Are the Poor Being Unfairly Blamed for the Financial Crisis?
October 13, 2008
The basic argument of Sasha Abramsky’s piece in The Guardian last week is that people who got into bad mortgages are not to blame for our current financial mess. He says that the system screwed them into buying homes they couldn’t afford.
And he’s right about a lot of individual points within his article. It’s true that the bundling and securitization of mortgage debt created an unsustainable situation. Lenders could reap huge rewards — in the form of closing costs and other fees — at the front end of a loan, then package the debt and sell it to another lender. There was no incentive to make sure that the borrower could actually pay back the loan. What’s more, there were probably a good number of lenders who assured people that they could afford loans they really couldn’t, based on the assumption that housing prices would continue to rise indefinitely.
Abramsky concludes that conservatives are blaming the poor for the mess, when in fact the blame rests on Wall Street. But he fails to recognize that there can be more than one guilty party here.
Just because those who couldn’t afford their mortgages may have been encouraged to spend beyond their means doesn’t absolve them from responsibility. If someone shows up at your door and asks you to buy into a pyramid scheme, he may be a charlatan, but you’re a dupe.
To be sure, we need to put regulations into place to prevent this crisis from repeating itself. Lenders should be required to obtain proof of a borrower’s ability to pay back a loan. Securities need to be much more transparent, so that purchasers know exactly what they’re getting. The government needs to publish educational material and public service announcements educating people about saving, spending and debt. Public schools should mandate a life skills class that encourages responsible financial behavior.
But even in the absence of these measures, people are still responsible for their own actions. Those who speculated and lost on risky investment schemes took a risk and lost. It was their risk to take. They should have saved. They should have given more thought and care to their financial picture before buying a home. But they didn’t.
Now, our commenter, Patrick, thinks that my argument about how much to save before buying a home has priced 99% of Americans out of home ownership:
You just priced 99.9% of Americans out of home ownership - not because people can’t save, but because our economy is based on them not saving THAT much…If people saved that much, consumer spending would plummet, and let’s face it, we HAVE built a consumer culture where people are encouraged, nearly to the point of brainwashing, to spend money on stuff they probably don’t need rather than save it.
And that’s why the system needs to change. We are the most wasteful country on the planet. We use up resources like they’re inexhaustible. We buy a bunch of junk — or worse, luxury goods priced for the very rich — on credit, and then turn around and lament when we can’t afford a home of our own.
It’s possible to have an economy where people purchase consumer goods and still save responsibly. It requires disciplined saving of set amounts each month, coupled with intelligent investments in low- to moderate-risk portfolio items such as bonds, certificates of deposit, and slow-growth, time-tested mutual funds. It requires not relying on credit to purchase a flat-screen television when your old one still works perfectly well.
Would a drop in consumer spending harm the economy in the short term? Absolutely. But it would build a stronger, more resilient economy in the long term. Imagine how much better off we would be if people had used credit responsibly in the preceding years.
I’m with you Teresa - yes, I’d love to have a house, but my income and savings is not yet what it needs to be to make that a reality. Unfortunately, I’m sure I could already buy a house (even in the current market) - I’d probably even be ok. But, if anything were to happen I’d run into trouble fast.
I hope that this recent financial “crisis” will help people recognize that being careful with money is important. You are the only person responsible for what you purchase. Time for America to realize that having more isn’t always better. Heaven forbid we slow down on consumption a little bit. Ugh.
Teresa - you got what I was saying exactly. This:
Is a perfect summation of my view on the subject.
I’ve been hearing alot of guff about whose fault all this is, and what bothers me about that is that it’s EVERYONE’s fault, from the dupe who took a terrible loan to the shark who sold it. Everyone got dollar signs in their eyes and their brains shut down. And this is what happens when people behave that way.
Nice post. Oh, I’m in Seattle now, did I remember to email you? My brain is jello…
It doesn’t end any differently. What you’re talking about is Japan in the late 80’s. A country with massive personal savings that went through a real estate bubble. There the real estate bubble played out using longer term loans giving the false perception they could afford the house because the payments were reasonable. The live of the loans in some cases were 100 years which looks insane in hindsight but practically it is no difference than a 0 interest loan. You expect to flip the house in less than 5 years so the amount of principal you pay is essentially zero.
That’s my observations but I am no expert on the Japan real estate bubble. In the end greed always wins over slow and steady when you have a large enough pool of people. It’s self reinforcing where as slow and steady isn’t.
As for how much the poor play a role in this. The truly poor who were scammed by fraudulent mortgage brokers I have a great deal of sympathy for. While ignorance is no excuse if you have enough ignorance that you wouldn’t even have tried this unless someone came knocking on your door I’ll forgive you. Plus from their personal finance sense it makes total sense. If your financial situation is crap and no one would have lent to you, taking advantage of a fool willing to lend to you on the off chance you might not fail makes sense. What’s your worst case scenario? you go back to no one willing to lend to you? seems rational to take the risk.
For the lower middle class and up I totally agree. They had the ability to be educated before taking the loan. They took the risk and now whine that the music stopped and they have no place to sit. Sorry that I have limited sympathy for. They had more to risk and got greedy. No different than the guy who buys stock on a hot tip and doesnt understand why he didnt get to sell at the top.
But the biggest part of the blame falls on the wall street firms. They have other peoples money that they have a responsibility to protect. They completely lost site of that in the game for more market share and more profit. Somewhere along the lines the goal of maximizing returns resulted in protecting assets being completely forgotten.
I also have sympathy for me, and my wife.
We stuck with a mortgage that we could afford, far below what we were told we “could” borrow.
We are living within our means.
And now (based on $840B bailout spread among 120M households) we’re stuck with an additional $7,000 in debt thanks to our federal government.
Our financial “crisis” is NOT really a crisis. It is NOT the second coming of the Great Depression. We are experiencing a Financial Panic — one that is FAR more dangerous, and one that is borne of a pitiful lack of economic information and faith in free markets.
Banks that did stupid things NEED to fail. Only then will we re-establish fiscal trust and start trading at a mutually-recognized level of value. Anything else is merely prolonging the bubble, and tacking on needless debt as we go along.
Corrections are painful. But it’s not like we’re talking an amputation here. We WILL if we continue down the path of trying to manage/massage/band-aid everything in the economy.
…and Ken. You’re neglecting the fact that the “greedy Wall Street firms” were reacting to a government mandate. Lenders were explicitly told how much of their credit had to be extended in the subprime market in order to prove that “redlining” wasn’t going on. Those who refused had limits placed on the lines of business they could explore, and their ability to grow (placing them at an extreme competitive disadvantage.)
This entire mess has a long string of blame that is non-partisan and very well-intentioned, but is the latest and greatest shining example of the Law of Unintended Consequences. Blaming this on Wall Street Greed is like blaming the US Mint for the coin flip that didn’t go your way. (The Mint is involved in making the coin, but there were a LOT of hands downstream that factored into the result.)