Blame for this economic crisis

Excellent post, Rod. I had a job in collections a few years ago (from 2002-2006) and I could see this problem unfolding. Most people just struggled continuously, and if something like a major medical expense came along the wheels just came off the wagon and they were forced into bankruptcy.

I remember exactly one couple who decided to scale back. They sold their 3000 square foot house before they were in foreclosure, moved into a more modest rental house in a more affordable neighborhood, and used their decent income to attack their debt. The great thing about all of it was that it removed the fear of creditors from their lives. They started answering their phone, returning messages, and having productive negotiations with their creditors. When finally talking to the husband I could hear the relief in his voice and it was a really great conversation. He was ready take care of his debt and together we came up with a plan that he could stick with. This was a key to success in my collection experience, approaching it from a problem-solving (not a nasty) perspective and arriving at a shared solution. I remember that account really well, mostly because I was really inspired and happy that someone finally "got it."

I keep thinking back to what Spengler said about how the Europeans, due to their demographics, had billions of capital to invest, and that demand for investment and higher returns is what fueled this whole mess. But what would have happened if the American saving rate had been higher? There would have been even more billions of capital competing for high-return investments, and arguably this situation would be a whole lot worse.

Could the problem be that we as a society simply have more money than we know what to do with? Is there such a thing as too much wealth?

That 60 Minutes piece was quite biased. The problem isn't that there was no regulation, it's that we are at a point where the government cannot regulate. Being liberals though, they have their story line and they made the facts fit their script. Evil greedy Wall Street people are to blame, please elect Obama.

Other Jim: "That 60 Minutes piece was quite biased. ... Being liberals though, they have their story line and they made the facts fit their script. Evil greedy Wall Street people are to blame, please elect Obama."

Great point. It occurred to me that we're talking about the wrong network's Sunday night analysis piece. Got home last last night and happened to turn on the tube to an hour-long "special feature" on FNN about the causes of this financial crisis. They pointed to excesses on Wall Street but the FNN piece did not spare, however, the culpability of Fannie Mae and their friends in Congress, including Senators Chris Dodd, Chuck Schumer and B.O. (who have received huge sums from Fannie Mae executives over the years). I know that FNN is the recipient of a lot of snide remarks on this blog, but give them -- and the folks who produced last night's hour-long analysis -- credit for being "fair and balanced."

If you absorb flawed data from biased sources ("60 minutes"), you'll arrive at flawed conclusions (soak the rich, blame Wall Street ONLY, more government regulation, higher taxes). It's an example of GIGO: Garbage In, Garbage Out. One solution: stop wasting your brain by watching "60 minutes."

Tragically -- and perhaps criminally -- the public school teacher's union works overtime to choke off any support for parochial schools...

Reaganite, that's quite a heavy allegation there. Can you point me to any citation or source that will describe that in any detail? A leg up on the best key words for a search would be sufficient, with my thanks.

My skepticism is based upon a lack of familiarity with NY public ed law, so I'm looking to remedy that lack. Here in PA state law mandates delivery of services no matter where the child is enrolled. Just as an example, special ed services not offered by a parochial school must be provided by the public school district, including transportation between the schools... something which, around here at least, is usually missing from the billboards proclaiming that "this parochial school is saving the taxpayers $X per child."

Reaganite, before you go giving the Fox channel accolades, I suggest you once again read the legislation of the Commodities Futures Modernization Act of 2000. The CFMA specifically banned regulation of credit default swaps. (The main focus of the "60 Minutes" presentation.) Please note the group of Republican Congressmen and Senators that introduced this legislation on December 14, 2000, and passed it without debate. In my opinion, the best short analysis of how we arrived at this place has been provided by Barry L. Ritholtz in his Barron's article of September 29, 2008, titled "A Memo Found in the Street." He lists eight specific events, in a short two page article, that have created this financial condition.

