The cause of the Great Depression, all of the recessions since then, is and has always been the U.S. Government. I keep hearing everyone blame the financial industry for the mess of 2008. Supposedly, it was all of those greedy bankers and investment houses that created the biggest financial crisis since the Great Depression. Even today, it seems like I can't turn on the news without some so-called financial "expert" proclaiming that "we need more regulation" and "deregulation caused this problem" - what a lie!

These assumptions overlook one crucial fact: there has never been a free market in the mortgage industry. The alleged "deregulation" in the financial services industry is a smoke screen at best.

The Government has always had massive controls in place in the financial industry from the initial creation of the Federal Reserve in 1913 to the creation of Fannie Mae and Freddy Mac to the Community Reinvestment Act in 1977 (which literally forces banks to lend money to people who can least afford to repay).

With all of these Government regulations, institutions, and controls in place, the stage was set for a complete financial meltdown when President George Bush announced in June 2002 that:

...But I believe owning something is a part of the American Dream, as well. I believe when somebody owns their own home, they're realizing the American Dream. They can say it's my home, it's nobody else's home. (Applause.) And we saw that yesterday in Atlanta, when we went to the new homes of the new homeowners. And I saw with pride firsthand, the man say, welcome to my home. He didn't say, welcome to government's home; he didn't say, welcome to my neighbor's home; he said, welcome to my home. I own the home, and you're welcome to come in the home, and I appreciate it. (Applause.) He was a proud man. He was proud that he owns the property. And I was proud for him. And I want that pride to extend all throughout our country.

One of the things that we've got to do is to address problems straight on and deal with them in a way that helps us meet goals. And so I want to talk about a couple of goals and -- one goal and a problem.

The goal is, everybody who wants to own a home has got a shot at doing so. The problem is we have what we call a homeownership gap in America. Three-quarters of Anglos own their homes, and yet less than 50 percent of African Americans and Hispanics own homes. That ownership gap signals that something might be wrong in the land of plenty. And we need to do something about it.

We are here in Washington, D.C. to address problems. So I've set this goal for the country. We want 5.5 million more homeowners by 2010 -- million more minority homeowners by 2010. (Applause.) Five-and-a-half million families by 2010 will own a home. That is our goal. It is a realistic goal. But it's going to mean we're going to have to work hard to achieve the goal, all of us. And by all of us, I mean not only the federal government, but the private sector, as well.

And so I want to, one, encourage you to do everything you can to work in a realistic, smart way to get this done. I repeat, we're here for a reason. And part of the reason is to make this dream extend everywhere.

I'm going to do my part by setting the goal, by reminding people of the goal, by heralding the goal, and by calling people into action, both the federal level, state level, local level, and in the private sector. (Applause.)

And so what are the barriers that we can deal with here in Washington? Well, probably the single barrier to first-time homeownership is  high down payments. People take a look at the down payment, they say that's too high, I'm not buying. They may have the desire to buy, but they don't have the wherewithal to handle the down payment. We can deal with that. And so I've asked Congress to fully fund an American Dream down payment fund which will help a low-income family to qualify to buy, to buy. (Applause.)

We believe when this fund is fully funded and properly administered, which it will be under the Bush administration, that over 40,000 families a year -- 40,000 families a year -- will be able to realize the dream we want them to be able to realize, and that's owning their own home. (Applause.)

The second barrier to ownership is the lack of affordable housing. There are neighborhoods in America where you just can't find a house that's affordable to purchase, and we need to deal with that problem. The best way to do so, I think, is to set up a single family affordable housing tax credit to the tune of $2.4 billion over the next five years to encourage affordable single family housing in inner-city America. (Applause.)

The third problem is the fact that the rules are too complex. People get discouraged by the fine print on the contracts. They take a look and say, well, I'm not so sure I want to sign this. There's too many words. (Laughter.) There's too many pitfalls. So one of the things that the Secretary is going to do is he's going to simplify the closing documents and all the documents that have to deal with homeownership.

