Part I: Who's to Blame for the Crisis, or More Briefly, Everyone

I'm pleased to present the Logician once again. To refresh your memory, I had asked him to write to help us understand certain aspects of the financial crisis. He did so HERE. This is part one, so he/we will be writing more about this in the near future.

Edit: Blogger software is mucking up formatting and failing to paste things where they belong. Apologies.

*********************

A while ago, I promised our host the Brew Master I'd write at greater length on the economic meltdown. In short, the problem arose from decades of pride, greed, stupidity, shortsightedness, willful blindness, naivety, dishonor, selfishness, and pride. Remember the vulgarization and glorification of greed? Remember "greed is good" and "greed works"? Greed is the foundation of capitalism, they said. Of course, none of them ever bothered to read Adam Smith's classic, and they were too blinded by lust of money to acknowledge a difference between greed and self-interest. (Nice explanation, here.)

I digress. Let's go back to the beginning. Before we discuss the greedy, dishonest, stockjobbing, maneuvering, conniving, angling real estate & finance professionals, let's discuss the borrowers.

THE BORROWER

The naïve, the willfully ignorant, the dunces, the lazy, the gamblers

Sally and Bob want a house so they meet the realtor who helps them find their dream house in Los Angeles. At half a million bucks, it's a great deal, even has a porch! Bob does pretty well as a contractor, sometimes making more than six figures, and Sally pitches in. Between them they're pulling in $125,000+ a year. Sally figures she'll quit her job and become a full time mom after they qualify for the loan.

Sally and Bob have a mortgage professional working for them to get a loan, so it absolves them of all personal responsibility. Remember second grade math? Multiplication? The social program that prepares you for your responsibilities as a citizen? In today's world, remember that the borrower is always the victim. If I say I'm no good at math, it absolves me from the responsibility of doing second grade math to figure out if I can afford something.

For fun, let's do Sally and Bob's math for them. Hell, we don't even have to do the math, go here. Let's say I borrow the full amount (no shit, some of these loans were for 120% of the property value) of $500,000. In 30 years, Sally and Bob will pay $1.4M, or just under half of Bob's salary, if he can sustain his six figures. Of course he'll lose a $30K each year in taxes, if he even pays them. So taxes & payments together, Sally and Bob have $20K each year to live on in Los Angeles. It might be a tough decision, y'know? You have to hope you can maintain or increase your present salary for the next 30 years, especially if Sally plans to stop working after they qualify for the loan. It never occurs to Sally and Bob that the bank's requirement for demonstrable income is there because the bank knows that if the income isn't there, the house isn't getting paid off.

Fortunately, the housing market always goes up. Everyone knows this, it went up for over 20 years now, eh? Sally and Bob listen to a pep talk from their realtor, who tells them they can flip the house in five years to another buyer. Not only will they pay off the loan with the sale, they'll profit from the sale, maybe pull in a couple hundred thousand. You'd be a moron not to buy the house, they figure. It's not hard to find Bobs and Sallys. You can find a hundred financial exhibitionists on the internet bragging about these schemes (like here).

Alberto and Rosa wanted a house too. These poor migrant workers have a deeply moving story. Struggling as $15,000/year strawberry pickers, they pool with other migrants to qualify for a $720,000 house in San Francisco. Yes, that's right, really. Short story this time – they're victims to predatory lending. Yeah, it'd take over 48 years just to pay the principal, so long as they can pay their entire annual salary to the mortgage payments for 48 years. But this is division, it's neither fair to ask them to do their own division nor expect them to ask anyone else with a 2^nd grade education. Alberto and Rosa probably don't speak very good English, and they probably have limited education. Based on everything that happened at this time, I'd guess they were presented a SISA loan application (Stated Income/Stated Assets, or "what I write is what I make, no proof required" loan). The broker likely reported their income as $200K, told them everyone does it, it's cool, and they went ahead and signed.