This has been a continuing topic in the news for a few months now, and there are many explanations out there, but what do you think? Who is most to blame for the problems in the credit market? I touched on it briefly earlier this week in an analysis of recent market volatility, but as requested by a comment in one of the previous polls, I am going to refrain from giving my answer here as to not sway the voting. After votes are cast and some comments generated, I’ll chime in with my opinion in the comments.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
I have been in my home for 10 yrs now. We have been through hard times an refinanced our home to pay off bills due to the loss of income but I have never missed a payment. I think the problem goes back to not READING all of the print on the paper before you sign your live away. Bailing out all these people is not fair. Where is my help I want to move to a new house out of the city but I know I cant carry a 300k loan I can only afford a 170k loan try to find a home for that price in a nice area. The problem is when people cant get it the smart way with a fixed loan they turn to an alt a loan to get what they want NOW. It is a way to keep up. I bought my house when I was 22 yrs old. Let me tell you it was all I could afford at the time by my calculations 1 paycheck per mo. I was offered an alt a loan even back then. I went home a looked into all the options the bank gave me and went for the fixed this way it would stay the same right? Wrong I still had to pay taxes... These first time home buyers should be forced to take a class before they buy a home this way when they sighn a bad loan that they cant afford later the only one they have to blame is themself.
You mean you its Bank of America's fault when I get a credit card through them and buy a new wardrobe from Neimen Marcus? It's CitiBank's fault I NEEDED to have a 50" LG plasma TV from Circuit City? Give me the first example you think of when you typed that post.
We are talking about consumer credit here right? I feel like I missed something.
And Heather....Take a walk outside and get some fresh air. WE [as in you and me] live in the greatest country the world has ever seen. I'll keep it that simple because there is no need to go further down that negative track.
Our capitalist government. Never about human beings, only about cold-blooded acquisition and cultivating the appearance of wealth. Welcome to United States Junior High.
It's the lenders because they allow everyone to borrow without knowing the risks involved. There are so many people that borrowed money without knowing anything about the loan.
I selected other. I think the problem is rooted in fiscal policy. Incredibly low interest rates and effectively subsidized mortgages by the Fed and Fannie Mae.
Lenders took advantage of being able to sell their mortgages as securities. Investment firms took advantage of CDO's to pitch them.
Thought I think buyers are responsible for making the purchase, I guess I consider them the least responsible, since they were fed all kinds of marketing speak to make them buy.
Great poll by the way.
There are many similarities here to the .com boom and bust in terms of people's thought that the boom times would last "forever" - or at least long enough that people would be able to cash out at the first sign of trouble. Unfortunately, as we're seeing that's easier said than done.
I place about equal blame to the borrowers and lenders. I think some who signed on for these interest only loans assumed too much - that the appreciation would continue (or they could sell quickly and get out) - or that the mortage companies were looking out for their best interests - meaning if they were going to offer up a loan of 600K on an income of 50K, it must mean the buyer could afford it, right? Wrong.
Whenever borrowing money there has to be an incentive for the borrower to do so - money isn't free, but for a while it may have seemed that way. At the end of the day many of the lenders didn't believe that the borrowers would take on loans that they couldn't afford and the borrowers didn't believe they'd be lent the money if they had no ability to repay it.
Both parties are to blame - I just hope their mistakes borne of greed don't affect the rest of the economy and toss this country into recession or impact those of us who are more fiscally conservative.
No bailouts or other fixes needed; the free market will work it all out. All individuals --- borrowers, lenders, or others -- will have their transactions subject to market mechanisms.
Here's a relevant quote from Shiller's Irrational Exuberance, 2nd ed., last chapter:
"...in a free society, we cannot protect people from all the consequences of their own errors. We cannot protect people completely without denying them the possibility of achieving their own fulfillment. We cannot completely protect society from the effects of waves of irrational exuberance *or* irrational pessimism --- emotional reactions that are themselves part of the human condition."
