Dear friends of HOPE,
“How did we get here,” you might be asking yourself about right now. Well, it is a rather simple explanation. Here it goes.
“If you are financially illiterate, and you didn’t understand the language of money, then in good times ‘no problem;’ the prosperity will paper over your problems. But in bad times, the pain and your lack of understanding (of the language of money) is simply amplified. These are the times we are living in.” John Hope Bryant
Every modern society operates on a combination of leverage (a level of debt made rational by an accompanying level of equity), and confidence. In good times, we had too much leverage (fueled by cheap and easy money, and in some cases pure greed), too much confidence and not enough understanding of money and how a sustainable system of capitalism really worked (financial literacy). This set up a wave of unsustainable “increases” in asset valuations, and average everyday people using their homes as slot machines; convinced the values would continue to go up forever. I remember getting into arguments with a number of my friends who were convinced I was nuts, and that “real estate values would increase forever.” Well, they probably will (over the long arch of say 20 years), but just not in a straight, unbroken line.
So, before the crash we had too much access to leverage (debt), too much confidence, and not enough knowledge (financial literacy). Today we seem to have too little access to credit, and too little consumer confidence, which is in part a result of having, guess what – no understanding of how money and the system really works (financial literacy). And so, fear sets in. And add to this job losses tied to an economy trying to de-leverage at the same time, across broad swatches of industry in America and around the world, and you have a perfect storm. If you thought the banking crisis was bad, think what happens if there is a fundamental breakdown of consumer confidence in America; a nation where 70% of the $14 trillion US economy is on the back of the US consumer, and you have your answer. Not good.
In many ways this is a wakeup call for America, and Americans, or to quote a new friend of HOPE, John C. Mellott, the publisher of the Atlanta Journal-Constitution, “a crisis of virtues.” If this crisis causes all of us to take a new look at our lives and how we are living them, and to reassess what is really important, and how we are all inter-dependent and inter-connected, then in the end this crisis may be a good thing. Now, that maybe good information, but that was not the question posed by me at the onset of this writing. The question was, “how did we get here?” Here is that answer:
We purchased homes, and many of us (middle class individuals, not just the poor and under-served mind you) asked “what is the payment,” and not “what is the interest rate.” We purchased homes like we might purchase an iPod on credit, and an iPod on credit, making the minimum payment, will cost you $4000.00 over time. Now imagine a home with a six figure, 30-year mortgage, and you understand our first mistake. We asked the wrong question, focused on the wrong answer, and signed documents that most of us did not understand. So yes, there was fraud, greed and outright predatory lending, but we also became better and easier targets because we simply were not able to push back on unscrupulous offerings by unscrupulous salesmen.
When the good times seem to only get better, we rode the wave of “irrational exuberance.” When our homes “went up” in value, whatever that means, we refinanced the debt that allowed us to live beyond our means into a new first mortgage, and then took out a line of credit. And like an addict, we repeated the damaging behavior, running up our credit cards to their limit, basically using credit as a substitute for the legitimate income we did not have (translation: living beyond our means). No problem we said, “let’s use that home equity line to pay off the balances on our credit cards, which had a dual impact; (1) it boosted your credit score up, and (2) once again allowed you to live beyond your means by charging more “stuff” on your credit cards. Note: I remember obtaining an equity line, which we used to remodel our own home. Remodeling and making hopefully value-enhancing changes to your home was the original intent and purpose of a home equity line of credit, but let me not distract with unhelpful facts right now, so on with the story.
A few of my friends continued this cycle of running up their credit cards (living beyond their means), using their home equity loan to pay them off, refinancing their home mortgage and starting over again, until they hit the wall. “Bloody September, 2008,” was the absolute end to this fantasy, as everything seemed to come to a screaming halt in the credit markets. Suddenly, in September or sometime (up to a year) before the party was over; home values were in retreat, equity lines were being slashed or called, and credit cards were abnormally high.
Nothing is wrong. Keep spending.
My friend civil rights icon Dr. Dorothy Height says that the greatest problem is to not admit there is problem. Dr. Height has this exactly right, and there are millions of individuals who decided that the best way to deal with a crisis of global proportion was to simply ignore it. This is not optimism (and I am an optimist, even in the midst of this crisis I see opportunity long-term), this is just nuts.
