A Tale of Two Chains

In a post over on LiveJournal, I quoted approvingly of George Will who said, essentially, "What no one will say is that we, the average person, are substantially to blame for the financial crisis because we wanted our illusion of prosperity at no cost."

Friends walrusjester and ng_nighthawk have responded by saying:

But the lenders, not the would-be homeowners, are the ones who start that snowball a-rolling. Lenders don't offer "exotic financial instruments" because people are begging to have them, but in hopes of making a profit by manipulating them. Lots of people had a hand in this crisis, but it started because lenders wanted to increase their profits by offering loans to people who were at greater risk of being unable to pay. A larger share of the blame does belong to the lenders than to the lendees. -- walrusjester

I agree with this. I'd also say lending institutions offer an easier "correctional chokepoint" (if you follow my made-up terminology there) than trying to make people more fiscally conservative in their lifestyle choices. -- ng_nighthawk

In response let me first point out that neither George Will nor I had exculpated lenders. We have merely tried to say what in the public square has gone unsaid and is unlikely to be said, for obvious reasons (how unfortunate that this junk hits during an election!). So, sure, many lenders knew they were playing a role in a crazy system, and they thought they could profit from it.

But if the lenders--the ones in the middle, anyway, who made deals directly with homebuyers--thought they were taking advantage of anyone, it was the big banks above them who were willing to buy any of these loans, or pieces of them, no matter how risky they were. There was indeed a demand for "exotic financial instruments," not from below, but from above. And, of course, there was demand for bigger houses for less money (this quarter, if not next) from below.

I don't have any issue with putting new sanity checks into the lending system in the form of new regulations. I question why we think this will make any difference other than a temporary and delusory one. We all seem to agree that there's a chain of causality here. And the lenders are just one link in the middle of that chain.

I should mention, my understanding of the housing situation comes from listening to this excellent piece of financial journalism, and what I take away from it is that the world is awash in money--money that wants to do something. Specifically, make more money. So we patch up the housing situation, but the fact is that housing, as an investment, is already ruined and will probably only be getting worse. The money out there still wants to be invested, and it's going to find another avenue of beating the obvious markets out there. If we think government can be more nimble or more perceptive than the financial market, we're fooling ourselves.

So, sure, clamping down on lending practices is easy, but is it effective? Only in a limited sense. Can we put other restraints on the "giant pool of money"? Theoretically, but, again, that money's going to go somewhere. If it weren't for inscrutable global financial markets, it might just end up investing in inscrutable military adventures--I don't even know how to speculate on that. What I do know is that at the opposite end of that chain from the "giant pool of money" is us, regular people, and crucially, in this context, our appetites. If we don't learn to moderate and restrain those appetites, then we will remain the fuel for the giant pool of money's future investments. If we don't correct our culture of abstraction, where our homes are just "investments" and our vocations are just "jobs" and our property is just numbers in a computer, then we will be satisfied to be cogs as long as we are cogs with neat stuff. Frankly, we're so deep in this global economic game that we can't escape it in any substantial way. Pragmatically speaking, we're stuck, which is why we're lucky that virtue (which is what we're talking about here when we're talking about restraining appetites) is its own reward, and is a capacity which can never be stolen.

Which is not to say there isn't hope for the future. Because there is another chain: At the top is us. People. And cascading down to the bottom are all those institutions--corporations, governments, hedge funds, global markets. They're all run by people. And just as the demand trickles down from the giant pool of money to us, so the virtue might, if we learn to value it again, trickle down to all those institutions. Many might turn out to be incompatible with virtue, and they will fade away. Probably the whole system would change, become smaller and saner. But if this hope is feasible, it doesn't start with the lenders, the bad actors, or the government. It begins with us, and it begins with our souls.