Are predatory lenders to blame for the mortgage catastrophe? Or individual borrowers, who ought to have known better than to take out money they couldn't pay back? According to David Brooks, it's both, and they both emerged out of America's debt culture. Excerpt:
Decision-making -- whether it's taking out a loan or deciding whom to marry -- isn't a coldly rational, self-conscious act. Instead, decision-making is a long chain of processes, most of which happen beneath the level of awareness. We absorb a way of perceiving the world from parents and neighbors. We mimic the behavior around us. Only at the end of the process is there self-conscious oversight.According to this view, what happened to McLeod, and the nation's financial system, is part of a larger social story. America once had a culture of thrift. But over the past decades, that unspoken code has been silently eroded.
Some of the toxins were economic. Rising house prices gave people the impression that they could take on more risk. Some were cultural. We entered a period of mass luxury, in which people down the income scale expect to own designer goods. Some were moral. Schools and other institutions used to talk the language of sin and temptation to alert people to the seductions that could ruin their lives. They no longer do.
Norms changed and people began making jokes to make illicit things seem normal. Instead of condemning hyper-consumerism, they made quips about "retail therapy," or repeated the line that Morgenson noted in her article: When the going gets tough, the tough go shopping.
McLeod and the lenders were not only shaped by deteriorating norms, they helped degrade them. Despite all the subterranean social influences, there still is that final stage of decision-making when individual choice matters. Each time an avid lender struck a deal with an avid borrower, it reinforced a new definition of acceptable behavior for neighbors, family and friends. In a community, behavior sets off ripples. Every decision is a public contribution or a destructive act.
And now the reckoning has come.
I wrote about this a bit in "Crunchy Cons": how in a north Texas county that's the most Republican in the state, quite possibly the nation, and certainly one of the wealthiest, people were going bankrupt at unusual rates because they were spending money they didn't have to keep up with the Joneses. For many of these folks, putatively conservative moral and religious convictions did nothing to stop them. The cultural context in which they lived, with its acquisitive values, was stronger than what they say they believed in.
This is part of the reason I believe the more important work of conservatives is cultural, not political. I don't mean conservatives should abandon the political world, not at all. But we have so much work to do in changing this culture, in ways that politics can't really touch -- and in ways that we can and must do, whether the next president is named McCain or Obama.
By the way, over the weekend the New York Times ran an excellent, plain-spoken explanation of how the country got into the economic mess it's in now, and how bad it's likely to get. Highly recommended. Excerpt:
Who's to blame?There is plenty to go around.
In the estimation of many economists, it starts with the Federal Reserve. The central bank lowered interest rates following the calamitous end of the technology bubble in 2000, lowered them more after the terrorist attacks of Sept. 11, 2001, and then kept them low, even as speculators began to trade homes like dot-com stocks.
Meanwhile, the Fed sat back and watched as Wall Street's financial wizards engineered diabolically complicated investments linked to mortgages, generating huge amounts of speculative capital that turned real estate into a conflagration.
"At the end of this movie, it's clear that the Fed will have to care about excesses," Mr. Barbera said.
Prices multiplied as many homeowners took on more property than they could afford, lured by low introductory interest rates that eventually reset higher, sending many people into foreclosure.
Mortgage brokers netted commissions as they lent almost indiscriminately, offering exotically lenient terms -- no money down, no income or job required. Wall Street banks earned billions selling risky mortgage-linked securities around the world, aided by ratings agencies that branded them solid.
Through it all, a lot of ordinary Americans borrowed a lot more money then they could afford to pay back, running up enormous credit card bills and borrowing against the value of their homes. Now comes the day of reckoning.
As one prominent economist quoted in the story says, the only question now is whether we'll have a bad year, or a bad decade. And, Peter S. Goodman, the author of that Times piece, turned in another good example of explanatory economic journalism on Sunday, investigating the question of whether or not the United States of America is too big to fail economically. Excerpt:
Still, as Mr. Tilton and others are aware, one fundamental reality continues to offer assurances that foreigners will still buy American debt:In the global economy of the moment, the United States itself is too big to fail.
The logic for that assurance goes like this:
The American consumer has for decades served as the engine of world commerce, using borrowed cash to snap up the accoutrements of modern living -- clothes and computers and cars now manufactured, in whole or in part, in factories from Asia to Latin America. Eliminate the American wherewithal to shop, and the pain would ripple out to multiple shores.
Globalization, in other words, allowed China and Japan to amass the fortunes they have been lending to the United States.
But globalization also emboldened American capitalists to take huge risks they might have otherwise avoided -- like borrowing to erect forests of unsold homes from California to Florida, delivering the speculative disaster of the day. They were operating with bedrock confidence that money would never run out. Someone would always buy American debt, delivering more cash for the next go.
And this same interconnectedness appears to have reassured regulators in Washington about the health of the American financial system, as they declined to intervene against highly speculative lending during the real estate boom. Mortgages were being distributed to investors around the globe, and so were the risks, the regulators reasoned. Anyone who bought into that risk would have a strong interest in seeing that the American financial system stayed upright.
In other words, in the estimation of people in control of money, the United States cannot be allowed to collapse, just as Fannie and Freddie cannot be allowed to fail. Too much is riding on their survival.
The central truth of that logic still seems to be apparent as the Treasury keeps finding takers for American debt.
