So here we are–yet again–in what is undoubtedly just the beginning of another major financial crisis; the point where the bubble has burst but the detritus has not yet settled.
The markets–stock, credit, etc.–seem to have awakened all at once to the fact that in the last few years the housing market got overheated, primed by an explosion of mortgage lending which went steadily from good credit risks to those who were just plain risky.
There may be hell to pay now, but boy, o boy, did Wall Street enjoy it while it lasted!
The subprime market, as it’s called, has all but evaporated, squeezed by mounting defaults by homeowners who couldn’t really afford their homes in the first place and definitely couldn’t afford their mortgage payments as initially low rates started to rise inexorably.
These loans were of course securitized by Wall Street firms, which in turn created more liquidity at the time for the overheated housing market. Now that these subprime homeowners are defaulting in record numbers, these securitizations don’t look so good and many firms that invested in them are losing their shirts.
Credit has tightened startlingly in an amazingly short time. Now even people with good credit profiles are having to go through greater scrutiny.
These periodic crises are probably just part and parcel of our capitalist system. The S&L crisis, the technology stock meltdown and now this credit crisis are but a few examples of how every few years some big thing comes along and then, fueled by excesses, explodes.
Much is being made about how a lot of these people in the subprime market were victims of not understanding the terms of their mortgages or were victims of outright fraud on the part of mortgage brokers and bankers.
Fraud is one thing and should be severely punished. But who in their right mind signs a mortgage agreement without understanding the terms, implications and consequences? This shows an appalling lack of personal responsibility, of letting desire overtake everything else. But I also think it exposes the astounding ignorance of the general public when it comes to practical economics.
This brings me to perhaps the only thing on which I have agreed with President Bush in the last six years. Yes, I’m still reeling. Indeed, it was one of those “Beulah, get me the smelling salts” moments.
According to the New York Times, the president said, “There needs to be financial education measures in place.” This was referring to his assertion that part of the housing crisis was due in part to homeowners not reading the ‘fine print’ in their mortgages.
Financial education. I hope the president was also thinking about things like understanding how usurious credit card rates can be even when they are given in terms of a daily or monthly rate. Or, the simple fact that bond prices and yields go in different directions. Or, that adjustable rate mortgages are more likely to go up than down.
The Life and Health Insurance Foundation for Education had the bright idea a few years ago, and has been implementing it, of teaching high school students about the elements of life insurance.
I’d love to see a widespread movement start that teaches high school students about everyday economics–things like credit cards, mortgages, savings plans, debt management, etc.
Periodic crises may be integral to capitalism, but a more educated public would be able to withstand the shocks that currently are wreaking havoc among the vast swaths of society that just don’t have a clue.