Posted by
Andrews on Sunday, September 28, 2008 10:24:42 PM
I lied when I said no posts tonight. There is one issue I want to address. Recently, I have heard a lot of pundits on both ends of the political spectrum saying this crisis*, in mortgages and property, is due to the general public living beyond their means. That is imply not true. The problem is due to one specific group living beyond their means, as well as some consequences of the same.
The only people living beyond their means are the poor individuals who took out mortgages they could not afford. They were likely foolish to do so, but they were not able to get mortgage in the first place largely due to bad financial judgment, so it is not surprising they continued to exhibit such bad judgment. What is more surprising is that the government consistently, since the Clinton administration, forced lenders to extend credit to bad risks.
This extension of credit has also caused two related problems. First, an escalating price inflation in the housing market, with the consequence of a disproportionate amount of investment being made into residential properties, rather than productive ventures. Second, a disproportionate amount of institutional investment being made into bundled mortgages containing these shaky instruments, mostly because they were implicitly backed by the government.
I could go on at great length about all of this, but my point is a simple one. Yes, the poor who took these loans were living beyond their means, but they were the only ones. I know it is considered "wise" to say we borrow "too much" or "don't save enough", but that has nothing to do with this crisis. In fact, part of the problem is people saved and invested too much in residential properties, which have now lost value, and they put too much into investments including these bundled mortgages, or put too much of their savings into banks such as WaMu, which are failing because of bad investment.
So, please, pundits, I know you want to sound sage, but there really is no sensible way to tie this crisis to people "not saving enough". This is entirely the story of bad government policies, tied together to people who hoped, ethically and unethically**, to gain wealth from exploiting the distortions those bad policies caused.
In other words, no more talk about needing to save more, as savings would have done nothing to avert this mishap in the slightest.
--------------------------------------------------------------------
* As in the past, I am not comfortable calling it a crisis. Some will definitely be hurt by the falling housing prices and tighter mortgage standards, but that may be a good thing. With the deflation caused by failed mortgages and collapsing banks, it is somewhat worse, but it is still a deflation we had to face eventually, so I am still not convinced it is all bad. We should never have had the artificial inflation, but if we had it, better to deflate now, after only a few years, than a decade from now when it would be much worse. So, I use the word "crisis" only because others do, not because I am convinced it is in any way critical.
** Most investors were legitimate, decent people trying to cash in on the rising market. However, there are some who used the rising market to obscure illegal flipping schemes which fraudulently escalated housing values before defaulting on inflated loans. There were also a few other scams the inflated prices made possible. But, by and large, even the opportunist exploiters were only cashing in, the real cause of the problem was the bad policy of the government, not these parasitic scam artists.