So the government offers its rescue of the mortgage companies, and foreigners keep stocking the government's coffers. "They don't want the U.S. to go into the worst downturn since the Depression," Mr. Tilton says.
But all the while, the debt mounts along with the costs of an ultimate day of reckoning. Debate grows about the wisdom of leaning on foreign credit, and about how much longer Americans will retain the privilege of spending and investing money that isn't really theirs.
Bailouts amount to mortgaging the future to stave off the wolf howling at the door. The likelihood of a painful reckoning is diminished, while the costs of a reckoning -- should one come -- are increased.
The costs are getting big.
In other words, it seems to me, the world is betting against the law of gravity.
This is going to get real interesting.
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Are we reaching the point where students from lower-middle to middle class families will have to ask themselves very seriously whether or not they can really afford a college degree?
Yup. Large family = downward mobility. Unless more socialism is instituted.
As for who is responsible for this 'culture of debt', that's easy. It's Nixon who let irresponsible indebtedness become a practice. Under Reagan it became a culture.
AnotherBeliever - my 11:32 post wasn't so much a reductio ad absurdum as a sober assessment of imperialism's feasibility & consequences. I do believe that tribute-via-nuclear-blackmail would be ill-advised & probably harmful to Republic.
IMHO, our (massive) dependence on oil & other imports is problematic because it renders the health of our economy dependent on events overseas. Our dependence on imported oil, for instance, gives us an economic incentive to take measures aimed at 1) keeping the oil price down, and 2) maintaining a smooth flow of oil from exporters. Given that such measures may include military confrontations with powers willing & able to disrupt these goals, such dependence thereby ensures our continued entanglement in the territorial disputes of Eurasia. I don't like such entanglements, so I support energy independence: without it, "blood for oil" will continue to be an unspoken aspect of our foreign policy.
[In fact, even if I supported a neocolonial program of conquering the entire Islamic world & remaking it in our image, I'd _still_ support energy independence as a near-term goal, since it would give us greater strategic flexibility.]
As to how...in the abstract, I agree with you: reduce consumption on the one hand, increase domestic energy production on the other, and meet up somewhere in the middle.
I don't understand the point about the Japanese as a nation saving too much. What is bad about that?
The more people save, the less they consume. If you're dumping money in savings accounts, you're not spending it on clothes or luxuries or movie tickets. If enough people do this, consumption falls. This isn't necessarily bad; for a country with our trade deficit, it's probably necessary & inevitable. If consumption falls enough, however, not only will imports be zeroed out, but the supply of goods & services produced by domestic producers will exceed aggregate demand. You end up with excess capacity, falling prices, lower profits...and ultimately closing factories & job losses.
Unless you export the excess production (as Japan et al have done over the years), but this has its own problems. E.g., what happens if various markets for your imports experience downturns, or go protectionist, or require massive capital imports to keep consuming your goods. Export-oriented economies are, to some extent, held hostage to other countries just like debtor nations like ourselves.
The FED has to take the biggest blame. Ron Paul is right. We've gone from dotcom to housing and now it looks like oil is the current bubble, caused by the debasing of our currency.
A look at the chart for the housing bubble shows a once in a lifetime insane rocket to the moon rise, which will now be followed by a very painful drop and correction. None of this should have happened. Tons of pain and misery to line the pockets of Wall St. scum.
The bailouts are for the money men, a raping of the American taxpayers. The banks, hedge funds, and mortgage houses that took on bad debt SHOULD BE ALLOWED TO FAIL. They richly deserve to go belly up. But no, they're getting bailed out, which will further destroy the dollar, penalize savers, and cause rampant inflation.
The left also is to blame for pressuring lenders to discontinue redlining, disregarding credit scores, allowing "stated income," basically throwing money at people who should NEVER have been given loans.
The GOP is equally culpable for claiming authorship of the mess and calling it "The Ownership Society."
Just plain STUPID all around.
Our "leaders" suck. ALL of them were asleep at the wheel.
We're gonna have mucho pain now for much longer than anybody is prepared to consider. That bad paper is going to take years to work through the system.
I'm sickened by this nonsense, to think that our government allowed housing(clearly the largest and most expensive of life's necessities) to become a speculative orgy.
Like someone else said, bailout our auto industry! Screw Wall St.!
I say again, if you're eligible, enlist. They'll pay back your school loans. You might even be better off enlisting first - the New GI Bill looks like a pretty good deal, compared to the one currently in effect, which has not risen to match inflation, let alone tuition inflation (which has been geometric, if not astronomical.) Sure it's not easy, and yeah, you'll be forced to put on hold your own case of rampant individualism... wait, are these actual drawbacks? Okay, the only (and obvious) drawback is war. But hell if the U.S. Army and its wholly owned former militant subsidiaries haven't started to make something ethically viable, if not exactly honorable, out of the whole Iraq situation. Afghanistan, remains to be seen...
But you'll be debt-free.
MI Guy, I can see what you mean about being serious about your point. But I'd still stand by the point that what we have now is nearly the same set up - it is only different in degree. And that should give any thinking American pause. Part of my main complaint with policy since Vietnam is that we are real fuzzy about defining what is necessary to our defense, and even vital to our economy, without getting into the vital interests of a few corporations' bottom lines. Free trade is great, until it is so free we are serving it, and it begins to lead policy. If we've not completely crossed the line, we've veered pretty close to it. And the thought of innocent lives lost for such a mercenary cause makes me nauseous.
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