To Speculate Is Rational

In the wake of the housing collapse there's naturally been a lot of debate about the role of homeowners who took on risky mortgages (or houses they simply couldn't afford) in inflating the bubble.

But this is a distraction from the real causes of the credit and housing bubbles which as Calculated Risk recently pointed out were driven by: [More...]

"Rapid innovation in the mortgage industry (securitization, automated underwriting, rapidly expanded wholesale lending, etc), and... a complete lack of oversight by regulators."

CR also noted in comments that "blaming the borrower is absurd" and more provocatively that "it was rational for people to speculate."

This is exactly right as even George Soros admitted in a panel discussion over at The New York Review of Books:

"When I see a bubble beginning, forming, I jump on it because that's how I make money. So it's perfectly rational."

So, ignore the sideshow of Megan McArdle clucking over the finances of Edmund Andrews and his wife: the real issue here is a lack of regulation and "innovation" in financial instruments that did little but lead to the current crisis.

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    The point isn't necessarily assigning blame... (5.00 / 1) (#5)
    by Ethan Brown on Mon May 25, 2009 at 04:12:20 PM EST
    but instead pointing to the MAJOR contributing factors to the housing and credit bubbles which were "innovations" in the mortgage industry and de-regulation.

    and remember that such "innovations" were promoted not only by the NAR but by Greenspan himself.

    In February of 2004, for example, Greenspan encouraged home buyers to take out ARM loans:

    "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage."

    oh, how i do love this! (5.00 / 2) (#6)
    by cpinva on Mon May 25, 2009 at 05:29:24 PM EST
    dadler takes one loose fact (people who couldn't afford the loan to begin with), and manages to extrapolate that into the entire population. you should really have a right-wingnut radio program, or run for office as a republican.

    loan originators make money from (drumroll!)............... making loans! therefore, it is in their best financial interest to make as many loans as they can. since they don't keep or service the loans, the ability of the borrower to repay is not paramount in the application process. this is all thanks to the nearly non-regulation of the industry.

    who, you might ask, is supposed to regulate the industry? why, that would be the SEC and the FTC, along with a variety of state entities. since they mostly either didn't do their jobs during the past 8 years, or did them so poorly any yokel with a shingle and can of paint could set up shop making mortgage loans, those loans got made to anyone who could walk and breathe at the same time.

    most of those sub-prime loans were teaser rate ARM's, sold on the premise that the house would substantially increase in value (and why not, they had been for years.) by the time the ARM came due. they would then convert to a low, fixed-rate, 30-year conventional note, and all would be well with the world. at least, this is what we were all told, by all the smartest people.

    these ARM's were bundled and sold, in a completely (intentionally) unregulated market, with insurance purchased, against the (high) possibility of default.

    this house of cards, built by the players, not us regular folks, collapsed in on itself, when layoffs and declining home values hit. oh, btw, it's not over yet, there will be at least one more round of defaults and collapse.

    so how, again, are all of us to blame?

    Because... (5.00 / 1) (#14)
    by kdog on Tue May 26, 2009 at 09:05:47 AM EST
    we should know better than to think money-changers have our best interest at heart.

    Excusing the gullible and none to swift is getting old...it takes two to tango.  Hopefully we have learned a lesson...but probably not.


    Well said (none / 0) (#7)
    by gyrfalcon on Mon May 25, 2009 at 05:44:49 PM EST
    CNBC's superb documentary about all this, "House of Cards," is running again tonight at 8 and on Saturday June 7 at 8.

    No it wasn't rational (none / 0) (#1)
    by Dadler on Mon May 25, 2009 at 03:07:59 PM EST
    You can only hold it was rational for people to speculate as they did if you also hold the majority of those people were irrational beyond reason.  

    We are ALL to blame.  People made loeans they KNEW were bad hoping to make a killing.  People bought houses they KNEW they couldn't afford hoping to make a killing.  It is the mercenary view of homeownership by ALL involved that brought this about.  Just make your home a home.  

