Making Beds. Lying In Them. Etc.

We deserve what we're getting now, and we deserve what's coming down the pike. First now, next later, then an unsatisfactory conclusion.

Now.

We've reaped the whirlwind of our past acts in the current financial collapse. People who had no right buying houses bought houses. These prospective homeowners were aided by appraisers and mortgage brokers who jiggered the numbers to support unwise lending. The appraisers and mortgage brokers were abetted by an irresponsible Congress, who permitted Fannie and Freddie to fund subprime mortgages, thereby opening the tap of cheap money to risky borrowers. Fannie and Freddie had money pouring in because financial gurus created derivative instruments that purportedly eliminated the risk of subprime lending by securitizing the debt and selling strips as riskless, high yield investments. And it all worked, for a while.

What happened? 'Puter's got a theory. All of the aforementioned people were rewarded for pushing money out, not for bringing money in. That is, salaries and bonuses were determined not on results, at least not bottom line results. If Congress really wants to fix the problem with regulation going forward (which 'Puter thinks is a bad idea), a not completely stupid way to do so is to tie commissions and other rewards to longer term benchmarks. For example, for mortgage brokers, pay a portion of the agreed commission on origination, but tie the remainder to 12 month loan performance standard. The broker gets less if the loan tanks.

Later.

Rampant populism threatens to prolong if not worsen this crisis. Nobody wants the downside of their actions to haunt them. Americans are showing themselves to be fundamentally unserious yet again. The rigmarole around the AIG bonuses is misplaced and shortsighted. No one receiving the bonuses was involved in the credit default swap debacle. And these people may be the only folks who know enough to unravel the transactions without completely destabilizing the affected entities. Rather than support and reward these folks (which Geithner and Dodd were right to do in the first instance (even if for the wrong reasons)), Congress is now tearing them down. 'Puter thinks this is going to end badly for AIG, and likely for America.

Further, everyone (banks, homeowners, states, etc.) is standing in line for government handouts rather than taking responsibility for his actions, deleveraging, living within his means and moving on. Relying on the government to protect stupid actors from the consequences of their stupid actions creates moral hazard. That is, if we are not permitted to fail, we won't learn anything, and we will continue to make the same stupid mistakes again and again.

Conclusion.

This post is much longer than 'Puter intended. Short synopsis. We all are at the root of the current crisis, whether we want to acknowledge it or not. Until we get serious, stop blaming others and make a societal shift back to personal responsibility, things will not get better. And government appears to be poised to prolong the transition by rewarding profligacy and punishing responsibility.