How did America get into the financial situation in which it now finds itself? Who’s to Blame for all the economic woes that we see piling up? Let me share my perspective on the answers to these questions.

     For over half a century, ever since the end of World War II, we’ve been told that every American has the right to own his/her home. From the movie, “Mr. Blandings Builds His Dream House” up to today, we’ve been sold on our God-given right to the American dream – our own little bungalow or mansion in the country or city. Whatever type of house, in whatever locale, you and I can have it. Politicians, Congress, administrations, financial institutions, home builders, scam artists - you name it – all encourage us to go ahead and buy the home of our dreams. After all, We are entitled to own our own house - even if we can't afford it!

     The last time I looked at the Declaration of Independence, it said, “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are Life, Liberty and the pursuit of Happiness.” It did NOT say that everyone is entitled to, “Life, Liberty and the pursuit of a free lunch.” Nowhere in the Declaration of Independence or the U.S. Constitution is every American family guaranteed ownership of their own home. What we are promised is the opportunity to earn enough money to buy one’s own home.

     Where can we get the money to pay for our home? – That’s no problem. The banks and mortgage companies will lend us whatever amount we need at whatever terms we want. The government will help by backing these mortgages with federal agencies or with federally backed agencies. The government will help even further with income tax breaks for home owners. Still can’t scrape up the down payment or afford the monthly payments? Still not a problem! Close your eyes - cheat and lie when filling out the mortgage application. The bank and mortgage company may even help you in your deceit or stupidity, and/or greed. At the least, they will turn a blind eye and ignore the fact that you really can’t afford that house. After all – home values “will always increase” and, no matter what, you will always be able to sell your house at a profit.

     America has become a country of instant gratification. Buy it now – worry about paying for it later. We don’t save. Instead, we spend, and we don’t just spend, we borrow to spend. Just look at credit card use; look at those unaffordable mortgages; look at the pitiful rate of savings in the United States. For the last several decades, we’ve been told by political demagogues that the government will take care of everything. Save for old age? – don’t be stupid, spend it all now and let the government take care of you in your old age. Worry about medical bills cropping up? – you’ve got to be kidding, the government is giving or will give us universal health care, Medicaid, Medicare and whatever else we want and will pay all the bills. Go ahead and get the most expensive medical treatments whether or not these treatments are really needed. After all, it’s virtually free.

     “As measured by the Bureau of Economic Analysis (BEA), the U.S. personal saving rate (PSR) has trended down over the past two decades, bottoming out in negative territory within the past year {2005}. . . . Simply put, a negative PSR means that U.S. households are consuming more than their current after-tax income. Consequently, many analysts have expressed concern that households are saving too little to support the levels of investment required to sustain economic growth, without excessive dependence on foreign sources of capital.
     “During 1970-93 the monthly U.S. PSR averaged 8.9 percent, but it subsequently fell to an average 2.8 percent in the period 1994 to February 2006. In the past 12 months {2005 – 2006}, the rate dropped to –0.6 percent, leading analysts to wonder whether the United States has become a spendthrift nation.” (Ref. 1)

     Economists may wonder, but I don’t – we definitely are a nation of spendthrifts! We are becoming a “welfare state - primarily, a transfer-payments pump providing pensions and medical care for the elderly.” (Ref. 2)

     So who do we blame for all our current economic problems? Well, a pox on all your/our houses!!! They and WE are collectively all to blame. We can stop pointing fingers. There aren’t enough fingers on our hands to point at everyone who is to blame.

     Our Government is to blame! - The government has told us that we have a right to own our own homes. They’ve set up departments and agencies to help us own our own homes. They tell us thy will give us everything we want. They’ll get the money from “the very rich” and make it available to us so we can buy what we couldn’t otherwise afford. They’ll “take from the rich and give to the poor” so we won’t have to worry about old age and medical expenses. At the same time, our government has failed to put in place the necessary rules and regulations to control the finances and economic institutions that they have established and/or which they are supposed to regulate. The government has failed to properly run the regulatory bodies that are supposed to oversee the financial and economic institutions that manage the credit that affects all aspects of America’s economy. As has been noted elsewhere, our regulatory processes were developed some 6 decades ago at a time far different than today. Our government has been running with these same regulatory processes for sixty years and has failed to adjust them for the realities of today’s economic environment. Our regulatory processes are sadly outdated and have proven to be a failure. Our government has failed the American people by allowing a 6-decade old status-quo regulatory process to remain in effect. But liberals in government have done still greater damage.

