Monday, 09.22.08
It's Our Fault, Too
Justin Sullivan/Getty Images
When John McCain said last week that the "fundamentals of our economy are still strong," he was wrong twice. First, he was wrong to suggest that the annihilation of modern investment banking was something peripheral to economy. Second, when he claimed that "fundamentals" referred to the robust American workforce, he was wrong again to suggest that average Americans somehow represent a fortress of strength against the onslaught of the credit crisis. On the contrary, we've met the enemy, and the enemy is in our own purses and pockets.
Remember the families seeking subprime loans to buy homes way outside their price range? Their defaults started without much fanfare, too petty to be noticed by either bank execs or the media. But like little snowballs rolling from the top of Everest, a smattering of defaults became an overwhelming avalanche of foreclosures and dead-ender mortgages packaged exotically into securities that devastated assets worth billions of dollars. This was largely due to poor regulatory oversight, but as Megan McArdle wrote last week even the dumbest loans are, by definition, mutual, so it seems a bit absurd to exclusively blame Wall Street's investment banks for their clients' defaults. Sure, banks pushed these loans, but foolishly agreeing to borrow money you can't pay back doesn't make you a victim of much except your own imprudence.
But the credit mess doesn't end there. As Michael Mandel pointed out in BusinessWeek, American consumers have overspent and overborrowed by about $3 trillion in the last ten years. Not to take the investment banking execs off the noose, but spending and lending habits out on Main Street contributed to the infernal scene on Wall Street. McCain's 'fundamentals' are quite fundamental to the credit crisis.
On this issue there is no debate -- literally. John McCain and Barack Obama are leading the bipartisan effort to ignore any public involvement in this fiasco. No surprise. Like the mortgage industry, the market for public policy has structural deficiencies: if hard truths are a commodity, they are subject to the laws of supply and demand. And in this case they are not in demand.
That's why Americans have, for eight years, existed in a world insulated from hard choices. How do you deal with a hundred-billion dollar war, rising health care costs and looming budget crises? Tax cuts, please! And with more quixotic policies coming from both campaigns, this election season is essentially a holiday of promises on the heels of an eight-year holiday from reality. So is it a matter of wasted ink to ask either candidate to address Americans' complicity in the financial crisis?
Maybe. But both candidates have, in recent memory, been known as tellers of hard truths. Straight talk marked the McCain bus like a corporate sponsor, and Obama has followed in Bill Cosby's prickly path to address what he sees as a crisis of personal responsibility in black communities. But could either address personal financial responsibility without coming off like a foul mix of Jim Kramer and scolding parent?
I think it can be done. It would be suicidal to wag fingers at profligate Americans -- after all, you don't want to trash consumer spending. The right message could unite Americans against wasteful spending by calling on them to lead Washington and Wall Street by example. Something like: "Of course, let's hold Wall Street accountable. The executives who put greed above principle, we'll hold them accountable, too. But first, let's hold ourselves to the same standard we expect from our corner-office leaders. We can either lull ourselves into thinking this is the problem of one street in New York or we can learn accountability for our own businesses, financial prudence for our own families, and strategies to keep a thousand Main Streets growing rich responsibly."
This is a risky strategy, inasmuch as any strategy that shops facts instead of promises is generally considered radical. But it's also the kind of honesty that could help either candidate distinguish himself as a fiscally responsible leader who is willing to tell hard truths and, by extension, make the hard decisions required to budget our country through the growing pains of the 21st century.
Consider Barack Obama, whose economic policies lack a unifying theme. He could tell Americans that responsible government starts with responsible citizens, something like: "In an ownership economy, the first step is owning up." After a rough few weeks following the Palin pick, Wall Street's meltdown has been to his advantage. Obama can relax into the financial crisis, fold his fingers and hope world events continue to bend to his benefit. Or, in a year when every week brings another game-changing event, he could recognize that, if this volatile fortnight has taught us anything, it's that there is no such thing as a safe asset.
