Web Letters: Subprime Politics

The key to this story is that "debtors have little sway in Washington." But banks and other mortgage lenders do. That's because they've spent hundreds of millions of dollars ($242 million to be exact) on campaign contributions and lobbying in DC. Common Cause has all the goods, here and here.

Pat Thomas

Arlington, VA

With the outsourcing of jobs, along with industries overseas, plus the in sourcing of cheap labor to drive down wages, and the collapse of the American market, we may be looking at a world-wide, interconnected, global depression. If people don't have a decent wage, they can't afford to buy anything! This is what you get from laissez-faire, unregulated, capitalism. It is Social Darwinism.

Pervis J. Casey

Riverside, CA

This is not a subprime crisis but a full-fledged credit crisis affecting banks, money market funds, bond funds and in the end the real economy, i.e., the consumer. There is much worse to come. House prices have to fall at least 30 percent on average. The "feel good" factor of the consumer will dissipate quickly. There is going to be a huge shakeout in the financial industry: banks and some money markets first, hedge funds next. Many economists think we are heading for stagflation, a scenario where Central Banks are practically powerless.

How did we get there? Double and triple leverage, sloppy risk underwriting, aggressive sales to investors (like European banks) who did not understand the risks involved. And above all regulators who condoned all of this. But in the final analysis it all boils down to an eternal management issue: can you as an employee in the financial industry sound the alarm bells as the lonely voice in a crowd of believers? Imagine yourself in a Baptist church one of those Sundays in Arkansas with Mike Huckabee in the pulpit. You get up & announce to your fellow believers that you no longer believe in God. You even want to give them a clear, coherent analysis of your reasoning--alas, they will not even let you speak.

Few people can afford a strategy like Warren Buffet & Co. (share price development of BRK-B went from 3.600 to 5.000 over the past six months), Vanguard, Dodge & Cox or Dimensional Funds. In most banks, brokerages or fund management companies you'll get fired or sidelined if you are a threat against vested interests (power + bonus). So the human element in a largely dysfunctional corporate structure is the main reason here. Top executives like getting rewarded (Chuck Prince et al.) rather than punished. From their point of view it is the modern version of Pascal's seventeenth-century wager on salvation.

However, as a long-term investor, don't panic--that is, if your asset allocation is conservative: low-cost equity funds, equity index funds, real estate (preferably your own & debt- free) and lots of cash invested in CDs or conservative money market funds. Thus one can ride out the storm in the equity markets, which is hitting us & probably will get worse over the coming year.

R.H. Weber

Geneva, Switzerland

"A recent study found that in 2005, fully 55 percent of those who got subprime loans had good enough credit to qualify for less expensive prime loans."

If that were so, why didn't they do their research before signing on the dotted line?

A.J. Cook

Dunwoody, GA