Thursday, November 11, 2010

Parable of Why Johnny Can't Borrow

I was in Las Vegas recently, after the November 2nd election. While having a casual dinner at the Trevi restaurant in Caesar's Palace, our waiter Ralph asked where we were from. We told him Oklahoma and he asked about our economy there and specifically the housing market. We chatted about that and then he told us he bought a house two years ago just north of the city of Las Vegas. He paid $256,000 and thought his property, usually in a hot market, would surely gain equity. Just the opposite happened, of course, and I began schooling him about Bill Clinton's Community Reinvestment Act (CRA), and Barney Frank and Chris Dodd's coddling of it. Had I had the Parable of Johnny, I would have been finished with Ralph before dessert.

Why Johnny Shouldn't Have Borrowed - Housing Crisis

Within a year, Ralph's home was worth not much more than $150,000.

So, I've talked about the reason for all of our economic woes on this blog many, many times.  Rather than go through it again, Michael Prell at The Daily Caller has a post today that simplifies the roller coaster that repeated itself over and over again, until everyone wanting a house had one, whether they could pay for it or not. This is how I should have explained it to Ralph:

The "Parable of Why Johnny Can't Borrow:"
One day, Johnny woke up and decided to buy a house. But Johnny did not have enough money to buy a house. So he went to someone who did have enough money: Mr. Capitalist.
“Mr. Capitalist,” asked Johnny, “could you please loan me the money to buy a house?”
“Do you have good credit, a down payment, or proof of income?” asked Mr. Capitalist.
“No,” replied Johnny.
The End
And the end of the Global Financial Crisis.

The good news is that rather than abandon his home, which Ralph and his wife seriously considered, they refinanced and got their monthly payment greatly reduced and are once again hoping for a rise in equity.

Prell's article, QE2 vs the Titanic is a short and pithy narrative of the meaning and importance of capitalism and what happens when the free market is under assault. Prell is a strategist for Tea Party Patriots and the author of the forthcoming book, Underdogma: How America's Enemies Use Our Love for the Underdog to Trash American Power (release date January 20, 2011)

Related and Background:
Tracking the Mess of Fannie and Freddie
Financial Crisis Timeline: Republicans Warned of Economic Crisis
Bulldog Maxine Waters and her Housing and Community Opportunity Subcommittee

©2007-2012copyrightMaggie M. Thornton