Economy Watch


‘Subprime’ Nation

Ancient Israel is famous for not learning from its history. Time and again it would commit the same sins and suffer the same punishment. Is the same thing happening in America today?

In July, the Federal Housing Authority said it would no longer back mortgages for individuals with credit scores of less than 500. In case you are unfamiliar with credit scores, a rating of 500 is terribly, atrociously, horribly low—as in, how is it possible you got such a low score?

What was the government thinking issuing these kind of loans to start with? Does it make sense risking taxpayer money on people virtually guaranteed to default on their mortgage? If you have a score below 500, you’ve probably never made a single payment on time and have probably defaulted on loans multiple times.

Because virtually no one has such a bad score, virtually no one is going to be shut out by this new policy. As far as the government is concerned, anyone who wants a loan can still get one courtesy of taxpayers.

It is as if the government learned nothing from the subprime mortgage meltdown that triggered Wall Street’s spectacular banking collapse. In 2008, it was the private banks that put the economy at risk. Now, instead of letting the bubble pop and the housing market reestablish at sustainable levels, the government is doing the same thing the banks did.

This cannot end well.

Ancient Israel never learned its lesson: If you keep doing what you are doing, you will keep getting what you are getting. Thus the cycle perpetuated: broken laws … loss of blessings … escalating curses … and eventually captivity. When things got bad enough, the nation would repent and cry out to God. God would have mercy and send a deliverer. But once things improved, Israel would soon forget God and return to paganism.

But at least Israel knew enough to ask God for deliverance. What will it take for America to do the same?

Is ‘Sudden’ Collapse Possible?

America has two years to fix its problems—or risk “sudden” collapse. This is the startling conclusion of Harvard historian Niall Ferguson. The world has seen what happens when investors lose faith in a country’s fiscal policy, he says. Just look at Greece.

This year alone, according to the Congressional Budget Office, America will add $1.5 trillion to its national debt. Under President Barack Obama’s proposed spending plan, America will run trillion-dollar deficits until 2019. And that is if everything goes according to plan.

Speaking at the Aspen Ideas Festival in July, the British historian said that historically, one indicator of looming collapse was when the cost of servicing a country’s debt became larger than the cost of its defense budget. This has never occurred in America before, he said, but it will within five years.

Even if interest rates remain at historic lows, the interest payments alone will soon take up one in every five budget dollars, he noted. If interest rates return to the level they reached in the late 1970s, America would be bankrupted overnight.

However, Ferguson said, there is a way out for America. Here, after a brilliant analysis of America’s financial situation, he falls down flat. To avoid collapse, he said, America needs to re-energize the two things that made the nation great: technological innovation and entrepreneurship. Innovation and entrepreneurship?

Sure, these played an important role in making America—but they are hardly the primary drivers of American greatness.

Abraham Lincoln knew the source from which America’s greatness came. In 1863, he stated: “[I]t is the duty of nations, as well as of men, to own their dependence upon the overruling power of God … and to recognize the sublime truth, announced in the Holy Scriptures and proven by all history, that those nations only are blessed whose God is the Lord …. But we have forgotten God! … [W]e have vainly imagined, in the deceitfulness of our hearts, that these blessings were produced by some superior wisdom and virtue of our own.”

How many people today truly believe that it is God who makes nations great?

Taking Over the Bank Biz

The Federal Deposit Insurance Corporation (fdic) announced July 23 that it had seized the assets of seven additional banks. The seizures brought to 103 the number of banks that have gone bankrupt so far in 2010, putting the nation on pace for the most bank failures since the Savings and Loan crisis during the 1990s.

America’s quiet banking collapse may be one of the most underreported stories of the year. If this failure rate continues, 175 institutions will become wards of the state by year’s end. In 1992, during the height of the banking crisis, 179 banks were shut; this year could set a ghastly new record.

One difference with 1992 is that the banks that are failing now are bigger and more interconnected—hence the determination by the fdic to keep a low profile. When banks do fail and are seized by regulators, the press is only notified as it’s leaving the office for the weekend.

But going forward, the increasing numbers of bank failures may become more difficult to hide. At the end of 2008, there were 252 U.S. banks on the fdic’s problem list. At the end of 2009, the number was 702. As of July 30, 775 banks made the problem list—about one in every ten! And the list might be even worse had the government not eased accounting rules to help the banks.

But the fragility of the system is greater than most people understand. The approximately 8,000 banks that operate in America have about $13 trillion in deposits. But guess how much money the fdic has on hand to insure those deposits? The answer is worse than zero! The fdic is completely broke and is operating in the red, even though banks are still paying their premiums for coverage. As of the end of the first quarter of this year, the fdic was $20.7 billion in the hole.

Who is going to bail out the fdic?