    To not spread the blame is to have this happen again. And George Soros talknig about jumping on bubbles is dishonest to the core.  He can AFFORD to do that, most of us can't.

    It is disturbing to me to see the ease with which indivuduals who made irrational and impetuous choices being relieved of responsibility.

    Now, that is not to say I don't UNDERSTAND why they did it, I simply cannot excuse it so easily.  

    But with wages stagnant for so long, with companies able to drop all contractual obligations to employees pretty much at will, to repeat, I understand why SOME people went crazy.  Most people, however, were merely shortsighted, illogical and greedy.

    No, we are all not to blame (5.00 / 3) (#2)
    by nycstray on Mon May 25, 2009 at 03:22:05 PM EST
    Some of us did not participate, others could afford their loans until their company laid them off/cut their salary, and some were innocent in their lack of understanding of the loans.  

    Most people, however, were merely shortsighted, illogical and greedy.

    I heard the figure was 1 in 8, if that is correct, how is that most people?


    Nonsense, we're not all to blame (5.00 / 1) (#3)
    by Cream City on Mon May 25, 2009 at 04:00:04 PM EST
    as we did none of the things you note above.  We were sensible -- and we saw, simply from reading business pages and paying attention -- the mess that was coming.  Nor do I blame a lot of people who did not overreach but have lost jobs because of bailouts for everyone but the middle class.

    I do blame the property flippers, the criminals who got into that scam, the banks that got into it, too -- and the lawmakers who let it happen rather than doing their jobs.


    And thank heavens that we did (5.00 / 1) (#4)
    by Cream City on Mon May 25, 2009 at 04:04:19 PM EST
    invest in a home, which has held stable, considering what has happened to my spouse's savings for retirement.  At least we will have a roof over our heads, one that we refinanced recently, too -- because we could, because we are good for it and did not fall prey to overspending.

    So are all the people who put away money for rainy days in 401Ks and the like now also to blame for the perfect storm?  What, you wanted them to put it under a mattress?  They were told to save.  At this point, maybe they would have been better off using the money to flip properties and run for the border.


    you really expect the soccer moms (none / 0) (#9)
    by of1000Kings on Mon May 25, 2009 at 10:59:12 PM EST
    or single parents, or struggling family heads who didn't even make it through high school (but still have a 'acceptably decent' job making 30,000 a year) to have the time to study all the terms in a mortgage agreement?

    these are the same people who vote based upon whether they think they could have a beer with the person and not by reading up on every single important issue....

    no...the WHOLE reason of paying a mortgage broker is so that person can read through it for you and ensure that the terms are good for your personal level of income...

    just like hiring a lawyer...do you need to hire a lawyer?  not really, you could learn all the terms and applicable laws yourself just by going to a university library and reading for a couple months...but do you really expect people to do that?  (I do it, but I'm crazy, I filed for bankruptcy last year pro se, no problem; but I wouldn't expect you're average person to be able to do this, nor would your average person even try and signing for a mortgage is exactly the same as filing for bankruptcy)...

    The problem was that the government allowed all these "Boiler Room" style mortgage companies to pop up everywhere (looking at you Countrywide) thanks to our good friend Ronald Reagan's belief that business supercedes any and all regulation...

    and why were these Boiler Room mortgage companies popping up everywhere?  because the new mortgage instruments lacked anything resembling regulation...

    All praise Reagan...either the greatest con-man or the greatest puppet of all time (think you could argue either one)...

    I blame the borrowers (none / 0) (#10)
    by maddog on Tue May 26, 2009 at 05:59:11 AM EST
    as much as the lenders and congress.  The lenders wanted to make money and were pushing whatever they could.  Congress was pressuring the lenders to lend to border line credit worthy individuals so everyone could own a home; reach the American dream.  Then I blame the borrowers.  The ones trying to reach the American dream putting over 30% of their income into a home.  Living on the edge.  Smart people, even those with little education, know that you can't live paycheck to paycheck with a home mortgage.  Smart people know that you don't buy a home that you live in as an investment.  Well I shouldn't say smart I should say people with common sense.  There was a lot of that lacking over the past 10 years in the housing industry.  But it is much easier to blame the regulators.

