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 MaryAnne’s blog contains a reference to Andrew Keen.      He’s  a crackpot who laments that the amateur content on the internet will overwhelm us, and destroy all forms of Intelliegence As We Know It.  The advent of MySpace, YouTube, and countless blogs written by talentless hacks will result in a digital anarchy that will render us numb to true art.

Andy is missing the good stuff out there.  If he had any sense, he’d realize that our media and technology has always been measured by its ability to facilitate porn.  Yes, it’s PORN that drives mankind to the height of expression!  From cave paintings to Egyptian scrolls to the taboo novels of the Victorian era, the overwhelming creative urge has been to describe numerous sex acts and draw dirty pictures. 

And let us not forget the progress of the Industrial Age! Why, did Andy even know, that Sigmund Freud invented the first vibrator? Yes, it was a steam-powered device created to ease the nervous tension of his female patients. 

We must also recognize the tremendous medical advances of our modern times, which brought us Viagra!  

The Internet is the best thing to have happened to porn since the advent of the printing press.  In fact it’s even better.  Now, instead of buying over-priced dirty magazines and grainy movies in sleazy roadside shacks along the interstate, and supporting the mafia in the process…

…you can shop a variety of porn right from the comfort and privacy of your own home.  Best of all, so much of it is FREE!  Yes, there’s sex stories, photos, and movies, for every imaginable bent and fetish and preference…FREE!!  It’s a beautiful world!!

Much of this free porn content is from amateur efforts.  How can Andrew Keen find fault with that?  Maybe he’s never had to jostle his way through a pack of truckers and sailors to buy an over-priced, already-flipped-through adult magazine in a dark, dirty store in the wrong side of town.  I for one, appreciate the creative Internet endeavors of our ambitious citizens and their use of webcams and digital cameras!  WAHOO!

Continuing the prior post:

No one can blame the Fed for cutting rates after the events of 9/11.  But here’s why it lead to an overheated real estate market.

The Fed had already been cutting rates gradually through the preceeding years.  I was in the mortgage industry during the 90’s and watched the rates fall.  At one time, it wasn’t unusual to have a mortgage of 9 percent with good credit.   I could put you asleep explaining the Savings & Loan bailout years before that and the impact on interest rates. ( how about 14% on a 30 year mortgage? Yes indeedy) Instead, I’ll just bottom-line it for ya.

There’s no way the Fed could have prepared for 9/11.  The discounted rates of the 90’s had already helped the stock market gain inflated values, leading eventually to a dot-com bust.  While that was a bump on the road, the events of 9/11 caused a real financial panic and the Fed had only one card to play.  Thus, the prime rate was taken down again and again and again in the hopes of breathing life into a threatened economy.

When it started to work, the Fed kept it up because the housing frenzy was the only major source of new employment.  ( Manufacturing jobs, by this time, were going to China.)  And so the government embraced the fact there were 2.5 million licensed real estate agents and umpteen people working in construction and score of clerical jobs in the mortgage industry.  It was the only bright spot in an economy that saw real wages shrinking and other forms of employment disappearing as a whole.  The tonic given in remedy, was continually lower rates, which faciliated cash-out refinancing that gave Americans buying power for cars and splurges that basic wages would never cover alone.

So why did the party stop? This is where it gets controversial, and I’ve yet to see any “real” financial writers broach the subject.  But here it is.

Simply, the costs of the continued Iraq conflict forced the Fed to raise interest rates.  With a government in trillions of dollars in debt and the dollar weakening against the Euro, the interest rates had to go up before deflation caused it’s own havoc.  (think of the Mexican Peso, where it takes about 100 of them to buy a Coke.)   Iraq was supposed to be a SHORT conflict.   Easy in, easy out.  Just as the Fed couldn’t predict 9/11, it was not prepared for the Iraq Conflict to last more than…oh, 18 months.

As things stand, the Iraq conflict has no end in sight, the price of oil remains high, China has most of the manufacturing jobs, tech jobs have gone to India, and somewhere in there we had the Katrina thing too - but somehow we don’t see insurance companies bleeding to death like we do mortgage companies.  Interesting how that works, eh?

