The Economy Blame Game

“We are all to blame.” I read that once, then read it again. It was an economic commentator’s attempt to assign responsibility for the financial crisis. By “we” he meant you and me and everybody else. I’ve seen others, including the Wall Street Journal, taking the same line.

Sorry, I’m not buying it. Neither, I suspect, are many other people. And there are excellent reasons not to.

I didn’t encourage lending institutions to make bad loans and then reward those who made them with big bonuses. Very likely, neither did you.

I didn’t approve giving failed executives who ran their businesses into the ground multi-million-dollar packages when they called it quits.

My fault, such as it was, lay in taking it on faith that Congress and the executive branch stewards of the economy were keeping an eye on things like derivatives and could be trusted to prevent the worst from happening. We know better now.

So hold the collective guilt for some other occasion. There’s another aspect of the current rush to ethical analysis that bears a closer look.

I mean the argument over whether the expansion and collapse of the financial bubble reflect a multitude of ethically bad choices by individuals or whether structural causes were at work. Was it greed or the system?

That recalls the debate over “social sin” and personal sin spawned by liberation theology some years ago. The question was whether social injustice was the result of bad structures and institutions or bad individual choices and actions. In the end, naturally, the only sensible answer was: Both.

Obviously, though, the discussion couldn’t simply end there. For, as further reflection made plain, the bad institutions and structures — apartheid, exploitation of working people, unjust trade policies, and the rest — had come into existence, and now were being sustained, through the evil deeds of individuals. Personal sin trumped social sin in the end.

It’s like that now. Many bad policies and practices came to be taken for granted during the lengthy runup to economic disaster. Eventually, people who were part of the system apparently took them for granted. But the corruption of the system resulted from morally flawed assumptions and values, and the flawed practices it led to were those of individuals who either knew or at least should have known that what they were doing was wrong.

I came across an illustration of that in a Columbia Journalism Review piece  berating the nation’s business press for failing — with some commendable exceptions — to sound the warning about what was happening and where we were headed.

Citing a Chicago Public Radio series, a veteran business writer named Dean Starkman quotes an executive of the biggest mortgage lender in Nevada on how his firm handled loan applications:

“Then the next one came along, and it was no income [or] verified assets. So you don’t have to tell the people what you do for a living….All you have to do is state you have a certain amount of money in your bank account. And then, the next one, is just no income, no asset. You don’t have to state anything. Just have to have a credit score and a pulse.”

This man and his company were scarcely the only ones doing business in a madcap manner. Moreover, an upcoming mid-November summit of leaders from world economic powers underlines the international dimension of this crisis. So are we all to blame? Certainly not. But quite a few people are. At great cost to everyone, as we’re just now finding out.

Russell Shaw

By

Russell Shaw is a freelance writer from Washington, D.C. You can email him at RShaw10290@aol.com.

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  • http://arkanabar.blogspot.com Arkanabar Ilarsadin

    I was in fact offered one of those “no-doc” mortgages. All that was required of me were my credit score, my signature, 5% down, and closing costs. The mortgage broker told me I could even use credit card cash advances(!) for the down payment, it didn’t matter.

    I thank God I didn’t get that loan. There was no way I would have been able to repay it. But the mortgage broker really didn’t care, and made zero effort to tell me what my monthly payment would have been.

  • Andrew James

    Very good article. Who are they going to blame when Bush is gone and the dems are in total control? It will be interesting.

    I was one of the people who benefitted from easy credit during the 1990′s and early 2000′s. I purchased two homes and sold each for substantial gain. I refinanced each of them and took out second mortgages to purchase vehicles and pay off bad debts. With the Grace of God however I sold my last home in 2006 and purchased my parents old homestead and got out of the cyle before it caught up with me. I sold high and bought low, so to speak. If I were still in my old home I would be in an upside down mortgage, with only myself to blame. I knew what I was doing.

