Many years ago, Alton Brown said something would do well never to forget:
Here’s what it comes down to kids. Ronald McDonald doesn’t give a damn about you. Neither does that little minx Wendy or any of the other icons of drivethroughdom. And you know what, they’re not supposed to. They’re businesses doing what businesses do. They don’t love you. They are not going to laugh with you on your birthdays, or hold you when you’re sick and sad. They won’t be with you when you graduate, when your children are born or when you die. You will be with you and your family and friends will be with you. And, if you’re any kind of human being, you will be there for them. And you know what, you and your family and friends are supposed to provide you with nourishment too. That’s right folks, feeding someone is an act of caring. We will always be fed best by those that care, be it ourselves or the aforementioned friends and family.
We are fat and sick and dying because we have handed a basic, fundamental and intimate function of life over to corporations. We choose to value our nourishment so little that we entrust it to strangers. We hand our lives over to big companies and then drag them to court when the deal goes bad. This is insanity.
This came to my head today as I was reading an article in the Mercury News regarding the effects to the Fed’s rate dropping. The Fed, of course, is doing this in an attempt to bring stability to the market, to keep people in their homes and the economy strong. Quoting from the Q&A in that article:
Q: If the Federal Reserve reduces the target interest rate at which banks borrow money from each other, as it is expected to today, will rates for fixed-rate mortgages fall too?
A: Probably not. Rates might even rise. The Fed has no direct control over mortgage rates; rates for 30- and 15-year fixed-rate mortgages are essentially set by those investors who are willing to purchase bundles of these mortgages – “mortgage-backed securities” – from Wall Street. Rates have risen lately to compensate for the threat of inflation, which erodes the value of investors’ returns. Also, investors are hesitant to buy some types of mortgage-backed securities because so many borrowers have defaulted in recent years, leaving them with nearly worthless investments. With low demand for these products on Wall Street, lenders want to keep mortgage rates – and therefore the yields on securities – high enough to attract investors.
So, Fed rate cuts have made it cheaper for lenders to borrow money, but so far, lenders are not passing much of that savings along to fixed-rate loan customers. They’re using it to boost their profitability.
Read that last sentence again. The banks are getting money cheaper. Does that mean they are doing their part to stimulate the economy, making things easier for the end consumer? Of course not. End consumers still see high credit card rates, low interest rates on savings accounts, and mortgage rates that refuse to go down. This is because the bankers (and the financial community) is running scared about the loss of their profits, and thus are afraid to take on any risk. In computer security (my chosen field) speak, they have gone from risk mitigation to risk avoidance, which we call know can bring fielding of a system to a stop.
Our financial structures run on mitigated risk. In lending, risk nowadays is mitigated through equity, down payments, proven income, and most importantly — trust. By being risk averse, the financial industry is fueling the problem, because the aversion leads to erosions in equity, which actually increases risks. In the old days, another form of risk mitigation was the personal relationship between the lender (typically, savings and loans) and the lendee (individuals or small businesses). They knew each other, their kids went to the same school, and there was personal trust behind the risk relationship. The move to large financial conglomerates and institutional investors in mortgage instruments has eliminated that mitigation approach: who knows their banker today? The parties are just names to each other.
I don’t know the answer here, but as Alton Brown said, paraphrased: The banks don’t care about you, and neither does that little minx Merrill Lynch. We need to remember that banks, if left to their lonesome, don’t care about the little people unless that caring helps their bottom line. If the government is going to help this market, it needs to find a way to reduce the risk aversion and come up with acceptable mitigations that don’t just move the risk to the government taxpayers, while leaving the profit to the banks. Moving just the risk to the govt will permit the banks to milk things further. What has gotten us in the situation we’re in is too many folks chasing that almighty profit: home sellers, mortgage brokers, mortgage originators, mortgage investors — while the one who gets it in the end is the family just trying to protect their house and home. This article in the Mercury News has a good graphic indicating how we got where we are. Perhaps FDR said it best: The only thing we have to fear is fear itself.
Finding the answer is going to take, I believe, bold leadership and unconventional solutions. So far, we haven’t seen either. We might get it after the election, but I fear it will be too late. Shrub may be the Hoobert Herver of this generation.