This is why I never majored in finance.  Frankly the subject pisses me off.  Anyway….

The Fed has had it’s head in the sand for the past six months, waiting for the real estate crisis to fix itself.  Sorry boys, but that won’t work.  It was delayed reaction by the Fed in correcting interest rates that lead to the current problem.  Would it kill the economy to loosen the purse strings just a little, and lower the rates just enough to give would-be home buyers and refinancers some hope? 

And about all these adjustable-rate mortgages…how about re-writing the damn loans and converting them to fixed rate?  Oh wait, that’s right…the interest rates now are TOO HIGH! DUH!!  Guess we still have to lower the prime rate a little bit, don’t we.

We also need a mortgage equivilent of the FDIC.   The FHA loan program has an outdated structure and it’s inapplicability to modern real estate is evidenced by how many consumers were driven into “subprime” mortgages.  This is the exact customer base FHA should be serving. 

It amazes me, that the Federal government jumped in on the Savings & Loan bailout in the 80’s, and entered labor negotiations during air-traffic controller strikes, and climbed all over insider stock trading and “accounting irregularities” and a hundred other things that can adversely impact the economy….but it can’t seem to take action as homes roll into foreclosure at alarming speed and a major sector of our economy is falling apart.

Earth to Fed:  This is your mess.  Clean it up. It won’t be cheaper or easier later. 

I’m months behind on my blog, so there’s a ton of personal rants that the public has been denied.  Not knowing where to start, I’m falling back on an old favorite - the sucky status of the mortgage industry.  Here’s a tidbit from an article in my local newspaper which explains what I experienced for myself: 

“Whacked by mounting losses from subprime, high-interest loans made to unreliable or overextended borrowers - mortgage lenders of all types are pulling back, fast and hard. Many are either going out of business or raising standards so high that only borrowers with pristine credit histories and ordinary deals need apply.”

“The lending straitjacket forces home buyers and sellers to fall in line with the stricter guidelines or get out of the market. Area real estate brokers report that deals are falling through as lenders snatch back promises made to buyers who went house-hunting with prequalification papers in hand.”

Yep.  Sure enuff.

There is a stingy spirit of over-correction going on, akin to paranoia, among lenders. It’s not just because of the very real losses, it’s also because of the perception that mortgage lenders themselves are at fault for the mess.  Frantic to appear diligent in the face of such criticism, lenders are removing the very bricks from the sidewalk in their haste to discourage customers.  Mortgage banking has regressed by 20 years in the process.  I believe it’s a devestating reaction that will compound the existing problem.  It’s especially distressing considering it’s not the lender’s fault.

It is the Federal Reserve, and it’s Chairman, that created the problem and must therefore be part of the solution.

Banks merely followed the Federal Reserve’s cues.  The Fed kept lowering the prime rate. Lending got easier because rates went down, and consumer buying power increased.  Home prices escalated madly, because the cheaper interest rates were, the more people could afford to pay for house.  As the Fed kept knocking down rates, the madness to throw around the virtually-free money and “get in” on the gold rush of real estate took on a life of it’s own.  Adjustable Rate mortgages sounded good in an environment where rates kept nosing south.  No-money down loans seemed fine when home values were soaring.

It was when the Fed started applying the brakes, too late, and too hard, that the true problem occurred.   Yes, there was mortgage fraud out there, with fake appraisals and shadow buyers, and rings of conspiracy to bilk banks out of loans that had no homes attached to them.   Then again, it was the Fed’s overzealous discounting of the prime rate that created the opportunity for fraud. 

We must remember that the Fed was desperate, after 9/11, to stimulate the economy. The stock market had tanked. The DJIA went from near 13,000 points down to about 7,000 in the course of a month.  Businesses were folding. Airlines were facing bankruptcy. Jobs were being shed by the thousands. The world, and the American way of life, had been ruthlessly shaken.  If faith was not restored in our economy, not only was recession possible, but a full-scale economic depression was likely.  One that could tank the economies of the world with it. 

More on this later.  Stay tuned for more boring economic opinion!