To read The Big Short,
Michael Lewis’s book about the sub-prime mortgage lending practices that led up
to the Great Recession a few years ago, is to take a voyage on the dark side of
the financial world. Lewis puts on full
display the avarice and shortsightedness of “Wall Street” that laid the
foundation for one of this country’s worst recessions.
One of the most telling statements Lewis makes is on page
179 of his book: “Complicated financial
stuff was being dreamed up for the sole purpose of lending money to people who
could never repay it.”
But what did the bankers care? They got their upfront commissions and kicked
the can down the road for someone else to pay the price.
It is certainly easy in hindsight to second-guess people’s
actions and to cast blame, of which there is plenty to go around. So while we are assigning responsibility, let
me throw some in the other direction: the people who fell for Wall Street’s
sales pitch.
Yes, I know this sounds like blaming the victim—and people
saddled with sub-prime mortgages were victims—but surely they were not so
ignorant as to really believe everything they were told. Did the restaurant worker in Nevada
At some point we have to expect a minimum level of financial
IQ, or simply common sense, of the consumer.
There will always be hucksters, someone out to cheat others or to shade
the truth a bit for his own gain. Most
parents warn their children of these charlatans and teach them some basic
self-defense against deception and being unfairly used. That knowledge needs to carry over to
financial dealings. As I’ve written
before, schools must be more diligent about teaching basic personal financial
planning, teach history more effectively (to avoid repeating it), and instill
some genuine critical thinking skills.
But just as important, consumers must not mirror the
behavior of the bankers they so readily criticize. What drives people to ignore their internal
warning system, to buy what they cannot afford, to borrow what they cannot
reasonably pay back? It is the same brand
of greed that drives the bankers, just on a lesser scale. Collectively, however, those many individual
decisions do have a huge impact on
the national economy.
Nor do I think our government is faultless. Home ownership is a proven way to build
wealth. It has been shown that
homeowners have a higher net worth, on average, than non-homeowners. But when bureaucrats tout the rate of home
ownership as a measure of economic growth and in response leaders push policies
to make home-buying easier (not cheaper, necessarily), they push unqualified
people into making that huge purchase.
Home ownership requires commitment and responsibility, and not only in
the financial sense. It is not for
everyone. Just as we will never have 0%
unemployment, we will never have 80% home ownership rates, and for good reason.
If you think we as consumers, the banks, and the government
have learned our lessons from the last recession and will not repeat those
mistakes, think again. Next week I will
cite some disturbing figures from the current economy that might presage
another recession.
Until next time,
Roger
“Then He said to them, ‘Watch out! Be on your guard against all kinds of greed;
life does not consist in an abundance of possessions.’” Luke 12:15 NIV®*
*Scripture quotations taken from the Holy Bible, New
International Version® NIV®
Copyright © 1973, 1978, 1984, 2011 by Biblica, Inc.™
Used by permission.
All rights reserved worldwide.
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