Earlier today, I read a fine post by Larry McGee. In his post (which I would suggest you read because it illustrates how a failed closing affects more than just a couple of people), Larry mentions that the correction to real estate prices can be very painful. And, in the comments, one commentor mentions that the current financial crisis is an outgrowth of the housing bubble and crisis.
I agree... and I don't.
I think that the financial crisis IS based in the housing crisis and the "sub-prime mortgage meltdown". I think that in many ways, the credit crunch was brought about by the SPMM... but there isn't a cause and effect relationship there... rather, they are both the product of an imperfect storm.
- Lack of corporate ethics
- Lack of leadership in the private and public sector
- Lack of personal responsibility
- Failure of individuals and companies to save
- Desire for instant gratification
Each of these items is a flake on the snowball that our business and financial system is currently stuck under...
The credit crisis isn't because there isn't money to lend... it is because nobody trusts the balance sheet of anyone else. Companies are reluctant to loan to other companies because too many of the loans of the past were not as advertised. One certainly can't blame them for failing to trust when trust has been dashed...
The signs of the impending SPMM were getting clearer in the financial community... and in the halls of government. Some members of the Congress were calling for new oversight to the GSEs (Fannie and Freddie), but others blocked attempts to slow their growth. The President tried to bring up the issues... but wasn't able to make his voice heard. Corporate executives and those that were in a position to alter corporate behavior knew that there was a problem, but failed to act. In short, instead of leading, these people, from the President to Members of Congress and CEOs all just knuckled under because it was easier than fighting.
Home buyers bought houses that they knew they couldn't afford. Real estate agents sold people houses that they were pretty sure people couldn't afford. Mortgage brokers and bankers gave people loans that they knew would go bad. Right down the line, people passed the buck... The real estate agents said "if they can get a loan..." and morgtgage brokers said "if they tell me that is what they make..." and the buyers said "if they are willing to let me have it...".
But now we are starting to get to the root causes...
We have become a society built on consumption. We lack a balance. We have a negative savings rate... there is no money in the bank, but instead we carry our lives as a loan balance. That isn't sustainable. And isn't like the government hasn't asked for it... and the companies that are getting slapped in the face in the current financial doom asked for it. Credit has been easy, and savings has been punished. Spending above and beyond our means has been promotoed, encouraged and rewarded. From the tax code to college tuition plans, assetts are punished... savings is punished... investment is punished.
And that brings us to instant gratification. As a society, we have knuckled under to the pressure and we are running the rat race full speed. Instead of seeing the car at the dealership that we would love to own, and saving and scrimping until we are at a point we can afford it, we took another line on the house or just leveraged a little more until we could justify it. We cashed out on the house in order to add a flat screen and a butt-kickin' stereo. We didn't save for the vacation... we charged it. When we got a great piece of news, we hit the expensive sushi house for dinner. When we got a bad piece of news, we hit the expensive steak place. We rewarded ourselves before we earned the reward.
Housing is at the center... but it isn't the root.
Housing is where the credit crisis surfaced. But it could have been cars, it could have been college loans. It could have been credit cards. It could have been business loans... It could have been anything. But now, houses are where it surfaced...
The causes are WAY deeper than sub-prime mortgages. They are way deeper than a housing "bubble." The causes go to the root of the society that we have become. In fact, one could make a case the trace it all of the way to individuals ceding responsibility to the government or to their employers for everything that is uncomfortable. Health insurance, retirement, housing, food... All of these are becoming something that society doesn't want to "deal with", but rather something that someone else should handle.
Until that changes, we can count on financial strife. We can count on instability. We can count on the beast being ready to bite us in the utt as soon as we aren't paying attention.
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