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this "reckless borrowers are just as guilty" is a nice argument, but how come that the law only goes after the snake oil salesmen and never after their buyers? Could there be a smart reason for that? or is the law just biased and therefore unable to realize how guilty the duped are? I think the duped in this case are punished enough you do not have to make them share the guilt of the fraudsters - what they need are explanations about what made them easy victims so they do not fall for the next guy coming around peddling paradise to them
It is all rather loaded with choices one as bad as the other, i.e. keeping houses lived in by bailing out its bankrupt buyers is bad for people's moral but it's good for a neighborhood because it keeps it attractive for potential buyers who do not like rows after rows of empty houses which in turn is good for the real estators
What about those of us who defied the insanity and chose the prudent path? I have contributed the maximum amount to my 401(k), have put adequate amounts into savings, and purchased a house I could actually afford, then continued making the mortgage payments without complaint when the value of my house dropped. Now I'm left to pick up the spending tab of those who behaved badly? This is what infuriates me with this bailout.
I have very clear memories of four years ago when I was refinancing and the mortgage broker tried to put me in an ARM. I told him very explicitly I wasn't interested in the ARMs, and as someone who planned on growing old in the house, it was absolutely the wrong instrument. He pushed on anyway, against my wishes. And lost what was a gimme sale. If I hadn't had some financial savvy, I wouldn't have known the difference and I would possibly be one of the people defaulting. At the very least I'd be cursing him for selling me a bad product. I'm sure there are good brokers who actually put the interests of their customers first. I'm also sure there are at least as many who said "This loan is a 600$ payment. This one is an 800$ payment. You want the 600$ right?" Without mentioning that the payment would spike in two years. The banks assumed that either the borrower would eat the new, higher rate, or they'd default, either way they'd make more money. If the plan had worked, we'd still have waves of foreclosures, but there'd be no bailout of the 'dumb' homeowners. The only reason this is a problem is that the value of homes fell. Now the borrower is defaulting and the properties are worth less than the note. The banks are getting hosed on foreclosure costs. Boo hoo.
I'll start this comment like I do pretty much every other opinion about why we're where we are as a country and a culture...
...by blaming the boomers. Without going into the myriad of reasons why, collectively but without collective will, they are royally screwing Gen-X'rs and beyond, I'll simply state one universal constant in human civilization.
The first generation comes from nothing, works hard, saves everything, and becomes wealthy in whatever context a culture considers wealth. They raise the fortune.
The second generation is raised around the back-breaking effort of the first and learns the value of both work and wise spending. They expand the fortune.
The third is raised never knowing anything but affluence and, among other problems that brings, does NOT know the value of hard work and wise spending. They loose the fortune.
There have been a number of studies that confirm this interesting constant on the family unit level, cutting across the developed to the undeveloped cultures in the world and the result is almost always the same.
I suggest that it goes the same for generations of people. In our case, the generation that rose from the Great Depression gave us the prosperity that allowed the second (also called the Greatest) generation the tools and material and, yes, the values-centered strength to fight and win a world war. That gave rise to the third, the Boomers, raised in affluence and about to loose the entire damned shooting match.
They rose up and fought the very institutions and establishments that ALLOWED them to rise up in the first place. They tore down the institutions and became the establishment.
Now they're going to destroy the establishment and take a good deal of us with them. Unless we, the children of the boomers, can somehow stop them.
I'm not optimistic. To take a page from Michelle Obama, for the first time in my adult life, I'm not optimistic about my childrens' future.
"Sure, banks pushed these loans, but foolishly agreeing to borrow money you can't pay back doesn't make you a victim of much except your own imprudence."
Correct me if I'm wrong but didn't Freddie and Fannie push these risky loans at the behest and "financial backing" of the government? I recall years ago Bush talking at me through the television saying he wanted to put as many Americans as possible in homes and his success, I assume, came because of the government's new/extended role in the housing market.
Sure, blame can be put on the institutions and the people dumb enough to get stuck under so much debt but we also need to recognize the government's fundamental role and also recognize that we want to minimize (not increase!) government's reach over and responsibility for our markets.
