Thursday, September 25, 2008

The Blame Game

It was requested that I repost this, so here it is, newer posts follow this one;

If you ask the majority of American's it's Alan Greenspan's fault.

If you ask Barack Obama, it's George Bush's and the Republicans' fault.

If you ask John McCain it's Wall Street's fault.

And if you ask Nancy Pelosi it's anybody, but the democrats' fault.

So who's to blame then?

None of the above.

In intellectual honesty we have to give credit where credit is due. Nancy Pelosi is "most right" when she says the democrats are largely un-blamable when it comes to the country's current economic woes. This ignores the fact that the democrats and leftists in this country have effectively cut off the supply of oil in the US and therefore did contribute to the increase in prices and thus the economic slow down, as well as pressured lenders to lend to the lesser qualified to get them re-elected, but these are very tangential to the current crisis.

Second "most right" is John McCain. Wall Street and their mortgage backed securities gurus highlighted in the Sub Prime Primer did provide a venue for which banks could unload worthless mortgages and effectively made them brokers with every incentive for volume and very little for quality. But this is not the primary culprit.

Then you have outright ignorant people who lack the intellectual rigor or curiosity to learn the facts for themselves and become informed, educated people, preferring to just find a scape goat because blaming one person is easier than trying to learn about international finance, monetary policy and price to rents ratios. Yes, of course, Alan Greenspan, how obvious. When he wasn't tripping nuns, kicking kittens and putting hot sauce in the retirement community's water supply, he was actively plotting the destruction and demise of the US housing market.

And do I have to even explain Barack Obama's claim it was Bush's fault? What isn't? Seriously. I got behind an old fart driving on the interstate today, that was Bush's fault. The sun was shining a bit too brightly when I went to lunch. That was Bush's fault. I had a bit of indigestion. That was obviously Bush's fault. Sadly, for a man who claims to bring change, he's just playing politics as usual.

No, the real culprit boils down to two groups of people; one of which no politician has the cajones to point out and another group we all love to blame.

The first group of people who are genuinely the ones to blame for the housing crisis we're in are banks and bankers. Long story short (though I definitely go into more detail in my book) banks, their management and their foot-soldier bankers put their commissions ahead of the American public and lent, lent and lent as they racked themselves up bonuses, commissions and undeserved raises. With little to no regard to the likelihood of repayment, they lent money to deadbeat losers to boost sales and make their figures look better, and to such an extent it threatened the stability of the US (and world) financial system, all at the expense and insurance of the US taxpayer.

The second group deserving the blame is a revolutionary idea I had, also detailed in the book;

Would we even have these problems if people did what they said they were going to and PAY BACK THEIR FREAKING LOANS IN THE FIRST PLACE?

Has that thought occurred to anyone? That if the people who put their signature on the loan documents, "promissory notes" suggesting they (I don't know) PROMISE to pay the money they borrowed back, then we wouldn't be having this discussion?! You know, like they agreed to return the money they took? Like how it's been done for eons? You pay back what you owe and do what you're going to say?

The fact that this group has gone completely unmentioned shows us not only how cowardly politicians are to put blame where it is richly-deserved (the deadbeats and losers of the American public), but how personal responsibility has been erased from the American lexicon. Not only do people lack personal responsibility, but society almost fails to expect or demand it. No longer is it the deadbeat trailer trash mom borrowing $50,000 to start a hair salon (I've seen it, this is a real loan), it's the "poor disadvantaged heroic single mom of 14 trying to make her claim in the world." It's no longer the moronic suburbanite brat who drives a fancy import who lacks the basic math skills to put together a budget to find out he can't afford BOTH the import AND a house (again, true story), no, it's "a poor disadvantaged youth who is a victim of Bush-Cheney-Inc."

It is this group of people, the literal, veritable, epitome of financial deadbeats and losers that is to blame, in conjunction with the greedy moronic bankers that lent such fools taxpayer-insured money in the first place. These people are why you have a house worth $100,000 less than what it used to be. This is why you're facing the specter of recession. This is why you might be losing your job. So blame Greenspan. Blame Wall Street. And hey, be REAL original and blame Bush. The banks and the deadbeats of America should be the target of your pitchforks.


Ed Kohler said...

Maybe it makes me a liberal, but if I had to decide between placing blame on people who took out loans they didn't understand they had no chance of repaying, or the people who knew that the people had no chance of repaying them, I'd lean toward the latter.

And to think that creating portfolios of loans given to people with horrible credit would somehow create less risk was absurd. Not by the people who were sold on the dream, but by the people who sold the dream.

Anonymous said...

Your house might be worth $100k less than it used to be, but it surely wouldn't have gone up $100k to begin with in a more sane lending environment. Don't forget to blame the (mostly Democrat) politicians who voted for the Community Reinvestment Act, which basically forced banks to make these bad loans or be caught between claims of redlining (if they don't lend) and claims of predatory lending (if they do). Actually, the latter is already happening.

