It has been said that American voters like solutions to political problems that are quick, cheap or paid for by someone else. In such an environment, elected officials are encouraged to postpone addressing problems that don’t fit the mold. After a problem escalates into a crisis, the unnerved electorate reverses its position and the political leadership rushes to repair the damage.
It may not be the best way to conduct national affairs, but we seem to like it. We have grown accustomed doing nothing for long periods and then reacting with a self-righteous vengeance when the problem spins out of control.
Congress oversees the federal agencies responsible for border security, immigration and foreign relations. It is aware that the majority of migrants attempting to cross the border into Arizona are Mexican nationals trying to enter the U.S. to find work. For the past 25 years, Congress and the White House have ignored the fact that Mexico’s ongoing anemic economic performance was contributing to the problem. Mexico is linked by geography to the southwestern United States. It is a major U.S. trading partner and a component in resolving the illegal migrant issue.
Through September 2007, our two-way trade with Canada totaled $277.0 billion. For the same period, the total for Mexico was $167.8 billion. A large number of jobs on both sides of the border depend on the commercial relationship between the three countries. If Mexico had been a foreign policy priority for the last 25 years, the total for Mexico would be a great deal higher today due to its economic expansion.
Because Mexico and Arizona share part of the national border, our futures are linked in many ways. Economic stagnation in Mexico drastically impacts Arizona. On the other hand, a prosperous and economically viable Mexico will benefit Arizona to a great degree.
The U.S. government is proposing to provide Mexico with $1.4 billion to fight drug trafficking over the next three years. At the same time, Congress and the White House should be looking into ways to get the Mexican government to stimulate economic growth. The country’s legendary corruption problem needs to be addressed along with Mexico’s atrociously poor productivity growth rate. The impediments stifling business formation, competitiveness and innovation in the economy have to be removed.
The committee on foreign affairs in the U.S. House of Representatives made national headlines recently when it announced it had determined that the killing of the Armenians during the World War I era was a genocide carried out by the Ottoman Empire. While the dismal fate of the Armenians during the period of collapsing Ottoman rule nearly 100 years ago is a subject worthy of historical study and evaluation, Arizonians should rightly question the priority given the subject by a Congress unable to come to grips with the immigration problem here at home.
Citizens have to demand that Arizona’s congressional delegation prod Congress to focus on Mexico’s economic situation because it is a key factor in determining how successful Arizona’s economic future will be. The matter certainly should rate as high in importance as the recent revisit of World War I events.
The “no amnesty” policy championed by many as the solution to the illegal alien (as they call them) question has a goal of ridding the United States of approximately 12 million undocumented individuals. While the implementation of this policy would create new government contracting opportunities for those willing to seek out, incarcerate and transport large numbers of people, it would be extremely disruptive to society as a whole. Humanitarian concerns aside, the chaos caused by the roundup and wholesale deportation of a sizable chunk of the U.S. workforce is not an event this economy can easily withstand.
Deportation would also be a peculiar position for the government to embrace given its previous policy of more or less ignoring the situation. By not acting when it should have, the U.S. tacitly encouraged the workers to come in. The new immigrants, as were most of those in the past, were not bent on the destruction of the United States. They came from places of little opportunity to find work in a country where they were allowed to fill jobs. Their much derided economic contribution has been real; it cannot be simply discounted as being irrelevant. The economic consequences of a deportation policy are real. They have to be seriously considered as the debate over immigration policy continues.
In the 1980s, industry lobbyists persuaded Congress to deregulate the savings and loan industry. As part of the process, Congress purposefully had the government retain responsibility for guaranteeing the safety of deposits in the deregulated savings and loans. The unpleasant consequences of the newly liberated environment became apparent to all when Charles Keating and his Lincoln Savings in Phoenix leaped into the headlines.
To the astonishment of lawmakers, the deregulated and rowdily managed savings and loans were not helping to generate greater national prosperity; they were imploding on a massive scale. Their sequential failures during the late 1980s and early 1990s resulted in the severest blow to the U.S. financial system since the Great Depression. Over 1,000 savings and loans eventually failed. The government dutifully acted on its guarantee, and the taxpayers footed a bill of nearly $124 billion to clean up the wreckage. This amount was on top of the once overconfident industry’s own substantial losses.