Fully 50% of individuals in foreclosure on their mortgages never picked up the telephone and called their lender.
Credit cards are a great and necessary innovation in the history of the consumer credit markets, and an invaluable resource to the average America family – unless of course they are abused. Well, this could well be the next wave of crisis to hit consumers.
Today the subprime mortgage crisis has morphed into a general credit crisis, and then a liquidity crisis, and now a growing crisis of confidence. Without confidence in ourselves and trust in others and the system, all bets are off. If this happens the system as we know it will break down, and we will be forced to go back to something a kin to barter and trade (“hey, I will give you this rock for that shirt, what do you say?”). Now, I am dramatizing to make the point here, but anyone who truly knows the facts will tell you that we have come dangerously close, on at least a couple of occasions, to the economic system as we know it fundamentally breaking down over the last year or so.
“This crisis was caused by poor people, and the Community Reinvestment Act (CRA), and not me. We will solve the problem if the Administration, Congress, regulators and bankers stop encouraging homeownership of and by the poor.” Wrong.
In Germany, following their loss after World War I, the economy began to falter. By 1925, Hitler was jailed as a crack pot, but by 1939, the German economy was in an absolute free fall, Hitler somehow became “the man,” and Jews were somehow now “the problem.” Hitler killed 6 million Jews on a bad idea, but people bought it.
Economic crisis cries out for someone else to blame, and here in the states you can hear the drum beat already, blaming the poor. The only problem is that the facts don’t lead to the same place as the drum beats. Beyond the fact that it is ridiculous to even suggest that the poor and the under-served, mostly without assets, homes or securities portfolios, somehow caused a $2 trillion plus financial meltdown, a quick look at Fannie Mae data will show you that the largest acquirer of subprime mortgages were middle class white men. Yes, that is correct. And even if you add up all classes of minorities (black, Latinos, Asians, etc) who took subprime mortgage loans, middle class white men outstrip them as a group.
We must admit that we are all problem, and we will only get out of this first class mess, together.
Politics as public policy.
There is a need for politics, and there is a need for public policy, but things become dangerous when one is used to replace the other. The reality is that Detroit auto makers need to figure out how to compete with its foreign competitors, as they were in a fix even before the credit markets froze up and consumers become pickier. The current situation just made a bad situation worse.
Democratic Politics says you cannot allow the three auto makers to fail, and conservative Republic Politics says let them fail, and restructure in bankruptcy. The problem is that the first answer only works when there is a long-term strategy that insures that the companies we save are positioned to actually make, sale and finance cars that people want to buy, and own. In other words, Detroit needs a make-sense business plan for the future, and that will be hard as long as the most expensive part on a GM car is health insurance. Yes, you read that correctly. Japan and Germany don’t have that same problem, as they are actually focused on making quality automobiles.
The problem with the second answer (restructure in bankruptcy) is that the credit markets are not providing funds for healthy companies, so what do you think the chances are for companies in bankruptcy. And when consumers have choices all around them, what are the chances they will purchase an automobile with a warranty from a manufacturer in bankruptcy? Think about the choice that you would make, and there is your answer. The normal, is not normal anymore. Which leads me to what I believe is the ultimate choice here, and that is good politics, good public policy and good common sense.
Even though it drives me crazy to think about it, the only answer is a rescue in the short term, but with a long-term focus on and absolute commitment to the outcome we seek, which may mean a blended solution. Now, let me clarity here that my proposed “answer” here, is actually not tied to the auto manufacturers themselves, but to the potential impact on the wider economy. When Lehman Brothers was allowed to fail it sent fear-shock waves throughout the broader market, and industries having nothing to do with Wall Street are still feeling the pain today. In the weakened and fragile economic state we find ourselves in today, a collapse of the three auto makers, along with the one million jobs (direct employees as well as many employed by supplier companies) and supplier companies associated with them, might be too much shock for our economy (and mental state) to handle right now. In other words, it might be the tipping point we don’t need right now. The answer here might become a pre-packaged restructuring in bankruptcy, with a guarantee of financing from or backed by (I hate to even suggest this) our government, accompanied by a possible restructuring of senior management and their board of directors. But what we cannot afford to do right now, is nothing. Doing nothing, and “letting the market forces alone handle it,” is precisely how we got into this mess.
