Thoughts on the financial and credit crisis
I’ve been giving this credit and financial crisis a great deal of thought over the last couple of weeks trying to determine the root cause of the problem and what it will take to fix it – that’s what engineers do. The most tragic outcome of this entire episode is that government, Wall Street and individual consumers have managed to destroy the trust that’s necessary for a capitalist society to function. The people who haven’t squandered the trust and integrity they’ve developed should do well right now as long as the cost of footing the bill doesn’t crush them.
Trust is built up over time which is why it is essential for the hurdles that people or companies must get over to begin doing business with another entity are so much higher than for those people or organizations continuing to do business when a relationship has already been formed and has been successful. When companies providing loans did not put their clients through the same tough scrutiny that they used to have to go through, they skipped a crucial step in the process for building trust. Lenders didn’t worry about that though because they were able to pass along the risk they took on to companies who bundled loans. So while government and others used organizations and companies like ACORN and Fannie May and Freddie Mac to make (or force) loans they normally wouldn’t have made, lenders were able to make those loans because they could pass along the risk. There was also an implicit understanding that the government would bailout companies who ended up collapsing from these business practices and therefore only needed to trust in the government to clean up their mess. Now we have watched a few people walk away with riches (corporate executives and government officials) and many people get hurt – I imagine that is quite the opposite of what was intended.
Borrowers also were done a disservice by not having to clear higher hurdles because they were convinced that they could service the loans they were taking out. They were told that they deserved more…more house, more TV’s, more cars, more stuff. They were made to believe that life wasn’t fair because they hadn’t accumulated as many things as their neighbors. Their greed to keep up with the Jones’, their trust in the lenders that housing prices will always go up and their ignorance in believing they could afford their loans led them to make very poor financial decisions. Now many who made poor decisions are getting bailed out by the government, the people who played by the rules are going to have to foot the bill and no one will end up learning a capitalist message from this mess. They’ll only begin to put more faith in the idea that the government should provide all manner of security regardless of the actions that put them in their particular situation. This is what happens when well-intentioned people make poor policy changes, when individuals can not be satisfied with what they have, when greed is not put in check by the reality of risk and when government gets too big.
If the government thinks that bailout packages, purchasing stakes in private enterprises, or providing stimulus checks to consumers is going to get our economy out of this mess they have another thing coming. The only action that all this government intervention is producing is delaying the inevitable - some very hard times. It is just a question of whether we want to deal with those hard times now or pass along the obligations to future generations. It is obvious to me that politicians want to pass along those obligations when we need to make some hard decisions (like saving instead of spending) and begin to rebuild the trust that is necessary for our country to function.
