Wax economics
You could say I am lucky. From the fall of 2005 to the spring and summer of 2008, I worked in the now floundering financial industry and left on my own terms. I cannot count on my hands how many of my friends lost their jobs or had their companies force them into a different department. Who knows; perhaps if I stayed in insurance, I might have fallen to a similar fate.
I didn’t work for the now defunct Bear Sterns or Countrywide, or even the nationalized AIG, so I didn’t witness firsthand the worst the financial collapse had to offer. That doesn’t mean that I or anyone else didn’t see it coming. The earliest warning signs for many experts occurred in early 2006, when real-estate markets across the country were rising at a pace no one had seen before. In a case of rising prices, you’d expect to see interest rates to rise to temper demand, but most banks followed the lead of the Federal Reserve, which kept rates steady. That was the warning sign for the financial industry’s Cassandras — the warning signs for me showed themselves as early as 2003.
I don’t claim to be a financial expert. I didn’t spot the early signs of impending doom through financial expertise but through careful observation.
In 2003, my parents moved from the Southeast Side of Des Moines to the country. Soon enough, more and more people joined suit. Interest rates were lower than they’d been in 50 years, and with prices rising steadily, if you didn’t like the house you just purchased, you could flip it for a new one. That I surmised was the intention of the people who moved across the street from my parents. The house they bought was unfinished but on a gorgeous acreage with rolling hills and a babbling brook. My mother told me they told her they purchased the property with zero money down and a low but variable interest rate. In little more than two months, the bank foreclosed on their house. In the era of cheap money and profitable real-estate transactions, I asked my mother why those people didn’t hold onto their house or try to sell it off for a profit. She responded by saying they got caught up in their balloon payments.
Ballooning mortgages was the common nomenclature for what we now call subprime mortgages, but this was before most people knew what subprime mortgages were, let alone associated them with other terms, such as “Dotcom Bust” or “Savings and Loan Scandal.”
Of course, the people across the street weren’t the only ones paying for their houses with subprime mortgages. Banks, both lending and investment, created investment vehicles based on these mortgages. Investors readily bought these mortgage-based securities because they were the most profitable at the time. Unfortunately, they didn’t stay profitable for long.
It’d be nice to place the blame on greedy investment banks and irresponsible bureaucrats for the mess, but that’s only half true. Consumers were just as shortsighted and irresponsible as the lenders and the politicians. I remember talking to my trainer at the insurance company in 2005 about putting down roots, now that we’d both grown up and entered the real world. He expressed no desire to put down roots or start a family, but he was still actively looking for a house, because he felt he needed to “build some equity.” There was a group of three girls whom I worked with who were buying a house together. The house was a small three-bedroom in a crappy part of town, but no matter. They were going to fix it up and flip it for a profit, despite its being overpriced to begin with. I also remember numerous friends who purchased property with subprime loans telling me I was throwing away my money on rent.
I’m not writing now to brag or admonish my friends. Homeownership replaced entrepreneurship as the American dream. This was a cultural phenomenon many people tried to exploit for their own advantage, and it ended up wrecking most of the dreams we all had. I’m lucky I avoided it and kept my dreams alive by going back to school.
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