share another important similarity. In neither were borrowers unwitting actors.

When lenders start throwing money around, it doesn’t take long for word to get out. Easy money casts a wide scent. Loans to suspect – but not unsuspecting – commercial real estate borrowers contributed to the demise of the S&Ls. Twenty-years later we have lenders making home loans to borrowers who do not have the equity or the income to add $100 – let alone hundreds of thousands of dollars – of debt.

There is blame aplenty in this subprime mortgage malarkey. Lenders coaxed borrowers into loans. Borrowers conspired to overstate their incomes. Brokerage firms scooped up the loans and resold them as investments. It is hard to tell who was conning who.

The $152 billion plan to prop up the U.S. economy, coincidentally, is about what the nation spent bailing out failed S&Ls in the 1980s. Stop me if you have heard this before: “Those who cannot remember the past are condemned to repeat it.”