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BY Steen Erikson
PUBLISHED: 10/03/2008
I have to ask, did the government require the creation of subprime loans, NINJA (liars) loans, securitized and collateralized debt obligations, and the rest of these outrageously risky devices? They did not.
These devices were created by the bankers who got the compliant government (Republican, and I’m sure some Democrats as well) to loosen regulations.
Then they leveraged like absolute madmen and had slick, hard-sell salesmen all across the country convince people that it was safe to buy beyond their means because home values only go up, and they could refinance before the rate adjustment knocked them flat and keep their payments low. Smart people as well as financially illiterate people were fooled by these slick shysters.
So an “overoptimistic borrowing public, and their failure to honor their loans” is not the cause of the problem. “Abusing new-found buying power?”
They were actively encouraged to take loans by “loan pushers” who convinced them to put aside reason and look at the “reality” that they couldn’t lose!
Many people were pursued! I can’t tell you how may phone calls, e-mails and letters I’ve gotten over the past six years with “great offers” to extract cash from my equity!
Granted, some small percentage of people played the system. Some made a lot of money. But the average subprime borrower was hoodwinked by this system.
And the system was created by the bankers. No government rule ever said to give loans out like candy to people with rotten teeth — exactly the opposite.
No government rule said it was a great idea to leverage 100:1 and then slice and dice that debt into billions of tiny pieces and mix it in with good debt, poisoning the whole pool.
Yes, the people who bought homes they should have known they couldn’t afford bear some share of blame. But they did not create the problem — the banks never should have given them that loan. Sadly, not everyone in America is savvy enough to turn down a “guaranteed” pot of gold when the slick salesman comes knocking. When it turns out to be fool’s gold, we all end up paying.
Personal responsibility slices both ways, and at some point, laws are created to protect the little guy from the very clever, very wealthy predators. What do you think about asking the bankers to give back their $37 billion in bonuses they paid themselves last year? That would make a nice down payment on some fresh, poison debt.
Steen Erikson
Executive secretary
Veterinary Biosciences
3 Comments
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Correction
"These devices were created by the bankers who got the compliant government (Republican, and I’m sure some Democrats as well) to loosen regulations."
Actually the "deregulation" that you are referring to happened under the Clinton administration.
re: Correction
As I understand it, regulations were loosened under Clinton and there was abuse by subprime lenders. The problem seems to have been limited to a small proportion of the market through the 90's, though, and less problematic for the system as a whole. The biggest problem as I can see it lies with the heavy emphasis on deregulation and/or lack of enforcement by George Bush and the republican leadership. All the charts I've seen on the topic show an increase in subprime lending between 2001 and 2006-7, accelerating sharply between 2004 and 2006-7. If that's incorrect, show me the data.
Subprime lenders were failing until the feds stepped in. States were passing anti-predatory lending laws in the early 2000's to stop the abuses, and the feds told them they couldn't do that any more - only the feds can regulate national banks. And then the massive push to sell the crappy loans ramped up.
Read the paper or watch the news. There are countless stories of people who were, unfortunately, financially ignorant and who were convinced by a slick salesman that they can't lose on their home. They were advised that they should buy as much as possible now, well beyond their means, with a no-money-down loan because the house value will go up and they'll suddenly have tons of equity. And the banks made the loans, which is absolutely amazing!
When I bought my first condominium, there's no way I would have qualified for a no-money-down loan, much less a loan at five to ten times my annual income! And with no income verification! The general rule of thumb was to have a steady job (and proof of that job), 10% down (or more), and roughly 3x your annual salary maximum loan!
The government didn't require these banks to make these insane loans, but the government allowed it to happen, and at an accelerated rate under the current administraion. And the banks went crazy, then rewarded their executives with billions of dollars in bonuses. Then they spread the crap debt into every nook and cranny they could find, all under the not-so-watchful eye of the regulators, and now the whole house stinks.
All this said, I'm not an economist or an attorney - I'm merely an observer. But pattens emerge and people work to place blame along ideological and partisan lines, frequently with absolutely no grounding in fact or any critical evaluation. Some of the arguments are so weak that they'd be laughable if it weren't for the compliant acceptance of those arguments by the ideological faithful. I can only hope that the centrists, moderates, pragmatists, or whatever you want to call them, will win the day and bring calm, reasonable discussion back to the table. Reasonable, intelligent discussion.
Ultimately falls on you
There is a lot of blame to go around, but ultimately the blame falls on those who signed on the dotted line. If a salesman is trying to convince me (and I don't know much about investing) to spend a lot of my money, I'm going to make damn sure I'm fine if things go bad. That is what is called Rugged Individualism. Of course the people taking out the loans can't be blamed, they are the victims! If everyone started looking out for themselves and relying less on others, this country would not be in nearly as much chaos as it is in now.
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