While I did work on Wall Street for several summers (in the days of liquid lunches, when you could still smuggle a stripper into a training session), and had a father and friends in the business, I am no financial genius. But I can tell you the three leading causes of the current financial crisis or meltdown: greed, envy, and ignorance.
Let us start with greed, and Mr. Gordon Gecko of the 1987 movie "Wall Street":
Brings a tear to the eye, doesn't it?
That was 21 years ago, but it seems like just yesterday (or a few months ago).
Btw, when I talk about greed, meaning "a selfish and excessive desire for more of something (as in money) than is needed," I'm not just referring to the Gordon Geckos of the world. We are all, at least most of us, greedy about something, like wanting a nice or nicer house, a nice or nicer car -- or clothes, lawn, whatever.
And many (if not most) of us, if offered a seemingly quicker, easier path to getting whatever it was we wanted, would run not walk down that path, ignoring or trying to ignore any moral and/or financial hazards along the way, particularly the inconvenient truth of not actually being able to afford or pay for whatever it was.
I've already mentioned (in a different post) my friend who despite having a decent-paying job ran up large credit card bills then declared bankruptcy -- and blamed her woes not on spending more than she made but on the evil credit card companies. She is/was far from being alone.
And now we are dealing with the repercussions of a similar problem, people who bought more house (or any house) than they could afford -- and it is or will be us the taxpayers, not just these homeowners, who will be paying the price or are. (Btw, I don't blame all of these individuals. Where were the naysayers, the people to tell them "No, I'm sorry, but you can't afford that," or, "You need to put at least 10 percent down and make three times your monthly mortgage payment if you want that house [or condo or co-op]"?)
The other day, I was having a conversation with the man who built our deck. Turns out he was in the mortgage business a while ago. And we got to discussing the sub-prime lending/mortgage fiasco.
I don't know about all of you, but every time the spouse and I have gone looking for a mortgage or to refinance one, we've had to produce a mountain of paperwork, been grilled by strangers wanting to know everything about us, and had to put down at least 10 percent. (Oh, and my dad had to co-sign/guarantee our first mortgage, even though the spouse and I, who were newlyweds at the time, both had jobs and savings and were able to put down 20 percent, this on a house that was by no means big or fancy.)
So anyway, the deckman, who works very hard and has built up a nice business building decks and selling spas and hot tubs, tells me that he used to meet with folks all the time who wanted a mortgage but had no or little means of paying it off -- and he would flag their application. Only to have his boss tell him to just put it through. The deckman found this very discouraging and moved on. And we know what happened to those people who got those interest only and/or subprime adjustable rate loans they couldn't really afford, don't we?
Which leads me to ask the question: When did renting become a dirty word? While owning is nice, there is no sin in renting (at least as I recall from the Bible). Yet someone clearly sold the American public a bill of goods (or bill of something) that made them/us think that we were somewhat "lesser" if we didn't own a house.
Which brings me to envy, that "painful or resentful awareness of an advantage enjoyed by another joined with a desire to possess the same advantage," and another deadly sin (one which I have been guilty of more times than I'd care to admit). Envy gets more people into more trouble than just about anything else (except for maybe greed and ignorance).
We see our neighbor has a shiny new BMW, and we want one, and make ourselves miserable for the wanting. We see a girlfriend got a big honking diamond ring from her boyfriend or spouse and we want one (or feel inadequate because we don't have one or ours is smaller) and make ourselves miserable. We hear the new guy just got a raise and promotion and we wonder how come we didn't get a raise and promotion. The list goes on and on.
How much happier the world would be if, to paraphrase Sheryl Crow, instead of having what we wanted, we just wanted what we've got?
I often wonder, maybe I would be more blissful if I stopped reading all the time (especially this week). Yet ignorance, or lack of knowledge, can be very dangerous, as I think we have learned -- or are learning (and I'm not even discussing the Iraq war or the difference between a Sunni and a Shi'a!).
Raise your hands out there if you understand exactly how mortgages and complex financial instruments like CDOs (Collateralized Debt Obligations) and CMOs (Collateralized Mortgage Obligations) work?
I grew up on Wall Street (metaphorically), and like to stay on top of things and keep tabs on my financial portfolio, but a lot of the stuff I've been hearing about the past 5 - 10 years has stumped me, and caused me to dig and ask questions.
How many ordinary Americans out there do you think know what CDOs or ARPs (for Auction-Rate Preferred securities or bonds) are -- or knew before this year -- or know how their 401ks are invested?
While I would love to type with confidence "Never invest in anything you don't understand," I doubt that most of us have the time or energy to truly master the intricacies of investing, though if the last 20 years have taught us anything, we should certainly devote more time to understanding what our tolerance for risk is and how much risk (read LOSS) is acceptable.