It is essential that we make it easier for people to buy a home,  not harder. And in order to do so, we've got to educate folks. Some of us take homeownership for granted, but there are people -- obviously, the home purchase is a significant, significant decision by our fellow Americans. We've got people who have newly arrived to our country, don't know the customs. We've got people in certain neighborhoods that just aren't really sure what it means to buy a home. And it seems like to us that it makes sense to have a outreach program, an education program that explains the whys and wherefores of buying a house, to make it easier for people to not only understand the legal implications and ramifications, but to make it easier to understand how to get a good loan.

There's some people out there that can fall prey to unscrupulous lenders, and we have an obligation to educate and to use our resource base to help people understand how to purchase a home and what -- where the good opportunities might exist for home purchasing.

Finally, we want to make sure the Section 8 homeownership program is fully implemented. This is a program that provides vouchers for first-time home buyers which they can use for down payments and/or mortgage payments. (Applause.)

So this is an ambitious start here at the federal level. And, again,  I repeat, you all need to help us every way you can. But the private sector needs to help, too. They need to help, too. Of course, it's in their interest. If you're a realtor, it's in your interest that               somebody be interested in buying a home. If you're a homebuilder, it's in your interest that somebody be interested in buying a home.

And so, therefore, I've called -- yesterday, I called upon the private sector to help us and help the home buyers. We need more capital in the private markets for first-time, low-income buyers. And I'm proud to report that Fannie Mae has heard the call and, as I understand, it's about $440 billion over a period of time. They've used their influence to create that much capital available for the type of home buyer we're talking about here. It's in their charter; it now needs to be implemented. Freddie Mac is interested in helping. I appreciate both of those agencies providing the underpinnings of good capital.

There's a lot of faith-based programs that want to be involved with educating people about how to buy a home. And we're going to have an active outreach from HUD. (Applause.)

And so this ambitious goal is going to be met. I believe it will be, just so long as we keep focused, and remember that security at home is -- economic security at home is just an important part of -- as homeland security. And owning a home is part of that economic security. It's also a part of making sure that this country fulfills its great hope and vision.

See, I tell people -- and I believe this -- that out of the evil done to America will come some incredible good. (Applause.) You know, they thought they were attacking a country so weak and so feeble that we might file a lawsuit or two, and that's all we'd do. (Laughter.) That's what they thought. We're showing them the different face of America. We're showing them that we're plenty tough. When it comes to taking somebody trying to take away our freedoms, we're tough, and we're going to remain tough and steadfast.               (Applause.)

But I also want people to see the deep compassion of America, as  well. I want the world to see the other side of our character, which is the soft side, the decent side, the loving side. I want people to know that when we talk about dreams, we mean big dreams. And when we talk about a free society, we want a society in which every citizen has the chance to advance, not just a few.

And part of the cornerstone of America is the ability for somebody, regardless of where they're from, regardless of where they were born, to say, this is my home; I own this home, it is my piece of property, it is my part of the American experience. It is essential that we stay focused on the goal, and work hard to achieve that goal. And when it's all said and done, we can look back and say, because of my work, because of our collective work, America is a better place. Out of evil came incredible good.

(emphasis added by me)

Source: http://www.hud.gov/news/speeches/presremarks.cfm

With lax lending standards and low interest rates, banks were given the "green light" to let everyone who wanted a home to simply borrow the money. It didn't matter if they couldn't REALLY afford it...

...because with total control over the nation's money supply, the Federal Reserve was able to lower interest rates and magically make the unaffordable suddenly affordable.

The FED also rewarded those institutions making bad loans (many of which, remember, were forced upon them by the Community Reinvestment Act) by turning an otherwise risky and dubious lending operation into a financial windfall for those "lucky" banking institutions. Bankers were rewarded by the FED for packaging and selling loans that, otherwise, would never have been profitable.

