Time to take responsibility
January 2, 2008 – 11:09 amThe YouTube video below lays the blame for the subprime crisis at the feet of the Wall Street establishment and said Hank Paulson, for one, should be indicted for leading Goldman Sachs during the heyday of the lending boom.
Yes, the Wall Street establishment deserves plenty of blame for feeding capital to mortgage lenders, encouraging them to sell ever more creative and ever more risky mortgage products. Yes, lenders and bankers who engaged in fraud should be indicted. But laying blame squarely on their shoulders misses the mark.
Borrowers themselves should take the lion’s share of blame for the mortgage crisis.
It is unfair to blame the subprime crisis exclusively on the shoulders of bankers and lenders just as it would be to blame drug use exclusively on drug dealers.
Bankers who deal in credit and drug dealers who deal in intoxicating chemicals both make markets in dangerous, addictive products that bring temporary joy. Yet if customers abuse their wares, they inevitably destroy themselves.
My point is that bankers/drug dealers are mere enablers. They aren’t the ones abusing these products. People abuse credit. People abuse drugs. In large measure it’s their own fault for getting mixed up in the stuff.
The LA Times published a great quote today from a retiree with a 760 credit score who took out an option ARM with an over-inflated income number on her “stated-income” application:
“I have no one but myself to blame for signing off on something I didn’t understand.”
With that in mind, the solution here isn’t government intervention on the behalf of overstretched borrowers—beyond, perhaps, regulations holding lenders to a legal standard of care. Nor is the solution price controls–like freezing interest rate, or subsidies–like allowing Fannie Mae and Freddie Mac to back larger mortgages.
The solution is to let house prices fall. Until prices retreat to a level more in-line with incomes, buying a home will be uneconomical.
As the folks in Zimbabwe, Venezuela, Argentina, and every other socialist economy that engages in price-fixing know all too well: if markets aren’t allowed to operate free of intervention, then supply-demand equilibrium can’t be established—goods can’t be sold. Surpluses or shortages are inevitable and the economy ceases to function.
You can’t force rational economic actors to purchase homes at a price that’s higher than they can afford to pay. Price controls and subsidies will only serve to keep home prices artificially high. Buyers will be frozen out of the market. The only benefit of such a policy would be to keep insolvent banks and borrowers from going under. Just ask the Japanese how well this has worked for them the last 19 years.
Let the market operate. Foreclosures are temporarily painful, but homeowners who couldn’t afford to buy in the first place will be better off when they go back to renting. The beauty of our capitalist economic model is that the folks who made bad lending decisions will end up suffering the most. The realized losses from foreclosures are ending up on their balance sheets. Lenders will keep going out of business and Wall Street banks will continue to suffer huge losses. And the massive bank layoffs and failures that are on the horizon will provide yet more poetic justice.
Yes, lenders should be held to a legal standard of care that prevents them from selling dangerous/inappropriate products to borrowers. But more borrowers need to take responsibility for their own actions. Sometimes that means getting thrown out of the house.
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3 Responses to “Time to take responsibility”
What about the impact here on the economy at large–when you’re talking about failing WS banks and floods of their recently unemployed (and in the current market, unemployable) analysts hitting the street, what impact does this have on the already tanking economy? It can’t be good… Poetic justice? Yes. Necessary correction? Probably. Still sucky for everyone involved? Undoubtedly.
By Rachel on Jan 3, 2008
Well Rachel, there are plenty of stories in the media warning about the possibility that the housing meltdown will drive the larger economy into recession. These stories run about 50/50 with stories on how the US economy is resilient enough to absorb the housing crisis with no major effects.
The party’s over, and everyone, including us non-home-owners, will be feeling the hangover.
By Cod Peace on Jan 3, 2008
Fraud was too widespread to write the problem off as “greedy borrowers”. Even in the case that borrowers knowingly signed the documents, there is some level of trust put in financial professionals to guide them to do the “right thing”. Yes, people should always get multiple opinions, but When the whole industry is shouting “let the good times roll!” at the same time, that doesn’t help much.
Further, this has been a time of an informal national policy of “ownership” society, specifically home ownership, which both made it feel like a birthright for everyone, and validated the fraud and misleading of the finance sector.
People should and will be “punished” for getting in over their heads… there are simply too many to “save”… but Wall Street needs to be held accountable for breaching its explicit and implicit fiduciary responsibility.
If that were ONLY done by simply refusing to bail them out (in which I include the major money center banks), that would be plenty. But of course, what we are getting instead is butt-covering by the government, which seems to have an innate sense of its own culpability in the matter, combined with the usual desire to put off overt collapse a little longer and win votes.
By Aaron Krowne on Jan 6, 2008