Bush in bell-bottoms?

Josh, film costumer that he is, tells me that flared pants are coming back (oh, good! I never got around to buying skinny jeans or losing the massive amount of weight required to look good in them). But if only denim cuts were the only 1970s trend to pop up (again) in 2008.

Unfortunately, it looks like the economy is also going to be wearing a vintage look this season--and perhaps for many seasons to come.

Granted, we're lucky that it's disco rather than dust bowl. It's true that some commentators predict economic chaos the likes of which hasn't been seen since the Great Depression. But most are comparing it to the less dramatic and just generally crappy bell-bottom days.

Even so, I'm scared. Why am I scared? Besides eating a hole in my 401K, the size of which I've been too nervous to check (my balance will go back up in the 40 years I have left until retirement, right?), I am scared that our country was dumb enough to get itself into this situation in the first place.

I've read and listened to many explanations of this economic meltdown this week. The best one I've come across so far is actually a This American Life episode. No surprise there, though I'll save my love letter to TAL for another post. Anyway, as far as I can tell, it all boils down to this:

Global investors found themselves with a lot of money and not many profitable investment opportunities. Then they realized they could make a lot by investing in mortgages. Wall Street firms sold bundles of these mortgages to investors and put pressure on smaller banks and, in turn, individual mortgage brokerages, to produce more mortgages. This led to a loosening of loan requirements to the point where some people didn't have to show any proof of income or assets at all. Then housing prices, which were predicted to rise forever, fell. And the rates on adjustable rate mortgages rose. And people started foreclosing. And all of the sudden, these so-called "mortgage backed securities," which credit agencies had rated AAA (or "good as cash") based on historical data that did not apply to the new type of mortgages being created were worth next to nothing. And so the giant banks and firms that owned them were--are--in trouble. And, presumably, so are the rest of us.

So who's to blame? That's what Josh and I were trying to figure out tonight.

One of the most obvious places to start is with the people applying for mortgages they couldn't afford in the first place. We bought our very modest house in 2004 in the midst of all this through a neighborhood redevelopment program on a 30-year, fixed loan. I remember pressure from many sources to go with an ARM (adjustable rate mortgage). Some people, who will remain unnamed, implied that we were basically stupid not to do so because of all the money that was to be made. But it seemed like such a no brainer--what happens when interest rates go up in 3 years? I didn't want to be stuck in that situation.

But that's easy for me, a college grad with a good head for money to say. I've since heard stories of people in low-income neighborhoods with very little knowledge of finance literally being suckered into these mortgages, whose details are filled out fraudulently by mortgage officers without the knowledge of the applicants.

And in any case, people heard from all sides that housing prices were going to continue rising. And in some markets it was just plain impossible to buy a house on anything but an ARM, with the insurance being that you could sell it at a higher price whenever that day came that you could no longer make payments.

So who else is to blame? Everyone who created, bought, and sold these mortgages. They knew they were risky, but they didn't care because they didn't ultimately have to take responsibility for them--the next guy did. And they were making a killing in the meantime.

Finally, what in the world were the credit agencies thinking? I think they were thinking in $$$$ rather than with their brains. Of course the default rate on historical mortgages was extremely low! And of course it would be significantly higher on significantly riskier loans!

And now, for the really important question--what should be done about all of this? I've noticed two impulses that in my mind are unproductive: to punish those at fault and to avoid "socialist" levels of government involvement.

As for the first, it's both too hard to place blame and too easy. There are too many loan applicants, too many complicit loan officers and banks to pin blame on. And it's so easy to place blame on companies that, if they fail, will likely affect us all.

As for the second, if a government bailout is what it takes to right this major wrong, so be it. What is our other option? I haven't heard one.

It seems that everyone is against this bailout package no matter what their politics: it's too much government intervention for the right and too little help for the average American for the left. Not to mention the fact that no one wants to take a stand one way or another with elections looming.

And so, for what may be the first time in my life, I'm with Bush on this one. If only it were more certain that the bailout would do any good. It worries me that Wall Street is so enthused by the plan while it's so hard to find an economist who backs it.

In any case, don't be surprised if come January 2009, President Bush dons a pair of bell-bottoms. I don't think he ever got around to buying skinny jeans either.