A view on home ownership from down under

    As I write this, the Dow Jones Industrials average is rolling off the cliff, down 500 points in the first hour of trading.  That $700 billion investment cum bailout sure seems to have bolstered confidence in the stock market, hasn't it?
    Like most Americans, I do not presume to understand the intricacies of banking and the financial system.  That, of course, is part of the problem; when you don't have the knowledge to understand what the heck is going on, you defer to others who don't know what is going on.  Yes, Freddie and Fannie were encouraged, maybe even pushed, into backing crappy home loans, but the geniuses on Wall Street were not forced to buy them; and they certainly weren't forced to engage in what appears to be criminal behavior by selling "insurance" on the bundles of crappy loans in the guise of something called a "credit default swap."  In other words, they sold bad paper and insured the bad paper with other paper.  There were only two things wrong with this:  First, they didn't have the financial reserves to cover their bad bets and, second, they skirted insurance regulations by calling insurance something it wasn't.  Their customers bought it hook, line and, especially, sinker.  
    The nuances of credit default swaps, derivatives and hedge funds are way beyond the ability of many Harvard graduates to understand, let alone Joe Bag of Donuts or the lesser minds in Washington.  But all of us can figure out that you should never buy something you cannot afford.  Somehow, this lesson was lost on everyone from first-time home buyers to the guys who ran Lehman Brothers, AIG and Merrill Lynch who bet their companies' ranches on toxic bundles of paper.
    Assuming our financial system, which is changed forever, returns to some sort of equilibrium and the banks begin to lend money again for home purchases, the new rules of the road had better be simple enough for all of us to understand.  When my wife and I purchased our first home three decades ago, our income had to be a minimum of 28% of the amount we intended to borrow, and the down payment a minimum 20% of the home price.  The rules were strict, and they were in place to protect the bank as much as they were to protect us.  We didn't whine about the size of the house we could afford.  Our parents had taught us never to do anything beyond our means.  Did these people on Wall Street all come out of orphanages?
    The Wall Street Journal published an interesting editorial today written by an Australian journalist.  It is entitled "Not Everyone Should Own a Home."  If you can't access it from the Journal's web site, let me know and I will email it to you (use the Contact Us button at the top of the page).  The view from Down Under, where the banking system is relatively stable, is compelling now that our own system is down under.