Don't follow clueless lenders off the edge of a cliff
Last time I dared look, the financial sector of our economy accounted for about 20 percent of all market value. At the end of June, for instance, financial services accounted for that much of both the S&P 500 index and the broader Russell 3000 index.
Either way, financial services are a hefty chunk of the market pie.
In some ways what's going on in financial services is a bit reminiscent of technology in 1999. All around us is a great symphony of financial sector excess: hedge funds, private equity funds, derivatives, or even the ridiculous growth of exchange-traded funds.
But let's not be so esoteric. Let's stay closer to home. Let's talk about mortgage lenders and the residential real estate market. That's where most Americans, if they have any net worth at all, have their biggest bet. Until you're in the top 10 percent of all households, home equity is what it's all about.
Here we see that our friends in the lending business have, once again, led us into a period of misery that may last longer than we want to contemplate.
Remember the real estate investment trust bust of the late '70s? It was driven by carelessly generous lending. The big commercial banks fell over each other making big loans to real estate developers. The developers built whatever they wanted to build. Each assumed that their project would be successful even when it was clear that many projects would not be occupied for years.
When that bust ended, commercial realtors were joking that you could have your name on a building if you'd promise to open a shoe shine stand in the lobby. Chase Manhattan Bank nearly became a casualty, given the excesses of its REIT. In Boston, I remember attending the shareholder's meeting at the Ritz Carlton where the esteemed Cabot, Cabot and Forbes Land Trust declared that it was no longer capable of paying its dividend.
Too much got built too fast.
Or how about the S&L bust of the '80s? That bit of excess wiped out the entire savings and loan industry and sent a mega-billion-dollar bill to Congress -- which you and I collectively paid. While the epicenter of that bust originated in Texas with land flips, congressionally allowed funny money accounting, buy-down mortgages, and no-down-payment home sales, the same thing happened in the rest of the country.
Clearing away the wreckage took us well into the '90s.
Today, yet another wave of nitwit lending has put the entire financial system at hazard -- and the subprime mortgage mess is only part of the problem. The rising wave of adjustable mortgage rate resets is a larger problem.
As financial writer John Mauldin pointed out in a recent newsletter, resets scheduled for next February and March alone will be more than all the resets in the first six months of this year: $197 billion. Resets in the first six months of next year, $521 billion, will be greater than the entire year 2007.
Talk about moments of truth. That's when many owners will become renters, and many lenders will become harried owner-sellers. Then, not now, is when the housing market should start to bottom. It's also when consumers will be tightest with their spending, so we're likely to see the economy grow weaker.
It would be easy to Armageddon-ize this -- and you can read plenty of blogs doing just that -- but it's really just an unnecessary replay of earlier surges of nitwit lending. We're going to have to tough it out. And we will.
What's the lesson here?
Lenders have proven themselves to be dull-witted altogether too often. If they aren't smart enough to change their behavior, we have to change ours.
First, don't borrow money just because a lender makes it available.
Second, ask yourself whether you'll be able to pay it back. Your lender is clueless, so it's up to you to know.
Third, don't plan on being able to sell anything quickly because these jokers can't be relied on to provide a steady and reasonable flow of financing. When their own foolishness comes back to bite them, they invariably make things worse by reducing lending, making a bad situation worse.
Watch them do it now. They will call it "prudence."
Scott Burns is a syndicated columnist. He can be reached at scott@scottburns.com. 
