Who's to Blame for the Great Recession?

Let’s agree first that the primary cause was the bursting of the housing bubble.  Mortgages went bad.  People moved out or were evicted from homes they could no longer pay for, leading to a housing surplus, leading to declining prices, leading to more people moving out or stopping payments on first or second homes that no longer seemed to be a good investment because they owed more than the houses were worth.  Since people had used their home equity to continue spending, a drop in value meant that people stopped spending.  Jobs that depended on that spending went away, jobs in construction, but also those associated with other expenditures, big and small.  Then the domino effect took over and unemployment soared.

If you have been following this blog, you know I intend to show that this mess is related to our failure in personal behavior.  Let’s see how we get there.

Every transaction has two parties, a buyer and a seller.  This applies to every bad mortgage that contributed to the housing boom and subsequent bust.  Granted, some of the brokers and bankers were real weasels.  They issued loans with teaser rates.  They talked people into interest-only loans.  They approved borrowers without adequate proof of income.  They did everything possible to initiate loans and collect their fees without regard to the borrowers’ ability to pay.  They sold those loans to Wall Street banks to be repackaged, insured with complex derivatives and to become the subject of other unsavory activities.  Everyone wrongly assumed that prices (and incomes) would continue to rise allowing even marginal buyers to refinance (for more fees) when the teaser rates ran out.  Now everyone is sure that the bankers are the villains and the borrowers are the victims.

I beg to differ!  For every transaction there are two parties.  Someone had to sign on the bottom line, take the money and move into a house they could not afford (knowingly or unknowingly).  Are we to assume that all these people were gullible or stupid or unable to save for an adequate down payment?  Is this a fair assessment of our fellow citizens?  Assigning the victim label shows either arrogance or shame, feeling superior for having not messed up ourselves or embarrassment for having been so careless.

They weren’t victims.  (Legally questionable acts by the banks disclosed so far have been on the foreclosure side, not on the loan origination side.)  The borrowers were lured by a culture that encourages going into debt to satisfy our current cravings.  The bankers took advantage of a mindset that was already in place – buy now, pay later.  It is a culture we reinforced for years.  Every time we were given an opportunity to buy on credit (not wait and save up), we took advantage of it, rewarding with our patronage the companies that made it possible.  

There was a time when being in debt was a disgrace, an embarrassment.  Not that long ago, people expected to put money down on a house or a car and pay it off over a reasonable period.  They would celebrate burning the mortgage.  The mindset changed to putting as little down as possible to taking advantage of financial leverage, then using the equity to finance our cars, toys and vacations.  We are all paying the consequences of this foolish, risky behavior.

Where would the bankers and brokers be if the majority had acted according to traditional values and expectations?  They wouldn’t be the villains, because there would be no villains.  Remember, there is not a company or a bank that can stay in business without our support, directly or indirectly.  Their business is to get us to freely spend our money on their goods and services.  Following the traditional values may have grown the economy more slowly, but isn’t that better than the roller coaster we have been on?  Perhaps fewer people would have been able to buy houses, but isn’t that better than having millions of houses standing empty?  Is it so terrible to pay rent for a few more years?  Wouldn’t everyone be better off – with the exception of a few bank and hedge fund executives who walked away with huge bonuses based on false profits? 

Who’s to blame?  We are – for lacking the discipline to save before spending and the perspective to distinguish between wants and needs – want a house, want it now, not willing to wait!  Now we want to compound the error by denying responsibility and claiming victimhood, leaving us in a position to repeat the same types of errors (and consequences).  You can say bad things about the evil bankers with their big bonuses, but don’t forget that each of those transactions had two sides!