The Buck Stops…Over There
A few years ago, I went to a local car dealer to purchase a car. It was a slightly used Volkswagen Jetta diesel. I loved the car. I ended up purchasing the car on a six-year loan. (Yes, I said six years.) At the time I was working in a call center and part time in a church. I knew in my mind the church job was shaky, but I didn’t think about it.
A month later, I lost that church job, thereby making my salary tighter. Then, a year after I got the car, I lost my other job. Through sheer luck, I never did skip a car payment, even though I went through two bouts of unemployment.
In 2007, my partner Daniel and I went looking for a house. Now, Daniel is a financial wiz. His plan was to get a house that one of us could afford if, the other lost their job. Daniel was thinking ahead and making sure that we had a house that was just enough and not going to be a burden on us if fortunes change.
These two lessons serve as a reminder of how we can and have acted in the years leading up to the financial crisis. And yes, while the bulk of the blame has to go to the banks and regulators, the common guy does have to bear some of the blame as well.
Our society is filled with wants and many of us crave these things. That’s not necessarily a bad thing. But the thing is, we don’t always think about the cost of trying to get these things and maintain them. Yes, having that new car or new house is great. But how will we pay for it? Like me getting that Jetta, we don’t always think about the consequences.
But there are some who think that the common person doesn’t need to be blamed. This is what Matthew Yglesias says:
When someone applies for a mortgage, there are two parties to the transaction. On one side of it is a teacher or a blogger or an electrician or a lawyer or a nurse or a guy who manages a Home Depot. On the side is a guy who, for a living, as a professional, works in the “deciding on what terms to offer people mortgages” business who works, for a living, at a financial services business. Businesses like that got in the habit of making loans with little regard to actual prospects for long-term payment on the theory that since house prices were rising, the borrower could always sell or refinance. That, to repeat, wasn’t the judgment of electricians and store managers; it was the judgment of people who were professional mortgage-offerers. They, in turn, were being lax in part because they were finding it very easy to sell the mortgages off as securities. And it was easy to sell the mortgages as securities irregardless of their quality, because big sophisticated financial services firms devised tactics for slicing and dicing the securities into packages that could be easily resold. Those packages could, in turn, be easily resold because they had high ratings from the bond agencies. These ratings were based on models which held that a nationwide decline in housing prices was impossible. The ratings agencies and the modeling firms were, in turn, regulated by the U.S. government. And in addition to the formal regulatory agencies, there are a variety of public officials—the Chairman of the Federal Reserve, the President, the Secretary of the Treasury—who have a kind of generalized responsibility for oversight of the economy. Beyond the political system, the American media offers extensive coverage of business and real estate.
There really is plenty of blame to go around here. But I just don’t see how more than a tiny fraction of it could possible adhere to our electrician or teacher or secretary who’s decided, basically, that the financial services professionals and government regulators know what they’re doing. Now could she have known better? Sure. She could have been reading Dean Baker and Paul Krugman and others. The idea that this lending was all being undertaken on a false premise that a nationwide housing bust was impossible wasn’t a highly guarded secret. I was, for example, familiar with the chart above and with the analysis suggesting that a bust was, in fact, likely. And I believed that analysis. But at the same time, I write about U.S. public policy debates for a living. If there’s a dissident line of thinking that, despite its general unpopularity, is popular among left-of-center economists—well, that’s the kind of thing I know a lot about. But our nurse? Why would she know?
So, the electrician or the nurse isn’t responsible to understand all these things. Now, yes, people have been suckered by mortgage services. That’s wrong. But I think Megan McArdle is up to something when she counters that the nurse or electrician might not know a whole lot about economics, but does understand their own situation:
Who knows more about your future income prospects: you, or a bank? Who knows more about your budgeting skills: you, or a bank? Who knows more about your health, personal habits, and home maintenance skills? Who knows better whether you’re likely to move two years after buying for a boyfriend or an employer? Are bankers somehow more aware than ordinary Americans that recessions happen, companies fold, people lose their jobs?
Of course, falling house prices make things harder because you can’t sell or refinance your way to stability. But unless you just suddenly lost your job–in which case, you probably can’t be helped by a workout, because you don’t have any income–then it’s not reasonable to say that all the information was on the banking side. People knew a lot. They just chose not to think about it. (Emphasis mine)
When I bought that car, I chose not to think about the future. Yes, the loan officer knew a lot more about financing than I did, but I knew that my economic prospects were tenuous; but I chose to ignore them.
A while back, I asked my partner why people got into these odd loans like adjustable rate mortgages. His response was that people thought that they would get that job promotion or better paying job and that by the time the loan reset, they would be making money.
You don’t need to be a Paul Krugman to understand if something is out of your price range. Just because a bank offers you a large loan, doesn’t mean you should take it.
Clearly banks have the lion’s share of the blame. Clearly, government fell down on the job in regulating banks. Legislation can take care of these problems. But you and I also have a responsibility to be wise with our money, to buy what we can truly afford and not hope to afford, to be able to say ‘no’ to that car or house.
That’s not an easy thing because we as a culture are used to being told we can do anything. But somewhere along the line, we have to learn prudence again.
As my partner’s dearly departed mother used to say, you can have anything you want, but you have to be willing to pay the price.
