Did the Average American Create the Housing Mess?

On Friday, September 19, the top news story was the massive “bailout” plan proposed by the Treasury Secretary, Henry Paulson. Every Television Anchor wanted to know on air who was responsible for this mess.

Every politician from the liberal left to the conservative right bemoaned the terrible burden the plan imposes on the Average American. The message is that, once again, the Fat Cats that caused the mess are being bailed out while the innocent, suffering Average American has to carry the load of the bailout.

Did Wall Street or the Fat Cats create this mess? Did the Bush Administration’s policies create this mess? Was the Congress responsible? Television Anchors and Newspaper columnists cast their nets far and wide to look for the culprits that put created this mess and changed the face of American Capitalism.

With great trepidation, we ask whether the American People are themselves mainly to blame for this mess? Was this crisis in fact created by the Average American?

Our intention is rationality and not blasphemy. Let us share our thinking with you.

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So, when low rates engineered by Alan Greenspan brought home-ownership within reach, every American who could afford a house bought one. The banks made it easy to get a mortgage with teaser rates and option-arms or mortgages that kept increasing the loan balance at the cost of equity. Mortgage companies came up with Ninja loans (No-income, No-jobs or assets).

But, the Average Americans were not deterred. They kept signing on the dotted line and buying the houses they could not really afford. History told them that house prices go up and before the teaser rates expired, they could sell the house at a profit or refinance at a better rate.

Fear of being left behind was just as big a factor. We recall a CNBC interview by Jane Wells a couple of years ago, in which a man of meager means said that he bought a house he could barely afford because house prices were rising so fast that if he missed this chance he would never be able to afford a house again.

So the dreams of future profits, desire for becoming a homeowner and the fear of being left behind (the ultimate American nightmare) combined to persuade Average Americans to reach for the biggest house they could get.

It is a basic tenet of business that supply will always rise to meet demand. It is this enormous demand for affordable homeownership that created the supply of low quality mortgages. The Average American kept demanding cheaper mortgages and the lending industry kept meeting this demand. Thus began the Great American Housing Crisis.

Let us take the final step in our journey into sacrilege. We believe that Average Americans knew that they were getting a deal from the lender for which they were not qualified, that they were embellishing their own situations to reach for the mortgage. May be they felt that the bank was big, they were small and it was time they scored one.

In other words, the Average Americans were complicit in the deception. They knew that they were scoring off the bank. They might not have understood all the technical jargon or the complicated conditions of the loan but they knew they were getting a loan they should not get.

This is what caused the Great American March to unaffordable indebtedness and its natural progression into foreclosures, mortgage problems, bank balance sheet deterioration and a huge pileup of bad debts in the American financial system.

Clearly the Fat Cats of Wall Street and Mortgage Lending did everything they could to facilitate the process, but for once, the Fat Cats did not create the mess. The Average American created this mess.

We are neither Republicans nor Conservatives. Our leanings have always been towards left-of-center. But, we believe in calling things as we see them.

In this case, our call is that the Average Americans created this mess and the fat cats are paying for it.

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