Monday, September 29, 2008

Thoughtless Financial Meltdown

Unless you've been on another planet recently, you've witnessed some dramatic changes in our financial markets. And, unless you have super-human intelligence, you're probably trying to figure out what happened and why the government (read: taxpayers) suddenly has to come up with a bazillion dollars to fix everything.

Some parts of the current mess are complicated; what exactly is a subordinated, pre-accounted, sub-prime mortgage-backed, qualified risk-reversal, fiscal debenture? Well, it's something I just made up. Regrettably, that's pretty much how the financial instruments that contributed to this mess were created.

I'm far from an expert when it comes to understanding our monetary system, but it seems to me that the core of the mess we're in can be explained simply: greedy lenders sold high-risk mortgages to greedy or ignorant people who either (1) felt they were entitled to live "The American Dream" of owning a home and would figure out how to pay for it in "the future," or (2) were so poorly informed about what an adjustable rate mortgage is that they signed on for a loan that they didn't know they'd have to worry about in "the future." Bad news either way.

Then, a bunch of greedy Wall Street hot-shots decided to sell little slices of imaginary money (it would magically materialize sometime in "the future") based on those loans made to people who couldn't afford them. In other words, it was a giant Ponzi scheme. It worked until "the future" came around. Now.

I do have some sympathy for home buyers who were duped by aggressive and sometimes fraudulent lenders, then got hit suddenly with an interest rate that bumped up their house payments to an amount they couldn't afford. There are also people who have to deal with unexpected medical expense or extended unemployment and suffer financial difficulties as a result of situations that spiraled out of their control.

But there's another factor at work here for many highly paid corporate executives and many homeowners who just got caught off-guard because they didn't scramble out of their unfavorable loans in time: an irrational expectation that somehow they'd scoot through the day of reckoning unscathed.

Author Barbara Ehrenreich wrote an op/ed piece called "The Power of Negative Thinking" in the September 23rd NY Times:

"GREED — and its crafty sibling, speculation — are the designated culprits for the financial crisis. But another, much admired, habit of mind should get its share of the blame: the delusional optimism of mainstream, all-American, positive thinking. The idea is to firmly believe that you will get what you want, not only because it will make you feel better to do so, but because 'visualizing' something — ardently and with concentration — actually makes it happen. You will be able to pay that adjustable-rate mortgage or, at the other end of the transaction, turn thousands of bad mortgages into giga-profits if only you believe that you can."

I'm pretty darn tired of all the "just believe it and it will be so" proponents, too. I happen to have a positive attitude, but I don't tip over into delusional thinking. Ehrenreich believes that our society has become delusional, and I agree with her. But it wasn't always this way:

"Americans did not start out as deluded optimists. The original ethos, at least of white Protestant settlers and their descendants, was a grim Calvinism that offered wealth only through hard work and savings, and even then made no promises at all. You might work hard and still fail; you certainly wouldn’t get anywhere by adjusting your attitude or dreamily 'visualizing' success."

Eventually the day dawns when the piper must be paid. The problem is that those people who carefully and thoughtfully managed their debts get stuck with the bill, too. And, in this particular meltdown, there are financial industry executives whose past behavior might be deemed illegal who are looking at huge "golden parachutes" that, if added together, probably would total half the money that is supposed to be needed for the massive government bailout.

Is it any wonder that so many people are mad? Responsible budgeters feel ripped-off; uninformed homeowners who are losing their houses want to know what happened; even the people who felt entitled to maneuver their way around their responsibilities are angry that they didn't get away with anything. And is it any wonder that members of Congress are reluctant to rush to pass unpopular emergency bailout legislation that could lose them votes in few weeks?

Meanwhile, the financial sector crumbles around us with bank failures and consolidations, insurance company failures or near failures, brokerage collapses, and investor confidence in a ditch so deep that it's hard to see the sun. Credit is so tight that you might have to sign a formal agreement with your best friend to borrow twenty bucks. How can we figure this out?

I've compiled a very brief list of articles, in addition to Barbara Ehrenreich's, that I found informative and interesting:

NY Times: Behind Insurer's Crisis, Blind Eye to a Web of Risk

Washington Post: A Lesson the Markets Ignored

Wall Street Journal: The End of Wall Street

Financial Post (Canadian): You Can't Have It All

The Financial Post article is one of my favorites and I recommend it highly. Here's the sub-title:

"Don't blame politicians and bankers. The real cause of the credit crisis is a society that wants everything now."

Yes, there's plenty of room for a whole lot of people to take some personal responsibility in this unpleasant scenario, but why bother with that as long as there seemed to be an endless supply of money? Just follow the advice of the old Cajun song lyrics: "Laissez le bon temps roullez!"

Unfortunately, the good times rolled right into a brick wall.

© 2008 Cynthia Friedlob

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