     Freddie Mac and Fannie Mae (F & F) were established in order to be safe suppliers of mortgage money for relatively low risk loans. For qualified borrowers, Freddie Mac and Fannie Mae would ensure that banks had access to the money to make the loans. The money loaned was cheap because it was backed by the faith and credit of the American Government. But the liberals in government wanted more. They wanted the low cost of low risk loans extended to higher risk borrowers, with lower incomes, fewer assets or less-solid credit. As the Chairman of the Congressional Financial Services Committee, Barney Frank, D-MA, said, “I want [Freddie Mac and Fannie Mae] to help low-income families get loans and to help clean up this subprime mess. Otherwise, why should they exist?” The liberals in government used the regulations of the Community Reinvestment Act to threaten lenders into making these loans. In order to meet the demands of the liberals, banks loaned money for subprime mortgages. Since these loans were guaranteed by F & F, both government- backed bodies, lenders were unconcerned about the soundness of the loans. The results of these policies are now evident - our financial system is on the verge of collapse while the American taxpayer may end up paying through the nose for all of this. And why? Because in the minds of our liberal politicians, the reason for the existence of Freddie Mac and Fannie Mae is taxpayer-subsidized housing for low-income borrowers - no matter how bad their credit or how high the costs. (Ref. 3)

     Some claim that the roots of the financial crisis hark back to the Carter administration when government officials "began accusing mortgage lenders of racism and 'redlining' because urban blacks were being denied mortgages at a higher rate than urban whites." Our liberal do-gooders pressured mortgage issuers to make more loans to minorities, i.e. to borrowers with poor credit histories. They pushed Congress to pass the Communities Reinvestment Act which empowered regulators to punish banks that failed to "meet the needs" of "low-income, minority, and distressed neighborhoods." As a result, underwriting standards were relaxed and banks made increasingly shoddy loans. Freddie Mac and Fannie Mae encouraged this subprime lending by authorizing ever more flexible criteria to qualify high-risk borrowers for home loans and F & F even bought up the questionable mortgages that resulted. These policies were justified by the liberal establishment as a means of increasing home ownership among the minorities and the poor. "Affirmative-action policies trumped sound business practices." The Federal Reserve Bank of Boston issued a manual advising mortgage lenders that, "Lack of credit history should not be seen as a negative factor." Lenders were directed to accept welfare payments and unemployment benefits as "valid income sources." Failure by the lender to comply meant that the lender could be subjected to a lawsuit. As Ronald Reagan said, "Government is not the answer to our problems; government is the problem." (Ref. 4)

    Our financial institutions are to blame! - Some unscrupulous banks and mortgage companies have helped to put us in the precarious economic position in which we find ourselves. Some of these institutions have urged borrowers to lie and cheat on their credit applications. Some have ignored the truth in reviewing these applications. At best, some of these institutions have acted imprudently. At worst, some of these institutions and those that have been running them should be criminally liable. We’ve allowed credit rating companies and agencies to either shirk their duties or to outright collude with the companies that they are supposed to be independently rating.

    We are to blame! - We Americans share as much blame s anyone in the mess in which we find ourselves. We have been brought up to borrow instead of save. We spend before we can afford to instead of saving and then spending. We think nothing of spending beyond our means. We insist upon gratification today and tomorrow be damned. We have bought into the notion that the government will take care of everything and that it won’t cost us anything. Someone else will pay the bills. Paraphrasing John F. Kennedy, we have morphed into a people that, “asks not what we can do for our country but what our country can do for us.” As another famous American has said, “We have met the enemy and it is us!”

    Greed and avarice have replaced common sense and prudence. Our politicians have failed to govern. They have pandered to their constituents, gotten in bed with the companies and institutions that can fund their campaigns and ignored their responsibilities to the American people. Too many of our financial and economic institutions and those that run them have been blinded by the prospects of personal and corporate financial killings. We, the American public, have succumbed to the temptations of profiting from a supposedly ever-increasing real estate market, and the lack of good common sense and morality that characterized our parents and grandparents before us – they saved till they could afford to buy; they expected to pay their own way and not leave it to someone else to pay their bills; and, they had the honesty and pride to do what was right.

    My father lost his job during the great depression. In order to get by, my family had to borrow money. Some 10 years later as a young boy, I remember walking with my mother every week or two to the small apartment of a little old lady. I didn’t know who this old woman was or why my mother and I went there. Several years later I found out that my mother went there to make repayments on money that she and my father had borrowed a decade earlier. It took them over a decade to repay the loan, but repay it they did - week by week, month by month and year by year. They would never have considered hiring a lawyer or company to find a way to avoid paying back in full what they owed. They paid back what they borrowed and they borrowed only what and when they needed to survive.

    Today, it is almost a badge of honor to see who can owe the most money and then get out of paying it back. For most families in my parents’ generation, borrowing and owing money was not something of which to be proud. In my parents’ days, loans were taken out only in the direst emergencies, and paying back what one owed was obligatory.

    Today, on the radio, on TV and in the print media, I hear and see ad’s for companies, lawyers and others that offer to negotiate for credit card borrowers and for those who owe taxes so that the borrower won’t have to repay the full amount owed. We take pride in avoiding payment of what we owe. Too many of us want a free lunch. The attitude too often is, “Don’t worry - someone else will pay the bills and bail me out.” The truth is: That someone else is you and me. We all pay for these cheaters through higher prices, higher interest rates and higher taxes.

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References

1. National Economic Trends, Massimo Guidolin and Elizabeth A. La Jeunesse, Federal Reserve Bank of St. Louis, research.stlouisfed.org, May 2006.
2. Accountability defaulted, George W. Will, Boston Herald, page 23, September 25, 2008.
3. Better not bank of Frank, Michael Graham, Boston Herald, page 23, September 23, 2008.
4. Frank's fingerprints are all over the financial fiasco, Jeff Jacoby, Boston Sunday Globe, page D9, September 28, 2008.