GOVERNMENT EARNS LOW MATH GRADES

By Bill Dunn

A housing and mortgage crisis has contributed to the U.S. economy’s recent slump. Home values have plummeted; mortgage foreclosures have skyrocketed; and the two largest lending entities in the nation, Fannie Mae and Freddie Mac, are in so much trouble, both were just bailed out by the federal government (read: by taxpayers).

There is a simple explanation for this mortgage mess. Lending institutions ignored the Number One rule of banking: they approved mortgages for borrowers who did not have the financial means to repay the loans. Any sixth grader with a B-plus in math class could’ve told us this fiasco was sure to occur. However, the barons of Wall Street and the princes of Congress (especially our own Sen. Chris Dodd, chairman of the U.S. Senate Banking Committee) were taken completely by surprise.

Mortgage lending is not the only financial concept our elected officials have difficulty comprehending. Here in Connecticut, the state receives from taxpayers (and immediately spends) approximately $9 billion per year. The state also spends a lot of additional money by issuing bonds. The current bond debt is $15 billion and growing. On top of that, retired state employees have been promised pension, health, and life insurance benefits worth $21 billion. When you add up all the bills, the total unfunded liability of the state of Connecticut is $54 billion.

Let’s put it in homeowner’s terms. This is like a family with a combined annual income of $90,000 taking out a $540,000 mortgage. The monthly payment on a 30-year mortgage, at a typical current rate, is $3300, which means the monthly mortgage payment uses up 44-percent of monthly income before any other expenses are met.

A competent loan officer (or sixth grader) would warn that this family is taking on an awfully large amount of debt. Since the state issues new bonds on a regular basis, it’s as if our hypothetical family also takes out new home equity loans every year. It appears the state of Connecticut has put itself in a financial situation similar to that of the many folks who were urged to borrow more than they could repay by the likes of Sen. Dodd’s buddies at Countrywide Financial.

But if you think that’s worrisome, consider the debt situation in Washington D.C. The federal government has an annual budget of approximately $3 trillion—and a good deal of that must be borrowed since annual revenues fall far short of annual spending. According to a study commissioned by USA Today, the U.S. government has made future entitlement promises totaling $57 trillion. (That’s trillion with a “T.”) Some analysts claim even higher amounts, such as the Medicare trustees, who earlier this year reported that the Medicare-Social Security debt is closer to $90 trillion. But for now we’ll use the more optimistic figure of only $57 trillion.

Again using homeowner’s terms, this would be like a family taking on a mortgage of $570,000, while having a combined family income of just $30,000 per year. A sixth grader with a C-minus in math class could tell us this is a financial train wreck just waiting to happen.

However, we are being told there is nothing to fear. Why? Because hope and change are just around the corner. Barack Obama has pledged to cut taxes for “95-percent of working families,” while adding many expensive new spending programs. John McCain’s economic plans differ only by degree, not by kind.

Apparently, continuing the current borrow-and-spend financial course sounds great to most elected officials. And apparently, most elected officials flunked sixth grade math class.