From every side we suddenly hear people calling for more regulation of financial markets. The calamity on Wall Street has brought to public attention the frightening risk-taking of firms like Lehman Brothers, which lent money against assets at a rate of 35 to 1.
Something must be done! The government must put a stop to this!
But in the excitement of scapegoat-hunting, something important is forgotten: Wall Street was doing exactly what the government wanted it to do. Almost all the exotic credit instruments now wreaking havoc trace back to the simplest of all assets: the single-family home.
Insurance giant AIG, for example, held almost $100 billion in mortgage-backed securities when the market began to fall last year — and almost one-third of those securities were based on subprime loans.
The United States takes pride in high home ownership rates. Over the past decades, administrations of both parties encouraged ever looser lending standards in order to push the home ownership rate higher and higher still.
The Germans commonly advance 60% loans; in Britain recently this went up to 90-95%; sometimes 100% with or without incentives. We have seen fixed rate schemes come to an end and mortgages move onto variable rates with declining asset values as the housing market has slowed and reversed.
We hear a lot about the banks and their staff; about the clever ways they have managed to invent instruments to collect and concentrate risk. But underneath all these mortgage-backed securities there must be real people with real homes who are going through real financial difficulty, struggling, losing their homes and facing destitution and real poverty. We don’t hear quite so much about that and what the governments and the rest of us should be doing rather than looking after foolish bankers and investors.
From a Christian perspective perhaps we need to step up to the mark and look at what we as churches can do to gear up to help these individuals and families. There will be an increasing need for food, shelter, support and just a listening ear for those struggling – community which we are well placed to provide. Matthew 25:34-40
I always find it fascinating that in a crisis so many people search for a monocausal explanation: it’s all the government’s fault, it’s all the mortgage lenders fault, it’s all the borrower’s fault, etc., etc.
There were many dimensions that got us into this fiasco, and it will take many steps by the same parties to move toward a solution.
also fascinating is how little attention there has been on the dynamic that Frum outlines. Now does the fact that the minority lending program initiatives were largely begun in the Clinton administration have anything to do with that? Hmmm……
here is another article:
Only, the risk-taking was [Pelosi’s] idea — and the idea of all the other Democrats, along with a handful of Republicans, who over the past 30 years have demonized lenders as racist and passed regulation after regulation pressuring them to make more loans to unqualified borrowers in the name of diversity.
They were the ones who screamed — “REDLINING!” — and sent banks scurrying for cover in low-income neighborhoods, where they have been forced to lower long-held industry standards for judging creditworthiness to make the subprime loans.
If they don’t comply, they are threatened with stiff penalties under the Community Reinvestment Act, or CRA, a law that forces banks to make home loans to people with poor credit risks.
read it all:
http://www.ibdeditorials.com/IBDArticles.aspx?id=306544845091102
The Democratic Congress, led by Barney Frank and Chris Dodd blocked any attempts to hold back Fannie and Freddie from ballooning their risk levels and leverage. On top of this Fannie and Freddie were making political donations to members of Congress to protect their favored treatment. Want to guess who one of the top recipients of this largesse was? One Barack Obama. But I suppose the mainstream media will give him pass on this one, too.
One of my favorite of all cartoons was a post WWII where a simple looking fellow read a huge headline in a newspaper, “A Brave New World Awaits.†The man says to his wife, “How can we have a brave new world with the same old people in it.â€
We are all to blame for the financial mess we are in. Remember, Genesis 3. Adam blamed Eve and Eve blamed the snake. The mortgage on the house that is too big and fancy, plus its expensive trappings, a new car when the old one was just fine, an expensive cruise we just had to take, etc. put us in our current situations.
Those governing us at the local, state, and federal levels pander to the voters and don’t want to upset the apple cart. They pass laws to let us get what we want without taking our own share of the risks. Then, we scream and yell and point fingers when we should be looking in the mirror to see who is really to blame.
Besides, it’s an election year and the candidates point at everything, but the voters who will, or will not elect them.
This must be the government’s fault. There is no way that this crisis can be laid at the feet of greedy bankers and mortgage brokers (isn’t that a freudianly apt name?) feet for pushing loans on people who can’t afford them and for trading these loans like they represented actual wealth rather than promises to pay.
Likewise, there is no way that this crisis can be laid at the feet of the individual loan customers who bought more house than they could afford for no money down with balloon rates or interest only mortgages or got 2nd and 3rd mortgages (aka home equity loans) to pay off consumer credit or to even invest in speculative stocks.
Nope, there is no way that the people could be held responsible for the crisis. It must be government.
(end sarcasm)
There is more than enough blame for this crisis to go around. Government played its part. Bankers and brokers played theirs. Borrowers played theirs. The question now is what do we do about it?
YBIC,
Phil Snyder
“We are all to blame for the financial mess we are in.”
I don’t see how that is possible. Those of us who were financially responsible with our own lives are now paying for those who were not. The folks that made that possbile through deregulation are folks I never voted for. So, I must say I disagree with the old “everyone is to blame” reasoning.
I don’t believe there was a single cause, but “everyone” is not to blame.
S&T;, As I said, look in the mirror. Seems you and I will not see our faces for we haven’t contributed by acting irresponsibly. I have lived in the same small house for forty years and paid the small loan interest every month. We raised two fine boys who grew up in the same room. I made one very wise investment when I bought almost twenty acres to go with the the house. Million plus dollar houses are now all around me. We have two cars, one a 1993, and the other a 1998. They are long paid for and chug right along. Both get excellent gas mileage.
