Whose fault is housing crisis? People/banks/gov't?

Magic 8 Ball wrote:

Youth soccer ruined capitalism... run up and down a field for a couple of hours, nobody scores, yet everybody wins!

Classic.

Caveat Emptor - let the buyer beware,.. Except when the buyer is a lending corporation purchasing a loan agreement, in which case it becomes "Vae victus" (might makes right). Which I believe is the only explanation for the asymmetry found in Flagpoles "blame" assignments.

If 90% of the blame goes to the borrowers, it cannot be because they had 90% of the information that their actions would lead to a macro-crises (as opposed to say, just an inkling that they were taking a personal risk).

And the banks, with all their MBA's, supercomputing clusters run by quant. teams and actuaries, were surely aware of more than 4% of the information as the others.

I can agree (and I think most others also) that borrowers shoulder the majority of the blame for their OWN personal misfortunes - but their individual losses is NOT what we are talking about. The crises affected the whole economy on a macro level.

I'd like to hear a rational argument about how borrowers should have been expected to know they were risking a problem with the entire economy rather than say taking a personal risk.

No individual involved in a transaction can be expected to act out of anything other than self interest.

However, a massive institution who has information / knowledge about the "big picture" in fact has far more responsibility to their shareholders than to ignore obvious risks.

Lets not forget that these banks which lent money to home buyers were also borrowers from their investors. Using flagpoles logic, they ought to be at least 90% responsible for the crises for taking thee bad investments that they should have known were bad, correct? Lets not forget they should be far more aware of the risks not only to themselves, but for the whole economy - unless they pay those billions to their managers and analysts just for fun.

Baldy wrote:

...I can agree (and I think most others also) that borrowers shoulder the majority of the blame for their OWN personal misfortunes - but their individual losses is NOT what we are talking about. The crises affected the whole economy on a macro level.

I'd like to hear a rational argument about how borrowers should have been expected to know they were risking a problem with the entire economy rather than say taking a personal risk.

No individual involved in a transaction can be expected to act out of anything other than self interest...

Good post, esp. the quoted part. That said- it sounds harsh- but the borrowers are getting what they deserve. Several years ago I noticed the outrageous mortgages people were taking- and spoke of it. These were before the job market curtailed, signing their entire paychecks to their mortgages. Lavish homes off $40K/yr. Trouble coming was inevitable over a 30-year period, and now many protest for bailouts. Yea... my stock went bad, so where's my bailout?? Makes as much sense.

Another thing is clear if you follow Flagpoles blame the borrower logic - one should not invest, because you have little recourse to recover from fraud.

Well perhaps a max of 4%.

Imagine you invest $100k to a S&L under good faith and with assurance of a AAA credit rating, only to find later on that the S&L collapses and the $100k is gone because Bernie (lets say the owner of the bank) was selling loans to dead-beats and re-packaging as CDO's as fast as he could to milk the housing bubble, which subsequently collapsed before Bernie could sell his share of the Savings & loan and retire rich.

Under Flagpoles logic, you could claim fraud for maybe 4% of your losses from the bank because that is the upper limit of their responsibility, even when it is clear that they knew the risk of who they were lending to, and that this did not match up with the ratings of the CDO's you bought.

This doesn't mean you would necessarily even get the $4k back (especially if it was not insured) - rather it means that you don't even have the *right* to sue for more than that as a defrauded investor. That is, if you believe the morality BS Flagpole and others are selling.

On the one hand, maybe there's an argument here that there is a legal blame for the lending institutions (quite the opposite to Flagpoles assertion).

Otherwise, one is arguing for pure capitalism, where micro-econ / invisible hand rules all, and un-trustworthy business/banks will all fail eventually due to lack of public (investor) trust, and all these problems sort themselves out with minimal carnage.

Unfortunately for the later argument, the real world is nothing like a micro-model with perfect competition. I think there is an obvious need for effective regulation which is missing now.

It is rather bizarre to read the WSJ where they argue that stifling regulations are killing business whereas the businesses are flush with cash despite low demand demand.

For some reason, I haven't clicked on the thread yet. It's 185 posts, so I don't think I'll be reading the whole thing. I don't know if it has been said but.....

"A person is smart, but people are stupid". Or something like that. I live at ground zero of the housing crisis, central valley of California. There is nowhere that has been hit as hard or taken longer to show any signs of life here.

This is kind of how it went down around here.

-Early 90's CA recession, housing glut in the valley, prices crazy low unemployment in high teens

-Late 90's Affordability index starts to level out. Prices come up to a level where the median priced home is affordable to about 50 percent of residents.

- Dot Com Bust, sends people packing from bay area. Although bay area housing prices tank, they are still way higher than out here in the sticks.

