Blaming the victim

The November Vanity Fair has a great piece by economist Joseph Stiglitz on the current economic melt-down. Stiglitz has some suggestions on policies that would actually help the economy recover, none of which will probably actually happen.

He also does something that most of the analysts and talking heads fail to do when it comes to discussing the whole subprime mortgage morass: he reminds readers any loan is a two-way transaction. There's been a lot of venting in the news media about people incurring debt they could not afford -- "Good Morning America" is running a tease about talking with a couple who did that even as I type; I'd like to see their mortgage broker sitting next to them, but you know that's not going to happen -- and not nearly enough slamming of the banks for writing all the bad paper in the first place.

The fundamental premise of a loan is that the lender knows what he is doing. It is up to the lender to ensure that he is lending money to a borrower who will be able to repay it, either by securing it with physical assets as collateral or through having sufficient income to make the payments. The borrower relies on the lender to not lend more than the borrower can manage to repay. After all, why would any rational person make a deal that was guaranteed to fail? The answer, of course, is the mortgage broker making the deal didn't care -- he or she wasn't going to be around to deal with the consequences.

Stiglitz then goes on to note that the reaction of the banks to the mess they created is even more illogical: foreclosing on property in a stagnant or sinking real estate market is flat out stupid, although he doesn't phrase it quite that bluntly. Pushing people out of their homes simply increases the inventory of unsold houses on the market, as well as creates inventory that is sitting there empty, unmaintained, subject to vandalism and theft, and decreasing in value with every passing second, more or less guaranteeing that if and when it does sell it'll be for a fraction of what was owed on the mortgage, depressing the real estate market even more. In short, creating a death spiral.

Of course, the huge mega-banks don't care -- they no doubt believe they'll still be able to keep passing around pieces of paper backed by nothing indefinitely, especially now that Congress has made sure the lifeboats are in the water for them -- so my own feeling is it's going to get a lot worse before it gets better.