Anonymous said...

if I had to decide between placing blame on people who took out loans they didn't understand they had no chance of repaying

Didn't understand? Yeah, right. There's no way, with all the mandatory disclosures these days, anybody can reasonably claim they didn't know what their mortgage payment was going to be, or what it might adjust to in the future (more, obviously). There's that whole personal responsibility thing again: you have a duty to ask the bank what your loan will cost. Now, if lenders were lying about what the loan will cost, or charging more interest than what the loan docs entitle them to, that's different, but I see no evidence this was (and is) happening.

Anonymous said...

Actually, it's very much Greenspan's fault. He gave the housing bubble a "full speed ahead" by slashing interest rates, and acting on the premise that the spike was due to real increase in the value of housing. By ignoring the reality of expectations and beliefs on the part of investor and actors in the market, he neglected an opportunity to stem the bubble. The problem with this is that the housing bubble meant that people's houses gained in market price, raising their taxes. It's arguable that the raised taxes meant that people had less to spend on consumption, leading them to take more credit.

There have been warning signs for years now, and anyone who knows the history of the many bubbles that have wreaked havoc with apparently strong economies should have seen this one coming... In fact, I think the Fed should have been on the ball with this. Of course when things are going swimmingly, no-one wants to believe it's all going to crash.

Hot Sam said...

Bill Clinton's National Housing Policy sowed the seeds for the current meltdown. They created and expanded the mortgage products and facilitated the securitization.

He will claim that he issued hundreds of warnings about possible misuse which were ignored, but that's just as disingenuous as Johnson and Johnson telling you not to put Q-tips in your ears. That's what they were made for!

George W. Bush's continuation of that policy and unwillingness to throw a wet blanket on the party allowed it to happen.

This is the third housing crisis we've had in three decades, all caused by the same excesses. You'd think we'd have learned by now.

In the recent legislation passed by Congress to address foreclosures, they actually continued to promote "home ownership" as a priority. As economist Joe Mason points out, the policy isn't to help people "own" homes but to help people "live in" homes.

Wow! For once, I agree entirely with Ed. Both the borrowers and the lenders were rolling the dice. Brokers originated for commission, lenders originated to sell, investors bought securities they didn't understand. Rating agencies misrated the risk. It was a perfect storm of stupidity and false hope and greed and everyone stood around watching it happen.

America didn't deserve 9/11 but we certainly deserved this.

Anonymous said...

I'd lean toward the latter.

Why, Ed? It's right to also blame the irresponsible lenders, but how are the people who took the loans not adults? How are they not responsible for their actions?

When the loan goes bad, the loan officer doesn't have it follow him personally. The buyer does. Who really needs to be more aware here? I have no pity.

Unknown said...

I'm curious about where you place government regulations and programs such as the Community Reinvestment Act and incentives to approve subprime loans etc. in this mix. I'm not of the opinion that this let's banks off the hook for separating loan approval (loan officer gets commission) from loan servicing (thru collateralization or selling or otherwise distributing risk of high risk loans). But to my mind... the development of and implementation of all those separation-of-accountability processes and programs were inspired at least in part through pressures to grant loans outside of what a bank by itself would consider acceptable to keep in its own portfolio at its own risk.

Anonymous said...

Not so. This bank crash is a result of the Clinton administration.

From the article:

But it was the Clinton administration, obsessed with multiculturalism, that dictated where mortgage lenders could lend, and originally helped create the market for the high-risk subprime loans now infecting like a retrovirus the balance sheets of many of Wall Street's most revered institutions.

Tough new regulations forced lenders into high-risk areas where they had no choice but to lower lending standards to make the loans that sound business practices had previously guarded against making. It was either that or face stiff government penalties.

Anonymous said...

Yes, it was everyone's fault. The politicians who helped push through penalties for good business sense, the bankers who sold their souls for another commission check, and the guy who didn't apply common sense and say "Interest only is a bad deal."

The continued fallout is everyone's fault, too. The politicians for saying a company is too big to fail, the bankers who want their golden parachutes, and the guy who doesn't apply common sense to say "Maybe people should be held responsible for their bad decisions."

Keep up the great work, Captain!

Anonymous said...

There seem to be misconceptions here.

Greenspan is probably the fairest government target. That's because (1) he really encouraged the use of derivatives and CDSs, (2) out of an almost irrational fear of slight deflation as opposed to slight inflation he encouraged a lot of loose credit, (3) he's been writing dumb op-eds the last year arguing that it's all a matter of poor risk models, which is partly but not entirely true, and (4) he focused a lot of energy, wrongly, on hedge funds.