    You couldn't be more wrong (none / 0) (#12)
    by Slado on Tue May 26, 2009 at 08:18:28 AM EST
    To believe your reasoning gov't should be able to regulate away a problem it creates?

    Gov't sets intrest rates along with the Fed.   Rates where too low for too long.

    Reagan wouldn't have allowed the fed to monkey with the rates for so long.  The market wouldn't have allowed Fred and Fannie to grow so large.   The market would have pulled out long before if there was any thought that real risk was invovled.

    Instead you had the gov't garunteeing all these loans and the market spun out of control.

    Stick that finger of blame right back at the gov't you think could have regulated away all the risk in something as complex as a trillion dollar economy.   Gov't should get out of the way and these bubbles wouldn't be created int he first place.


    Praise reagan he taught us all (none / 0) (#13)
    by Rojas on Tue May 26, 2009 at 08:18:35 AM EST
    Having lived through the buble created by S&L deregualtion and it's aftermath this all seems way too familliar to me. We knew everthing we needed to know to prevent this and we did nothing. Just as then, with few exeptions the same folks went back to the senate and congress and the reactionaries point fingers. Round up the usual suspects.

    But I am reminded the heart of the matter lay in a small sign displayed in an executive washroom in an S&L in the eighies "Always remember the golden rule, those with the gold make the rules".


    You are right about one thing (none / 0) (#19)
    by Slado on Tue May 26, 2009 at 04:04:17 PM EST
    Those in the buisness of making money will always make money.

    Government creates the unfair practicies by changing the rules (most times with good intentions) that allow people to take advantage.

    In a pure market system the cheats eventually loose.  In a system which is heavily regulated, has lots of loopholes and where the gov't insures against loss only those who know how to game the system win.  

    When the gov't steps in to try and make things "fair" it only becomes "fair" for those who are freinds with gov't.

    Such was the case wih the housing bubble and such will always be the case when gov't gets away from free market principles.

    To lay this crisis at the hands of de-regulators is to miss the forrest through the trees.  The market was heavily regulated.  The problem is no government can regulate such a large entity as the world economy.   When gov't intervenes it leaves a mess of corruption and loopholes behind and we get these catastrophies and then I'm to believe that the solution is more gov't.


    ya, because businesses will stop cheating (none / 0) (#20)
    by of1000Kings on Tue May 26, 2009 at 06:49:50 PM EST
    people if there was no regulation...

    What's unreasonable? (none / 0) (#17)
    by Lora on Tue May 26, 2009 at 11:47:01 AM EST
    Is it unreasonable to have placed your retirement money in the stock market?  How about the good folks in charge of your pension fund?

    Is it unreasonable to live in California?  How about New Orleans?

    We take risks based on current conditions and hope we can predict the future.

    So did a lot of homeowners.


    This was a gov't created problem (none / 0) (#11)
    by Slado on Tue May 26, 2009 at 08:13:34 AM EST
    Government and regulation was absolutely not the issue.

    These markets where heavily regulated.  The problem was you can't regulate greed out of anything.  

    The Federal Reserve, the last 5 presidents and Congress should get 99% of this blame.  They set up the system and allowed it to grow out of control starting back in the 70's.   Our government decided that more Americans needed homes, cars, TV's and college educations then anytime in history and the only way to make that happen was to make money affordable....IE credit for everyone.

    Interest rates where too low for too long.   This made college tuitions, cars and houses balloon in pricing to the point that only someone willing to mortgage or borrow against their future could afford anything of "value".

    Then the market simply took advantage of the money at all costs system set up by the fed and our government.

    To now blame buisness for doing what buisness does is foolish.   Money was too cheap and too easy to get and give away and the inevitable happened.   The bubble burst.

    What's so maddening is Obama and Co. haven't learned from the mistakes of the previous administrations and are printing and borrowing money in the failed effort to pump up another bubble and call it economic prosperity.