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Thursday, May 08, 2008

Folly, foolishness, and hope

In some markets, especially the residential construction industry in parts of the South, things are dismal. The mortgage crisis has threatened the entire U.S. economy and in fact disrupted the world economic situation. And, I'm troubled. Why?

Who thought it made sense to push loans and home ownership on people without enough credit and financial resources to obtain a mortgage in the first place? And which brainwaves came up with the brilliant idea that it makes sense to 100 per cent -- or more -- leverage your home with the delusional perspective that home values only go up, and homeowners with bad credit, unstable income, and not enough cash to meet regular living expenses let alone inflated mortgage monthly payments, could actually afford these houses.

Does any of this make sense to anyone with even a little intelligence and social responsibility. I'm thankful that the North Carolina legislature saw the folly of this unbridled and ill-thought "capitalism" by introducing legislation to eliminate the worst excesses. But where were all the big thinkers in the other markets and in the investment banks in New York to allow this to happen? Who will -- should -- take responsibility?

Here, my Canadian conservatism takes hold. In Canada, mortgage interest is not tax deductible unless you are using the mortgage loan to invest. That is, you could mortgage your home and purchase stocks or put the money into a business, and claim the deduction, but you don't just get the deduction by borrowing against your home. This seems a perfectly rational and responsible approach to me -- people wishing to take risks -- to play the limits -- can -- but most people living ordinary lives (and most astute businesspeople!) know that it doesn't make good sense to load up more mortgage on your home than you need; and it makes lots of sense to pay it off as fast as you reasonably can.

So, when I married Vivian (later in life than most), we purchased our home and Vivian paid 50 per cent down with the proceeds from her own place. I had the mortgage. I decided to live modestly, cut expenses, and cleared the mortgage to zero in six years. Good timing. Because just as I made the last payment, my business entered a major crisis and cash flow got really tight. But we owned our house, and of course, didn't have to budget any more for the extra high mortgage payments (extra high because I wasn't just paying the amortization down, I was paying the principal!) So we survived the downturn without stress and anxiety you might otherwise expect.

I wonder about business owners who live high for the short term, and lack longer range vision. I wonder about greedy brokers, agents, and "marketers" who think it is right to push junk business deals on unsuspecting and unsophisticated people. Where does making some money and living a little high need to be put into context and thoughtful, respectful and responsible living values overtake the superficial and stupid greed and ignorance that shaped some important markets in recent years.

Yes, I feel sorry for the innocent victims of this carnage -- the people who worked hard, tried the best they could, and now are losing their homes, experiencing family break-ups, and deep unemployment. But I also know that we all have to be responsible for the decisions we make; and here, a lot of people made a whole lot of very wrong decisions.

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