Give a little blame to the debtors, not too much though; they are, after all, idiots and can't help their stupidity.
Give a bunch of blame to the creditors. They should know better.
Give the government its due blame, learn our lesson, and take away their power to put us in this position again.
People who wanted to borrow money to purchase over priced homes should have been denied by the banks, but the banks did not care because they were going to sell the mortgage to someone else. The banks did not keep a stake in the bad loans they were making, so they made irresponsible loans. The borrowers, unlike the businesses that loaned them money, had no secondary markets to sell their obligations to. Had the banks not had a market to sell their poorly made loans to, they would never have approved loans of $200,000 for a $50,000 house.
Mr. Thompson does make a good point about overconsumption, however almost every single person who purchased an over priced home paid a percentage of that price to professional realtors and mortgage brokers as fees. None of these 'experts' told their clients it was the wrong time to purchase a home, that they were over priced and that the subprime and ARM mortgages were bad deals.
I think that it would also be fair to blame Obama’s group, the Association of Community Organizations for Reform Now (or ACORN), for much of this mess we are in today. It was groups like this that effectively forced banks to take on these sub-prime loans under the guise fairness. We are all now suffering because of shortsightedness and irresponsibility exhibited by groups like ACORN and Obama himself. In browbeating these banks into unwise investments, they are the ones that planted the “acorn” in an unstable soil. It is this direct link to from these bank lenders, to the ones defaulting on the loans that broke the system.
There is a lot of truth to what Chris said. My brother worked in the loan apparatus for one of the biggest midwestern banks and recalls the tremendous amount of pressure they were under during the mid to late 1990's from groups claiming that everyone deserved to own a home.
Once again, it's the left pushing the equality of outcome (socialism) vs the equality of opportunity (classical liberalism).
We do all need to be a lot more responsible, and hopefully we're all learning that lesson. However, consumer debt is frequently by personal crises (medical emergencies, divorce, and unemployment) and the gap between increasing costs and stagnant wages.
In this economy, real income has shrunk in the last 7 years for most Americans. The cost of many core essentials including housing, phone, food, transport, childcare, fuel, and others has significantly outpaced growth of income. In addition, social safety nets have rapidly disappeared since the 1990s. So while you may point a finger--and actually many do--at profligate consumers, in fact much of this borrowing is an attempt to keep up with an ever-increasing cost-of-living.
It's somehow easier when we say that So-And-So is in debt because So-And-So bought too many shoes and a lake home she couldn't afford. "That would never be us!" But the truth is, many people are in debt trying to keep up with essentials that cost more every year when their salaries have stagnated or trying to stay afloat when tragedies strike.
Instead of confronting the problem of consumer debt by preaching responsibility, let's focus on raising real wages and providing some safety nets for working Americans.
Chris and Scott seem to be proponents of the seemingly timeless tactic of making a statement including or implying 'socialism', 'the left' and 'minorities did it' to free the 'good ones' from any guilt. What is missing is any form of self-reflective analysis of your claims. Doing so I believe would have revealed to you the bankruptcy of yet again placing blame on the 'others'.
Or, perhaps you thought it intellectually honest to ignore the fact that many of the 'others' applying for loans in the past few years qualified for fix-rate loans but they where not a part of the so-called equality of opportunity. Second, many of the poor loans at the root of the problem did not originate in banks rather in non-federally insured, thus not under the influence of federal mandates like CRA. Third, the CRA is an interesting scapegoat considering its pre-Reagan, Bush I/II origins (and its 2001 and the lack of progress of many other federal programs designed to increase the equality of outcome. College admission practices railed against, minority business (whether owned or placed in disadvantaged communities) earmarks frowned upon (many of which went to majority-owned businesses with addresses in disadvantaged neighborhoods for the sole purpose of qualifying) but somehow the housing crisis sneaked up on the Secretary of the Treasury,the President with the Harvard MBA, and all of those people who either issued or used liar loans (ACORN made them do it), speculators who provided false information concerning their intentions thus their commitment to a second mortgage (estimated at 20% of default loans) (ACORN rears its ugly head again), or the lenders who knew that with ever increasing housing prices even delinquent homes had equity that could be tapped into to make up for the shortfall (ACORN is amazing). None of these factors require the poor or minorities to be effective. This is evidenced by the defaults in wealthy areas. It is the poor and minorities who are often the first to feel the negative effects however.
