Wednesday, February 25, 2009

The Buck Stops...Over There

A few years ago, I went to a local car dealer to purchase a car. It was a slightly used Volkswagen Jetta diesel. I loved the car. I ended up purchasing the car on a six-year loan. (Yes, I said six years.) At the time I was working in a call center and part time in a church. I knew in my mind the church job was shaky, but I didn't think about it.

A month later, I lost that church job, thereby making my salary tighter. Then, a year after I got the car, I lost my other job. Through sheer luck, I never did skip a car payment, even though I went through two bouts of unemployment.

In 2007, my partner Daniel and I went looking for a house. Now, Daniel is a financial wiz. His plan was to get a house that one of us could afford if, the other lost their job. Daniel was thinking ahead and making sure that we had a house that was just enough and not going to be a burden on us if fortunes change.

These two lessons serve as a reminder of how we can and have acted in the years leading up to the financial crisis. And yes, while the bulk of the blame has to go to the banks and regulators, the common guy does have to bear some of the blame as well.

Our society is filled with wants and many of crave these things. That's not necessarily a bad thing. But the thing is, we don't always think about the cost of trying to get these things and maintain them. Yes, having that new car or new house is great. But how will we pay for it? Like me getting that Jetta, we don't always think about the consequences.

But there are some who think that the common person doesn't need to be blamed. This is what Matthew Yglesias says:

When someone applies for a mortgage, there are two parties to the transaction. On one side of it is a teacher or a blogger or an electrician or a lawyer or a nurse or a guy who manages a Home Depot. On the side is a guy who, for a living, as a professional, works in the “deciding on what terms to offer people mortgages” business who works, for a living, at a financial services business. Businesses like that got in the habit of making loans with little regard to actual prospects for long-term payment on the theory that since house prices were rising, the borrower could always sell or refinance. That, to repeat, wasn’t the judgment of electricians and store managers; it was the judgment of people who were professional mortgage-offerers. They, in turn, were being lax in part because they were finding it very easy to sell the mortgages off as securities. And it was easy to sell the mortgages as securities irregardless of their quality, because big sophisticated financial services firms devised tactics for slicing and dicing the securities into packages that could be easily resold. Those packages could, in turn, be easily resold because they had high ratings from the bond agencies. These ratings were based on models which held that a nationwide decline in housing prices was impossible. The ratings agencies and the modeling firms were, in turn, regulated by the U.S. government. And in addition to the formal regulatory agencies, there are a variety of public officials—the Chairman of the Federal Reserve, the President, the Secretary of the Treasury—who have a kind of generalized responsibility for oversight of the economy. Beyond the political system, the American media offers extensive coverage of business and real estate.

There really is plenty of blame to go around here. But I just don’t see how more than a tiny fraction of it could possible adhere to our electrician or teacher or secretary who’s decided, basically, that the financial services professionals and government regulators know what they’re doing. Now could she have known better? Sure. She could have been reading Dean Baker and Paul Krugman and others. The idea that this lending was all being undertaken on a false premise that a nationwide housing bust was impossible wasn’t a highly guarded secret. I was, for example, familiar with the chart above and with the analysis suggesting that a bust was, in fact, likely. And I believed that analysis. But at the same time, I write about U.S. public policy debates for a living. If there’s a dissident line of thinking that, despite its general unpopularity, is popular among left-of-center economists—well, that’s the kind of thing I know a lot about. But our nurse? Why would she know?

So, the electrican or the nurse isn't responsible to understand all these things. Now, yes, people have been suckered by mortage services. That's wrong. But I think Meagan McArdle is up to something when she counters that the nurse or electrician might not know a whole lot about economics, but does understand their own situation:

Who knows more about your future income prospects: you, or a bank? Who knows more about your budgeting skills: you, or a bank? Who knows more about your health, personal habits, and home maintenance skills? Who knows better whether you're likely to move two years after buying for a boyfriend or an employer? Are bankers somehow more aware than ordinary Americans that recessions happen, companies fold, people lose their jobs?

Of course, falling house prices make things harder because you can't sell or refinance your way to stability. But unless you just suddenly lost your job--in which case, you probably can't be helped by a workout, because you don't have any income--then it's not reasonable to say that all the information was on the banking side. People knew a lot. They just chose not to think about it. (Emphasis mine)

When I bought that car, I chose not to think about the future. Yes, the loan officer knew a lot more about financing than I did, but I knew that my economic prospects were tenuous; but I chose to ignore them.

A while back, I asked my partner why people got into these odd loans like adjustable rate mortages. His response was that people thought that they would get that job promotion or better paying job and that by the time the loan reset, they would be making money.

You don't need to be a Paul Krugman to understand if something is out of your price range. Just because a bank offers you a large loan, doesn't mean you should take it.

Clearly banks have the lions share of the blame. Clearly, government fell down on the job in regulating banks. Legislation can take care of these problems. But you and I also have a responsibility to be wise with our money, to buy what we can truly afford and not hope to afford, to be able to say 'no' to that car or house.

That's not an easy thing because we as a culture are used to being told we can do anything. But somewhere along the line, we have to learn prudence again.

As my partner's dearly departed mother used to say, you can have anything you want, but you have to be willing to pay the price.

1 comment:

Mike at The Big Stick said...

It seems we're all jumping on this one today : )

I agree 100% with your comments.