I think this has been discussed on this blog before, but the point remains valid; we cannot set up one set of rules for the rich and powerful to live by and then expect the rest of us not to absorb that set of rules as the norm. When the masters of the universe types were riding high, the rules for them were: do whatever you need to do to make money, take whatever you can get, looking out for the long term is for chumps where there's so much to get today, if you can make money using someone else's cash that makes you a genius, etc. You can't have this sort of ethic at the top and then turn around and tell the little people: be good little people, save your money, buy with cash, live modestly, etc. It just isn't going to work. It's a problem from the top to the bottom. Yes people are responsible for their own choices, but as conservatives, we know that culture is extremely powerful. Our culture and our choices have both been pushing the other into ever uglier and more dangerous waters.

Rod, a *million* thanks for pointing out that much of this housing / personal debt has been run up by families looking for better school arrangements for their children. Elizabeth Warren in The Two Income Trap is one of the *few* personal-finance writers to point out the economics of homeschooling, and how it frees couples to seek out cheaper housing stock in lower-quality school districts (and thus save enormous amounts of money.)

Not everyone is going to homeschool. Not everyone is going to send their children to parochial schools. Private education (last I saw any stats, in Forbes Magazine) hovers around 8-9% of all school age children. So the reality is that parents who want better public school experiences for their children are often going to find themselves looking at either expensive inner-ring suburbs (where I live) or far-flung McMansion-ized exurbs.

One pernicious result of the housing boom was that cheaper, more modest homes in better school districts were "worth more dead than alive;" i.e. they were bought and then torn down to build McMansions. So even though families might have *wanted* to buy that old frame farmhouse or somewhat shabby ranch, they were crowded out by the developers and speculators.

The school situation was like gasoline on home-price fire. It really needs to be said.

It's kind of hard to blame people for not saving when, thanks to reckless Fed policies, the interest rate on savings is so low; in terms of real dollars it has often been negative for the past 2 or 3 decades. Part of the "great deleveraging" that we are going through is going to have to be higher returns on savings, else the lenders are not going to have any money lend and stay within leveraging limits.

Erin Manning: My grandfather built the house my mother grew up in. He and my grandmother bought the land, and the house was all his doing. They didn't owe anybody for it, and that was, in terms of human history, a short time ago; moreover, it was the way most people lived. The very idea of taking a thirty-year mortgage just to have somewhere to live would have been repugnant to most of the people in their town....

I appreciate what you are saying.

When my husband's great-grandparents built their farmhouse, they still had the original 1830s smokehouse on the property (and they used it almost until the property was demolished to make way for a highway.) But the turn-of-the century version had a summer kitchen, outdoor toilets, no electricity, and no running water (instead, a pump out in the yard.) Yes, you could do that then. Those systems were added later, as time went on. But any new structure has to have them, especially if you want to live in a city or suburb.

Unfortunately, today, unless you live in a rural county / unincorporated area in *some* states where there are virtually no zoning or housing code regulations, building your own house on the cheap is just about impossible. There are many building codes, all designed to force people into using builders and putting in materials/systems they might not even want. Some of these involve safety; some simply involve making more work for plumbers and electricians.

People are going to cling to their notions of "property values" and "propriety" as long as they can. Even if we go into a steep depression, you will still see people fight to keep trailers (for instance) out of their neighborhoods, even though they can serve as low-cost housing. However, even trailers need to be hooked up to sewage and water systems. (You start neglecting those little details, and we get cholera - which last I looked, still is incurable.)

I agree that in general it *is* repugnant, that a man cannot build his own house on his own land, with wood and stone from his own property. One could say that over-regulating real estate (to benefit developers and speculators) is as much a factor in the price run-ups.

As far as public education goes. I know throwing money at things won't automatically fix them. However, you can't ignore the disparity between the per capita expense paid per child in those nice suburban districts, and those children warehoused in disintegrating inner city schools. This is because we fund schools by property tax. And precious few people in inner cities own real estate. Can we think of a better way to fund things than property tax? A consumption tax, a value-added tax? I'm not sure what the solution here is. Private education plays a role here, and programs like Teach for America.

And yeah, I know. More equalized school funding is not going to fix the inner cities. There's areas in need of cultural rebirth and family renewal. Changing the tax code is not going to get that for us. But not every child in the inner city is dysfunctional, or hopeless. Plenty of them have the aptitude to rise above their circumstances, and the gift of our Republic has always been that possibility. If these kids had the same quality and caliber of teacher and curriculum, and the same security as those suburban schools, then the ones with that aptitude would stand a chance. And those people not from broken homes and generation-after-generation poverty might be willing to stick around in affordable housing if they could send their kids to such a school. Plus we'd be less dependent on oil.

