Economy In Freefall? Don't Blame The Financial Barons

Economic columnist Robert Samuelson argues today that a recent Dartmouth study of certain real estate statistics over the period of the recession may, "if they hold up to scrutiny by other scholars," may debunk the idea that the main cause of the real estate bubble/collapse was "the abusive peddling of mortgages to the uninformed poor."  Samuelson magnanimously admits that such abuses may have been "part" of the problem, though.

Well, that's a lot of hedging but it almost appears that Mr. Samuelson just didn't have a topic to write about today.  Or, perhaps he is being disingenuous.

First, I suggest the use of the word "poor" in the above sentence is a red herring.  It never occurred to me that abusive lending was aimed at the poor.  No, it was aimed squarely at the middle class.  Lenders seek money, and the poor by definition don't have much of that.

Samuelson says the real problem was the undeterred rising expectations.  People began to believe that the housing market could only go one direction.   This is, certainly indisputable (duh!) and is the crux of the matter.   But that's where greed comes in.  It seems to me that by and large, lenders consciously stoked the fires of the bubble.  Far from reminding borrowers of the reality that what goes up can come down, financial marketers irresponsibly invented new forms of loans -- the loan with no down payment; the loan whose principal was greater than the value of the property; the loan whose payments exceeded the ability of the borrower to pay; and the loan that permitted the mortgagor to pay only the interest for long periods of time.

So if Samuelson says (as he does) that "it's tempting to blame misfortune on someone else's greed or dishonesty," I'm sure we can say amen to that, but most of us would go on to add, "especially when it was." 

In a last shot of disingenuity, he offers the view that if Wall Street "were the only problem," the solution would be stricter regulatory policing.   That seems a truism, but it's certainly an unrealistic one.   Bankers and their allies in Congress lost no time in working to roll back nearly all legislated restrictions the Obama administration sought to put in place.   And they continue to do so today. 

So let's grant that in the end, the individual is responsible for tending his own garden.  He who loses sight of the obvious principal that market gains can't last forever may deserve his fate.  Yet shouldn't such dreamers at least be able to rely on financial advisors to have reminded them of the risk, rather than making it easier for them to indulge in it?    

 

Comments

[PiedType]

I would change that quote to "the abusive peddling of mortgages to the uninformed." The truly poor probably would never have considered applying for a home loan. But gone were the days of banks scrutinizing your employment history, financial records, etc., and carefully judging your ability to pay off your mortgage in the years to come (assuming you had the 20% down payment to begin with). They were peddling loans to anyone ill-informed enough to sign up.

I was in the market myself at the time. A brand new spiffy condo complex was under construction just a mile from my son's home and I went in to look around. The builder offered me a special this-week-only, no-doc, 3% adjustable rate mortgage when the going rate on a conventional loan was 6.7%. With a three-day grace period to back out of the deal, I got carried away and signed. Later, with a little time alone and some distance between me and the slick saleswoman, I realized that of course I couldn't afford it. That low interest rate would go up considerably in 3 years, but my income certainly would not. So I canceled the contract.

With similar deals being offered everywhere, it's easy to see how people who'd never owned a home before, never qualified for a mortgage before, got sucked into deals they couldn't afford. Especially when the banks, which used to be so careful to check out an applicant's ability to pay, were instead eager to push loans onto any warm body they could find.

[JHawk23]

Yes, exactly. If Samuelson wants to argue that some responsible lenders did exist, I suppose he can't be entirely wrong. But they must have been a tiny minority.