The Libs are Still Looking For Someone To Blame About Housing

January 24, 2011 § Leave a comment

Simon Johnson is the sort of liberal who really gets my blood boiling.  He’s still trying to figure out who to blame for the housing market crash, and of course finds the people who took out loans for houses they couldn’t afford to be innocent.

Look, it’s pretty simple:  the whole market is to blame.  People bought houses they couldn’t afford using loans they didn’t understand.  They didn’t engage in these deals just because they were dupes, though they were dupes, they engaged out of greed.  They saw other people buying houses and seeing profits of 10-20% per year, and they wanted some of that (never mind that there was no basis for the appreciation aside from irrational exuberance).  People who had homes they could afford and payments they could handle traded that security for a trip to the Bahamas or a fancy new rec-room.

Wall Street relied on bad risk models that told them they were doing the right thing, so they kept doing it.  Regulators had no reason to doubt the risk models, and if they were smart enough to understand them in the first place, they wouldn’t have been regulators, but would have been Wall Street investors.

A few actors on the finance side engaged in out-and-out fraud, just like a few on the home-buying side did.  A nucleus of hucksters on both sides lead their peers down a dangerous path that few understood, though the outcome should have been easy to see.  I wrote my first paper on the coming housing bust as an Undergraduate, when I saw a friend who made $12.00 per hour buy a home for $120,000 on a five year ARM (interest only payment) and a lot of confidence that he’d be able to refinance to an equal or lower rate ARM when the first term was up (i.e., “I’ll never have to actually pay for this house”).  If an undergraduate at a state school could outline what would happen to the market when buyers like my buddy went bust (bringing his neighbors down with him), I simply can’t believe that bankers and buyers couldn’t foresee the same thing, and I really can’t believe that professional watchdogs couldn’t see it.

The problem in the early 2000s was that I didn’t have a blog, so let’s stop talking about the three year old disaster and start talking about the next one.  People have been borrowing against their 401ks ever since they stopped being able to borrow against their homes (big surprise, stupid people don’t get smarter just because bad things happened to them in the past).  The 401k system has become a new tax deferred savings account for people to borrow against for vacations, consumer goods, college, home renovations…everything they had used their homes for in the early 2000s.  This borrowing has far reaching and very dangerous implications for the individual borrowers, and for society at large, as the losers on these bets against the future fail and have to rely on the social welfare system to provide for them in retirement.

The people who are borrowing against their 401ks are stupid.  I would like to point out, now, that the borrowers are the stupid party.  When we are debating who is to blame for the 401k crisis in 10 years, please refer back to this post; it’ll be a time saver.



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