We drink nothing but bottled water here. And I have gotten cavities because of it, I think, as I never had any before I deployed to Iraq and when I came home I had three. I seem to have gotten off topic somehow...

Yeah, I remember the pallets - pallets! - of bottled water sprinkled throughout various base camps.

I wonder if bottled water might've actually been curative for me. Medical (mis)diagnosed me with cavities prior to my deployment, and pulled my wisdom teeth in preparation for filling them. And then decided they could remain unfilled 'till after I got back Stateside. (WTF?) Then, after months of nothing but bottled water (I don't do coffee or soft drinks), the dentists conclude that my fangs are entirely free of caries. I'd always chalked this up to simple incompetence, but now you've got me thinking of alternate explanations...ah well.

Time spent out in the field, along with occasional muj attacks on the facility supplying our base with water, gave me a new appreciation for the luxuries of indoor plumbing & running H2O.

Rod @ 0913:So it's not our fault because no one who is fit decided to run for office? That seems like weak logic to me. Certainly some who were more fit ran and were defeated.

And not being all-seeing is also no excuse for the decisions we as a society have made. A little common sense would have gone a long way. When people are getting mortgages that by any reasonable measure were completely unrealistic (for example, interest only) you didn't have to be an expert to see that a correction was inevitable.

I'm not claiming to be perfect. I didn't do anything to stop it, even when I knew it could come to no good end. However, when this bailout came up I could see that it would not solve the problem, and did what was in my power to stop it. I called and emailed my federal elected representatives, and let it be known in no uncertain terms that I disagreed with the bailout and with the way it had been reworked as a pork delivery vehicle. One office hung up on me and the others might as well have. My actions didn't stop it, but if everyone who agreed with me had taken these actions perhaps it would have stopped it. The fact that while people claim to be against it, they didn't act to stop it is an example of why we as a society are responsible for what is coming. Another clear example is even though people claim to be against the bailout, they will re-elect the fools that voted for it.

No federal or state incumbent will get my vote this year. That applies to people who are trying to change offices, such as McCain and Obama. I don't know who I will vote for but if I say I am adamantly opposed to the bailout it is imperative that I vote that way. It's not OK to hold your nose and vote if a bedrock principle is violated. That's the behavior that got us where we are.

Hi, AnotherBeliever, thanks for the heads-up that cholera is treatable. Still, I don't think it's something we want to risk breaking out, especially if there are a lot of demands on the medical system.

Re public schools: However, you can't ignore the disparity between the per capita expense paid per child in those nice suburban districts, and those children warehoused in disintegrating inner city schools.

Most urban districts have a greater per child allotment than suburban schools (in the St. Louis area, it is about $11,000 per student, versus about $7,000-$8,000 in some of the "better" suburban districts.

The money in inner city districts comes from the state (i.e. state taxes) as well as the city district. In our state, "better" suburban districts are forbidden by state law from receiving any substantial amount of state tax money, and are made to fund their districts almost entirely from *local* property tax revenues - while at the same time sending tax $$ to urban districts.

In some states like Texas, property tax money is "pooled" and redistributed to the districts which "need it the most." These are usually very poor-performing districts with a lot of problems.

There are other issues too - even though the courts have pretty much backed off of mandatory school desegregation plans, the fallout of these plans (some of them 30+ years old) have soured many middle-class people on public schools within the cities altogether. Until it became too expensive to operate the busses, St Louis for instance used to almost automatically bus white children to largely black neighborhoods, in order to achieve racial integration goals. (The district at the time probably had 20% white children at most.) The city district was quite adamant that "racially unbalanced" schools would not develop in various neighborhoods (i.e. that white children wouldn't cluster in city neighborhoods that were mostly white.)

I don't know what St. Louis is doing now - the district has kind of imploded - but the first lawsuit was filed almost 40 years ago, and it radically changed the face of the city schools. And that's just one city.