Tuesday, July 22, 2008

Back to Marshmallows


David Brooks takes us on another guided tour of his, "Everything I need to know about life, I learned from marshmallows" school of sociology. The credit crisis? Caused by a deterioration in America's moral fiber.
America once had a culture of thrift. But over the past decades, that unspoken code has been silently eroded.
What part of America had "a culture of thrift"? The part that went bankrupt while building giant casinos and luxury buildings? The part that went broke while building opulent mansions and living a lavish lifestyle? The part that... well, did the same thing, but way back in the 18th or early 19th Century? No, by all appearances Brooks doesn't care (and has never cared) about the excesses of the wealthy - his "moral code" seems to apply only to people who aren't "of means".

So what has changed between the time when the poor and working classes observed this purported "unspoken code" against debt and the present? Is this code really a thing of the past, or is it actually something most people continue to try to live by? And those who spend beyond their means - did they truly not exist a century ago or could it be.... Could it be that it is not human nature that has changed, but that the credit industry has changed? Could it be that the guy who was once at risk of having his knees broken by a loan shark is now under the thumb of the likes of Citibank?

Brooks does identify a change in the culture - the rise of consumerism - but he again seems to regard this as an individual failing.
Rising house prices gave people the impression that they could take on more risk. Some were cultural. We entered a period of mass luxury, in which people down the income scale expect to own designer goods. Some were moral. Schools and other institutions used to talk the language of sin and temptation to alert people to the seductions that could ruin their lives. They no longer do.
Yet corporations have spent hundreds of billions of dollars building up this culture of consumerism. And the government has encouraged the rise of consumerism as essential to our nation's economy. What happens when the government takes us into a war of choice? Are we told to tighten our belts, buy war bonds, and pay higher taxes? Or are we told, "spend, spend, spend as if there is no war"? What happens when the economy slows? The government sends out checks hoping that people will cash them, run out to a store, and buy stuff.

Some of the ways that government and industry have, hand-in-hand, helped build this crisis? By deregulating loans such that people who, on cursory review, would be found to have insufficient credit are nonetheless extended credit. (As Brooks notes, "These lenders had little interest in whether she could pay off her loans. They made most of their money via initial lending fees and then sold off the loans to third parties.") By encouraging a mythology that there was no "housing bubble", and that we could expect 10-20% annual increases in our home values from now through eternity. By gutting usury laws, or allowing financial institutions to exploit loopholes in those laws that could have been easily closed, encouraging risky loans to consumers who really aren't creditworthy. Oh, sure, this is depicted as "the market at work" - risky consumers "pay more" for those loans "as it should be". But when push comes to shove, it's the creditors who get backed up with "reforms" to bankruptcy law, insulating them from the risks they accepted when they chose to extend those extremely risky loans, and making it possible for them to profitably expand their lending to the same people.

As for Brooks' statement about schools and institutions "talk[ing] the language of sin and temptation to alert people to the seductions that could ruin their lives", what in the world is he talking about? He thinks we would benefit from incorporating Biblical passages (or, if he prefers, their secular equivalent) into high school economics classes or mortgage contracts?
Despite all the subterranean social influences, there still is that final stage of decision-making when individual choice matters. Each time an avid lender struck a deal with an avid borrower, it reinforced a new definition of acceptable behavior for neighbors, family and friends.
I'm all for personal responsibility, including in relation to your spending. But I can't agree with Brooks' effort to shift this to the individual. It was not a culture at the bottom that caused aberrational "avid lenders" to suddenly appear and offer unwise and risky loans. It was a culture of unwise and risky lending that opened the door to excessive borrowing by people they knew were extremely risky prospects. This culture of corporate irresponsibility was fostered by government policy, and was evident from the bottom to the top of pretty much every financial institution that has been affected by the current crisis.

You want people to adapt back to the times when financial rules were tighter, and thus when people who could not afford credit could not easily get it (at least without risk to their kneecaps)? Then you need to stop yammering about how people have changed, and start advocating for the reinvigoration of usury laws and regulations on lenders. But no, David, you will not find that either government or industry have any interest in backing you up.

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