Even though Helicopter Ben pumped some liquidity into the ailing U.S. financial system last month, it's undeniable that the blame game will continue. Who is at fault for the credit crisis caused by sub-prime loans gone bad? Bet you can guess; It's you. Well, more precisely, your firm — that is if you work for a big securities company whose propeller heads at the home office securitized the debt, and then moved it off balance sheet via some special purpose investment vehicle. Of course hedge funds had something to do with this, right? Because they are loaded with cash, make too much money, and are, well, evil. And don't forget that pernicious mortgage broker down the street who sold whatever made him the most money to an unsuspecting homebuyer. It's all a big scheme by the boys with the capital to screw the laborer. Or so that's the theory emerging from Washington.
Barney Frank (D-Mass.), the U.S. House Financial Services Committee chairman, groused in early September that, “It is clear that financial innovation outstripped regulation,” and that more regulation may be needed. A week before that, Sen. Charles Schumer (D-NY) got before some reporters brandishing a mortgage company's newspaper advertisement, and laid out the problem from Washington's perspective. And that was this: As usual, unscrupulous big business interests — in this case, mortgage brokers — were fleecing their clients. In fact, he thundered, they continued to do business as usual, despite the spike in the nation's foreclosures. Schumer declared, “We have to stop them — plain and simple.”
But notice what Schumer refrained from saying: “I am amazed that my constituents would lie on mortgage applications about their income; that they would greedily take on more debt than they could handle via some tricky nothing-down, interest-only, floating-rate mortgages to speculate on houses; and that some would agree to take on hundreds of thousands of dollars of debt, knowing that they couldn't afford these aggressive loans if some macro events turned against them.” He might have also said, “It's unbelievable, the things people will do in my home state, my hometown, to profiteer, to flip a brownstone in Brooklyn.”
It would be far better for all involved to realize that this is a familiar boom and bust cycle. Assets run up in value, and people begin to give chase, seeking risk without as much as a second thought. And guess what, there are plenty of people out there — some honest and some not so honest — to help the speculator (or the just plain greedy) find new ways to engineer their dreams. In this real-estate and credit spasm, there are many to blame.
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