Macroscopic understanding of a particular circumstance or problem is sometimes best understood using microscopic analysis. If one tiny seemingly inconsequential event occurs over and over again the microscopic becomes the macroscopic.
I’m considered a bit anal retentive by many of my business peers and employees due my insistence on cleanliness and order, and become irritable when every tool is not replaced in its respective spot. In a machine shop entropy is the rule, fighting it takes constant vigilance.
The current economic crisis and housing debacle is clearly one created by stewards who have simply watched the entropic march go on pass them ignoring simple details that warned catastrophe was imminent. No self-respecting businessman responsible for his business’ success would ever tolerate the evolution to disorder as have stewards of the mortgage industry. What has allowed executives of this industry to tolerate such a progression?
In a small business like my machine shop, the steward is clearly identifiable, and the ramifications of bad decision will rest squarely on my shoulders. Reward or failure is attributed directly to me, and which ever I obtain is based solely upon my competence, integrity, and diligence.
The banking industry has been one where loans were given to people who could not afford them, then sold to other institutions, and subsequently packaged with other bad loans and sold again as investment securities. The whole house of cards was backed by federal guarantees.
The banking industry has prevented its stewards accountability by enacting corrosive policy protecting executives from failure by insuring their losses would be covered by the federal government. Additionally, the political establishment has gone further to encourage the issuance of bad loans to people it thought disadvantaged to promote its altruistic ideals void any measured responsible tactic.
Politicians are now attempting to blame capitalism’s greed for this debacle.
Our financial markets have not failed because we embrace capitalism; they failed because we did not embrace capitalism.
Much of corporate America has not been forced to follow the doctrine of capitalism, especially those corporations where CEO’s and board members have not had vested interest in the organizations which they have been responsible. Much has been the case in the mortgage industry protected by U.S. Government guarantees.
My small business machine shop example is the one imagined and protected by capitalist American traditions. To suggest in any way that blame for this current economic crisis rests with the conservative tenets which laud these capitalist American traditions is either deliberately dishonest, completely ignorant, or both. Capitalism and Conservatism are not ideologies that reward corruption, they are ideologies which rein it in.
Unfortunately, politicians on the right and left are trying to pin this economic mess on greed, insinuating it is the natural by-product of capitalism.
Capitalism is the ideology which forces businesses and executives to answer to markets. We the people are that market. The banking system has failed not because the people have had their say, but because politicians placed arbitrary demands on the industry and encouraged banking industry workers to answer to government instead of answering to people.
So back to my microscopic analysis experiment:
There is a 5000 square foot house, newly constructed but not complete, in an older neighborhood of Yorba Linda, Ca. Most of the homes in this tract are built on half acre lots, and few have sold for more than a million dollars.
I’m in the market for such a home and I am knowledgeable of all homes available in this city thanks to ease of gathering information on the internet.
This particular house caught my attention because it was incomplete, but had potential. While it was in a nice middle class neighborhood, it was not in a location you would expect to find homes over 2 million dollars. I was certain its asking price of 2.25 million dollars was way out of line and it would never sell for that price. Larger houses in better neighborhoods on 1 acre lots were available in this price range.
I kept my eye on it out of curiosity, and to my amazement it sold for full asking price. Periodically I would drive by to see how the home would progress. Completion required two or three hundred thousand dollars for landscaping and some work on the homes faÃ§ade was still required.
Month after month, no one moved in and construction never resumed.
After a few months I decided to look up the home and found that it had gone back to the bank who loaned money on it. It was no surprise to find ailing Washington Mutual the mortgage holder.
A couple other odd details: The purchaser had a foreign name, and the original owner/builder has maintained a lien on the property, making it difficult for the lender to resell it.
Why would someone purchase an incomplete house for 2.25 million dollars when a nicer completed home in a better neighborhood with twice as much land was readily available?
Why would a builder maintain a lien on a home he received full asking price for?
All of the information here is of public record, not knowing all details it would be irresponsible for me to postulate what may have transpired between the builder and the buyer to complete this deal, nefarious it may seem.
On the other hand, it is not irresponsible to ask why Washington Mutual loaned so much money on a home clearly not worth the amount borrowed.
It will be interesting to see if the original owner buys the home back at a fire sale price because the banks are in so much turmoil that they will all be enthusiastic to clear their balance sheet of foreclosed properties. With a lien on the property the builder is first in line to acquire it back.
179 Sink Hole Dr. is an experiment in the microscopic analysis. The macroscopic analysis would be to investigate the thousands of similarly made bad loans where politicians are now screaming that American taxpayers must help to keep people in their homes. When our politicians get what they want they may or may not help some poor borrowers, but they will definitely help shrewd builders who know how to work the system.
Taxpayers will foot the bill while politicians blame capitalism for forcing us to do it.
How is it with no extended training in mortgage principles, no terrific knowledge of banking systems, and only an introductory understanding of economics can I analyze a mortgage transaction from afar and recognize it not viable when some bank’s executive cannot?
I can because I am a capitalist receiving no favorable treatment from the corrupt political elite. If I make a bad decision I lose money.
That’s what capitalism really is, and it works every time it’s tried.
179 Sink Hole Dr. is a fictitious address for a real property in Yorba Linda, Ca and the actual transaction described here. The real address has been withheld to protect the privacy of anyone who will eventually purchase and live in this home.
Copyright 2008 Jim Pontillo