The Blame Game

OK, I think I am getting to the breaking point with all of the finger pointing when it comes to this financial crisis. We all know the usual suspects when it come to the guilty. Wall Street, government regulators, predatory mortgage agents, banks, etc. These groups are certainly the most obvious of the culpable. The less obvious are the regular folks who went ahead and purchased homes by leveraging themselves to the point of bankruptcy.

I think the problem was insidious because it was very gradual in its nature. Little by little, as the lending standards loosened, and people on main street just like the ones on Wall Street began to adjust their actions to the new landscape. This meant it was actually acceptable to take out second mortgages to finance the renovation of a new kitchen. It was acceptable for somebody without much business experience to use their homes as collateral to raise capital to start a small business. It goes on and on. It became a money grab as people thought of new ways to consume as available cash was everywhere.

I think when a person making $50,000 a year qualified for a mortgage to buy a $600,000 home and decides to go ahead with the purchase because they believed the value of it will rise to $800,000 in a few years at which point they will sell it and downsize with a tidy profit before the mortgage rate resets really knows exactly what they are doing and cannot possibly claim ignorance and pass the responsibility to the banks. To do something like this one must already have an understanding that there is considerable risk being taken or they will not plan on taking such drastic actions before their rates increase to an unaffordable rate. Perhaps they did not understand just how big the risks were because in recent past the landscape has temporarily shifted where nothing could go wrong.

For average folks to claim that they were not educated enough or were swindled by cunning bankers and mortgage brokers is really just passing the responsibility. I don't think this is very constructive because as long as people blame somebody else for their mistakes, a valuable lesson will not be learned.

This is analogous to the gambler or alcoholic who blames everyone but themselves for their transgressions.

Lets be perfectly clear, there is plenty of blame to go around. Sometimes you might have to start with the person in the mirror.

The Bailout, The Stimulus

So now that we are in the middle of the global financial crisis, governments are scrambling to attempt the remedy the situation. Since we are in the internet age, problems have to be addressed by yesterday or the natives will become restless. Therefore, governments - notably the US Government have been engaged in a campaign to save the economy.

The question becomes this, how can governments faced with an economic crisis of unprecedented scale and complexity be expected to tackle this issue in a intelligent, pragmatic way? I think the answer has been partially answered already with the seemingly haphazard fashion that governments have responded so far.

The latest theory is to throw massive amounts of money into the economy with the hope that it will stimulate it. I am certainly not smart enough to figure out if this will work or not. But I think in the big picture sense this credit bubble was created in the first place by massive over consumption by everyone around the world.

A few years ago, when I was still back in New York and was observing the real estate bubble growing, what struck me was that the real estate around the world were also growing at an unreasonable pace. In the newspapers all you read about was that countries as varied as China, Ireland, UAE, England,India, Poland, Vietnam, etc were experiencing even bigger real estate booms than the US. I read stories of economies in those countries booming and its citizens enjoying an accelerated rise in standards of living. All of this consumption were directly or indirectly related to the cheap credit available at the time, and that is how interconnected we all were. Therefore, spending was more and more dependent on the house of cards named credit.

Now that credit has been effectively cut off, I think we are in a process of returning to normalcy. The problem is that from where we came from this is a drastic change of the credit landscape. The actions taken by governments around the world to lower interest rates and throw money into the system in hopes of stimulating the economy is the obvious short term answer to cushion that fall. The problem is that I hope that all of these actions will not act as a catalyst to return our economies to the broken model that pervaded globally in the past 10 years in the long run. I am not sure if the answer is to get people to buy more cars by lowering the standards of issuing credit again by stimulating the banks. Maybe its better to just go with the scorch earth way. Clean up everything in sight and start anew. Maybe everyone has to suffer in the short run and take a step back before moving forward again.

The other problem that we don't have is time to intelligently and carefully consider these issues in this day and age of the internet before people become agitated. Patience is a virtue that not many of us have these days.