A Philosopher's Blog

Subprime Loans, the S&L Scandal and Bailouts

Posted in Ethics, Politics by Michael LaBossiere on March 26, 2008

As I was watching the latest bad news about the economy, such as the sub-prime mess, I was reminded of another economic down turn in the 1980s that arose from the Savings & Loan mess.

While I am no economist, the similarities are evident. One example of this is a common pattern in the realm of real estate.  In the S&L scandal, one factor was that the S&Ls started making “imprudent loans” in order to take advantage of the real estate boom. The end result was, of course, a massive taxpayer bailout and other severe economic problems. In recent years, there was once again a real estate boom. Once again, imprudent loans were made to cash in on real estate. The result was yet another economic disaster. Once again, it seems that the taxpayers (such as me and possibly you) will be bearing the brunt of this mess.

The pattern here is certainly an interesting one and shows that either people do not learn (and hence repeat the same mistakes) or that they learn all to well (that a huge bailout will always be available).

I’ve read in various places that the current crisis is the result of mismanagement. On one hand, that seems obvious. It is like seeing a car in a ditch and concluding that is most likely a result of bad driving.  On the other hand, perhaps the crisis is a mix of both poor and brilliant management.

In terms of the poor management, the people who are suffering from the sub-prime mess seem to have made poor financial choices. The banks were in error when they offered such loans and the people who accepted them also made a mistake. Or perhaps it was merely a case of a gamble that went terribly wrong. Then again, staking so much on a gamble could also be seen as bad management.

In terms of brilliant management, some people made a fortune through the practices that have created today’s disaster. It is tempting to attribute to them a clever plan-one they developed based on past experiences. To be specific, they learned that a fortune can be made through practices that ruin others and that the folks in the government will be willing to throw our money at the problem. Thus, like spoiled and rotten children who have broken the cookie jar stealing cookies, they get to have their cookies while the adults clean up the mess and explain to the other children why they just get crumbs. Knowing this will always be the result, they keep on breaking that cookie jar.
Of course, perhaps that hypothesis is giving people too much credit. It might simply be the case that people were motivated by greed and let their desire get in the way of whatever better judgment they possessed. Like any other addict, they simply focused on getting as big a fix as they could and thought little about the consequences. Then, as always happens to a structure built on a weak foundation, the whole mess collapsed.

As noted above, this is a pattern and one that needs to be broken. One way to do this is to hold corporations accountable for their misdeeds and to refuse to bail them out. Taking money from the taxpayers is not a way to fix the problem. It merely encourages business people to keep following that same pattern because they expect they will be bailed out. As with anyone, if a person does not suffer the consequences of her mistakes (or misdeeds), she will most likely keep on making them.

On an unrelated note, whenever people tell me how education should be run on the “business model”,  I always give a short laugh and ask whether we should follow the S&L Model, the Sub-Prime Model, or another similar model of disaster. Yes, I know that I’m willfully ignoring the good business models. People should feel free to suggest some that work well.

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6 Responses

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  1. magus71 said, on March 26, 2008 at 10:59 pm

    Banks got greedy. Home-buyers got greedy. The governement enables it with bailouts. It’s just like dealing with an alcoholic or drug abuser; there comes a time when everything you’re doing for them is only feeding their problem, so you have to take away the the good stuff for a while.

    But that won’t happen, because we’re officially addicted to our governemnt giving us “magic money”. The system won’t last forever. Something has to give eventually.

    The banks would shrink from imprudent loans of they knew for sure that the government wouldn’t bail them out.

    Your predictable shot at the business model for schools is nearly baseless. Afterall, there are many successful businesses in America, not just the failed institutions you’ve mentiond. Schools don’t follow the model? But actually, schools are following a great business model, they’ve hiked average tuition by astounding amounts in the last ten years–far outpacing inflation–made tons of money, and made college almost inaccessible for some:

    “The College Board pricing report states that for dependent students from the lowest income quartile, the average net cost of attendance at a four-year public school was an astonishing 47 percent of the average family income in 2003-2004, up from 41 percent in 1992-1993.” ~http://www.wsws.org/articles/2005/oct2005/tuit-o27.shtml

    So if you mean Business Model as in, Making Tons of Money–I’d say colleges are putting it to practice quite well.

  2. Ethics. How To. said, on March 28, 2008 at 8:26 am

    OMG

    Are you kiddin’?

  3. Geaghan said, on March 28, 2008 at 7:52 pm

    Then there’s the familiar Exxon model…

    But the bailout, so far, has been very selective: the investors in Bear Stearns, but not the people who are, or have been, faced with foreclosures. The Dems won’t give the latter group much relief either, just a promise of regulatory reform and, from Clinton, a 90-day moratorium on foreclosures.

    The whole situation recalls the old saying: If you owe someone a small amount of money, you’re become their debtor. If you owe them a large amount of money, you become their partner. So it is with the federal guarantee of Bear Stearns’ bad debts.

    The underlying problem seems to be the assumption that the best-case scenario would always prevail: debtors could service their ratcheted-up mortgages, housing prices would remain stable, the secondary mortgage market would remain strong and so on. This whole house of cards was pathetically fragile.

    Call it the Iraq model.

  4. H James said, on April 13, 2008 at 2:19 pm

    Glad to see this blog posted. Discussions of economics, a subject of great ethical import should not be relegated to to experts in economists. Economics involves the study of human systems arranged to distribute and provide access to goods, services, and wealth accumulation. Martin Luther King Jr. properly recognized economics as the root from which other ethics or social values blossom. Citizens would be wise to attend more carefully to their nation’s economic policies and the process by which these policies are created.

    Clearly, current and historical economic policies set by the US Congress and Federal Reserve Bank, reflect the fact that those who can legislate economic policies are guided by the lobbyists of selfishness and fear rather than by any ethical economic philosophy. Monetary bailouts — whether directed to organizations or to individuals — inevitably sustain immoral thoughts and deeds (mismangement).

  5. Charissa said, on May 12, 2008 at 2:03 pm

    At the risk of looking petty, my husband and I bought our house at a price we knew would be adequate for living within our means and preparing for a future. That means no granite countertops, no wainscotting, no..you get the idea. I have watched others as they “buy up” and feel pretty sure their incomes aren’t substantially more than ours. But the prices of their houses were substantially more than ours. I know some now are struggling. Is it prideful to say I’d rather not have my taxpayer money shimmy to their rescue so they can continue to live large, to look wealthy, to continue to pay for THEIR granite countertops and moldings? I’m sure there are some legitimate cases of people needing some help, but this blanket rescue mission idea leaves a bad taste in my mouth. Kind of like laminate…

  6. Michael LaBossiere said, on May 12, 2008 at 3:40 pm

    You made a wise decision in buying a house within your means. If more people took that approach, fewer people would be in trouble now.

    I don’t think it is prideful to not want your taxes to go bail out people who made poor choices. While I think that the people who were misled should be assisted, that money should be taken from the people who deceived them and not from everyone who pays taxes.

    If our tax money is dumped on the problem, this would send the wrong (but usual) message. It is like having a family in which the responsible people keeping getting hit up to pay for all the foolish mistakes of the others. While family needs to help each other, there is a time when people have to take responsibility for their own poor choices and (in the case of the finance people) their misdeeds.

    Like you, I have a house that is well within my means. The only granite I have is a small piece from the coast of Maine-a souvenir from home.


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