THE SUBPRIME CRISIS; COULD IT BE OUR OWN FAULT?

Foreclosure after foreclosure, bankruptcy after bankruptcy, the mortgage crisis seems to grow every day. The Dow has taken a sharp hit and dropped more than 10% in the past few months resulting in all of our retirement accounts shrinking instead of growing. Realtors are getting ulcers watching housing prices shrink while inventories of houses grow, and the average homeowner is watching the equity in his/her house disappear slowly. Pundits are all over my T.V., each claiming something different is at the root of it all. Some say the builders built too many houses, others claim shady leading practices are the cause. Still others point to gas prices, inflation, and even rising tuition as factors. Finally there is the argument that government intervention caused banks to be required to give loans to people that had bad credit histories (the definition of subprime is, after all, people with less than prime credit). All of these things contributed in one form or another to the problem, but in the end are we not at fault ourselves? Have we become a society that doesn't know how to take responsibility for our own spending habits? Do we have to have the government step in and tell us when we're over-extending ourselves? Do we need to be given an "allowance" by our paternal government to stop us from financially destroying ourselves?

One only needs to look back 20 years to see how much worse our debt ratio has become. All through the 90's we leaned harder and harder on our credit cards to make ends meet. From 1989 to 2001 alone our credit card debt nearly tripled from $238 billion to $692 billion, this resulted in bankruptcy jumping 125%. Note in the link provided that low income people had the biggest percentage increase in debt. How is it that the people with the least ability to pay, are the ones leading the pack getting themselves more in debt? On the housing side we went from having a U.S. mortgage debt of $2.188 trillion in 1988 to a debt of over 11 trillion in 2007, an increase of over 500%! Are we loaning out to just about anyone, with any kind of credit, in an effort to give everyone a chance at homeownership? Or are people simply over extending themselves and overstating their incomes so they can get bigger and bigger houses? We seem to think we have to have the newest car, the biggest house and thousands of dollars worth of computer components. This has become a country where even the poorest amongst us are driving brand-new lease cars while talking on their cell phone. The new norm is way beyond what most people can afford and to reach it they push themselves farther and farther into debt. But whose fault is it really?

Don't get me wrong, I'm not letting lenders off for their part in the bargain. In their effort to sustain an economy that was overinflating itself, they found new and creative ways to give us more borrowing power than we ever should have gotten. Every quarter report was judged on it's own merit with no thought of the future, so mortgages were bundled and sold and resold. The purpose was always to take the "cream" off the mortgage (the first few years of the loan where the principle was the highest) and then to sell it to someone who would except less money for more risk. It is a game of mortgage "Hot Potato", making quick profit while trying not to get caught holding should the housing market reverse. To keep it sustainable, housing values were constantly pushed up so the borrowers would have even more equity to refinance. Over and over again. To make it even more profitable, they turned to the least educated and most risky borrower, the subprime. To make it worth their time they wrote in high interests rates with appealing first year rates. "You can always refinance." Was their main selling point. The people, convinced that they can't, or shouldn't have to, resist the temptation of putting themselves further in debt, simply borrowed and borrowed all the way to foreclosure.

We desperately want to blame the people who lent us the money, but is it their fault really?. Without them, we contend, we wouldn't have the money to push ourselves into debt. But isn't it also true that if we didn't take their money we wouldn't have gotten into such a mess? We act like we're all little children with no self control. We blame the T.V. for its sexy ads, we blame Hollywood for it's commercialism. "Who can blame us?" we plead. "We're victims of their evil powers." We buy for vanity. We buy to make ourselves feel better. We buy to keep up with our neighbor, or our brother. We buy things to fill the empty spaces inside ourselves that were once filled with the joy of everyday events, or the pride of making something yourself. Have you ever noticed that materialism never leaves you feeling fulfilled for very long?

When I was just a young man trying to understand this complicated world, I was blessed to have a teacher wander into one of my classes who explained finances in a way that has helped me more than anything else I've ever learned. For some strange reason, (I suspect community service), this multi-millionaire was stuck teaching economics in the poorest school in Flint. While the rest of my poverty stricken classmates threw pencils at each other and laughed at his partially stroke-frozen face, he explained credit, financing, interest and budgeting. He told us, "Most of you will be poor your whole lives because you don't understand interest." And I listened intently. He warned against credit cards and refinancing endlessly. He told us to live within our means and to remember, "You can't be better off tomorrow by spending tomorrow's money today." And I listened alone. He taught me to budget and to plan. And to have a plan "B", and even "C". That year I learned those important lessons while my classmates played. Like the proverbial ant, I have lived better for it than my grasshopper counterparts.

It's hard to blame people for lessons they didn't learn. It's even harder to tell people things they don't want to hear. But is it fair to exempt ourselves from the blame for this whole mess when we're the ones that should know what we can and cannot afford? I doubt very much that you could borrow money from a drug dealer or a bookie and then claim, "You should have known better than to loan me money I couldn't afford." So why would you try that on a bank? Ultimately, we are the ones responsible for our own finances. Even though there is plenty of blame to go around for the economic mess we're in, lenders and regulators included, it's clear we're not getting the full view of the problem unless we also look in the mirror. H.C.