As we dive deeper into recession, everybody wants to know who is to blame. Financial institutions point to a bursting equity bubble that they couldn’t have foreseen. Others point at individuals who tried to achieve affluence through credit and now aren’t able to repay the loans. And of course, everybody points at the government for excessive spending and the relaxing of credit rules. All of those criticisms have truth to them. None alone can take all the blame.
Let’s start with government. It is true that back in the late 80’s and through the 90’s there was a move towards relaxing credit criteria. It was noted that it was getting harder and harder for low income people to achieve home ownership under the more stringent criteria. Perhaps loosening the criteria would let more people own homes, which would help out other sectors of the economy. It was a risk, but it seemed to be a risk worth taking. While it achieved the goal of getting more people in homes, now many of those homes face foreclosure and banks are being crushed under the weight of defaulted loans without the equity to cover them. So, is it government’s role to fix everything?
The financial market cannot argue that too many loans were made to too many people without adequate credit worthiness and without adequate consideration of the ability to pay after adjustable loan interest rates began to increase. It was assumed that as long as property values continued to rise that bad loans would be covered by equity—encouraging financial institutions to approve loans of more even than the value of the equity. Rather than a system driven by credit worthiness and ability to pay, it was a system fueled by speculation. When the property values stopped rising and the ability to pay didn’t match the rising payments on adjustable loans, the system fell apart. Despite the mistakes of speculation, with both corporate and personal bankruptcies looming, and so many jobs on the line, not to mention the trickle down effect on the economy, shouldn’t somebody rescue the financial industry?
Many borrowers see themselves as victims. That is more often than not a sophistry. Contracts were too often entered into without consideration of any possible reversals and with wishful thinking about wage increases and future equity values rising. Isn’t it dishonest to borrow money that one isn’t sure they can repay or that the repayment thereof can only be accomplished with wage increases or equity appreciation hopes that are far from guaranteed? Like the financial institutions who gambled on the future, so the individuals gambled and lost. Should somebody else’s money now bail them out?
Hundreds of billions of dollars are being offered to financial institutions, individuals, car companies, and other entities who claim that they are bordering on failure and that the failure will hurt employment or spread to the economy as a whole. Government seems almost eager to borrow from our future in order to save our today. Whether it is a mortgage bail out, secured loans to car companies, or a stimulus check to individuals, let’s call it what it is. It is a government loan that has to be paid back with taxpayer money—in most cases by the taxpayers who didn’t over-borrow, or don’t work at the car company, or don’t have stock in failed financial institutions. And it isn’t just the taxpayer of today, but our children and their children who will still be bailing us out after we have retired or passed on to our graves. Do we care so little about the legacy we are leaving them?
Let us be careful and think clearly and honestly before we act. If we are expecting government to react with financial assistance, let us make sure that the money goes directly to the place it will have the most affect, and that those who made the decisions which lead us to today are not rewarded in the process. Maybe it might be better to let economic nature takes it’s course, even if it means a few years of recession to right the ship. We have weathered such storms before. But, if we bankrupt the country and mortgage our future to bail ourselves out and fail, we will be looking at economic damage that may literally take decades to resolve and put our democracy at risk.
Let’s start with government. It is true that back in the late 80’s and through the 90’s there was a move towards relaxing credit criteria. It was noted that it was getting harder and harder for low income people to achieve home ownership under the more stringent criteria. Perhaps loosening the criteria would let more people own homes, which would help out other sectors of the economy. It was a risk, but it seemed to be a risk worth taking. While it achieved the goal of getting more people in homes, now many of those homes face foreclosure and banks are being crushed under the weight of defaulted loans without the equity to cover them. So, is it government’s role to fix everything?
The financial market cannot argue that too many loans were made to too many people without adequate credit worthiness and without adequate consideration of the ability to pay after adjustable loan interest rates began to increase. It was assumed that as long as property values continued to rise that bad loans would be covered by equity—encouraging financial institutions to approve loans of more even than the value of the equity. Rather than a system driven by credit worthiness and ability to pay, it was a system fueled by speculation. When the property values stopped rising and the ability to pay didn’t match the rising payments on adjustable loans, the system fell apart. Despite the mistakes of speculation, with both corporate and personal bankruptcies looming, and so many jobs on the line, not to mention the trickle down effect on the economy, shouldn’t somebody rescue the financial industry?
Many borrowers see themselves as victims. That is more often than not a sophistry. Contracts were too often entered into without consideration of any possible reversals and with wishful thinking about wage increases and future equity values rising. Isn’t it dishonest to borrow money that one isn’t sure they can repay or that the repayment thereof can only be accomplished with wage increases or equity appreciation hopes that are far from guaranteed? Like the financial institutions who gambled on the future, so the individuals gambled and lost. Should somebody else’s money now bail them out?
Hundreds of billions of dollars are being offered to financial institutions, individuals, car companies, and other entities who claim that they are bordering on failure and that the failure will hurt employment or spread to the economy as a whole. Government seems almost eager to borrow from our future in order to save our today. Whether it is a mortgage bail out, secured loans to car companies, or a stimulus check to individuals, let’s call it what it is. It is a government loan that has to be paid back with taxpayer money—in most cases by the taxpayers who didn’t over-borrow, or don’t work at the car company, or don’t have stock in failed financial institutions. And it isn’t just the taxpayer of today, but our children and their children who will still be bailing us out after we have retired or passed on to our graves. Do we care so little about the legacy we are leaving them?
Let us be careful and think clearly and honestly before we act. If we are expecting government to react with financial assistance, let us make sure that the money goes directly to the place it will have the most affect, and that those who made the decisions which lead us to today are not rewarded in the process. Maybe it might be better to let economic nature takes it’s course, even if it means a few years of recession to right the ship. We have weathered such storms before. But, if we bankrupt the country and mortgage our future to bail ourselves out and fail, we will be looking at economic damage that may literally take decades to resolve and put our democracy at risk.
