One thought that keeps coming up when I hear about this ‘crisis’ we are going through is whether people really understand what we are talking about here.
It is easy to get complicated and start talking about mortgage backed securities, debentures and other financial instruments. But let me dumb it down a bit: the current problem is all about irrational behavior.
One side of the irrational mess was created by consumers. People hear about other people buying houses for 100 and selling for 200 and think: I can do that! Then they not only invest all they have, they get loans and invest all of it. All of that done without an ounce of caution or logic behind their actions.
The other type of stupid consumer is the one that applies for a loan for something he clearly can’t afford. He even lies about his income or ignores that the word ADJUSTABLE means something that can be… adjusted.
Both of these groups are a very small sub-sets of the general public: close to 5% (as of the end of last year, 5.82% (!) of all mortgages were delinquent, the highest level in 23 years. 0.83% were in the process of foreclosure, also an all-time high)
But still, we have to feel bad for them and come up with schemes to ‘protect them’. That goes without mentioning that they only behaved that way in the first place because the US already protects them… No one can go to jail for making debts and not paying them.
The second part of the mess, more evident since the Bear Sterns debacle, is the creditor side.
These are the banks and financial firms that assumed that mortgages were a solid investment (because historically only 1% of them went bad) and therefore invested their pants in such securities. Again, because of leverage and crazy plans of trying to make easy money, when the risk went up (minimally to be sure) they were all screwed.
The argument is that the government HAS to intervene because if these ‘big players’ go under everyone else goes crazy and the market goes down in flames. The interesting part about this theory is that it completely ignores the fact that whatever damage we are talking about here has already happened!
Again, what the FED is trying to avoid is… irrational behavior by banks, who could stop lending to everyone because they don’t know who can be trusted.
I am not a radical libertarian who thinks we should go back to the gold standard and not have a central bank at all, but I wonder how far people will take this rationale. I mean, if we are going to start bailing out Wall Street companies and Real Estate speculators because the whole system might get afraid, when does that stop?
People talk about 1929 as if it was something that was created by some lack of government… If our only hope to avoid/get out something like that is the government then we are truly in trouble (it took almost 30 years for FDR and his super new deal to do so).
The best indication to me that there is no way that the government is the right solution here is to listen to what the democrats are saying. Check out what Hillary (the least loone of the two!) has proposed:
– Boosting consumer protections for credit cards and student loans and capping credit card interest at 30 percent.
– Easing home foreclosures by pushing for legislation to expand the Federal Housing Authority’s jurisdiction to guarantee mortgages and allow the agency to buy at-risk mortgages.
She wants to make risky behavior even easier!
And I haven’t even talked about the endemic corruption that always comes with these kinds of programs. Alphonso Jackson is nothing new.
So what to do? Can we really legislate stupidity away and get a better society? Or should we start thinking about ways to let the stupid pay the price for their actions?