I think a lot of the commenters get it wrong because they thing this is about strictly the housing crash and bad borrowers. It's not,except in the sense World War I was about Franz Ferdinand. Think about it: Frannie did not, by definition, make subprime loans. When Countrywide went bust it wasn't like this! And if you make a crappy loan and don't get paid you repossess the house: there's basically no way, I don't care how overpriced you think the housing market is, that you can get levered 45 or 50 to one, like Lehman, doing that. And note that the failures everyone's hyperventilating about (Bear, Lehman, Lynch, AIG) - those aren't people you can go get your damn mortgage from. People, this isn't about the housing crash, which lots of people foresaw. It's about the credit crunch, which pretty much Nouriel Roubini saw.

Bearing that in mind I don't see how it's "intellectually honest" to blame the lenders (in some socialist way where I guess they shouldn't be trying to make a buck when it's lying around for the taking) and blame the borrowers even more. After all the people buying CDSs were customers of the lenders too and they were the problem. I mean, duh, pay back your loans, don't be a deadbeat. But it's not the deadbeats we're worried about, it's the guys who, egged on by the Fed, swapped derivatives on their loans. Tighter housing law would've stopped this but blaming it is flat-out economic ignorance: people can make bad loans on real estate and the markets not get hammered like this. There have been other asset price bubbles you know. And most subprimes do in fact pay back: the CDS market amplified the mess.

Blame? First the ratings agencies which were almost criminally negligent and didn't want to admit they had no risk models. Then the big investment banks which decided not to care about those models and levered up, and does anyone notice how GS, with its huge in-house modelling and algorithm crew, is the stablest of the bunch by a damn sight? Notice how the hedge funds are still standing?

Anonymous said...

Java made a really nice point. This bubble was perhaps not preventable, but banks and rating agencies made it even worse.

Although I also don't like what Greenspan did with the funds rate, I don't like seeing him blamed for the whole mess. Sure, he reacted a little bit overanxious about deflation, but don't forget that in 2002 a bubble had deflated, too. And that, combined with a sluggish economy, frightened the sh** out of him that a Big Ol' Great Depression might recur.

Remember that GDP growth has been rather disappointing between 2002 and 2007, even though real interest rates have been as low as they can get. Considering the huge size of the housing bubble (that, actually, already started in the late 1990s), would it have mattered much if he had raised interest rates by, say, 1%? Had he raised it by even more, the economy could've tanked even earlier and everybody would've blamed him for that.

As far as I can remember, Greenspan writes in his new book that the dotcom bubble and the housing bubble probably couldn't have been stopped just by raising interest rates anyway. And he's probably right on that.

Anonymous said...

Ain't blaming Greenspan for all of it, dtrum, but I'm blaming him some, and blaming Clinton or Bush is economically wrong.

And so what if the housing bubble couldn't have been avoided? Again - it's not the housing bubble, it's the credit crunch. The sure way to identify the economic illiterates (I'm at a hedge fund) is from their gabbing about the housing crash at parties and stuff. Look: most subprime borrowers paid up. That's why people got into the subprime market: it was a good market. Me, I'm not a credit snob. And especially with the asset bubble if you ended up seizing 10% of the houses you still came up well on top; heck, even with the decline in prices, in most markets that's still true because of the loan balances. Somehow it's become the thing to do to blame the lenders' greed - but the lenders did OK for themselves. I don't get why you guys want them to be some kind of socialists worried about whether or not they hurt society by picking up dropped dollars, and in fact they were helping things, getting more people better property that they wanted, except for the CDSs, which weren't their bad.

I mean, reread the post and think. The companies that have the markets panicking - Lehman, AIG, Bear, Lynch - are far, far removed from the subprime borrowers. And the post and the commenters want to blame the borrowers for the mess we're in? That's economically illiterate. The borrowers are irresponsible and it sucks for them but we in finance know how to adjust for that and have good risk models for it. It's not a problem. The derivatives, we don't have good models for.

That's not a tirade against derivatives! I think they spread out risks and lubricate trades. But damn they are hard to account for.

Anonymous said...

FWIW, I know that none of this is my fault, since I only have a small balance left on my home's mortgage, have no other debt, have not invested in wacko, speculative investments and have live within my means for decades, but sure as hell will I end up paying for the mess.

The comment about the Clinton administration is correct, but there also was an attempt in 2005 by McCain and some other Republican senators to rein in Fannie and Freddie and to strengthen oversight called the Federal Housing Enterprise Regulatory Reform Act, however that was blocked in committee by the Democrats.

More details here:

Be sure to check out the connections to the Clinton Administration and campaign contributions from Freddie and Fannie, and note how much they've given to Obama.

Last, the fact that the Fed is helping out AIG as they are is a clear indication of how serious and precarious the situation really is. No way would they have done such a controversial and radical move unless the circumstances were so dire that was their best option.

I'm staying in the market, but frankly it scares the hell out of me.

Anonymous said...

