Editorials

What caused our current recession?

There has been quite a bit of chatter in media about what caused our current recession.   It seems like everyone has complicated explanations as to what caused it.  We were thinking that the answer might be really simple.  So, here is our take on the situation:

• People trying to appear wealthy to keep up with other people who are tying to appear wealthy.
  It’s not unusual for people to want the same life for family that their neighbors and friends have.  So, if offered the opportunity, many people would jump at the chance.  However, there ’s a big difference between the appearance of wealth and actual wealth.  In reality it’s not unusual to see millionaire’s driving  ten year old Toyota Corolla ’s while his  next door neighbors (who is living paycheck to paycheck) are driving a new luxury cars.   The  book The Millionaire Next Door by Thomas J. Stanley does a really good job of dispelling myths about wealth.

• Consequences of political/governmental measures taken to make it easier for people to get into homes that won’t be able to afford.
  According to the U.S. House of Representative 111th Congress Staff  Report titled
  The Role of Government Affordable Housing Policy in Creating the Global Financial Crisis of 2008 report dated July 2009  provided by the Committee on Oversight and Government Reform:”The housing bubble that burst in 2007 and led to a financial crisis can be traced back to federal government intervention in the U.S. housing market intended to help provide homeownership opportunities for more Americans. This intervention began with two government-backed corporations, Fannie Mae and Freddie Mac, which privatized their profits but socialized their risks, creating powerful incentives for them to act recklessly and exposing taxpayers to tremendous losses. Government intervention also created “affordable” but dangerous lending policies which encouraged lower down payments, looser underwriting standards and higher leverage. Finally, government intervention created a nexus of vested interests – politicians, lenders and lobbyists – who profited  from the “affordable” housing market and acted to kill reforms. In the short run, this government intervention was successful in its stated goal – raising the national homeownership rate. However, the ultimate effect was to create a mortgage tsunami that wrought devastation on the American people and economy. While government
  intervention was not the sole cause of the financial crisis, its role was significant and has received too little attention.”

• Companies making big profits by targeting  people who are trying to appear wealthy. Now with uncle  Sam’s help (see text above), these companies have a great tool to market mortgages to people who will never be able to keep up with the payments.  How is this helping anyone?

• And last but certainly not least, companies and individuals acting on the belief that there won’t be any consequences to their actions.
  Financial institutions learned a lesson from the saving and loan crisis several years ago and that lesson was that the United States Government will never let U.S. Banks fail (no matter what goofy risks that they take).  So, now we have government, lenders and consumers operating on the belief that there is no downside risk.  A perfect storm.