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Financial crisis (or, when the shit hits the fan)
Written By Ozone42 on Sep. 19, 2008.
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So it seems we find ourselves in a bigger and bigger mess with the economy. There are several factors compounding to make life today interesting, but I do believe the biggest fault lies in the US mortgage and credit "crisis."
Yes, I said "crisis." I don't mean to belittle the severity of the situation. Obviously, we are not in a happy place. Rather, I wanted to belittle all the absurdly stupid decisions that brought us here. While I know that collectively people tend to make stupid decisions, the reach of this situation boggles my mind.
How did we get into this credit crisis? Because a huge amount of people allowed it to happen. This is not a mystery, nor is it an honest mistake. It is absolutely the fault of hundreds or thousands of individuals making plainly bad — or at least plainly dangerous — decisions.
Buying homes when you can't afford them. A great number of people hold (at this point held may be the correct word) sub-prime mortgages. That is to say, they took adjustable rate loans. Either they were confident the rates would not rise, felt they'd be able to handle the rise, or were flat out lied to by their loan officers. I don't think we'll ever know the breakdown of which case was most often true. I understand desperation, and I understand the desire to own a home. I want to attribute ignorance as the main factor with this fault, but I simply do not know if it was genuine ignorance or willful ignorance. Certainly, this is not the crux of the matter. It may just be a symptom. It makes it clear that people in the US do not understand money.
Crooked Loan Officers. We've heard of the pressure and assurances that were given to the recipients of these loans. I don't doubt this was common. If you're trying to sell a house it is very easy to ignore the reality of the situation and focus on getting the sale closed. Most sales people either get commission for the deals they close, or it directly impacts their performance rating. If you don't close deals you get paid less or are looked on less favorably when it comes to review time. This inside-out business perspective is systemic across the world. Employees are blinded to the bigger picture, and to their customers because of the way they are trained and paid. I have no problem with ruthless competition, but I do have a severe problem with acting without acknowledging what is right. The whole "not my problem" attitude people seem to take on when they are in fact causing the problem is ridiculous. I would equate this to selling thirsty people seawater to drink.
Greedy lenders. I've got to preface this one. I am all for greed, just not in the way most people look at it. The desire to acquire wealth can be a wonderful driving force for progress, innovation, and quality of life, but only if it's pursued in a rational manner. In this case, it was not. Having a certain amount of sub-prime or other risky loans in your portfolio makes sense. They can be very profitable, but the potential profit must be balanced with the potential risk. This was not done, Systemically. Again, it's typical of the corporate world. It's not my job. It's not my problem. I don't have the power to ask a question or make a change.
Idiot CEOs. I don't think this one needs a lot of explanation. It falls back to the previous examples of failure to think. I understand the temptation to maximize profits for a short period. You look good, make buckets of money. Unfortunately that does not make you a CEO, it makes you an opportunist. If you do not have at least some form of contingency plan for the risks you take on, you have already failed.
Every failure I've listed here comes down to myopia, and avoidance of responsibility. Every single level. The financial situation we currently find ourselves in was completely avoidable at any of these levels.
Thanks guys.
I'd like to believe that what we're seeing is not human nature. I'd like to believe that somewhere along the lines we've made some mistakes that we can find and correct that have led to the idiocy we see. Whether we've created this culture of ignorance and responsibility avoidance, or whether it's something natural, we have to fight it.
I don't think anyone is responsible 100% of the time. I don't think we need to be. But please, the next time you're going to make a big decision think a bit about the implications down the road. The next time your boss asks you to do something stupid, question it. Just because you were trained a certain way does not mean it is right. Just because everyone else is doing it does not mean it is wise. Challenge yourself and think about the actions you take. Just because an action will give you an immediate benefit does not mean it will give a lasting one.