What we need now
My experience tells me that nothing has done more to create a middle class around the world, and to even lift the poor from poverty, than responsible capitalism and free enterprise. That said, what we need now is a massive restructuring of capitalism and free enterprise, and a right sizing and balancing of the role of government and market participants. In other words, the government sets the rules and genuinely monitors basic framework compliance, and the private sector rows the boat and innovates, creating real and sustainable value, in the context of a “fair enterprise,” and not just free enterprise. Money is not everything. And frankly, if you ask true innovators such as Bill Gates or Ted Turner or the creator of Apple, Steve Jobs, it was not even their primary objective.
These men (I have to find a woman’s example next time) were passionate about an idea, or better an “ideal,” and they pursued them with passion. Ultimately, it was the power of ideas that empowered everyday people, and increased their sense of choice, opportunity, dignity and independence, that made these men rich and powerful. In other words, they focused on serving society and creating sustainable value, and they and others were rewarded for it. Ask yourself is that what you are seeing from many private sector leaders who call themselves leaders today, and you have a sense of what is wrong, and what we have got to get right again.
In short, what we need now is you – again.
America was built on the back of entrepreneurs and entrepreneurship, innovation, serving others, hard work, and the power of our ideas. And casting ourselves away from mother England has always left us with a sense of wanting to prove we were “better than,” or at least “good enough.” That vanity, and maybe even a hint of insecurity, has served us well because it caused us for a very long time to not get puffed up, or to become over confident, or worse arrogant and class conscious.
I was in the airport last week and there was Ice-Cube and myself, a US Presidential Appointee, being worked over by local US airport security, while the local plumber and the hair dresser and house wife happily sailed through security and on to their departure gates. Who was held back for a few additional questions (no big deal really), and who was not, may at times be questionable but it was not about mere class or status. That sense of democracy, and the leveling of the playing field for all, is what made and makes America great. The CEO of Accenture said recently at a speech I attended, “what makes America different from every place else in the world is our ‘special sauce.'”
The fact that a white woman and a black man can run, competitively, for the highest office in the land, and that we can have a US President-Elect named Barack Obama, a mere 40 years from Jim Crow and Dr. King, is precisely why America will bounce back. Where else in the world could that have happened? It’s our “special sauce.”
Rainbows after storms
After the Great Depression, some of America’s greatest and most sustainable public innovations (“great ideas”) were created; from the FDIC, to the Securities Exchange Commission, to Social Security and the modern social safety net we know and value today. All of this came out of a time of despair, and fear. Someone wrote “never let a crisis go to waste.” I don’t plan to.
Operation HOPE has served more than one million low-wealth individuals since our founding in 1992, but we need to do more, and we will do more.
The bi-partisan US President’s Advisory Council on Financial Literacy, chaired by financial guru Charles Schwab, vice chaired by me, and including 16 leading experts in their fields, has recently approved 15 draft federal policy recommendations around financial literacy in America. We will present our final annual report to the President, Secretary of the Treasury and the Transition Team soon.
Civil rights icon Ambassador Andrew Young and I have recently pinned a letter to President-Elect Obama, encouraging him to dual track the “education of America,” about both their own finances and the nations, at the same time as he seeks to frame out new broad based economic policy for the nation. In other words, Mr Obama will need to bring us all along with him, as we (the American people) initially rejected the last major $700 billion package precisely because we did not understand it. We thought it was about rich fat cats on Wall Street, instead of soon to be skinny cats on your and my street. It was about providing liquidity to the credit markets, but as our Council’s listening sessions from South Central Los Angeles to Iowa confirmed, most people did not know or understand that.
Let’s use this crisis as a means and mechanism to make America great again. Let’s launch a nationwide silver rights movement, that finally makes capitalism and free enterprise work for us all, and the first silver right is financial literacy empowerment. When you know better, you tend to do better.
Hope in on the way. Keep the faith. As a friend recently reminded me, “it is always darkest before the dawn.”
Onward with HOPE,
John Hope Bryant is the founder, chairman and CEO of Operation HOPE, the vice chairman of the U.S. President’s Advisory Council on Financial Literacy, and the chairman of the Council Committee on the Under Served. Bryant is also a financial literacy expert for the Global Agenda Council of the World Economic Forum. Bryant is the innovative behind of the global silver rights movement.