<
But the Great Depression was caused by multiple weakness in the economic infrastructure of this country, and in particular the backing of loans to buy stock. Stockbrokers increased the number of loans backed by businesses (with no collateral) and decreased those backed by banks (which required collateral). John Kenneth Galbraith explored five reasons for the Crash of 1929:
- unequal distribution of income
- weak corporate structure
- poor banking structure
- bad international trade balance
- poor state of economic intelligence
These are large reasons related to infrastructure, not consumer behavior.
What’s happened here is that people without enough income applied for loans they couldn’t afford, and got them. Home ownership is the American Dream; it is not a political or social right. Adjustable rate mortgages are gambling; one bets that your income or the housing prices will go up and make it OK once the payments increase. People who avoided this game will now have to help pay for those who “played” the housing market, figuring they could buy a house with a low payment for five years, then sell the house and make money. These weren’t people buying a home; they were buying a house, hoping the market increases would make them money with very little effort. They invested poorly, were ill-informed, took stupid risks with their money and housing. I’m sorry.
Why was this allowed to happen? The socialist in me says lack of government regulation over mortgage lenders. They had notoriously loose standards for a loan, not checking income and outsourcing application underwriting. Allowing businesses unfettered license was a problem in the 1920s and it’s a problem now — that much is a historical trend. We now have continual pattern of the government not regulating businesses, then having to bail out businesses after things go wrong. [I know I sound like a disgruntled taxpayer, or even a (gasp!) conservative. Or worse, John McCain.]
Alan Greenspan disagrees. He sees a much larger, historically founded phenomenon known as a “bubble”. Greenspan’s analysis of the crisis, written in December, cited “speculative fever”. This is where people and institutions begin creating riskier investments in response to perceived rising prosperity. He blames low-priced exports from developing countries, a decline in interest rates, rising stock values and home valuation, and “the expectations of rising prices” [italics mine]. He claims that even if low ARMs had not been available, people would have still gotten mortgages, but I really don’t think there would have been the large number of bogus applications without the low introductory rates of the ARM. For years in San Diego, people were talking about how they bought their home for this amount, and the value had tripled or quadrupled. Looked like the same two-bedroom suburban tract home to me, and I knew it wasn’t worth that much in real money. I warned of a crisis coming, as the year fives began to kick in. Sometimes I hate being right.
]]>