Ozone42
Written Sep. 19, 2008 / Report /
More on how people shirked responsibility and kept digging the hole deeper
Tyme
Written Sep. 21, 2008 / Report /
I read what you said shortly after you wrote it and I agree...but I didn't want to say "I agree" but honestly, you summed it up really well. :)
I wish more people would do some serious research. I know many that trusted the loan officers but those people aren't neutral - it is in the loan officer's favor to get that mortgage. If a buyer can't understand the legalese and the implications of their decision(s) on their own (meaning they aren't trusting a stranger to guide them) the truth is: maybe they aren't ready to buy the house.
I don't think people are realizing how much this is going to impact us. This standard of "the government will fix it" only makes matters worse. And unfortunately there are going to be more companies and banks failing...watch 4th Qtr. 08 and 1st Qtr. 09. It's not going to be pretty when many more losses will be forced to come to light.
Mark Cuban made this post today and he points out that the strategies both presidential candidates have proposed are completely worthless due to the what happened this week. He points out that privatized Social Security is completely unrealistic considering that major corporations are not fiscally responsible.
Ozone42
Written Sep. 21, 2008 / Report /
While I do agree, that this really points out the lack of fiscal responsibility that can exist in private corps, it's not the rule. It is far more common than it should be, that's for certain. The current bailouts will not do anything to decrease that either, in fact they may encourage more of it.
The mind numbing bit is that it is absolutely in the best interest of the corporations to be fiscally responsible. I think a big part of what we're seeing is a get rich quick — now get the hell out mentality. Some of this is due to corporate culture with things like golden parachutes and the like. If you can cut through all the bullshit, it is outright malfeasance. The corps aren't evil, but people in them are willfully making decisions to get a quick benefit at the cost of others, or the cost of the company itself. Most people can recognize this for what it is: self destructive behavior.
I don't think there's an easy solution, but it's at least clear. Corps need to hold their officers and boards responsible for the decisions they make. You don't look the other way, and you don't say "it's not my problem." It is your problem, at every level of the organization. In some ways it just comes down to honesty. If you know your boss is ripping off customers you should not stand for it. It might cost you your job, it's true, but evil only propagates when we fail to act. The more of us look the other way, the farther it will spread.
I think most people know when they are faced with right and wrong, I just think a lot of us don't listen to ourselves as much as we should.
Ozone42
Written Sep. 22, 2008 / Report /
A term I'm hearing a lot today is regulatory malfeasance.
I'm not sure I understand it. Because there weren't rules/laws in place to prevent this situation, and thus CEO's, Managers, Boards, etc abused the system... it is the fault of the regulators?
Perhaps there was a lot of lobbying/payola type behavior I'm unaware of but that seems ridiculous. I don't need a law against murder to know it's wrong. I don't need someone to outline for me that pushing someone with low income into a dangerous situation is immoral.
cooper
Written Sep. 26, 2008 / Report /
Regulation which were in place not follow and a huge warning sign around 18 months ago ignored.
I am understanding the banks actually gambled by giving loans with no margins, evidently before my time there was a twenty percent down rule which decreased the margin significantly thus lowered the gamble. They did the same thing with credit, no longer requiring proof of being able to pay, I mean giving credit cards to people with no means of income is not just the fault of the person with no income it is the fault of the institution who is putting public money at risk.
Everything I've read says there were regulations which were not followed
there were a lot of OTS regulators laid off over the past 5 years, so in that regard the eye was off the ball, the regulations though did not give full transparency.
I admit to finding this whole thing extremely confusing, and the more I read on it the more confusing it gets. Though my grandfather was a banker and I am sure he is rolling over in his grave about now.
auburn
Written Oct. 19, 2008 / Report /
It's true I don't clearly understand this mess either. It seems there's enough responsibility for many thousands of people and systems. The part that is a source of shame to me is what the process will likely mean to the next two generations. My elderly parents who are not risky financial people at all and bought their home decades ago lost several thousands of their retirement dollars of stocks. This was money they saved, one dollar at a time. They were children in the Depression and it was a leap of faith for them to trust banks.