Not so tiny bubbles

Let’s see, the stock market was tanking, mutual fund managers were moving investment offshore and there’s an election year around the corner. Gentleman, place your bets. If there was ever a time to get bullish, this was it.

Of course, I was relying upon the Fed to do the equivalent of shooting a hole in the bottom of a leaky boat to let the water out. When it appeared they might actually do something that resembled long term strategic thinking, Greenspan’s in-your-face book came out and nudged them over the edge. Thank you and excuse me while I cash in my chips.

While the bet paid off even better than I imagined, I just can’t get all that giddy about it. I see this as more of a political move than sound fiscal policy for the country. Isn’t this how we created the bubble?

If Deion Sanders was Prime Time,” then Alan Greenspan must be “Subprime Time.” His recent statement that he didn’t see the danger of the subprime mortgage loan bubble coming down the road is like Timothy McVeigh claiming surprise at the destruction of the Murrah Federal Building. A band aid for the construction and financial lobbyists is going to create even bigger bubbles for the future. Better to bite the bullet now and deal with the fact that we’re a nation in debt, publicly and privately.

That aside, we often focus on the hit taken and overlook everything else. Mortgages are the tip of the iceberg. Credit card debt and vehicle financing are part of the house of cards we’re resuming construction on.

Greenspan’s suppressed interest rates were the miracle pill for a vehicle industry desperate to move iron. Mortgaging their future, the manufacturers stoked the subprime boiler. Where 20% down was once the floor, single-digit became common. Or, just use “your discount” as the phantom down payment, essentially eliminating any requirements or screening.

Instead of marketing based upon the price of a vehicle, it became a matter of monthly payment figures; deceptively palatable numbers. Those could be made tantalizingly low by stretching the term of the loan up to and beyond five years. This is dangerous territory, because the value of the vehicle would decline below the loan balance, leaving the borrower “upside down.” And, to make matters worse, borrowers were offered the option of rolling their lethal unpaid balances into a new loan if they would buy newer vehicles. A discounted interest rate also helped skirt some of the emerging restraints on repossession.

And then there came the big push of the lease, which not only took the monthly payment perception tack, but also made the disguised repo virtually automatic. Lenders could recoup the interest rate discount on the back end with questionable charges for “excessive wear and tear.”

While mortgages get the press as the bubble, they are just the first domino. Subprime borrowers will let their housing and credit cards go before their wheels. A significant number have multiple evictions in a year. So, the burst of the mortgage bubble is not the end, but a harbinger.

Subprime borrowers will also skip a mortgage or rent payment (same thing, since the landlord needs the rent to make the loan payment on the property) before their cell phone bills. Ironically, that’s how lenders are skip-tracing them – cell phone billing addresses.

No one knows for sure. But, I’d take the profits now and gird for the downhill when the chickens come home to roost.