Farm Crisis Of Mid-80s Compared To Mortgage Crisis

In the ag sector during the 70s there was a boom in agriculture. Russia became a customer and prices soared. Everything worked. Farmers made decisions based on a decidedly optimistic future.

Land values jumped reflecting this optimism. Land was an asset that would not only inflate but could be used to make more money.

There was more. Wages and prices were rising at every turn. Even though interest rates were going through the roof, inflation was even worse. It made sense to borrow money at rates that could be paid back with even cheaper dollars. It was equivalent to a negative interest rate.

Farm magazines, university experts and farm management specialists lead the chorus on how smart it was to use borrowed capital to expand farms and buy new equipment. The lenders loosened their purse strings and competed with each other to push money out the door. When farmers came into to get their operating loans, they were pitched into taking on more debt. Farmers competed with each other to push the price of land up even further.

Offering easy credit to farmers was like offering crack cocaine to an addict. There is nothing more they wanted to do than expand and improve, have newer equipment, better pickups, and leave it all to the next generation. They overextended into debt based on projections that inflation, particularly land values based on inflation, would protect them from any shortfalls in farm income.

Banks, farmers, agribusinesses, and local suppliers in small town North America, Australia and New Zealand all made money. Then President Reagan pierced the inflationary bubble by crushing the Air Traffic controllers strike and the economy went into a major recession during 1981 and 1982.

The nation bounced back but the farm sector didn’t. Commodities markets shrank. Land values plummeted. Farm operations couldn’t service their debt through cash flow and low prices. Ag lenders were caught with unprecedented defaults and dug in their heels. It became an "us against them fight" with the stakes very high - the collateral - machinery and land.

To farmers, land was more than an asset. It represented a way of life based family goals, dreams and sacrifices through the generations. To lose land threatened the identity of those who worked the land and whose roots were in the local community.

Some farmers had borrowed so much they were deemed too big to fail. Their failure would take down the bank along with them. There was no market for the land. What would the bank do with it? It was grim, nasty and emotional. A lot of people got hurt. Local creditors, small town businesses and the rural economy soon followed farm income into the tank. People took sides and blamed each other.

Credit tightened or dried up. People - some well meaning and others devious - appeared with schemes to game the system and sucker farmers into desperate attempts to keep their farms. The Posse Comitatus and other militant farmers fought law enforcement and lenders to prevent foreclosures.

Programs, such as mental health services, hotlines, support groups, outreach, ag mediation services and farm financial counseling were set in place. Transition assistance for farmers forced out of farming materialized. Most of these programs came too late to blunt the raw impact for most farmers. For some borrowers, write downs and write-offs based on mediation eventually took the place of foreclosures and bankruptcies.

The peak of family disruption, suicides and aggressive resistance actually took place between 1982 and 1986 with the farm sector slowly pulling out of its tailspin in 1987 - just in time for the 1988 drought. It was a decade of misery in agriculture and for rural America.

How does that compare with today? It started with inflationary housing prices in California, spread quickly to Arizona, Nevada, Florida and eventually everywhere. Real estate prices rose faster than inflation and incomes. People could make money by investing in housing - either their own or through speculation. They borrowed money believing that the rising value of their homes would protect them from the debt they were incurring.

The government stimulated this American dream by encouraging banks to loan money with relaxed rules to everyone, no matter how unqualified. Armed with adjustable rate mortgages, subprime loans, and lax to nonexistent qualifications and even with applications designed for outright lies ("stated income") for borrowers, unscrupulous and greedy lenders poured gasoline on this already incendiary exuberance.

Investing in real estate was the smart thing to do. The demand was there. It was also being pushed by the home builders industry, real estate brokers and mortgage loan officers making money on loan originations.

How this problem became everyone’s problem. The financial sector packaged and sold these mortgages as securities to investors. These securities were rated AAA, insured through A.I.G., and banks didn’t have to show them as liabilities on their balance sheets. Eager international banks and U.S. investment banks purchased these securities.

Some of our biggest investment banks bought and sold these mortgaged-backed securities and some of our biggest banks swallowed this poison pill of bad credit whole.

Home prices fell. Then came foreclosures and people walking away from bad loans. The whole house of cards fell when it became apparent that securities sold based on pooled bad credit doesn’t magically become good credit.

Lessons learned. Asset price expansion doesn’t go on forever - not without continuous inflation. Easy credit and loose lending standards can be a recipe for disaster. Everyone - borrowers and lenders alike - should evaluate the downside scenarios before entering into long term investment or lending deals. If something seems too good to be true, it probably is too good to be true.