As I try to put my mind around the intricacies of the proposed $700 billion bailout of the finance industry, I’ve been thinking about my father’s first television.
It was a proud moment for my grandfather, a bread truck driver of modest means, to be able to purchase a TV for his family. Back in the 1940s when the technology was still young, the cost of a new set represented a significant portion of his annual salary and so he had to wait until he had saved enough money. When the time came, as my dad tells it, his father got all dressed up in a suit and tie just to withdraw cash from the local bank before heading to the store to buy one of those giant monuments with tiny black and white screens that only transmitted a few channels.
A lot has changed in the intervening decades, and not just the fact that the technology has improved dramatically. Even as lawmakers consider unprecedented action to remove troubled home loans from a financial system that is facing the consequences of its easy lending practices, the front page of the Best Buy website features a picture of a large flat-screen HDTV with the pitch: “No Interest for 3 Years on TVs $999 and Up.”
In today’s America, if you want a new television, or iPod, or laptop computer, or Blu-ray player, or designer refrigerator, no matter whether or not you can afford it, some company — somewhere — will loan you the money. In 2007, the average American household had $9,840 in credit card debt, according to Forbes, and the Federal Reserve Board reported earlier this month that consumer debt — excluding mortgages — stood at nearly $2.6 trillion. Though Americans saved 7.2 percent of their disposable income in 1950, last year the rate was merely 0.6 percent.
The proximate cause of the current financial crisis may have been bad home loans made a few years ago, but on a deeper level, the crisis has been brewing for decades, and it is just a symptom of a larger problem rooted in the transformation of the nation’s basic mindset into one of instant gratification, in which Americans consume without regard to their ability to pay, and without thinking about the long-term consequences.
IN SOME SENSE, the current plight is a natural result of some of Americans’ most common impulses — equality, prosperity, and entrepreneurship.
American liberals believe not only in equality of opportunity, but equality of outcomes. The same crowd that now criticizes mortgage companies for having given loans to un-credit worthy borrowers once complained that those companies discriminated against the poor. Though they lament the easy lending environment, they helped create and sustain institutions like Fannie Mae and Freddie Mac, which used their implicit government backing to gain virtually limitless access to cheap money, allowing them to suck up mortgage debt with reckless abandon.
In the wake of the bursting of the Internet bubble and the September 11 attacks, an economic slowdown that would have broken up two decades of nearly uninterrupted prosperity was unfathomable, and so the Fed went on one of the most aggressive interest rate cutting campaigns in history, creating an easy money environment that kept the economy afloat, but also helped replace the Internet bubble with a real estate bubble.
One of the themes of American capitalism has been the ability of entrepreneurs to find new ways to deliver products to the masses, and the recent innovations in mortgage banking were just another example. Taking advantage of the latest trends in finance, companies found creative ways of offering loans to cash-strapped consumers, bundling them up and selling them off to one set of investors, allowing those investors to sprinkle around the risk to yet another layer of financiers. And so on. And so on. Caught up in the euphoria, and desperate to maintain their staggering growth, mortgage companies tossed standards aside and in some cases resorted to outright deception. Eventually, the contracts became so complicated that by the time the underlying assets became imperiled, companies lost track of how much money they owed to whom.
The sad part is that though plenty of people warned repeatedly about this problem, everybody involved had a vested interest in keeping up the charade as long as possible.
WHATEVER ARGUMENTS can be made for the necessity of the current bailout, let us not for a moment buy the idea that it addresses the root of the problem. By the time the negotiations end, those who acted irresponsibly and bought homes that they couldn’t afford, banks that put short-term loan sales ahead of smart lending practices, and large finance companies that couldn’t keep track of the cost of their own risk will be let off the hook, and those of us who acted responsibly will be stuck with the bill. When the dust is cleared, Fannie and Freddie will still be around. And though the so-called Maestro Alan Greenspan helped get us into this mess with his easy money policies, we’re now supposed to put our trust in a new government savior, Hank Paulson.
Unfortunately, the mortgage mess is just a harbinger of things to come. While pundits debate the $700 billion bailout plan, a $53 trillion entitlement deficit stares us in the face. Baby boomers are too selfish to allow us to debate the issue, younger Americans are mostly ignorant, and politicians are scared stiff. There’s an expectation that we can keep taxes low, sustain the welfare state, and remain the world’s superpower in perpetuity.
The root of our current problem is not, as Paulson says, “illiquid mortgage assets” — for they are only a symptom. The root of the problem is a culture in which Americans live beyond their means, in the moment, without taking any responsibility for their actions, and assume that American ingenuity will find a way to fix the problem somewhere down the road — at somebody else’s expense. Far from offering a solution, the Paulson Plan merely reinforces the problem.