I say it's the borrowers. It's no more the lenders' fault than it is the house builders for making bigger houses, the fashion designers for coming up with new fashions, or the tech industry for coming up with new gadgets. They're doing what the people demand. If the borrowers were responsible, the lenders' 'fault' in this would be moot--no one would be doing things to get in trouble, even with more risky lending practices.
Lenders make it possible for us to get in trouble, but ultimate we get in trouble. Car manufacturers make it possible for me to go 100 mph, but if I get in an accident at 100 mph, I doubt anyone is going to stand up and say it's the manufacturer's fault (it isn't). It's my fault for pushing down the gas pedal. It's fun to go fast, but there are consequences (and thusly, I never go very far above the speed limit). It's fun to buy things, but you're responsible for how much you buy.
I thought this article about getting started in alternative investments might be interesting to cover on your blog!
I did not see an option for "the media" on here. I think the media are very much to blame, although everyone listed has contributed to the problem, in one way or another.
Media perpetuates the images and status symbols that consumers think they must have in order to ape the lifestyles of the depicted models and celebrities. But consumers are to blame for confusing needs and wants and for equating happiness with being able to impress others through the acquisition of the advertised goods and services.
The arguments here are very valid, but if I may there is a UK perpsective here which may have a bearing. Obviously the UK property market has been on a surge for some time, many ordinary people have made millions from over extended themselves initially and then reinvesting.
Can we blame people who thought that the US housing market was going to do the same, there were plenty of ads for 'let me show you how to make millions - no money down' schemes? These 'investors' took a risk and it went wrong. Being investors we all do the same sometime.
Should the lenders have had a better grip on the amount they lend, definately. However, in a market looking for short terms gains to satify shareholders and to increase profit share/bonuses, the incentives for lenders to over do it was obvioulsy there and they could always sell the wrapped mortgages to the hedge funds...
6 of one half a dozen of the other is my position.
ahhhh....I guess I'll disagree here.
I fault the people that borrow money. Of course they don't have 100% of the responsibility...Well how does 98% sound? Keeping up with the Jones' is what everyone is doing and folks are willing to finance clothing purchases, McDonald's food and are even willing to buy a house WELL out of their limit and put NO money down.
Call it harsh, but when are WE going to take responsibility for our actions? Consumer debt to be "cool" and buy iPhone's is NOT CitiBank, Bank of America or Capital One's "fault"...
Yeah, I am lumping many folks in together, but when are folks going to wise up? I didn't buy a condo with 0% down in Miami. I don't drive a 2007 BMW. I don't wear $75 t-shirts and I don't spend $100 for a night out in the city. There's a reason I have only student loan debt and am building a solid financial foundation.
Please....Where am I wrong?
I suppose I will finally chime in now that we have some discussion going on and quite a few votes in. I tend to put the blame on pretty much all of the above to varying degrees.
1. The lenders. Like rstlne said, they are in the business of lending money. Do they continue with the tried and true standard 30-year fixed mortgage that requires a sizable down payment and leave money on the table? No, they wanted to make more money, so they loosened lending standards and created more unique lending opportunities to generate more business. Not their fault entirely, but with lending to more risky prospects can, and will likely lead to more defaults.
2. The borrowers. I think a bulk of the blame has to go on the borrowers, or in general, the greed that thrives in our society. When lenders were making it easier to borrow more money at attractive rates, people jumped at the chance. Sure, who wouldn't love to be able to get into a 300k home with 0 down and a mortgage payment of $1,500/month? That is the American dream! Well, common sense took a back seat as people saw the thriving real estate market and easy to obtain loans as a sure way to build wealth.
A few years ago, we bought our house. The bank was willing to lend us upwards of $300k in a various number of ways. We could have gladly taken it, but we knew that much house would be tight, even with fancy financing. Our budget, income, and lifestyle determined we could afford to borrow between 150-175k. Just because the bank was offering more, we would be in the same boat as many other people if we would have been greedy. Instead we stuck with what we knew we could afford. Unfortunately, most people aren't very prudent and would rather flaunt their pseudo wealth in the form of a large home.
3. Regulators. Some blame, albeit a small amount could be attributed to the problem. Again, as was mentioned, they tend to step in AFTER a problem arises. They should be in place to prevent problems, but that is the unpopular move. So, some of the blame has to go towards the regulators not living up to their duties, but that is hardly at the root of the problem.