So, yes, we are all at fault whether through our participation or silence. Let's just stop giving the same answer to every problem: the 'others' took something from 'us'.
Y
The "timeless tactic" the Mr. Y speaks of can, in large part, be translated into an astablished fact, that has proven itself to be true more times than not.
The Community Reinvestment Act was passed in 1977. This law was passed to stop geographical (red lining) and racial discrimination by banks, which they had been practicing for a very long time. This law had nothing to do with forcing finance institutions to loan money to those unable to to pay them back. It was W. Bush and Greenspan who pushed the ARM and subprime loans, as welll as home ownership, as a way to 'help' those with lower than median wages. If the CRA was responsible for the current finance crisis, why did it not occur during the Reagan, H.W. Bush and Clinton administrations?
As we watch WaMu's fall today, it strikes me that there are other predatory problems contributing to foreclosure: credit-card debt, healthcare costs, and food and energy inflation.
Wall Street treated middle-class Americans like a perpetual money machine; it hasn't had the sense to reign in it's own greed. And now that the middle-class ATM's been wrung dry, they're asking for salvation through tax dollars from those same middle-class Americans.
Sure, I know folks with over-priced McMansions they can't afford and shouldn't have purchased. But I know a lot more folks who are facing foreclosure because of bad news at the doctors office. You wanna blame them because they've got cancer and their health insurance is a scam? Because they had to pay that debt with a credit card and now loan-shark finance charges?
Get real. The problems of the dinner table should take precedence now.
I agree with quix0te. Marketing has known for many years what behavioral economist are just learning; it is relatively easy to exploit "irrationalities" in our thought process. The good old experiment of 100 dollars 100 days from now or 101 dollars 101 days from now. Banks exploited something akin to a time inconsistent preference in the average consumer, and thought that if things go bad, they could simply take the house and sale it. The irony is that the banks proved to be as myopic in their own strategy as the consumer. Couple that with the incentive structure executives have and booga!
DT- Great piece! I actually think Americans are sobering up and are collectively ready for an intervention.
With this reset (bailout, recession, et al) now is the time for some national leadership on exactly what you alluded to. The problem is not with the masses (they see the light and as with any REAL crisis people thirst for leadership) the problem is with the leadership.
Since main street Rs or Ds have no desire to hear from the republicans on this, the stage is set for the Ds. However, I honestly think the Ds lack the boldness and confidence to this prior to the election...which is when it would matter most.
Imagine if you will the 'fundamentals' (nice touch!) in Cleveland, Detroit, or Minneapolis who literally sit at the precipice of financial ruin as we speak (precicely for what you and Mags outlined). They understand they made some bad decisions but see no end. If the Ds play it on two fronts 1. Continue to fight the Rs on the bailout package on their behalf but 2. Also have a tough national talk that doesn't deride but informs and paints a positive 36-48 month scenario for a turnaround then people will listen...
The people want practicality and true boldness not John McCain's ersatz version that requires a new "tough decision" of what he would do, but real talk that the people can chew on not laugh off. Since McCain has put himself in the position of being the "I'll say anything guy" his gravitas and crediblity is running on E.
Obama, you're up dude! This is one of those decisions you have to make w/o regard for Pelosi, Reid or even Biden's opinion since they will definitely require you to play it safe.
The people will listen, we may not be I-bankers but we understand the severity of this situation. And while we never aspired to a corner office and private jet, we do want promise of safe retirements and futures for our kids and grandkids. We need someone to tell us how that happens...if it requires action on our part we're in, as long as you're in for us....
k1
Posted by kforceone | September 22, 2008 8:55 PM