What Wall Street doesn't know
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by Jack Cashill
Published in ingramsonline.com - April 2010

In his current bestseller, On The Brink, former Treasury Secretary Hank Paulson tells of convening a meeting of Wall Street CEOs during the scary, sobering days of 2008 and asking them, "How have we gotten to where we are?"

The answers went no deeper than those one hears on the evening news: greed, excess leverage, lax investor standards, lack of transparency, lack of discipline, unmanageable risk, uncontrolled hedge funds. In their solipsistic despair, not a one of the executives, Paulson included, looked beyond Wall Street, and that in itself was indicative of a larger problem: Wall Street had collectively lost touch with the culture.

In my new book, Popes and Bankers: A Cultural History of Credit and Debit from Aristotle to AIG, I have attempted to reverse-engineer our train wreck of an economy and see where exactly it went off the tracks. Although I follow the thread of our successes and failures back to Exodus, a more proximate jumping off place might be post-war America.

In the years after World War II, new towns were springing up full-blown all across the fruited plains. One such burg close to home was Prairie Village, Kansas. Incorporated as a city in 1951, it was not even an idea until 1941.

Better documented is a southern California equivalent called, for no apparent reason, Lakewood. In the first 10 months of Lakewood’s existence in 1950, the developers sold 7,400 single-family homes. As Lakewood City Administrator D.J. Waldie notes in his wonderful memoir, Holy Land, “Buyers needed only a steady job, and the promise they would keep up the payments.” By 1960, Lakewood would house 67,000 people, virtually every one of them part of an intact nuclear family in its own home.

The average age of the wives in that early 1950s wave of Lakewood homebuyers was 26, the husbands 32. Most of the men had served in World War II, Korea or both. They had title to these houses due in no small part to the efforts of the federal government to put people in their own homes.

In fact, the federal government had been in the home credit business since at least 1862, when President Lincoln signed the Homestead Act. Although well-intentioned, the act put an awful lot of people into properties that they could not sustain.

Do we see a pattern developing here?

The first president to make a serious effort at finding homes for the nation’s non-farm citizens was can-do Herbert Hoover. For all his genius, Hoover failed to ask a question that has escaped lesser political lights as well: Does home owning make people more happy and productive, or are happy and productive people more likely to own homes?

In 1944, Congress enacted the Ser-vicemen’s Readjustment Act, which in turn begat the VA home loan. As with FHA loans, the government did not lend the money, but rather guaranteed loans made by private mortgage lenders against loss of principal were the homeowners to default. No doubt many, if not most, of the first flush of Lakewood residents came wrapped in a government guarantee. In California, homeownership rates increased from 43 percent in 1940 to 58 percent in 1960, a figure just slightly below the national average of 61 percent.

For several years thereafter, home-ownership rates continued to climb, and default rates remained low. Then, in the 1960s, something began to happen that the chattering classes chose not to chatter about. Great Society programs—welfare, Medicaid, food stamps, income-adjusted public housing—were unwittingly making males an economic liability in lower-income households, and the males more or less left.

Single motherhood was not unique to the poor and/or minorities. As it often did, California was paving a new road, if not to hell, at least to purgatory. In 1953, when Harper’s Magazine asked the young homemakers of Lakewood what they missed most in moving there, they usually replied, “My mother.’”

“In his current bestseller, On The Brink, former Treasury Secretary Hank Paulson tells of convening a meeting of Wall Street CEOs during the scary, sobering days of 2008 and asking them, "How have we gotten to where we are?"”

In a culture unmoored and increasingly hedonistic, divorce began to spread like Continental dollars. In 1969, rather than stabilize the currency, the state abandoned the band-of-gold standard and introduced no-fault divorce. Bad marriages promptly drove out the good. In 1970, the first full year of the no-fault law, the state registered 112,942 divorces, a 38 percent increase from just the year before. In 1960, there had been only 105,352 marriages in California.

By 1980, California had registered a record 138,361 divorces. In other words, more than 276,000 Californians got divorced in 1980 alone. That was more than twice as many as in 1966—and in 1966, the California divorce rate was already 50 percent higher than the national norm.

The nation, however, was eager to catch up. By 1985, just about every state in the union had adopted no-fault divorce in one form or another, with predictable results. By 1980, the nation’s divorce rate was higher than California’s had been in 1969. (To its credit, Prairie Village and Johnson County resisted the trend. The county’s divorce rate today is lower than the national average in 1950.)

Embarrassed by its own numbers, California stopped tracking divorces after 1980. By the year 2000, only 57 percent of the homes in the still-functional Lakewood had a married couple dwelling within, and by California standards, that was high.

By 1993, when Bill Clinton was inaugurated president, the nation’s home-ownership rate of 64 percent was lower than it had been when Richard Nixon was inaugurated in 1969.

The reasons were obvious to anyone who wanted to see. In the 1950 census, “families” made up 89 percent of all American households. By 2000, that figure had dropped to 68 percent.

Worse, among “families,” single-parent households were the fastest-growing cohort. By century’s end, married couples with their own children made up only 24 percent of all households, down from 40 percent just 30 years earlier.

The decline in two-parent families was offsetting the increase in prosperity. How could it not? In 1993, the average income for households headed by divorced women was 40 percent that of married couples; for unmarried women it was only 20 percent. Home-ownership rates for female-headed households struggled to stay above 50 percent. As the numbers suggest, many of these women were a leaky roof or a missed child support payment away from defaulting. For married couples, home-ownership rates hovered consistently in the mid-80s.

A compulsive number cruncher, Clinton paid little attention to these cultural variables in his eagerness to jack the numbers up, and Wall Street paid even less. With the full-throated support of the media, the government started force-feeding the marginal into the maws of the subprime grinder, and brokers just looked for new ways to package their debt. Wall Streeters weren’t worried. After all, the home mortgage business had been remarkably stable over time.

How were they to know that homes no longer were?

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