Saturday, October 23, 2010


I believe this entire mess we find ourselves in, politically, economically, and socially, is mainly caused by a misplaced sense of responsibility. People find it much more convenient to assign blame to some disliked individual or entity rather than those who actually took the actions which lead us to this disaster.

Think of the banks in our nation right now. I am willing to bet that did not cause a warm, fuzzy, sympathetic note to sound within your soul. Ask around about the banks; the responses will not be positive. You will probably hear something about how those greedy bankers gave out bad loans to make money and put us all in this miserable situation. What you won't hear is that those banks often didn't have a choice, thanks to government intervention like the Community Reinvestment Act. You won't hear about how the government effectively backed up sub prime mortgages through Fannie Mae and Freddie Mac, seriously distorting the market, making those sorts of loans profitable and hence encouraging the banks to act in a way they otherwise would not have. And yet it happened.

You'll almost never hear about how the people who signed those loans were responsible for this predicament. From the way people speak of this crisis, you would believe homeowners were forced at gunpoint to take the houses and mortgages. A loan is a contract, a promise; millions of people broke their promise and then promptly blamed the banks they screwed over for the economic recession.

We live in a confused time where many believe society and the state have the responsibility to improve our lives rather than the individual. This makes it all too easy to avoid responsibility for one's own actions and to pin bad times on unpopular scapegoats who themselves had little to do with the mess at hand.

A great wave of irresponsibility is killing this country. No one wants to admit they shouldn't have signed the mortgage or lease, or gone to college; no one wants to admit social programs are failing, that we can't afford them, that jobs in that sector should be cut; always find someone else to blame who didn't make the decision; always affix blame to those who did well, as if one could not do well unless they had done wrong. Until we fix this problem, there will be no solutions to the crisis we face. Let each be responsible for himself and we will soon see improvement. Give a man an excuse and he will take it.

"But it was the greedy profit motive that brought us into this mess!" some will undoubtedly say. Let's think about that for a second. Imagine an economic system (we'll call it "free market") where people make decisions based on their own greed and where all transactions are voluntary (nobody can be forced to do something). A person with no job and no assets tries to get a loan from the bank. The bank examines this person, realizes giving a loan will almost certainly lead to losing money, and promptly decides not to issue the loan. Guess what? Almost no sub prime mortgages are going to be issued by greedy banks, meaning there is no sub prime mortgage crisis.

"But they got around that by selling those mortgages, breaking them up into securities!" Ok, let us assume the bank tries that. They go to a potential investor and say "I'm considering offering this loan, but I want to hedge my bet against the risk of the buyer defaulting. If you buy a part of this mortgage, you will receive a chunk of the profit." The investor (also greedy) examines the buyer just like the bank did to determine if the buyer will actually pay the loan back, sees the buyer couldn't, and decides to turn down the chance to buy the security. Guess what? No sub prime mortgages, no sub prime mortgage mess.

"But this crisis is proof of market failure, that the market system doesn't work!" Nope. With the profit motive, it would be almost impossible for this sort of crisis to occur. But occur it did. Was the housing market really "free?" As we saw above, it was not. The government regulated this market and interfered with government sponsored enterprises that acted not on the profit motive but on the supposed "common good."

Let us start again. The man with no income and no assets looks for a mortgage. This time, the government seeks to increase home ownership among the poor, because it helps create a more equal America and it is the right thing to do socially. The government requires the banks to make a certain amount of mortgages out to low income people. VoilĂ , sub prime mortgage.

And the government also creates giant, government run corporations (backed by the Treasury) to issue securities for these loans. Banks can now offer loans with little risk to themselves. And the government will set interest prices low, which encourages people to build and buy houses. Now everyone can get a house, creating skyrocketing demand and increasing the attractiveness of investing in housing which is not backed by the government. That is, right until the number of buyers starts drying up.

Once demand starts falling (with a durable good like housing, this is inevitable; people do not need to buy a new house every day), the value of those houses starts sinking. Since artificial demand had propped up prices very high, those prices start sinking very far and very quickly. Investors begin losing money at a rapid rate, and businesses and individuals who invested in housing find their net worth plummeting. Banks and those government sponsored enterprises begin taking huge losses on these houses. With their cash on hand falling, the credit market seizes up, as banks cannot or will not lend right at the same time businesses and people who lost money investing need it the most. Panic begins to set in; stock prices drop like a rock, people are laid off due to falling consumption, creating less consumers and more pressure on local governments. And we end up about where we were in 2008.

The profit motive is hardly evil and we cannot pin responsibility on those who wish to do well in life. This mess is largely the responsibility of well intentioned (but dead wrong) social "reformers" who believed they could fix perceived problems in society with the force of the government. What they failed to realize is that the profit motive keeps toxic assets out of the system. Those who cannot buy a home on their own probably do not deserve one; either they have not produced enough wealth to own one or they have frittered it away on other things. That they do not own houses is not a societal sin; it is not the responsibility of the wealthy, of banks, or of society to increase home ownership, but that of the individual who wishes to own a home.

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