Friday, July 1, 2011

Blame the lenders (again)

Barry Ritholtz has an interesting piece regarding the noticeable differences between the public response to the housing-led financial crisis of 2007-2008 and that to the current (and developing) sovereign debt crisis in Greece and elsewhere. He writes (pardon the "colorful" language, he's got strong feelings on the matter):
I’ve noticed something intriguing about the debate regarding the Greek default/restructuring/bailout: There is a familiar odor to the “Blame the profligate Greeks” meme now circulating. It is little more than a brilliant marketing ploy. This distraction ignores the simple reality that lending to insolvent people, institutions and countries is first and foremost the fault of the lenders.
Let us start first with the Greeks, who lied their way into the EU (with the help of Goldman Sach’s financial engineers). The ridiculous pay and vacation structure, the absurdly generous pension plan, the excessive spending by Athens. They are a nation that can honestly be described as tax scofflaws. Yes, Greece is a mess.
None of these factors were well-hidden. Everything about Greece is well known to any casual visitor, from its Welfare state to its deficits. Even the shenanigans Greece went through to join the Union European were not unknown. Rather than confront their obvious lack of qualifications, the EU turned a blind eye to it, in order to form their more perfect union.
He raises a good point, and it's interesting how different our responses have been. In the housing crisis, there were some who blamed the borrowers (i.e. homeowners) for irresponsibly using debt to live beyond their means, but the vast majority felt that the real story of the crisis was one of overly greedy and predatory bankers taking advantage of borrowers, originating loans that were destined to fail. This "blame the lenders" dynamic ultimately became the "winning" narrative in the aftermath of the crisis, hence the incredible vitriol directed at banks today.

In today's budding crisis, though, that's far from the case. Instead, we direct our ire primarily at the irresponsible borrowers, blaming the nations in question (rather than the enabling lenders) for their predicament. Instead of blaming China for consistently purchasing our national debt time and time again over the past few decades, we blame our own government for its irresponsibility (which is probably fair, just noticeably different from how we viewed the housing crisis).

After watching the strange theater of the forced "austerity measures" in Greece this week, I tried to imagine the proper analogy in the housing crisis. What if, instead of foreclosing on a home, banks and mortgage companies came to an individual's house and demanded that they cancel their phone service, cut down on their food intake, and sell their cars in the name of "austerity" and improving the chance that they repaid their mortgage? That sounds completely ridiculous, right? And yet, that's exactly what we're seeing here.

Ultimately, I think that the differing responses to otherwise similar stories derives from our pre-existing notions of who is the more sympathetic party, rather than the facts of the matter. In the housing crisis, it was far easier (and incredibly satisfying) to blame the big, evil banking institutions than it would have been to accept the blame ourselves, as homeowners.

In the sovereign debt case, it is far easier to blame one or two basket-case governments (especially when it is so fashionable right now to blame governments--in this case, THEY are the big, evil corporation relative to the smaller banks) than it would be to place the blame on the lenders, who span everyone from the European Central Bank to nearly every American who places money in a money market fund.

It's hard to trust ourselves when we try to analyze complex situations like these, simply because our reactions are so utterly inconsistent with regard to the actual facts of the case. We all approach situations in life with inherent, trained biases, and it's exceptionally difficult to get past these and assess problems at face value. However, if we are ever to get to the heart of any matter, it's an essential exercise.

[The Big Picture]

No comments:

Post a Comment