Americans spend millions of dollars on cosmetic surgery because there is the belief that if you weren't born a certain way, well, you can have it anyway. The wedding industry is a multi-billion dollar industry that thrives on women seeking fantasies (and no, an expensive wedding is not security for a happy marriage); ultimately, we all know that there is an inescapable reality, but with a little bit of money we can all run away from that reality, and lately, in the past few years, we have decided that you don't even have to have any money to live a certain life to get what we want. All we have to do is fill out an application for a credit card, mortgage, etc, and voila! all of your dreams can come true. Except, we all know this isn't true either.
When I was little, my parents never used credit cards. My mother had a charge account with Thalhimer's, but it was paid off monthly and beyond that my parents never took on too much debt. They were raised by a generation of people who lived through the depression and had to learn in the hardest of ways that if you don't have the money, don't buy it. This very idea must sound blasphemous to many teenagers in college, but that is how it was with my family and generations before.
But then the 1980s came and lenders discovered that there was an insatiable appetite for consumer goods; and if a buyer couldn't afford it, then they would extend them a credit line. When I was in college in 1995, the lending businesses started to issue out credit cards to people who had no business having a credit card. I was given several cards by several companies, and I had no income. I had no credit history, so my credit score was decent, and therefore I was creditworthy; nevermind that I had no income. As with many other students, I defaulted on my credit cards. I went shopping and didn't realize that paying $10 a month on the balance would mean that to repay $200 it would take me over two years to repay. I didn't really care. I had cool clothes. I was part of the economic boom of the 1990s. The economy thrived on the selling of fantasies; and the lenders didn't care because they could just charge a higher interest on me because I was riskier, and then they would make more money on me. I can't even say how many credit card offers I received when I was considered to be "subprime."
So then the dot com bubble busted in 2000 (which, by the way, thrived on the selling of stock options, which was perpetuated by the investment banks who were funding all of the start-ups--not that the companies were actually worth what the analysts said they were worth). The market had skyrocketed above 10,000 for the first time, and shortly thereafter in March of 2000, it crashed. Margin calls were killing the brokerage firms and mass layoffs at all of the big firms in New York were accelerating. I remember going to visit my family in January, 2001, and I was on a train from Manhattan to King's Park, and I remember the looks on some of the guys' faces. You could tell bombs were dropping, and it was just the start. I overheard them talking about Goldman Sachs laying people off. In my job I worked with analysts on Wall Street, and it was unnerving, to say the least, to call a client and hear that they were laid off (or "no longer with us). That train trip was a sign of things to come. And then September 11th happened.
Months later, in order to stimulate the economy, the fed decided to lower rates after it had raised rates numerous times. Many complained that the rate cuts were too late, but they were nonetheless happy to have them anyway. Interest rates plunged, and here the investors on Wall Street saw another golden opportunity. Lenders had been making money on subprime credit for years now, and once again there came another opportunity to sell a fantasy to millions of unassuming homebuyers. In all of the years past, those with poor credit or no income couldn't buy a house. Logically they wouldn't be able to afford the payments, and because mortgages are more than just a few thousand dollars, they historically wouldn't have qualified for the loans. A lender who is risk averse isn't going to take the guarantees loss...but wait! If they are subprime, then they are higher interest, and if they are higher interest, then those mortgages can be sold off to investors in the form of mortgage backed securities, and the firm will make money, as will the investors...and as long as the home values rise (just like they thought the stock market would keep going up up up), then they had a sound financial model. To explain: say Goldman Sachs agrees to issue funding to a mortgage company for $x billions of dollars. The mortgage company promises Goldman's a rate of return of 7% on the loans. 7%? Rates were down to 3%-4% back then? How could they promise that? Well, with subprime loans you can charge 10% interest if you want. The mortgage company will pocket a certain percentage and give the rest to Goldman's, and then Goldman's will then, in turn sell mortgage backed securities to investors around the world, which is how they continued to fund the loans....big problem here though: subprime buyers are subprime for a reason. They are a risk for a reason: they are not as responsible and are therefore much more likely to default, and even if the value of the home goes up, that doesn't mean they can afford the loans....but all of that didn't matter because they were able to get enough investors to fund them, and they made so much money that they were willing to ignore all of that, at least for a while. The reality is that while we can point finger at these lending institutions, the blame really and truly falls on us.
Fantasies. Dreams. Everyone wants a big house. We may say we don't need it and therefore we don't want it. But really, if you close your eyes and picture your dream house, surely it isn't a little bungalow. It's a big house with a nice yard and a couple of cars. Not that there's anything wrong with this vision; but we all know what we want, and those banks knew what we wanted too. They came along and gave loans to people who had no business getting a mortgage, and for a while everything was okay. But when a family has to work three jobs to make that mortgage payment, you know something isn't right. And if the economy should falter so that there are only two jobs, then we know we're in trouble. I think that a lot of people knew they couldn't afford the houses, but just for a little while, they could have the big house and live a better life, even if they would lose it in the end.
Technically we're not in a recession right now. The GDP has been at an anemic .6 for the past two quarters, so technically, there is no recession. But we all know that we are at the start of one. And from all of the signs that we have been given, this one could be bad.
I think what most amazes me is the whole idea of investors thriving on losses. And I don't mean anything like a man getting rich while others go poor. What I do mean is that the Dow has been rising like it has NOT because investors felt the economy was going strong. They invested because they KNEW it would go down. Selling stocks on the idea that it will go down is called short selling, and I had listened to stories about short selling and how it has been the driving force behind the market's rise, but I had no idea just how bad this was. According to an article in Vanity Fair, the SEC is investigating two mortgage brokerage houses/hedge fund investors for essentially profiting off Bear Stearns' demise. According to the article, a rumor was intentionally started about them having liquidity problems, and even though it wasn't true, the rumor caused all of their investors to pull cash from the bank, which ultimately killed them. The real kicker here is that they believe that short sellers were behind the whole thing, which is also why the fed put a cap on shorting last week to prevent another bank from collapsing. So on the one hand, investors profited from high risk buyers, and then they decided to profit on the fallout once the bubble burst. Sure, it makes sense, but we need to ask, is it right?
There's a question of morality here, and ultimately I do think it has to be addressed. One can look at the almighty dollar and argue that that's how businesses operate, but are we fooling ourselves into thinking that it actually works to do business that way, or are we coming into an era where we are getting what we deserve. A man with an income of $12,000/year should not get a credit card with a line of $20K, just as a couple with a combined income of $100K should NOT buy the $600K house--even if they are approved by the bank to buy it. It makes no sense, and even if someone is willing to fund the bad idea, it still shouldn't be done. I think that an economic downturn will force many of us to come to terms with taking on too much risk and being more realistic about what is and what is not impossible. The optimist in me counters with the idea that "anything is possible!" but I also know that I was raised on Disney.
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