- Bay area commuters start buying up property in the valley, driving up prices.

- Land starts getting more expensive, so builders start building bigger houses (put more square footage on a lot so you can sell the house for more to make up for the increasing cost of land.

- The standard single family home becomes a 4/3 at about 2200 square feet.

- Prices are rising at a faster and faster rate every year.

- Average joe shmo says "I gotta buy now, or I'll never be able to"

- Increasingly lax lending standards allow joe shmo to buy a house he shouldn't be even dreaming of.

- 2005 housing market peaks here in the valley and starts to inch downward. At this point, the median priced home is "affordable" to only 3 percent of residents in Stanislaus County, yet until this point, people had still been signing their lives away, believing that prices would keep going up indefinately.

- People stop being able to finiance things on imaginary equity

- Retail sales drop off a cliff, people working at Target and trying to pay a $500,000 mortgage get laid off.

- Economy dives into the toilet.

That is about how it went down around here. I'm sure that in other hot spots such as Riverside, Las Vegas, Reno, Florida....it went about the same.

Obamatistic economics and government.

1) In my mind, those who need to resort to name calling really need to examine who the simpleton or prick is (and, I'm not calling you either, for I'm not a name caller, but some re-examination on your part is necessary).2) I don't understand why you are offended by personal responsibility. Anyone with a 5th grade education should have understood the perils of taking out loans with bad terms, taking out loans for HUGE amounts that they couldn't possibly pay back. Yes the banks are responsible...to the tune of 4%, because the banks can't sell a bad loan if there isn't a sucker out there to take it.3) Were YOU fooled and taken advantage of by a bank? If so, then I can see why you are angry, BUT it would STILL be 90% your fault. If not, then do you just think you are better than others? That would be egotistical. In my case, no bank fooled me into taking a bad loan, and that doesn't show I'm egotistical, because I EXPECT other people to not have been fooled too. Really, they weren't fooled...they were greedy, and they believed that because the bank said it was ok that it must be. That is the fault of the borrower. Banks should ALWAYS be looked at askance.I think the main disconnect here is that when I'm assigning 4% of the blame toward the banks, I've already got a TON of bad vibes about banks factored in. Banks aren't there to help anyone but themselves, and for me that is a GIVEN about them...this is why in this specific case, I can't give them more than 4% of the blame, because they are bad news to begin with...with this crisis, they were just a little more bad news than normal. The PEOPLE should have known better, but they were greedy. Greedy people only need to look for validation to move forward, and the banks gave them that. Not a good idea to look to a greedy entity (banks) to give you permission to do a greedy and potentially VERY risky venture.

webby wrote:

Flagpole wrote:

Well, I blamed them all, so you and I agree.

1) Banks - 4% of the blame.

2) Government - 6% of the blame.

3) People who took out bad loans - 90% of the blame.

I'd just like to add my voice to the chorus who think that this perspective is misguided and more than a little offensive.

Some were guilty of making bad choices based on ignorance, unrealistic dreams, or faith in what trusted professionals were telling them.

Some took what they knew about human nature, weaknesses and limitations of borrowers and investors and exploited it to make massive fortunes, with full knowledge of the implications of their actions.

If you want to assess the majority of the blame to the first category, you are a simpleton or a prick.

Mick Lovin wrote:

Banks lower the rates when economy is good.

The growth of mortgage brokers muddied the waters.

Many mortgage brokers hired un-educated salesmen (and women) and worked on commision, began making un-supported promises to many people who believed them. These potential home buyers got great rates. The eceonomy went south with over-sturated market. Rates went up. Ignorant consumers who listened to 'used car salesmen' mortgage brokers, watched their mortgage payments go up up and up until they could no longer make the payments.

The mortgage broker who sold them on the rate, is no longer around.

The consumers ran scared, and no real estate was moving.

This really wasn't about rates.

Rates did not go up.

They went down.

Most people did not have payments that went up.

They had payments that they couldn't handle in the first place.

For some it meant they couldn't keep up and the bank would miss on the cash flow and led to foreclusures.

But a big factor that hasn't really been discussed here, is that people now had less disposable income because their house payments were too high.

This led to less consumer spending and helped with the recession.

The economy was helped along with home equity loans but that dried up.

The combination of home prices being made artificially high with reckless loans and new homeowners being squeezed on their monthly budgets was a big hit on the economy.

Yes, there were mortgages where payments went up, but they were interest only and negative ammortization loans. Some had teaser rates that changed, but the language was written in at the beginning. Changing rates in mortgages and even ARMS did not cause any major increases in mortgage payments.

Traditional ARMs were OK. The exotic designed loans were not.