Maybe now that the chickens have come home to roost, or to the slaughter, and all traces of lipstick have been wiped off the pigs, we should take a little time to educate ourselves, or re-educate ourselves, about financial matters, and to admit that greed and envy and ignorance extract a high price. I also believe it is high time the government reinstituted measures like the Glass-Steagall Act of 1933, to better protect investors (especially the smaller ones), so we don't find ourselves in a similar mess another five or 10 years from now.
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(and I'm not even discussing the Iraq war or the difference between a Sunni and a Shi'a!).
I can't believe that you still don't know this! Sunni was the short husband with the mustache and the nasal voice. Shi'a was the taller, glamorous wife with the better voice who made fun of Sunni!
Good question about renting. I rented until well into adulthood, and people (well, relatives anyway) were always telling me what a waste of money it was and that I should buy a house. I didn't want a house! I'm not handy. I hate yard work. Renting isn't a waste -- you get a roof over your head, after all.
Hubby and I rented when we first got married, and it was nice not to have to spend every weekend fixing something. It only lasted a year, though. The thing that finally drove us to buy our 1st house was that it was actually cheaper to buy than to rent at the time. That, and we wanted a dog.
When did the days of liquid lunches end?
We’ve been talking a lot about causes for the current situation and you are on target – but its nothing new. Think back to England in the 1800’s… Anyway, my thought is that as long as we remain human, i.e., greedy with short memories, this kind of stuff will continue happening!
good timely article
this last sentence re consider:
"....I also believe it is high time the government reinstituted measures like the Glass-Steagall Act of 1933, to better protect investors (especially the smaller ones), so we don't find ourselves in a similar mess another five or 10 years from now. "
the government being involved in Fannie and Freddie (one a Depression era company and another during the LBJ days) was a big, big mistake
there is no constitutional authority for the federal government to be in the home loan business
freddie and fannie were massively overleveraged.....25-1 or 30 to 1....maybe higher?
they also became political banks for Congress: Frank Raines made 75 million (plus or minus) and Janet Gorelick (about 25 million) for running these enterprises into the gutter
I have no problem with people making money....none, but not when they drive the companies into essentially worthless enterprises....these two above began the massive leverage, then they go into the wilderness with their money without any repurcussions
though we have Congress discussing baseball, there are no hearings on these guys making millions while leveraging up these enterprises
these were essentially government backed businesses....but they were run by the politicians as piggy-banks for themselves, for campaign contributions plus low cost interest rate loans
we want less government intrusion and interference upon businesses--especially the government involved in the home loan business
fnm and fre had about 50% of all home loan outstanding in America
that's absurd, and Congress, when they created these shams, had no constitutional right to do so--despite what FDR and LBJ argued at the time
they interfered with individual's liberty with the iron fist of the federal government
yes, no question many on Wall Street took advantage--and they should not be let off free
but the culprits are in Congress years ago and today who kept the shame going.....that seized control of a vital private business that should have always been in the hands of the people
another good point you made about renting
anyone who actually thought they 'owned' their home when they only put down 5% or 0% were not owners--they were renters, in theory
they had zero (almost) skins in the game--and why would they not mail back their keys to the mortgage company?
I'm no economist so I will tread carefully here. In response to the most recent and prolific comments:
I missed the news about Congress taking over Fannie Mae and Freddie Mac. I believe that was an Executive Branch action so kindly direct your ire in the proper direction.
Also, you cannot flip back and forth in time to indict a private (until recently) corporation for having originally been administered by the federal government.
I am also shocked - shocked! - to hear of a huge private corporation making contributions to politicians.
Finally, do you want the government out of private corporations' business or do you want hearings on the internal workings of same? Limit one choice per customer, please.
On a more serious note, I am strongly tempted to steal the fantastic "Sunni and Shia" bit. "I got ululating, babe..."
And now we are dealing with the repercussions of a similar problem, people who bought more house (or any house) than they could afford -- and it is or will be us the taxpayers, not just these homeowners, who will be paying the price or are.
Hmmm... Sounds fiscally conservative. Perhaps you, like me, find yourself in a political conundrum: fiscally conservative, socially liberal. Where do we independents go? Is there a candidate for us? Where is the Independent Party? Perhaps Leiberman/Weiker/Perot/Anderson?
Thanks for all the great comments! Keep 'em comin'.
As to the last Anonymous comment, I am and probably have always been fiscally conservative and socially liberal (to a point). I am against running up deficits and incurring debt and all for getting government out of people's private lives -- and other countries where it wasn't invited.
Btw, not that you asked, but I am also, in theory, for privatizing social security, so that we taxpayers get out what we put into the system, instead of it being a pyramid scheme. But I worry that people will make bad financial choices and lose their savings, much like we are seeing right now. So not sure what the solution is -- definitely NOT Lieberman (or Perot).
Very nice piece, J. I *knew* greed and foolishness had
something to do with all that--but that's about as far as my understanding went. Of course, *knowing* that, and having all of your money sitting in a bank like,
say, WaMu, are two different things. *gulp* Meanwhile, what's all this about Shia Labouf?
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