Housing and the Galveston Hurricane of 2008:

I have, over the past 9 days, watched first hand the response of the Texans in this part of Texas. It has been interesting to say the very least. As of this morning there were a number of points of distribution (PODs) still handing out needed supplies to the public. Initially these handed out ice and water … a day or two later meals ready to eat (MREs) became available.

Ike Photos

Power outage was something approaching 2.3 million customer accounts or 4,000,000 people without power. This from a category 2 hurricane that hit the Houston / Galveston beginning about 2 am September 13th. 2008. This storm had hurricane force winds that extended 120 miles out from the center. The sheer size of the storm meant the wind blew for a number of hours. Several areas were a total loss and there was much damage done.

Now as Houston / Galveston begin to enter the rebuilding phase of the recovery effort, a very different type of storm has appeared on the financial radar. This is a storm of confidence. The folks who lost their homes to Ike are going to be hard pressed to borrow the dollars to rebuild because their line of credit is maxed out to credit card companies. Many banks are holding customer IOUs (in the form of adjustable rate mortgages) that frankly are not worth the paper they are printed on.

All of this has come to a boil in the past 7 days. Yet we lack the political will to acknowledge that America is poised at the edge of a very ugly fall. Once again there is finger pointing and a lot of “I told you” going on. The facts are simple. America has been running on borrowed money for at least 16 years. Yet taxes continue to be cut and regulation of the critical financial markets continues to be lacking.

Loan clients who lacked both the desire and the ability to repay the loans were extended credit. This largely done because the bonus of loan officers was based on the dollar volume of the loans they made. And not just the loan officer was rewarded this way. Bank managers were compensated in many cases based upon their loan volume not the soundness of the loans made.

What happened was that Lehman Brothers founded in 1850 filed for bankruptcy on September 15, 2008. The following day Merrill Lynch was sold to the Bank of America. This comes within days of the government announcing that it had taken over Freddie Mac and Fannie Mae the major buyers of junk status loans. I have no idea what the American government’s exposure is but we are all ready fighting two very expensive wars in Middle East. Add to those costs the cost of this bail out; and the total costs become truly astronomical. Can we weather these storms or will the nation become as crippled as Galveston Texas or New Orleans Louisiana? The next four years are indeed going to be a challenge for those seeking elected office this fall.