  • marcey

    BLAME? Here you go: but obama supporters better read with caution because they’ve cast their votes with apparently little care for facts and figures.

    1977: Pres. Jimmy Carter signs the Community Reinvestment Act into Law. The law pressured financial institutions to extend home loans to those who would otherwise not qualify. The Premise> Home ownership would improve poor and crime-ridden communities and neighborhoods in terms of crime, investment, and jobs. Statistics bear out that it did not help.

    1992: Republican representative Jim Leach (IO) warned of the danger that Fannie and Freddie were changing from being agencies of the public at large to money machines for the principals and the stockholding few.

    1993: Clinton extensively rewrote Fannie Mae and Freddie Mac’s rules turning the quasi-private mortgage-funding firms into semi-nationalized monopolies dispensing cash and loans to large Democratic voting blocks and handing favors, jobs and contributions to
    Political allies. This potent mix led inevitably to corruption and now the collapse of Freddie and Fannie.

    1994: Despite warnings, Clinton unveiled his National Home-Ownership Strategy which broadened the CRA in ways congress never intended.

    1995: Congress, about to change from a Democrat majority to Republican, Clinton orders Robert Rubin’s Treasury Dept to rewrite the rules. Rubin’s Treasury reworked rules, forcing banks to satisfy quotas for sub-prime and minority loans to get a satisfactory CRA rating. The rating was key to expansion or mergers for banks. Loans began to be made on the basis of race and little else.

    997 – 1999: Clinton, bypassing Republicans, enlisted Andrew Cuomo, then Secretary of Housing and Urban Development, allowing Freddie and Fannie to get into the sub-prime market in a BIG way. Led by Rep. Barney Frank and Sen. Chris Dodd, congress doubled down on the risk by easing capital limits and allowing them to hold just 2.5% of capital to back their investments vs. 10% for banks. Since they could borrow at lower rates than banks their enterprises boomed.

    With incentives in place, banks poured billions in loans into poor communities, often “no doc”, “no income”, requiring no money down and no verification of income. Worse still was the cronyism: Fannie and Freddie became home to out-of work-politicians, mostly Clinton Democrats. 384 politicians got big campaign donations from Fannie and Freddie. Over $200 million had been spent on lobbying and political activities.

    During The 1990′s Fannie and Freddie enjoyed a subsidy of as much as $182 Billion, most of it going to principals and shareholders, not poor borrowers as claimed.

    Did it work? Minorities made up 49% of the 12.5 million New homeowners but many of those loans have gone bad and the minority homeownership rates are shrinking fast.

    1999: New Treasury Secretary, Lawrence Summers, became alarmed at Fannie and Freddie’s excesses. Congress held hearings the ensuing year but nothing was done because Fannie and Freddie had donated millions to key congressmen and radical groups, ensuring no meaningful changes would take place. “We manage our political risk with the same intensity that we manage our credit and interest rate risks,” Fannie CEO Franklin Raines, a former Clinton official and current Barack Obama advisor, bragged to
    investors in 1999.

    2000: Secretary Summers sent Undersecretary Gary Gensler to Congress seeking an end to the “special status”. Democrats raised a ruckus as did Fannie and Freddie, headed by politically connected CEO’s who knew how to reward and punish. “We think that the statements evidence a contempt for the nation’s housing and mortgage markets” Freddie spokesperson Sharon McHale said. It was the last chance during the Clinton era for
    reform.

    2001: Republicans try repeatedly to bring fiscal sanity to Fannie and Freddie but Democrats blocked any attempt at reform; especially Rep. Barney Frank and Sen.Chris Dodd who now run key banking committees and were huge beneficiaries of campaign contributions from the mortgage giants.

    2003: Bush proposes what the NY Times called “the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago”. Even after discovering a scheme by Fannie and Freddie to overstate earnings by $10.6 billion to boost their bonuses, the Democrats killed reform.

