Wednesday, September 17, 2008

The Economy -- Where should the blame lie?

At Political Civility, Lyall is discussing the economy, government bailouts, and financial regulation. He infers that if elected Barack Obama will over increase regulation (somehow missing the past several hundred billion dollars the Bush administration has expended in market intervention) and Democrats will push more government intervention into the market, and that doing so will reek disastrous results. While I'm no fan of over-regulation, I'm even less a fan of the Treasury Department throwing cash at a banking industry that has proved incapable of making prudent lending decisions over the past decade.

In rebut to a comment blaming Republicans he points out theories that the subprime mortgage market was sparked by well-intended Carter/Clinton policies regarding the Carter-era Community Redevelopment Act, and therefore the blame for the current market woes falls (not wholly, but in part) with the Democrats. This was later brilliantly impeached by bekkieann who pointed out that it was lenders misuse of the deregulation provided by the CDA that has led to the current crisis:

"Clearly lenders took a concept intended to help low-income people and extended that concept to those who did not need that type of financing, and a lot of people got way in over their heads.
Do you know anyone who had/has an ARM? What income bracket are they in? I know some in my own income bracket. We are not poor.
Deregulation allowed lenders to perpetrate this financing scam on Americans who were eager to live beyond their means. "

In the current situation, increased regulation is warranted and deserved on a banking industry that failed to perform due diligence in lending practices for the past several years. Bailouts of the banking industry, without stringently increased lending regulations is an offense to the American taxpayer footing the bill. (For starters, make sure mortgage originators are qualified to evaluate a customer's ability to repay, objectives in obtaining financing, and matching proper mortgage products to their customers -- Stock brokers need to prove their competency in these respects and individuals suggesting mortgage products should be have these same demonstrable competencies.)

1 comment:

Victory In Progress said...

There are too many people and things to blame for our current economic crisis. It's naive for me, or anyone else, to point to one thing as the sole or primary culprit. I do however, think there is one thing that hasn't been addressed enough and deserves its fair share of the blame.

I've heard a lot of economists, politicians, and people in general say that deregulation is the biggest reason our economy is receding at such a rapid pace. My response to that is a simple question: Why do we need to the government to regulate our personal finances?

It seems to me that we've gradually and willingly traded our freedom of responsibility for our freedom from responsibility. If we turn over all responsibility to the government then we can be held guiltless for anything that happens to us as individuals or as a nation. We have established ourselves as perpetual victims. We no longer are beings who ambitiously act but passively wait to be acted upon and then complain when those actions don't accomplish our own desired ends.

I know that to many of you this sounds a little extreme. And I don't believe that all of us are guilty of completely giving up our freedom for the sake of avoiding consequences. I do think we're more guilty of it than we'd like to admit.

Take the average home-owner who is in the process of foreclosing. I'm willing to bet that more than just a few knew they were getting into a mortgage and payments they couldn't afford. How did they justify it? How do you rationalize committing to a payment you know you are unable to make?

For many, the unconscious thought process probably went something like this: "I'm not an expert at this. I just know how much money I make an how much I can afford. This guy is telling me I can afford a lot more than what I thought. But he's the expert. He's gone to school for this and done hundreds of loans. He knows what I can afford a lot better than I do. I just can't see things the way he does. We need to re-evaluate our own finances so we can fit into the payment plan the lender is offering us. Besides, this guy can't be feeding me a line. There are too many laws against that. He would be risking huge fines and jail time and the government would never allow a credible bank like this to take advantage of someone like me."

I see three major flaws in this thought process. The first two are pretty closely related. The first is that the average consumer is willing to talk themselves out of their own understanding of personal finances in order to justify making a new purchase. I know that one first hand. I've fallen victim to it before; just like I'm sure most of us have. We all need to make that mistake but make it when you're buying an X-box, not when you're buying a home.

The second is that we readily believe what the experts tell us about our financial situation. The catch is, the lender doesn't have to live on the extremely tight budget they put us on in order to justify our loan. We do. It's very easy for a lender to look only at the income and expenses of a client and say, "You can afford this. You just have to cut back on some other things." I also know this first hand. I'm a lender and I can guarantee that the person who knows your finances best is you. If you're not comfortable with a payment plan, whether it's on a home, a car, or a credit card, don't borrow the money; regardless of what the lender may tell you. You know your finances better than any expert because you know your spending habits.

The third is that we believe we are completely protected by the government. That the government or "they" always have our best interest in mind, let alone at heart. It's very foolish of us to expect to be protected from everything. The more laws we create for a sense of security, the more freedoms we give up. We don't need our government to tell us when a deal is bad or good. That should fall to our own self judgment.

All three of these fallacies are basically the same thing. We give up our responsibility and judgment to the responsibility and judgment of others. I understand the appeal of this. We did it with our parents when we were younger and then, if things went bad, we could blame them. We were just doing what we were told to do. But we're not children anymore. And the more we expect to be treated like children, the more our leadership will oblige that wish. But, just like when we were children, we can't expect the privileges of being adults without the responsibilities that come along with them.

I understand that there are real victims of the credit crisis. There are people who were more than responsible with their finances and still found themselves in a difficult situation. You are not who I am talking about and I expect you to be responsible with your feelings and not take offense when offense is not directed at you.

But there are plenty who are responsible for abandoning their responsibilities. That mentality has a huge portion of the blame in our current economy and needs to be addressed so it can be recognized and corrected. Otherwise, we'll find ourselves in the same situation over and over again.