Greed and Excess - Consumer Edition

Most people have been pretty harsh on the banks and the govt since this whole mess got started, and rightfully so. These guys in conjunction controlled the purse strings and approved the loans to the masses that were the impetus for all of this crisis. If you haven't read it yet check out Michael Lewis' inside look at the investment banking mentality that fueled this crisis. It's a long but good read if you have the time.

As much as the banks and govt have been beaten up over the past 2 months you'd think this whole thing rest with them. It doesn't. The 3rd piece of the puzzle in this crisis is the consumer (aka YOU). Friedman has a good piece in the times today, check it out here, I finish up after the jump

So many people were in on it: People who had no business buying a home, with nothing down and nothing to pay for two years; people who had no business pushing such mortgages, but made fortunes doing so; people who had no business bundling those loans into securities and selling them to third parties, as if they were AAA bonds, but made fortunes doing so; people who had no business rating those loans as AAA, but made a fortunes doing so; and people who had no business buying those bonds and putting them on their balance sheets so they could earn a little better yield, but made fortunes doing so.

The progressive in me hates to stipulate to this fact, because WHO could be against people owning a home? We know owning a home is the best way for the average person to begin to build their wealth. And with income spreads WIDENING between the classes, it was and still is hard to argue against...in theory. In practicality though, I must say people who were taking out these loans WITHOUT understanding the implications were either ignorant or greedy or both.

I recently debated with a buddy of mine, who continued to echo the meme that somehow "the consumers were fooled" into buying these types of mortgages. I asked him how is it that an adult, who had never entered into a contract for liabilities this large before (a mortgage loan) could do so without UNDERSTANDING the terms. My only answer is either ignorance (they didn't think they needed to know...huh???) or greed, more likely.

The ignorant piece I kinda sorta understand, maybe people THOUGHT that these subprime loans were structured like normal loans and that their low payments were static. However, it's hard for me to see how any reasonable person would think they could pay $600 per month on a 15 year loan for the life when it originated at $250,000??? That doesn't square.

The greed piece is probably more likely. I think for a lot of people the loans went something like this.

-John Q makes $35,000 per year and has a revolving savings of about $2000.

-John's buddy circa 2006 tells him that he took out an ARM, bought a house for $75k and sold it 8 months later for $150k.

-John read about people backing into these sales (buying a house to live in and just getting lucky with hyper-appreciation) or doing this on purpose (flipping).

-John takes out the loan, circa 2007, not bothering to understand the terms because it's worked for his buddy and "all" of these people he saw online.

-The pyramid ends, as it always does, and John gets left holding the bag, aka known as foreclosure, screwed up credit and a massive headache.

What's my point? Well the banks lent the money, so they're most responsible because it's their money. The govt allowed for this scheme to get out of control, so they're second inline. But the consumer played a willing role. And I understand taking advantage of opportunities, but since NO ONE forced you to do anything...you deserve some blame too.