Liquidity - Like oil in the engine.

The financial crisis of September 2008 was the direct result of the wholesale collapse, to nearly worthless, of the bad mortgage loans on the books of many of our most vital financial institutions (commercial banks, investment banks, insurance companies, etc.). Loans that were "booked" as assets, became worthless, and the company's ability to attract credit/liquidity was further compromised. As a result, these institutions could not meet their capital ratio requirements and lost the ability to use their strong balance sheet to conduct their business. These institutions "froze", and experienced a severe lack of liquidity. Think of the engine of a car seizing up if there is insufficient oil to lubricate the system. Liquidity is important.

What happened to the 28% Rule?

It used to be that in order to be approved for a mortgage, your expected mortgage payment could not exceed 28% of your verifiable wage income. Do you remember this rule? I do! This rule assured buyers of the mortgage loan (banks, insurance companies, etc.) that there was a good chance that the homeowner could pay the loan back. And the 28% rule also held Wall Street’s propensity to create new ways to make money in check. Certainly, had this rule been in place for the past 10 years, banks, mortgage companies and Fannie/Freddie would not have been able to create the junk loans that they did. And hedge funds, investment banks, foreign banks, insurance companies, and the like would not have been able to purchase and sell such loans, spreading them to every nook and cranny in the global financial system. I believe that with the old 28% rule, we wouldn't be in the mess we're in today. It's like a fruit fly bringing down an entire civilization.

Financially Illiterate?

But this crisis isn't just about a dearth of regulation; people felt emboldened to make irresponsible financial choices too. Were those who got away with securing a loan for little down and little or no ability to pay gaming the system? Or were they really so financially ignorant that they made decisions counter to their own best interests? I suspect a little of both. Some were risk takers, others were clueless. Financial illiteracy is rampant in the US. Too many people do not know the first thing about making prudent financial choices. This is a sad statement. Clearly the "masters of the universe" on Wall Street, characterized by an insatiable appetite for "more" money despite the risks, are not the right role models for us. As a start, let's consider whether we in the United States even value responsible financial behavior. And then let's do something about it.

The Road Ahead

The good news is that we are hopefully on a new road. A road not paved with easy credit. A road where personal responsibility for financial outcomes is a given. A road where we appreciate the simple things in life, like friendships, a good neighborhood Bar-b-Q, camping, the beauty right here in the good 'ole US of A. In fact, let's not use the word "consumer" anymore. Investor? Saver?

I welcome your thoughts.