Along with you, I don’t see my face in the mirror!
Nos. 8 & 9, this is where I have some area of genuine Christian confusion. We are to care for our less fortunate brothers and sisters, but what about caring for our irresponsible brothers and sisters, and not just irresponsible, but purposefully irresponsible. What do we do there? Prodigal son versus older son comes to mind, but prodigal repented first. I’d really like some real discussion of this from theologians who can shed more light than I on this issue.
Frum is spot-on. While irresponsible individual borrowers have a part in this, the inescapable truth is that for 15 years federal regulators, spurred on by Congressional mandates, marketed mortgages to these irresponsible borrowers [b]because[/b] they are high risk. I was outraged to discover, after going through a couple of re-fi’s that were just short of vivisection, that these loans were being handed out without verification of income, work history, assets or credit history. No sane institution will do that and, indeed, when you see a business acting in an irrational manner, you can bet that there’s been an incentive to do so.
We got just what Congress wanted. Next in line are Social Security and Medicare. Just wait for those.
I agree with those who say “we are NOT all to blame.” My mortgage is paid off. I don’t owe $1 in debt. I don’t live beyond my means.
I DO blame the government, not the banks OR those who took loans. In a capitalist society, we expect individuals and institutions to behave in a way that is intended to maximize their profits. Indeed…if they DIDN’T do this, our society would fall apart economically. The government’s job is to create regulations that limit what can be done in the pursuit of profit, just as the government limits how we can drive our cars, sets speed limits, requires us to have a license, inspects our vehicles, etc.
We don’t want the guy coming at us on the highway to be driving a car with defective brakes and going 85 mph. Now, if the law says he can’t do this, and he does it anyway, he will be fully culpable for any damage that results. But, suppose that the government never had any inspection program, never set speed limits, never provided any rules or regulations about how people could drive. So people could use their own judgement about how fast to drive, or whether it was safe to go through an intersection, or how much it was reasonable to drink before driving (or while driving.) The result would be carnage on the roads. Now, you could sit around and say “it’s the fault of the people who decided to drive too fast” or “it’s the fault of the people who didn’t look carefully enough before entering the intersection” etc. etc. but if you put a bunch of people in cars and turn them loose on the highways with no rules, carnage is going to result. Blaming THEM is, functionally speaking, totally pointless.
I expect capitalists to try to make money. I expect people to try to get the best deal on a loan they can. I expect people to try get mortgages to let them participate in what they perceive as the unstoppable ballooning of housing values. Anybody who doesn’t expect this is denying a fundamental tenet of capitalism (and I would say reality.) I also expect the government to be the highway department (and patrol) that sets the rules and the speed limits.
This is a Republican AND a Democratic problem because both parties have participated enthusiastically in the de-regulation of Wall Street — I would say the Republicans for ideological reasons and the Democrats because of lobbying. So there is lots of blame to go around — but let’s not start saying “we are ALL to blame” because this is effectively saying “no one is to blame” and that is not true.
“We are all to blame for the financial mess we are in.â€
Yup – expect an imminent apology from the Church of England.
Under the bankruptcy laws, a secured debt may be adjusted, by the court, as part of the reorganization plan. The lone exception is a secured mortgage on the debtors primary residence. A change in the law to treat home mortgages the same as any other secured debt would avoid many foreclosures, keeping folks in their homes and assuring the mortgage holder of a return of most of their claim. This would not be a perfect solution, but would bring a measure of stabilty at no cost to the taxpayers.
#14 Jeff Thimsen – that would be good. However I wonder if there would be issues of lenders being willing to lend as they do at the rates that they do without that priority charge? What could be done to meet such issues if they are a factor in lenders’ decisions to lend in the first place. It would be great if such a change could be brought in. These properties may not achieve much in a ‘firesale’ and it is surely better for all if people can have a roof over their heads.
Jefferson – it wasn’t a government “mandate.” There was simply no regulation.
Some community banks used rational, but experimental, ways of evaluating credit history in difficult neighborhoods and succeeded. What we had here was corporations looking for quick profits, and with cheap money they thought they could keep those profits coming. There was no regulation of the kid with his hand in the cookie jar.
Perhaps the government passed out too many cookies; they should have been present when the kids were taking.
#17, John, I have done a lot of reading in NYT and WSJ about this. What you have just said is only a portion of what apparently went on. Yes, there was abuse, especially in the sub-prime marketeers, that wasn’t well regulated by the lending institutions themselves, nor, also, by the government entities. But the liberals politicians pushed the lending institutions to make non-standard loans, under the threat of heavier regulation, if they didn’t. And then to shore up those institutions that did it, the liberal pols (think Pelosi and Barney Frank, here) raised the protocol limits of Freddie and Fannie, so they could buy those loans (which were bundled with other good loans for misleading appearances and also sold to other worldwide lenders). Then Barney and his crew refused to allow any proposed regulations to reign in this activity to come before or out of the House Banking Committee. In the meantime, the lending institutions went on making false profits, with the help of some Enron style accounting methods. And FYI, your hero Mr. Obama received $572,000 from Freddie and Fannie in campaign contributions; McCain received between $100,000 and $200,000, but he did call for reigning in Fred and Fan in 2005. And also by the way, all of this started way back during the Clinton Administration, and former Carter Admin guys headed up Fred and Fan. So this is not all about regulation nor all about the present Administration, though it is partially.