A Reward for Failure?

Who is at fault for the financial crisis and who is being punished for it? Our hope is that these would be one and the same, given our country’s love for justice. Similarly, those who have worked hard to maintain financial stability with wisdom should be rewarded by seeing their investment in their future flourish. Of course, we read every day about the incompatibility of this economic ideal with our current situation, and most unfortunately, many have seen the consequences of this fault occur to their families or friends.

Initially, the finger of blame points to large corporate banks, who have made loans and allotted credit to high-risk candidates, in the hope of receiving higher returns and expanding assets on their balance sheets. Banks also packaged and repackaged bundles of mortgages so often that their true value now lies in mystery, which, in an economy that thrives upon the value placed on currency, securities, and property, carries the potential and power to devastate the fundamental aspects of the entire system. In addition, not many people associate that common, yet small footnote saying “investments cannot be guaranteed” with the idea of a large bank, known for its stability and safety for depositing savings. Who could have imagined that so many mistakes could be made in corporate investment banking? Clearly, banks are to blame for lending to risky individuals and businesses.

But what were these individuals and businesses thinking, to prompt them to take on more debt than they could possibly pay back in the present? For starters, much of the country was living under the assumption that real estate would continue to appreciate in value indefinitely. Thus, by the time the loan had been paid off, the owned property would be worth more than the value of the loan. After years of surging profits and opportunities, the future was bright, and businesses assumed that expanding in the present would yield further growth in the future. Many people bought houses that became an excessive liability, and businesses grew too quickly, loading up on debt that could not be paid back in the event of a fall in profit. Shouldn’t these people have known better? It appears that they share a large part of the blame as well.

The ensuing fear and panic has led to harsh consequences. The banks, which abused lending power, are failing, and those individuals who took on too much debt are seeing their homes foreclosed or businesses pushed over the brink of bankruptcy. This alarming news created a psychological effect, in which people stopped spending, magnifying the effects of the downturn substantially. For a length of time, Fed rate cuts and small fixes were largely ignored, and it became clear that the only way to counter a change in sentiment was to make a statement so large it would reassure the ordinary consumer. Three or four of these ‘large statements’ later, we have not seen any change in sentiment, though the effects of the stimulus packages and bailouts have been touted. Certainly, halting foreclosures and allowing failed banks to maintain operations for those frightened for their life savings is a respectable goal. However, the $800 billion, and possibly much more, in government bailout money has been tossed into the infamous balance sheet black hole, and the newly proposed $50 billion plan to hand money over to homeowners who can’t pay mortgages will also go to many of those who overextended their capabilities in order to live in an excessive manner. Needless to say, idly allowing businesses to fail and families to lose homes is not an option from a societal standpoint, and clearly a sizable action was taken. But will help eventually reach the responsible people who merit it, or will it be lost somewhere along the dicey path of uncertainty through which the aid is being fed? For the moment, this remains to be seen.