jackiedoherty.org

Last year as the first wave of foreclosures was hitting the news, people were blaming homeowners who didn’t read the fine print or those who speculated that real estate prices would keep going up; next in line were the subprime lenders who were handing out adjustable rate/no-money down loans, often without any discretion whatsoever (no income, no problem!). Further up the food chain, we find the big money financial institutions like Merrill Lynch and Lehman and others, the ones who bought the risky loans and repackaged them as securities with attractive rates selling them to investors and holding them in their own portfolios and for awhile earning nice returns. Earlier this week, a Wharton School of Business Professor, Jerry Siegel, wrote in the Wall Street Journal (“The Resilience of American Finance,” September 16, 2008) that the cause of the downfall of these giants was “leveraged risk.” He adds that

Their demise was caused by bad risk management, and a failure to understand the high risks of an overheated real-estate market, the root cause of our current problems.(my bold)

(Gee, sounds a bit like the hapless homeowners everyone was blaming last winter!) Siegel adds:

So, Siegel traces everything back to the overheated real estate market, and certainly home prices rose to giddy levels in recent years, but that is like a rapist blaming the victim for being too attractive. The rise in home prices (fueled, I believe, by low interest rates) attracted those who wanted to make money off of the boom, and they found a way to do so through sub-prime lending and the following securitization of the loans. As Barney Frank said in April “It was not just the housing bubble,” said Frank. “People made housing loans that shouldn’t have been made.” (The blog Civic Boston has an insightful account of Frank’s appearance last April at the JFK Library).

You still have those who blame the consumers, those who tried to buy homes they couldn’t afford (was anything affordable in recent years?). Some are calling for mandatory financial education for potential homebuyers; but until we have mandatory ethics classes for corporations, let’s let the government protect us, not just from terrorists, but from greed and the ravages of the too-free market as well.