Strength In Diversity

Traders who deal with the United States are doubtless feeling some anxiety. The subprime mortgage mess has sent shivers through the world economy. Financial institutions look weak, the ultimate extent of losses is unpredictable and the U.S. economy may slip into a recession, perhaps dragging other parts of the world with it.

At the same time, a U.S. presidential election is being vigorously contested, leaving open the question of what policies America’s leadership will favor come to the inauguration of a new president in January 2009.

It is reasonable enough for businesspeople to be concerned about all this, yet it is less a cause for concern than one might think.

The economic problems are best seen as a natural correction; the normal business cycle means that when individual sectors or the overall economy get too frothy, it leads to excess, and the business cycle dampens the build-up of excess with the occasional pullback.

The subprime mortgage crisis is getting all the attention but subprime mortgages have done the country a lot of good by making home ownership an option for millions of people who otherwise wouldn’t have gotten a home. Perhaps they didn’t have a sufficient down payment, high enough credit score or secure enough income. Yet, many of them now enjoy the pleasures of home ownership and the United States enjoys the stability that comes from having a population with a stake in its local community.

The current turmoil may lead to many people losing their homes. As long as prices were going up, they could keep the houses by borrowing, but now that values are flat or declining, they will wind up losing their homes to the bank.

While the suffering of individuals should never be discounted, one man’s pain is another’s opportunity. Homes lost to foreclosure don’t disappear; they are resold by the bank, often at prices significantly lower than they sold for originally. A home lost to foreclosure tends to make more reasonably priced housing available to others. There will wind up being as many people in houses as there were before the crisis.

What about the financial implications? The big losses at all those banks? Even these are overstating the problem. Our laws require banks and other institutions to “mark to market” all the loans and securities they hold. Right now, because of the uncertain value of these subprime mortgages, the market value of them has gone way down — in all likelihood, far below the value of the stream of income that will be generated in the future from payments and foreclosure sales.

Sure, there were abuses. It is often hard for regulations and markets to keep up with technology and innovation. Banks used to give loans and hold them to maturity. This practice encouraged caution among lenders since they would absorb any losses from these loans. In recent years, however, we have developed highly liquid financial markets and the practice became that the loan originators would quickly sell them in securitized packages, thus generating more capital to lend once again.

Although this pattern enabled originators to write more loans than they could have if they held onto all their loans, the practice of reselling loans had the unfortunate consequence of making originators indifferent as to whether the loans they underwrote would ultimately fall apart.

Everyone recognized these temptations could cause real problems, but rising house prices covered a multitude of sins. Those who warned of the dangers were seen as Cassandras, always preaching doom when, in fact, there were few losses on subprime loans. How could there be losses? If a homeowner were in trouble, he or she would sell the house and realize a tidy little profit after paying off the bank.

Now, of course, the problem is recognized and both public and private entities are putting in new safeguards to reduce the likelihood of a future collapse. There may well be a recession, although the weak dollar actually creates opportunities for purchasing from the United States, so exports may save the day for the U.S. economy.

If the political future looks dicey, see it as an example of the enormous strength of the American polity and economy. The strength of America derives in no small matter from the ability to draw on the talents and industry of all Americans. The presidential race illustrates that strength. The top candidates are a black man, a white woman, a member of a small religious group and a man famous for courage as a prisoner of war.

How diverse a field and how fitting for such a diverse nation! When you are looking at the diverse selection of food, beverage and agricultural products available for export, remember that the same diversity of products that makes our food export industry strong is echoed in the diversity of our people and that diversity keeps America strong.