So, who should we really blame for this humongous financial mess that led to hundreds of thousands of layoffs not only in the finance sector but basically every industries?
Apparently, the banks' irresponsible lending practice was a major cause; had they not done this, the investment banks wouldn't have the opportunity to utilize their leverage and buy thousands of subprime loans. To my mind, however, the government is the biggest culprit behind all this mess.
"How come? The banks were so crazy that they lent huge sums of money to people without a decent credit score or even income proof! They're the biggest culprit!"
Well, if a system has holes in it, people will always abuse them to maximize their gains.
Wake up guys. You're not living in a wonderland. You've to assume that a substantial number of people are greedy and selfish. The most important thing a government should do is to make sure that when greedy people earn their money, they also bring some values to society. Ideally, the more money they earn, the more values should be resulted. Even if you cannot make these two things proportional, at least make sure they're doing no harm.
Both the government and the banks have bad systems. Let's take a look at the banks first.
If you read Joel's article "How Hard Could it be?: Sin of Commissions", you'll see how a shoe chain cashier earned his commission while driving down the net income of the business with hard-to-find coupons. Similarly, if you give your loan officers commissions based on the number of mortgages they solicited and the values of the loans, they'll sacrifice the things you're not measuring just to make sure these two benchmarks look good on paper.
"The borrowers don't have income proof? No problem. I will 'make it work'."
"How? The underwriter will reject the loan right?"
"Haha you must be kidding me. The underwriter is just a small potato. Who's he to say anything when our CEO says that it's okay to do subprime loans?"
And, guess what, the CEO's bonus is based on the revenue of the bank in that year (Will we be still okay in 2008? Who cares?).
If I claim that this financial mess was unavoidable because no freaking bankers was able to see that they were generating a housing bubble, you must say that I'm out of mind.
I mean, how could they NOT KNOW? Even if the low-rank loan officers didn't know because they couldn't see the big picture, the management MUST have known that. They do that for a living, okay?
And the sad thing was: who would give a dime even they knew what's going on? If you're pocketing astronomical bonuses that're more than enough for you to retire at 40 and live a easy life later on, why would you care that you're killing Citigroup, Bank of America, HSBC, etc?
"In addition to our bonuses, the stupid government will utilize all means to save our ass should we run into troubles since we're 'too big to fail'."
Talk about AIG.
Yeah the boards of directors should have had the incentives to care. After all, they're supposed to have substantial amount of stock of the banks. No matter how much dividend they got in those few booming years, I don't see how it's worth it to have all their stock flushed down the toilet later on. Well, the only reason I can think of is that they were all fooled by their CXO's (X = E, F, O, etc).
"We've increased our income by 20% this year!" said the CEO.
"You've done a good job! Let's give him 20% increase in bonus!" cheered the board of
Anyways, how about the government?
Banks are no regular businesses in at least two ways:
- they've a huge number of small debtees (aka depositors)
- the money they borrow (the deposits) are backed by FDIC
Because of this, the government created FDIC to insure the depositors' money. This is a good thing, but it also creates the "government-will-save-our-ass" problem. If the banks aren't regulated, they'll make very risky bets:
"Hey, the money is backed by the government anyways so let's make this bet. If we win, we'll be rich. If we lose, worst case is that we got fired, no big deal."
And the banks weren't regulated at all when they were creating the biggest housing bubble in history. Did Alan Greenspan notice the bubble? Of course he did, everyone did. Did he or the government do anything to stop it from growing? To the best of my knowledge, not that much or even none.
I don't have enough knowledge in economics (heck, I've never taken any economics class) to judge how well his free market ideology works. That being said, there're some regulations that make perfect sense to even to a layman like me. How about these rules?
- Do not lend money to borrowers who've no proof of income.
- Do not lend money to borrowers who've very bad or zero credit.
- Do not let borrowers make 0% down payment despite the lucrative high interest rate.
- Do not make ARMs to borrowers who've no hope of making payments when the interest rises after a few years.
- And so on.
Using any kind of reasonable measure, the Bush administration was a failure. Bill Clinton might have initiated the bubble back in the 90's but Bush had plenty of time (8 years) to at least make the bubble burst more gracefully.
I hope that the Obama administration will reform the rules that govern the banks so as to stop these irresponsible lending practices from emerging again. Remember, to own a home is the American Dream, but there's no shame whatsoever to rent. If you can't afford to buy, just don't buy. This is one message that I really hope that the government can spread to the general public (preferably from Obama's mouth).
Beside having a more capable government, another long term solution is to educate the our next generation to have better values:
Instead of judging people's success by how much money they make, judge them by what they do to the country, to the world, to humanity.
There's no way to construct a perfect legal system with no hole at all that can be exploited by the malicious to get rich. However, if we have values like the one I propose above, a low-income janitor will be considered far superior than a wealthy investment banker who uses his smarts to invent securities that no one can understand and sell them to the ignorant elderly (Lehman mini-bonds in Hong Kong anyone?). When people have right values, they'll tend to do the right things.
To the bankers who caused this world disaster for the sake of their commissions/bonus/whatever: how do you think the history will judge you?