7 Responses to “The Buck Stops…Over There”
I disagree with the thought that the banks have the lion's share of the blame. For over 200 years, banks in the US operated, mostly profitably, providing valuable public services without causing a single mortgage crisis. Government set up the regulatory structure and enabling bodies (Fannie, Freddie) that allowed banks to sell mortgages to be securitized and avoid future consequences of those mortgages going bad. Banks that wanted to grow (mostly by buying other banks) had to be able to prove they were lending to 'undeserved' customers to get regulatory approval for acquisitions. Every business seeks porfit based on the opportunity environment that they operate in. Government created the regulatory environment that fostered this atmosphere for the banks. In addition, the government has been fostering an 'entitlement mentality' that caused many citizens to disregard risk and undertake 'investments' that community organizers promised would pay off. (For those of you who don't know it, the relevant divisions of ACORN and LaRaza (along with others like greenlining.org) that dealt with 'community reinvestment' and 'bank terrorism” would get a 'commission' on the order of $800+ per whack on mortgages they helped arrange)
We see their real entitlement mentality when they break in to 'repossess' foreclosed homes.
I place the blame squarely on government and community organizers fostering wishful thinking in an audience who can be convinced that Adam Smith's invisible hand really won't be able to guide the market to true profit – not speculation.
” providing valuable public services without causing a single mortgage crisis. “
Um what? Really? You really think that? What about the dozens of major property busts during the 1800s, the Great Depression that was largely driven by farm land speculation and saw about 50% foreclosure rate, the real estate collapse in the 80s, I could go on.
Markets have formed bubbles and collapsed in every industry since time immemorial. To say otherwise is flat out lying.
Mikkel,
The property busts of the 1800s were caused by a crisis of insufficient banking resources that Andy Jackson and others struggled to solve.
What finally emerged in the early 20th century was the banking system we have used until today. A pretty good banking system that drove the growth of the richest country the world has ever seen.
One of the drivers of the great depression was the Dust Bowl that caused many farmers to default on mortgaged land because they could not produce crops to service their loans. That was an economic crisis, not a mortgage crisis. My family has land in Oklahoma that our ancestors acquired in the OK Land Run… that land is still in the family, so thru skill or luck, some did manage to hang on to their land. Speculation was a factor, but a far larger factor was the crop failures caused by the Dust Bowl that was a product of dryland farming practices. The dryland farming practices were modified, and dryland farming of those regions has been productive to this day.
None of the crises that you mention above were the product of government regulation encouraging risky loan practices, combined with community oprganizing to promote the same, combined with securitization of risky loans, combined with rather 'wishful thinking' on the part of borrowers who asked 'what's the worst that couldhappen' as they signed the loan papers…
Well I disagree that speculation was just a “factor” with the Dust Bowl the primary cause during the Great Depression especially since places like Florida had speculative increases that were largest on record until recently and the Dust Bowl didn't hit full force until well into the Depression. Also the reason why there were insufficient banking resources during the 1800s was because speculation kept going bad and under hard currency that automatically means deflation.
While I agree that none of the above were completely analogous to the current crisis, my point was that all booms and busts share the same characteristics which are malinvestment and speculation that goes bad. I don't see how you can argue that those previous times were just “economic” rather than “mortgage” crises considering that they had major mortgage components that started going bad before the economic brunt was felt — although we did have the largest mortgage bubble in history build up the last 10 years, that's true, but we've had the largest generalized debt bubble in history as well in non-mortgage related areas — and that people didn't get burned by wishful thinking back then too.
Plus if you read the comments to the last thread we talked about how the CRA part of the whole subprime mess (not to mention the whole mortgage mess, of which subprime is a tiny part) is very small compared to the non-regulated part. If you want to argue that the government was ineffectual that's fine. If you want to argue that they are responsible for much of the bubble through providing excess liquidity I agree. But I strongly disagree with the assertion that busts are a function of government intervention only, and that before regulation there were no banking problems. If the government steps in there are problems, if they don't there are different problems. If there is a central bank there are certain problems, without a central bank there are still problems.
The common theme is that people as a whole make malinvestments and over time cause collapse and no system can stop that. The primary question to me is how to balance risk/reward and compassion. I'd be the first one to say that the government has created a perverse system where people that made stupid risks got all the profit (or at least help now) while the rest of us got screwed, and that using so many resources to try to help limit the pain of those bad decisions is dumb because we have enough of a safety net in place that no one has to worry about starving or freezing to death but I don't see how trying to blame people and programs that dealt with 1% of mortgages is productive. To me that just sounds like scapegoating.
An excellent illustrative anecdote, Dennis.
You clearly have a point, though part of me finds it hard to blame people who just wanted a slice of the American dream.
BTW: Your judgement was not entirely faulty…given your pick of a partner, who sounds like he has his ducks in a row.
Or did you just luck out there?
Like I mentioned in my previous post that mikkel pointed out, the mortgage gatekeepers were more irresponsible since they CONTROL ACCESS. It was ridiculously profitable to collect mortgages instead of scrutinizing them (the process). Because you could package the mortgages into a weird-o-rama financial vehicle and wash your hands of it (or so they thought). The mortgage gatekeepers were bad parents giving their “children” (us) whatever we wanted regardless of the circumstance.
“Like I mentioned in my previous post that mikkel pointed out, the mortgage gatekeepers were more irresponsible since they CONTROL ACCESS.”
So once again the argument is about who was the bigger idiot. Why is that important?