The lessons learned in cleaning up the savings and loan mess didn’t seem to stick. The housing industry, one of the major drivers of the U.S. economy, has now become entangled in a financial mess that may take two to three years to remedy. It is estimated that about two million homeowners are carrying $600 billion in subprime adjustable-rate mortgages. The low initial interest rates on these mortgages are expiring. They are scheduled to ratchet up during the next two years.
As a result of the combination of slipshod lending practices, cheap credit and the unrealistic belief that housing prices would always continue to climb, many of the home buyers are finding themselves holding mortgages they will be unable to carry at the new rates. The regulators didn’t pay attention as the inventive mortgage financing industry promoted its teaser rate inducements to unwary buyers. No one questioned the industry’s motives as it developed ways to turn these mortgages into investment securities, a process that detached the lender from the risk of default. Since the lender’s motivation to closely check the creditworthiness of borrowers was reduced, a degree of misrepresentation and even outright fraud crept into the system.
To make matters worse, the neatly packaged securities containing the subprime mortgages were marketed to buyers around the world as first-class investment products. When the low preliminary mortgage rates began to expire about the same time as the housing market began to slow and prices leveled off, defaults on subprime mortgages started to rise. Billions in what may be reduced value investments are now on the balance sheets of the largest global banks. The mounting losses could easily spill over into the pension and mutual funds that invested in the same securities.
One after another, large banks have begun writing down the value of their subprime assets and CEOs have started to exit. In this uncertain situation, many of the small borrowers, who didn’t understand what kind of obligation they were taking on, will get wiped out. The banks will have to take massive write-offs, significantly devaluating their investors’ stock holdings. Large numbers of employees will be laid off, the lucky ones getting severance pay.
The corporate officers and directors, who organized, ran and oversaw this ugly show will do nicely. They will suffer a little mortification from the wave of relentless press stories exposing their lack of judgment and poor management practices. They will, however, be able to retain the all bonuses and hefty salaries already in the bank. They will not be forced to give up their big houses or multiple cars. Thanks to the money made in mortgage securities, they will not have to rely on social security payments when they retire.
The effects are ricocheting through the economy. The U.S. Department of Labor estimates around 100,000 jobs related to the financial services sector have already disappeared. Foreign investors have become distrustful of American offerings; the value of the dollar is plunging. Housing sales are slumping, construction is slow, and the median price of homes has dropped approximately 5 percent since last year. Analysts are predicting an additional 5 to 9 percent drop before housing prices level off.
The shock waves of the creative financing binge will reverberate throughout the economy, maybe pushing it into a recession. The final cost has yet to be tallied. It remains to be seen if the taxpayers will have to provide a bailout.
It is now clear that the undisciplined dealings in mortgages and securities will put a sizable dent in America’s economy. As it did with the savings and loan debacle, Congress will hold hearings and move to tighten regulations. The White House will look for ways to control the damage because the president’s appointees supervise the regulatory agencies.
The problem has already hit home. Arizona has been affected, the housing slump driving the state’s economy into a downturn. The University of Arizona’s researchers have found that, along with Michigan, California, Nevada and Florida, we have entered the beginning phases of a recession.
Karl Reiner is a friend of this site and an active voice for a
fact-based approach to the issue of immigration from Mexico. He asked
me to post this commentary here on BlogForArizona.com. This blog
published previous articles by Karl on the world’s richest man, the failure of the immigration bill considered by Congress this year and the economic underpinnings of Mexican immigration, as well as the transcript of an erudite lecture Karl gave on that subject.
Karl managed international trade and economic policy analysis at
the U.S. Department of Commerce in Washington, DC. He served as an
acting deputy assistant secretary during the first Bush and Clinton
administrations. A Vietnam veteran, he is a graduate of the Ohio State
University and holds a MS degree from the Garvin School of
International Management. After retiring from government service in
1994, he did consulting and authored a novel, "Sgt. Bellnapp’s Secret", published in 2001, and a collection of historical essays, "Remembering Fairfax County, Virginia," last year.