    2005: Then Fed chairman Alan Greenspan warns Congress: “We are placing the total financial system at substantial risk”. Sen. McCain, with two others, sponsored a Fannie/Freddie reform bill and said, “If congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole”. Sen. Harry Reid accused the GOP; of trying to “cripple the ability of Fannie and Freddie to carry out their mission of expanding homeownership” The bill went nowhere.

    2007: By now Fannie and Freddie own or guarantee over HALF of the $12 trillion US mortgage market. The mortgage giants, whose executive suites were top-heavy with former Democratic officials, had been working with Wall St. to repackage the bad loans and sell them to investors. As the housing market fell in ’07, subprime mortgage portfolios suffered major losses. The crisis was on, though it was 15 years in the making.

    2008: McCain has repeatedly called for reforming the behemoths, Bush urged reform 17 times. Still the media have repeated Democrats’ talking points about this being a “Republican” disaster. A few Republicans are complicit but Fannie and Freddie were created by Democrats, regulated by Democrats, largely run by Democrats and protected by Democrats. That’s why taxpayers are now being asked for $700 billion!!

    And the saga continues…

  • Warren Jewell

    “I knew what I was doing.”

    The economist and others may have it all very bloviated, but there is a kernel of truth about ‘all of us’ reflected in
    - the Social Security Ponzi scheme moving inexhorably to collapse,
    - to consumer credit debt now at thousands of dollars per head,
    - the crazed acceptance that ‘hope and change’ given rhetorical smoothness is some kind of master blueprint,
    - the drive in the face of the deleterious experiences in other countries to government-paid health care,
    - the overwhelming ‘what’s in it for me?’ all over our western culture,
    - the incredible lack of desire for truth, God, worship – and accompanying ignorance about principles and priorities,
    - even to the resistance to destroying abortion rather than our children that it destroys.

    All of those are indicators about a culture and economy in decay while digging its own grave. But, as we are meant to be ‘our Church’, we are also ‘our culture’, and ‘our economy’, and ‘our nation’. In that the price of freedom is vigilance, and vigilance is paid for in demanding truth starting with our very selves, we have placed vigilance aside with immutable truth as just not part of the easy-way.

    I will at least agree that “We the people . . .” have become a sorry lot, becoming sorrier all the time. Electing Barack Obama is symptomatic of that.

  • yblegen

    Thanks Mr. Shaw and thank you marcey for laying out the facts. It’s so strange how the facts didn’t really seem to matter in this election.

  • gk

    No one stopped the scheme. No one stopped any of the schemes. 9-11 helped us ignore many things. Any banker who worked in the business for more than 10 years before all the “no document” loans were made … could have, should have but did not stop the schemes.

    Everyone can blame whoever they want. But, I’ll say it like it is: the political parties do not control this country. We control this country. We hold the power. We let it happen. We wanted to believe that our economy would never tumble. This is just the beginning of the tumble.

    Blame whoever you want or which ever political party you want. It does not make it go away. It does not take those bankers who should of known better off the hook.

    It is easy to be good when times are good. We will see what we are really made of as we enter these though times. We all have the time and energy to blame right now, soon we won’t have any.

    Friends and family will be the only thing that will help going forward. I’d say we should be looking to make friends and not creating more divisions. Saying I told you so is about as helpful as a wet pack of matches in the dark and cold.

  • marcey

    gk,

    You are obviously unaware of ACORN’s intimidation practices in the banking industry. And to say that the political parties do not control the country is beyond naive. The majority of Americans did not want the bailout and yet the bailout happened. If “we” control the country, why is that so? The majority of Americans are pro-life and yet we have abortion on demand. How come? Because political parties absolutely run this country. This presidential election shows that people do not spend the time researching candidates or their platforms or their voting records. People just vote their emotions so the candidate who plays on emotions the best, wins.

    Of course the political parties control this country. To want to hold hands and not open eyes to what is happening around us is a dangerous attitude to take. Someone opened the gate and the fox is now in the hen house.

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