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Fixing the finance mess and ourselves, too

November 29, 2008|By WILLIAM F. McLAUGHLIN

Now that the "financial rescue" package is in place, it's time to ask, "What's next?" Congress has passed what is essentially a "nonpartisan" Christmas tree, adorned with expensive, nonessential ornaments. When viewed from Main Street, we have to ask, how much more cooperation can we afford?

The nightmare of a total financial meltdown seems to have been averted in the near term, but real recovery will prove to be a difficult process. In order to begin recovery, we have to come to the realization and freely admit that we are suffering from an addiction.

In the case of the American economic system, it is an addiction resulting from unrestricted access to easy credit. For years, this addiction has been viewed as a "victimless" pursuit with no real consequences. We now recognize the error of this approach.

The credit disaster that has been quietly building since 2002 has turned the United States into a debtor nation. We have been getting by on the generosity of strangers, few of which are true friends.

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Free market economics and deregulation were seen as the panacea that would result in perpetual economic growth. For this approach to work, it must be coupled with a tremendous amount of self-control.

We have demonstrated that as a society, we lack the maturity to act wisely. Now, old rules and regulations must be dusted off, and new ones formulated, to save us from ourselves. Verifiable credit guidelines must be re-established and enforced. This will help to solidify the foundation of our financial markets in the future.

Americans must start saving again. In 2006, out total domestic spending exceeded our gross domestic product by 0.1 percent. For the first time in history, we had negative savings.

Home equity loans fueled a binge of big ticket spending. Many home owners mortgaged their future for items with no intrinsic value. This myopic approach to instant gratification has probably placed as many homes at risk as sub-prime mortgages, and represents the hidden fuse of the debt bomb. Hopefully, the financial rescue plan will address this problem, too.

What can we do after we have acknowledged our addiction and taken the first small steps toward recovery? We must rebuild confidence in the housing industry.

Traditionally, housing has been a necessity that provided long-term security for families and appreciated in value. Voodoo economics has taken this basic necessity and converted it into a commodity for short-term gain. The results have been disastrous.

The housing industry represents approximately one-eighth of our entire economy. It employs contractors, financiers, real estate agents, material manufacturers and suppliers, and millions of other people on the periphery. Recovery will not come overnight.

For any recovery plan to have beneficial, lasting results, housing values must stabilize. With the current supply of homes on the market, this stabilization process might take 12 to 18 months. During the interim, as the credit markets try to achieve equilibrium, values may continue to decline.

The number of qualified buyers will initially shrink, due to the need to meet new qualification requirements. As the current supply glut is absorbed, we will again begin to see reasonable rates of appreciation.

During this transitional period, many buyers and sellers will be frozen in place. This freeze should allow people to get their financial houses in order by eliminating credit card debt and beginning a savings plan.

There is a bright spot on the horizon. I believe that substantial growth in our next economic cycle will be fueled by energy technology. We may finally rise to the challenge of energy independence. Americans have always had a remarkable ability to band together in times of adversity.

Old habits die hard. If we can beat our addiction to easy credit, we can also overcome our foreign oil addiction. By harnessing the creativity and ingenuity of the American people, we can do anything.

William F. McLaughlin is the president of the borough council of Chambersburg, Pa., and is also a real estate broker.

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