4. Investment Banks and hedge funds. Like the lenders, they are in the business of making money, and to do that they have to follow big returns. When the real estate market was booming, that is where the money was going. This happens in any bubble, just like we saw in the late 90's. All of the money was going into technology because everyone wanted big returns.
This situation wouldn't be a "problem" if it was allowed to run its course as an efficient market should, but unfortunately that isn't what the American people want to see. So instead, we have to deal with bailouts, adjusting interest rates, and who knows what other type of band-aids that will be used to try and equalize the market.
The problem is that nobody wants to ever experience a down market, whether it is real estate, stocks, or otherwise. We all want to live in this utopia that makes us money all the time in every market. That isn't how the economy should work, yet we have all of these outside influences trying to do what they can to help improve the situation. Unfortunately when the market is driven by humans that are irrational by nature when it comes to money, this is what happens.
Hardly anyone points the finger at the Federal Reserve, but in my opinion, it is the one and only cause of the real estate bubble. The Fed, under Greenspan, could've held the line on interest rates and refused to bail out Wall Street after the Nasdaq bust, but instead, he lowered interest rates all the way to 1% while simultaneously boosting money supply to double-digit rates of growth year-over-year. All that loose money led to a boom in real estate and the subsequent excesses and speculation.
Let's look at the other choices in the poll:
1. The borrowers
Why are they to blame? If you can borrow at low interest rates, wouldn't you?
2. The lenders
They're just doing their jobs. If there's a huge tide of liquidity out there, what are they supposed to do? Sit on it and not lend it out? That's a sure way to not be a lender really soon.
3. Investment Banks / Hedge Funds
They get fat fees for putting money to work and there's a lot of it coming in every day! Where else are they going to put the money for juicy returns? The rest of the bond market looks pretty wrung out with low interest rates that don't even beat inflation after taxes.
4. The regulators
Nope. Anything they do while the boom is still going on will only make them very unpopular and our representatives want to be reelected. If history is any guide, they'll step in only AFTER the bust happens and the only outcome would be to increase the size of government and prolong the bust.
Voted OTHER. I vote ALL of the Above pretty much in line with Thuy. I also disagree with calassifying the current situation as a problem. The current situation is fixing problems in the past. It seems, at leat to me, each is getting their just rewards for creating the problem:
Greedy consumers who financed a home they could not afford are losing that home.
Greedy Banks who mispriced risk to get more buisness are losing money the monies they made on those loans defaulting.
Greedy hedge funds and who bought financial instruments they did not and could not price properly are returning historic profits as losses.
Regulators who turned a blind eye to the above issues because no one was complaining now have an eye turned to them for allowing such a "calamity" to occur.
This is how it should work. Those that gained and hoped to gain from the problem are now paying for the fix.
I have to agree with Leroy, ultimately things break down to personal responsibility. Nobody forced anyone to take on a home loan they couldn't realistically afford.
The lenders have been foolish for doing what they have been doing, but ultimately the blame is on the borrower. It's your job to know what you can afford to borrow, and what you can afford to pay back. Just because someone will lend you the money doesn't mean you should borrow it. Personal responsibility, and all that.
Lenders are controlling the market. They decide if they lend or not. It's up to them to be more careful in their lending procedures.
Can we really blame only one? I think the borrowers, lenders, and investment banks equally share responsibility. Borrows took on more than they could handle to repay, thinking it will be easy; lenders spend more money than they should have, out of greed; investment banks simply made a stupid move on "the sure bet" of real estate without actually keeping the house (correct me if this is not how it works).
I don't see how the regulators are to blame, but that gets into an argument of _more government or less?_ at that point.
Does no one take responsibility for their actions any more? I may be $50k in debt myself, but I was aware of every step I made down that path. I don't blame the Joneses or advertising or a consumerist lifestyle; I don't blame the government for not supplying enough in grant money for my education. I was at least _conscious_ when I signed on the dotted lines. How did so many end up asleep at the wheel?