The United States of Avarice, Pt. I
Ah, the good ole’ United States of Avarice, a country where responsibility has died and been replaced by unsustainable get-rich-quick schemes. A country that has been greedy for far too long. A country with a new generation that will be punished for the sins of its fathers. This is the country that we live in.
The recent recession serves as a rude wake up call to Americans today, just as the Great Depression was a message to those who prospered in the Roaring Twenties. Instead of learning from our mistakes, though, we are still trying to avoid taking the blame; scapegoating the banks and the Bush administration. Since we assign the blame to others, we are also unwilling to sacrifice in order to get out of this recession. The problem is systemic.
Business owners, banks, and investors are seen as the primary cause of the financial crisis, when they are actually the least guilty set of institutions. This isn’t to say that they are innocent, though, because they have definitely sinned. This doesn’t apply to all banks, but many are irresponsible and lend to high risk clients. One of the many horrible policies that led to the housing crisis was the policy of pick-a-payment mortgages. Under the terms of these mortgages, a borrower could pay less than the minimum amount needed to pay off the loan each month for a set amount of time. Then a balloon payment would be required to get the repayment of the loan back on track. The plan was to wait for your house price to increase so that your loan to value ratio was bigger. This meant that the bank would be more likely to refinance your house, giving you a better rate and allowing you to avoid the balloon payment. Young, middle-income home buyers received these loans, but then they over-leveraged and defaulted on them at high rates. These defaults were caused by banks that got greedy and tried to give out as many loans as possible.
However, the government is also responsible for forcing private banks to provide loans to high-risk clients. The Fair Housing Act (1968), Community Reinvestment Act (1977), and Equal Credit Opportunity Act (1979) forced banks to loan to low-income borrowers and set informal quotas on loans to minorities. This was in an attempt to correct perceived racist dealings with minority borrowers, but in reality these dealings were purely business. Yes, African-Americans were denied home loans at disproportionate rates, but that’s because they were mainly low-income with low credit, making them high-risk. Many of these minority borrowers defaulted on their loans, because they really couldn’t afford to take them out in the first place. The government, not greedy CEOs, caused the banks to engage in this sort of risky behavior, even though it was often not in the banks’ interest (pick-a-payment mortgages were actually in the banks’ interest when house prices were steadily increasing).
The government’s role in wrecking the economy cannot be understated, and I don’t mean just in terms of banking regulation. The U.S. government has been setting America up to fail for decades. It’s time for a brief history lesson. In the 1960s, President Lyndon B. Johnson wanted to fund his “Great Society,” while not taxing people outrageous amounts, so the Federal Reserve agreed to print more money, which drove inflation up throughout the 1970s. In order to correct this, the Fed raised interest rates, reaching 21 percent by 1981. The increased interest rates caused many savings and loans (S&Ls) to fail. Under Presidents Reagan, H.W Bush, and Clinton, the FDIC and the Fed were allowed to save companies and banks that should have been left to fail. So, President Bush was just following the trend set by his predecessors when he bailed out Fannie Mae and Freddie Mac and signed into law the Troubled Asset Relief Program (TARP). So, the government rewards greedy behavior and causes stable industries to crash.
But I would like to return to the topic of the “Great Society.” It was President Johnson that really started to transform the United States into a clientele state. By irresponsibly printing more money to increase government spending on welfare and other government programs, he was able to buy votes from low-income voters. Every President since has done it, because if they don’t give the masses what they demand – more services and lower taxes – they won’t get reelected. Why do you think President Obama has proposed increasing the amount of Perkins loans available to the public from $1 billion to $8.5 billion, which would encourage even more students who cannot really afford college to go into debt? People want to live beyond their means and the government is more than willing to help them do it.
This brings me to the American public. Everyone is responsible for this recession, but consumers are the biggest culprit. People are so intent on satisfying their infinite wants, even though their original needs are already met, that they spend money they don’t have. Life lesson number one – don’t spend money you don’t have. Loans provide people with the illusion of a better life, but when the debt catches up to them they are worse off than they would have been living frugally. The banks and governments may have made taking out loans easier, but the American public made the decision to sign off on the loan. People also aren’t willing to cut down on government services, because people have become accustomed to the welfare state. American citizens are the real culprits of the financial crisis, not the banks or the government, because they could have refused loans or government services, but chose short term gains over long term prosperity. Now a new generation is going to have to help clean up the mess, but where do we start? Should we cut government spending or raise taxes? I will offer solutions in “The United States of Avarice, Pt. II.”
Adam Ondo | University of Rochester | @JoplinMaverick