2008 Financial Concerns – Their Causes and Relief

The roller coaster ride that the financial markets have been taking lately is hardly the kind of kind of trip that seniors, in particular, would like to sign on for but reliable sources indicate that it may stabilize soon.   This still means that the effect of taxpayers assuming the risk in the buyouts of Fannie Mae and Freddie Mac or AIG will be felt into the future but the consensus is that, as home prices even out, banks and lending institutions will rebuild their capital reserves and confidence will be restored.  For now, if anyone questions who insures the insurers, it seems that the answer is the government does which means that, ultimately, we do.

All of this leaves me, as an elder law attorney, scratching my head regarding the past several years of indoctrination into the “free market” and “personal responsibility” ethic.

No less a person than Alan Greenspan, the former Chair of the Federal Reserve Bank, in a book published about this time last year, The Age of Turbulence: Adventures in a New World, trumpeted the idea that government involvement is bad and a self regulated market economy is good.  Using an expression, “creative destruction,” Greenspan explained in his book at pages 48 and 49, “A market economy will incessantly revitalize itself from within by scrapping old and failing businesses and then reallocating resources to newer, more productive ones… I saw this pattern of progress and obsolescence repeat over and over.”  id.

In other words, according to Greenspan, using a Darwinian approach, while it might seem that it is a bad thing for businesses to fail, this is actually good since they will be replaced by better, more efficient enterprises.  He went on to describe this in great detail using examples.   His thesis was that government should not intervene.

One of my favorite quotes appears in the introduction when Greenspan explains that, as a result of protection of private property rights, “the control of governments over the daily lives of their citizens has lessened.”  I am guessing he is speaking about control over the markets since it seems that government regulations reach into just about every area of our lives.  Greenspan about a week ago appeared on a morning talk show to say that the circumstances of today and this buyout are very different since this is a “once in a century” event.

For those who would like a reasoned explanation of what has been happening, Kiplinger’s Personal Finance at www.kiplinger.com describes it in steps as “15 Things You Need to Know…”  Kiplinger’s sees an end in sight and counsels consumers to stay calm.  Generally following Kiplinger’s analysis, here is a summary.

First, interest rates were allowed to stay too low for too long after the downturn in the economy in 2001.  Cheap money increased home values.  Banks and mortgage companies went further by offering cheap credit “to all comers, including those who would not normally qualify.”  Many of them were at adjustable rates resetting as interest rates would increase.

Low grade mortgage loans were packaged with better ones and sold to investors as “collateralized-debt obligations” or CDO’s sold in segments known as tranches.  To make the loans attractive, lenders bought insurance guaranteeing that the loans would be repaid.  This is one way that the insurers also became involved.

When the Federal Reserve Bank began raising short-term interest rates in 2003, home buyers who could initially afford the loans at the lower rates now were committed to much higher payments.  The default rate increased, home values decreased, and rating agencies lowered their assessment of the debt.  Banks that routinely lent each other money now questioned the value of the collateral and held back.  Credit was tightened across the board.

The federal government tried various measures including a conservatorship for Fannie Mae and Freddie Mac, companies that assist in insuring mortgage loans, but initial measures were not enough.   The recent buyout of American International Group (AIG) which is a loan exchanged for an almost 80% stake in the company is to be followed by a more comprehensive strategy based on having the government pull the so-called “toxic assets” off the market to let the economy recover.  Not all of the assets are toxic and the government should recover some of its payout on the loans so that the outlook is not as bleak as originally considered.
Honesty and accountability are two measures that have taken a beating over the past few years.  This may be a good time to bring the dialogue back.

About the Author Janet Colliton

Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.

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