I find it hard to believe that no one saw this financial mess coming.  I find it even harder to believe that adding another $800 billion of debt is going to fix it.

Outside of what I learned in college about markets, economies, and history, my understanding of the economy over the last seven years has been informed by my research aimed at making sense of what I saw take place around me.

I graduated from college in May of 2001 and got a job a few weeks later working in sales for a telecom company.  Life was good until reality struck six months later in November when a few thousand of my coworkers and I were laid off.  If it wasn’t for 9/11, the lay-offs would have happened in September, as it would have been a PR disaster to let so many people go right then.  A few months after boxing up my desk, cutting up my company credit card, and turning in my computer, reality struck again when the stock market really took a beating and times were terribly tough at my new non-profit job.

One would think that at the time with so much creative destruction in the economy folks would be a bit more leery about buying a house.  Not so as my wife and I learned in the spring of 2002.  

The race to buy a house struck us as ridiculous at the time, but we figured that was what we had to do to get a house before the prices rocketed any higher.  Many times we would try and schedule a showing only to find out the house was already sold for the asking price or more.  Finally, in May 2002 we found a “reasonably priced,” modest bungalow.  At the time we thought we were getting a good deal.  I later found out we paid twice what that starter house went for in 1996.

Even at the time, I knew starter incomes had not doubled in six years and surely the population of the Twin Cities had not doubled in six years.  The economy was simply not right.

In 2003 I began mobile loan closing in the evenings to make a little extra money for my family – which quickly obliterated any confidence I had in the soundness of the American economy.  The job was simple: Be available in the evening, get a call from a closing company needing a refinance loan closed, pick up the loan documents from the closing company, drive to the borrower’s location of choice (usually their house), walk them through the documents, notarize the needed signatures, and drop the loan documents off to the closing company the next day.  

Back in those days, house values were soaring and ads were extolling the virtues of turning those houses into ATMs.  It didn’t matter if they were sub-prime, Alt-A, or prime borrowers: Everybody was loading up on cheap debt and I saw it happen.

I went all over Minnesota, from Baudette in the northwest to Albert Lea in the southeast, and everywhere it was the same story.  If I saw a shiny, new $30,000 truck in the driveway, sure enough the debt for it was getting rolled into the home loan.  If there was a flat-screen TV as big as a wall, sure enough the debt for it was getting rolled into the home loan.  If someone had a framed picture of their time in the Virgin Islands, sure enough the debt for it was getting rolled into the home loan.

My job was just to go over what the loan said and notarize the borrower’s signature.  During that half-hour to hour, people talked.  On paper, everything seemed fine and dandy.  The borrower makes $x amount and is going to carry $x amount of debt at x percent interest rate, and the loan to value is x:x. 

More precisely, all was deemed proper and sound as discerned and spit out by computer programs.  But I often found matters to be radically different when I visited clients, saw where they lived, and learned what they had done or planned on doing with the money.

I went into one house not far from where I lived.  Before I could knock on the door I could smell the stale cigarette smoke from inside.  To the left there was a cement pad where a garage once stood.  Once I got inside, I could see it was a rundown house with plywood cabinets and ripped and stained carpeting – albeit sporting a giant flat screen TV.

While I went over the paperwork with him, I found that the mortgage company set the value of his house at about $200,000.  I about fell over.  Again, my house wasn’t far from the borrower’s location, and mine had just been valued at about 10 percent less than his.  I had a garage, a remodeled kitchen, nice layout, etc.  I thought to myself, who would pay $200,000 for this house?  But I’m not an appraiser, so what did I know.

As if that wasn’t shocking enough, I found out he was getting almost $40,000 in cash-out.  He said he was going to fix things up a bit and maybe buy a newer car.  He also said he might go to the casino at Turtle Lake to celebrate – all because the mortgage broker told him he could do it.  I’m not a mortgage broker, so what did I know.

If you think it was just sub-prime folks, you’re wrong.  After going into house after house, rich or poor, and seeing what the money went for, it was impossible not to think the whole economy over the last six to seven years was a credit-induced sham.

More disturbing than what was purchased, were some of the attitudes of borrowers.  Always, the perfectly appropriate question: “How much is my monthly payment?”  Well, I would say, you have an adjustable rate mortgage so the rate can change, though it’s capped at 8, 10, or even 13 percent – which meant if your rate changed, your payments would be affected.  And always the response:  “Well, my house will keep going up and rates are going to stay low, so I can refinance later.”  Well, no one can ever know that for certain and people should plan for a worse-case scenario.

What did we get for all of this debt?  Overall, will it generate wealth or will it turn us into serfs as we pay for already consumed goods and services of depreciating value?  Is borrowing $800 billion a step in the right direction or is it a continuation of what got us here?  If the latter, are we suffering hubris by believing we can painlessly unwind a debt-induced bubble of historic and global proportions?

Now that house prices have stopped rising and credit isn’t so easy to get, many Americans are finding they are like the grasshopper in Aesop’s famous fable about the ants and the grasshopper.  Winter seems to be approaching, and unlike the ants that worked and saved, grasshoppers who worked and didn’t save have no reserves and aren’t ready.  If winter hits hard, many Americans may look back and wish they hadn’t been so quick to get into debt.

Devin Foley is director of development for Center of the American Experiment

October 2, 2008