The long-standing policy of "too big to fail", the FDIC, the Federal Home Loan Banks, and the Federal Reserve itself, compounded the problem by removing responsibility from banking institutions and placing it squarely in the lap of the Government (who in turn places it in the laps of all of us tax-paying Americans). It was quite obvious 3 years ago to this advisor that banks and other financial institutions were going to be rewarded for being reckless - rewards that would most certainly come from Government regulations and future bailouts.

...except I was wrong. Not all financial institutions were rewarded.

Lehman Brothers announced that was going bankrupt in 2008, and the government didn't step in to save it. What's worse is that, during this time, many financial professionals advised their clients to just "ride it out."

A lot of people were (and still are) invested in mutual funds inside of their retirement accounts. You see, the nice thing about mutual funds is that they are so diversified. The bad thing about mutual funds is that they are so diversified. Nearly every 401(k) has exposure to the financial industry...mainly because they represent good investments when the economy is doing well.

Now that the economy is in the toilet, anyone invested in these financial giants is going to take a beating like never before. And...all the financial "experts" are telling people to ride it out. The problem is...what if you can't "ride it out?" It's too late for those who are 5 years away from retirement. If you've lost the bulk of your retirement money, too bad. Proper planning could have prevented it, but since you didn't plan...you might as well give up.

That doesn't sound like a very nice thing to say, but I think of it like I think of those folks who know that a hurricane is coming but refuse to get out of the way or evacuate when it's clear that they're going to be hit hard. If you weren't smart enough to get out of the path of destruction when you had plenty of advanced warning, you deserve everything you've got coming to you.

We, as Americans, are not used to hearing someone talk to us like that, but then again, America needs to grow up and take responsibility for its own actions (or inactions). The citizens need to grow up and take responsibility for their own investment portfolios as well.

If you haven't a clue about the companies you are investing in, then you need to become educated or stop investing in those companies. That means...if you are investing in a mutual fund that invests in 100 different companies...you should know and understand those businesses...as well as the industry that that mutual fund is investing in. Sadly, most mutual fund investors have no clue exactly how they are invested and they don't understand the markets where they put their money.

You wouldn't start a business, or loan money to someone who you didn't know...would you? You wouldn't right? Right?

...then why invest in companies that you don't understand?

I know, I know...your friend "Bob" is invested in "XYZ" fund and he's making a killing...and you want to follow the money so that you can make a lot of money along with "Bob"...What happens if "Bob"'s investment tanks? Are you willing to go down with your friend?

It's easy to look at the upside and totally ignore all of the bad things that can happen by taking a "blind faith" approach to investing...but you do so at your own peril.

So...the question remains...how do we plan for retirement when institutions like Bear Sterns and Lehman Brothers fail when economic times are tough?

One way is to take flight to safety - to insurance companies. But...what about the AIG debacle? Aren't insurance companies just as irresponsible? That truly depends on the insurance company...

Keep in mind that AIG is often thought of as just an insurer, but they, like GM, moved beyond their corporate expertise and paid a small price. Most people believe that AIG policyholders were at risk of losing their money. Last week, the New York Insurance Superintendent addressed the public in an interview saying that AIG's life insurance and annuity portfolio was "never at risk."

During the Great Depression, the following recessionary periods up through to today's economic turmoil, the safest place to keep one's money has always been in cash value life insurance. Even as money market accounts have begun to look shaky (help from the Treasury aside), cash value insurance has blossomed. And...some life insurance companies that specialize in long-term savings and insurance even showed a profit amidst all of this mess. Go figure. I guess the old adage of "Keep it simple..." really works out sometimes.

Seriously, get back to basics and make sure you have a solid financial foundation. That is the only thing that will help you in tough times.

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1. Financial Planning & The Perpetual Financial Crisis of America
2. Financial Crisis: My Birthday Gift From Uncle Sam & Uncle Ben

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This entry was posted on January 9th, 2012 by David C Lewis, RFC. Edits may have been made to keep this entry current. · No Comments · Budgeting & Money Management, Philosophy In Financial Planning, Retirement Planning