Lots of blame to around. Personally, I think Greenspan should shoulder some of the responsibility. However, this recent quote from the former Bank of Canada governor suggest Greenspan had seen the dangers coming and many ignored him.

From the Globe and Mail Sept 12th:
Many of the world's central bankers saw signs of a credit crisis five years ago, said former Bank of Canada governor David Dodge, but no one foresaw the “period of great financial danger and unrest” that followed the meltdown in credit markets last summer.

“We've known for a long time, going back to 2003 and 2004, that we were building up to a global problem that needed to be resolved,” Mr. Dodge said during an interview to mark his new career as an Ottawa-based senior adviser to one of Canada's largest law firms, Bennett Jones LLP.

The biggest danger, he said was the overheated U.S. housing market and proliferation of mortgage-linked securities, which left global investors and major financial institutions exposed to billions of dollars of losses. Some powerful critics such as former U.S. Federal Reserve Board chairman Alan Greenspan privately warned for years “that a disaster was waiting to happen” in a real estate sector fed by historically easy access to mortgages, he said. But Wall Street and other regulators turned a deaf ear.

“It was very hard to get reform because there was the perception that if you make mortgages more accessible, you are helping homeowners, but what you're really doing is driving up home prices.”

Anonymous said...

I bought a house in 2003, and with a modest income was approved for a loan of up to $550K - something that I knew to be a farce. I could never have afforded the payments and would have put my family into serious trouble. My real estate agent ( and my lender ) were pushing that range when looking for houses, claiming wage increases over time, the youth of myself and my spouse, blah, blah, etc. And had I not put my foot down I would be in a position to blame others as well - and would have been well-founded in my opinion.

But I didn't. I bought a house that I could afford and though we had agreed on payments, price, etc. I still wound up paying about 20% more than expected as a present when I signed the docs. I felt swindled even though I can well afford my house with fixed rates.

The whole thing is a racket, I can imagine how others could have been pressured as all of America is taught to 'get now' and pay later, never believing later will come. I'm responsible for what I owe, but not for what others owe and it angers me that making a right and fair decision for myself could be jeopardized by others.

I can afford my payment

Anonymous said...

The credit crunch would not have happened if there hadn't been a housing bubble, right? It was like an epidemic. Everyone, the borrowers, the lenders, and the investment banks, thought that housing prices will rise forever. That's why investment banks were happily trading their crappy CDSs.

Nobody thought about what would happen if housing prices started to fall significantly. Banks seem to have ignored the warnings of their risk models, because everyone wanted to participate in this boom.

I don't call the borrowers or lenders greedy bastards. If anything, greed is basic feature of mankind. Without it, capitalism wouldn't work. You're right, people just took their chances.

I also don't think that there was any chance to prevent the crisis by regulating banks. In fact, that was even tried, but it has been shown that you need much tighter regulation to have banks under control, but then you destroy our whole free market global financial system.

I don't know how all this could've been prevented in a sensible and practical way. And I haven't heard any sound theory yet either.

Anonymous said...

I don't know how all this could've been prevented in a sensible and practical way. And I haven't heard any sound theory yet either.

Does it need to be prevented? The thing about booms is that the upside is always greater than the crash afterwards, and overall Americans are a lot better off than they were before the boom started. Even subprime borrowers, who couldn't participate in previous housing booms because they couldn't get financed, are as a class much, much wealthier.

Anonymous said...

And had I not put my foot down I would be in a position to blame others as well - and would have been well-founded in my opinion.

Taking a loan you knew you couldn't afford would have been somebody else's fault? I find that logically suspect.

Anonymous said...

Here's another link to more information/opinion.

More blame to spread around.

Anonymous said...

I saw a customer who, I think, did not know how to read enough to fill out a lottery ticket (seriously!) talk to another customer about the $300,000 house she recently bought (with mortgage, of course). How she could understand the loan documents when she could not fill out a lotto form is beyond me.

Anonymous said...

I have trouble blaming large groups of people. The way I see it there are two alternatives:

* a huge number of people all at the same time decided to be irresponsible where in decades past they would not.

* a lot of people got a lot of bad information.

i reckon the people who signed those "PROMISES" as you put it were given teaser rates, explicitly told that "there was very little chance they'd go up", were told that house prices would always go up, etc. etc.

And of course, a lot of people respond to the hard sell. And those people were suckered. and they helped cause the crisis.


Some perhaps should have known better. But when so many people have been so duped, I'm not going to blame them, I'm going to blame the people who duped them.

It wasn't bankers who did that *directly* of course, but they take ultimate responsibility.

So really, it IS all their fault. Not "the people's".

Anonymous said...

Not Clinton, everyone.

Think Jimmah Carter.

The CRA was enacted during HIS administration.

Anonymous said...

BTW, congrats Captain on getting your book mentioned on NRO Corner