Subprime People?

One of the most instructive bits of analysis in recent years was to examine how commentators in the media interpreted the current subprime housing crisis. To many of them, the mess was the result of, well, the recklessness of the American people.

Of course, there were many other potential culprits. They include the investment banks, rating agencies, Federal Reserve and mortgage brokers. all of them had a hand in creating that mess.

The reason why this blaming the customer is so strange is that in the American economy, the American consumer is generally king. It’s nurtured with the oft-quoted line: “The customer is always right!” The rest of the country — particularly corporations and government agencies — is just there to serve their every whim. Or so the fairytale goes.

In reality, the narrative that unfolded about the housing crisis was that it was the inevitable result of consumers taking out loans which they should not have taken out in the first place.

Don’t blame the pros

The media’s message in short: Say what you want, just don’t blame the professional bodies charged with maintaining the safety and soundness of the U.S. financial system — such as the Fed or the rating agencies. Or credit supervisors and underwriters at banks.

Doing so would evidently fly in the face of that even more American bedrock concept – personal responsibility. This amazing pattern of analysis is trotted out reflexively by Republicans and conservative writers (for whom the concept of personal responsibility is a broader dogma).

Never mind that the established powers — the investment banks, rating agencies, Federal Reserve and mortgage brokers — all have a fiduciary duty to keep consumers from making financially unsound decisions.

After all, when it comes to matters of financial prudence and circumspection, the financial system is the center of competence in any nation. Consumers, by contrast, are busy people whose primary area of competence is coping with myriad other things. Finance is generally not one of them – and, at best, only one of many.

There used to be a time when the various financial intermediaries would have intervened in all of this loan business — by denying loans firmly to overstretched consumers. In the past decade, that was no longer the case. consumers were on their own.

Gone, too, were proud American traditions such as transparency and disclosure. In the case of all those housing loans that went bad — whether subprime, flexible rate or interest-only — there was an easy way to avoid the mess. The simple addition of some powerful calculations added to each loan’s coversheet would have forewarned consumers against getting in over their heads.

This information would have included items such as the expected monthly payments if interest rates rise, for when the flexible rate would end – or what the payment would be including paying off some principal.

Adding that information might have helped bring some consumers to their senses. Others, of course, would have signed on the dotted line anyway.

Who’s really responsible?

Financial intermediaries are responsible for more than just earning their transaction-based fees. They also need to make sure that, in the aggregate, their business operations do not undermine the safety and soundness of the financial — and ultimately economic — system of the nation in which they operate.

One bad decision by a consumer to take out a loan he or she cannot afford is an act of stupidity. Having a lot of consumers engage in such acts of recklessness borders on national insanity. Having the central bank, rating agencies, mortgage brokers and investment banks merrily stand by while this happens adds up to a systemic crisis.

In short, it does not suffice for these “players” to focus purely on the mechanical dimensions of capitalism, while neglecting the ethics of capitalism.

Appealing to institutional responsibility in no way absolves consumers from their own responsibility. It just ensures a real counterbalancing mechanism — where consumers are always free to express a want — and creditors are free to reject their application.

When push comes to shove, the only thing that protects people anywhere against a culture of relentless — read: irresponsible — optimism is the firm hand of supervisory authorities, such as the Fed, practicing their fiduciary duty to protect the nation’s (and, as we see now, also the world’s) financial system.

A famous phrase

That is what’s meant by the phrase of the Fed taking away the “punch bowl” — before everybody is getting intoxicated with monetary looseness. And that’s precisely when supervisory bodies ought to step in.

The classic retort to this kind of thinking is that it represents an un-American argument, and in fact the onset of a European-style “nanny state.”

The question is whether such sloganeering — which has infected far broader swaths of rational American thinking than the op-ed page of the Wall Street Journal — helps Americans deal with their finances.

Focusing on the empowering functions of capitalism is certainly important. Since the 2007-2008 crisis, critical steps have been taken to avoid a similar disaster from occurring in the future. None is more important than the establishment of the Consumer Financial Protection Bureau (CFPB). Despite its slightly awkward mouthful of a name, it captures the new federal agency’s purpose pretty well. Consumers now have somebody who has their back on finance.

Democracy is the art of checks and balances, push and counter-push, lots of institutions and players fighting hard to arrive at better outcomes for public policymaking. The purpose of all that is to improve the quality of people’s lives.

What sadly still prevails in the United States of today is something else. The wishes of the consumer are said to be king but, in reality, the consumer often ends up holding the bag.

The most peculiar factor in all this is how leading parts of the U.S. media condone this practice by engaging in a curious game of effectively advocating “Just Blame the People.”

If anything is deemed un-American, that ought to be it.