Monday, April 13, 2009

House of Cards: The Economic Down Turn and the Impossibility of Playing the Blame Game

Recently, I watched a MSNBC special entitled "House of Cards," about the origins of the current recession - the bursting of the "housing bubble." I assume that the special is based on the book by the same name, which I am going to read as soon as I can. It was quite an interesting, and maddening, special. Of course, I am not an economist, so the following essay will not be written as if I were one. Rather, I want to focus on something others may have missed during the special: while the media and public are wont to blame someone - government, wall street, consumer greed - for our current financial predicament, the special never gets involved in blaming anyone in particular. In fact, the special seems to make an implicit point that, like a house of cards, no one piece can be "blamed" for sending the edifice crashing.

But first, here is my attempt to summarize as best I can thespecial's depiction of the fiasco. The government (Bush administration and Congress) had a noble idea that we should do all we can to promote home ownership, and particularly minority home ownership. Thus, the federal reserve encouraged lenders to find 'creative' ways to give loans to those they might not otherwise give loans to. And that they did. An example of one type of new mortgage offer is depicted here:

“the pay option negative amortization adjustable rate mortgage.” It was designed to help first-time homebuyers who couldn’t actually afford the cost of the loan. Those homebuyers would have the option to pay only part of the interest they owed each month. The unpaid interest was added to the total amount of the mortgage. As a result, the mortgage balance increased; instead of the mortgage being paid down, it was getting bigger.

Now, as stupid as banks were to concoct such doomed-to-fail schemes, consumers were stupid enough to sign on to them. Thus, home ownership went up, home prices went up (because 'loose' loans made it possible to raise home prices as there was now more demand) and banks went lower and lower, only to push home prices up and.... etc.

So who do we blame? The two most common suspects are the banks who created such hairbrained schemes and the government. Generally, those who have left-leaning sympathies blame the former and those with right-leaning or free-market symapthies blame the latter. Even though I have free-market sympathies, I blame both and neither (and can't understand WHY no one thinks to blame consumers for where they spend and misspend their money!).

The problem is this. Each group is responsible for a certain piece of the puzzle, but wiithout willing participation by ANY of these three groups, the party would have been cut short and the housing bubble wouldn't have soared to gargantuan and unjustified heights. Yes, the government cut interest rates and encouraged banks to do what they did, but if banks or consumers didn't take the bait, the point would have been moot. Yes, banks practiced predatory practices, issuing loans to people they knew could not afford the loans they signed on to, but the consumers eagerly joined the action. And yes, the consumers were stupid and greedy, but had the banks not played to that stupidity and greed, there would have been no transaction.

And this, to me, is one of the beauties of capitalism. In a centrally planned system, it would be easy to blame one party (the government and its economics board). But also, since all economic decisions would be centralized, mistakes like this one would be easier and more frequent, as there would be fewer checks and balances. In the current case, THREE distinct groups rather than one economics board) had to make the exact same mistake in order for catastrophe to strike. The problem is not that one group screwed up (which is all that would have to happen to send a centrally planned economy into a tail-sprin), but we all screwed up.

And here is the other great thing about capitalism. Were the president familiar with capitalism, he would recognize that one of its assets is that it punishes the guilty. If capitalism were allowed to work, the guilty banks would be penalized with bankruptcy and the stupid and greedy consumers (who bought houses they could not afford knowingly) would be homeless. (Of course, the government - just as guilty a party as the rest - would not be punished becuase they can just keep stealing money. from the public to stay in buisness.)

Thus, while some see capitalism as encouraging greed, if it were allowed to work in this situation, we would see that greed is just as often punished in a capitalistic economy.

But, really, the point here is that those intent on playing the blame game need to explain how the group they decide to blame could have done their damage without the willing complicity of the other two. I don't see how that could happen, and that is why I blanche at any suggestion that there is A guilty party (other than all the government and bank officials as well as consumers who let greed, rather than temperance, dominate their thin heads).

But give Obama seven more years, and this will surely not be the case. The next time the economy goes awry, we will be able to blame one party - maybe the nationalized banking comission, or the centarlized economic planning comission. Until then, I like not being able to blame JUST ONE party.

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