Where Credit is Due

The financial mess we’re experiencing now has a lot of causes, it seems to me. I’m suspicious of anyone who points to one cause, or one group of people as being the sole cause. It seems that there is plenty of blame to go around.

I’m not a financial expert nor an economist, but the mortgage mess has such basic causes, in my opinion, that a layperson can get his or her hands around it pretty easily. I’m sure there are far more complex issues under the surface, but there’s plenty on the surface to talk about.

The first thing on the list of causal factors is greed. I’m not big on using that word. All too often, what we see in ourselves as “wanting a better life” we see in others as “greed.” It’s a very relative term. I don’t know where behavior by banks or consumers clicks over from being morally okay to being greedy, but here are some of the things that happened that I think show greed:

1. People got a home loan they couldn’t afford, and then borrowed against the equity to buy cars and vacations and such – all with the hope that home prices would keep going up.

2. People with little or no money bought houses with the get-rich-quick idea of “flipping” them a few months later as the housing market escalated.

3. Banks loaned money to people without verifying their ability to repay them, knowing that the adjustable rate increases that were inevitable would force foreclosures.

4. Members of congress and the senate took huge “contributions” from Freddie Mac and Fannie Mae – the repository of hundreds of billions of dollars in mortgage loans – in exchange for not regulating them, and in fact, pressured them to give loans to people with low incomes who weren’t prepared to repay them. Legislation was put forth to head off this crisis by limiting their book of loans, but the powers that be in the house and senate wouldn’t allow a vote

Add to the above the investment firms who bought all those mortgages on the secondary

market, taking the profits with the full knowledge that these mortgage notes were extremely shaky. It reminds me of the “dot com” boom/bust, where some people made a ton of money, but others lost it all, because they were basing their investments not on what the companies they were buying stock in were really worth, but based on the hope that the share price would go up. The housing market experienced the same thing. Prices went up beyond the actual value of the houses, and people ended up with houses that were worth less than what they still owed.

The result of all this is that many people have lost their homes, many companies have gone bankrupt, and those of us who acted prudently will end up paying for the messes made by all of the above. The thing that kills me is that with the exception of a few dim bulbs, everybody involved knew better. All these MBA’s and lawyers had to know they were taking a tremendous risk.

Sadly, all the investment bankers, mortgage brokers, and the other corporate types will either land on their feet, or retire on the money they made at the expense of others. Happily, our economy will eventually be fine, and people who made the mistakes of borrowing too much won’t do that again, and most will someday own a home of their own again. A lot of misery has been caused, but we’re a strong country, and we’ll get through it.

One final thought: De-regulation is being painted as a bad thing, and perhaps in this case it was a problem. In my opinion, though, prudent de-regulation is almost always a good thing, as long as the companies who are de-regulated are held accountable for their actions by their shareholders and smart consumers.

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