Subprime Loans, the S&L Scandal and Bailouts
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.