Sub-Prime Surprise?

I don’t understand why everyone is so surprised by the sub-prime debacle. Let’s look at some decades-old factors which have gotten us where we are today:

1. Banks actively encourage people to buy more house than they can afford. All the reasonable people I know who have purchased a house in the last 15 years have been shocked by the amount of credit for which they were approved by the banks. We’ve been in our house for 11 years, but even back then most banks were willing to lend us 50% more than we knew we could afford on a month-to-month basis.

2. The President of the United States told people it was their duty to spend more to help the economy. Bush’s position during the economically shaky period after 9/11/2001 was to encourage people to spend more to prop up the economy, regardless of whether or not they they had more to spend. (Hey – why not? – the government does it every day!) Unfortunately, people listened and in 2005, the U.S. saving rate fell to 0%. More spending equals less savings equals less cushion for the inevitable downturns in life.

3. ARMS. Adjustable rate mortgages are profit centers for banks and bum deals for home owners. The only time an ARM makes sense is when you pay it off before the rate bumps, but no one does that. This modern “ARMS race” has made the market more active as people who normally would have held their mortgages for 30 years are now refinancing every 2,3, or 5 years looking for the best deal, resulting in unnecessary extra closing, appraisal, and title fees.

4. Financial Secrecy. Schools teach math, but not personal finance (at least, not on a high school level) and discussion of money within families is often as taboo as politics or religion. And not only do we NOT discuss finances, we often make monetary decisions based on what our parents did without knowing the financial reasoning. So if you can’t learn personal finance at home or school, where do you learn it?

So now banks and mortgage lenders are is in a bind of their own making. George Bush appears to be uncharacteristically responsive to public opinion, deciding yesterday to help bail out people who are in financial trouble. He’s probably working to help his big business pals, because he’s obviously not listening to the chairman of the Federal Reserve.

Bernanke maintains that it is not the government’s responsibility to bail out either individual borrowers or financial institutions who made bad loans. He said that it’s not “appropriate…to protect lenders and investors from the consequences of their financial decisions.”

Bad choices have consequences. What a concept! So what do you think? Do you as a taxpayer feel it’s a good use of your money to bail out people who made bad financial choices?