BANKTHINK

Who's to Blame for the Crisis? The Consumer

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There is an iconic photo from the 1930s showing Richard Whitney, the former president of the New York Stock Exchange, being led off towards jail in his elegant suit. (He had stolen from the NYSE pension fund.) Sending him to jail didn't alleviate the Depression, but I suppose it gave many people a nice, warm feeling.

Now, once again, hard times continue, politics intensify to a crescendo — so the spotlighting of scapegoats, led by President Obama, proceeds and expands. Create just one more taskforce or bureau, and we'll finally make these evildoers pay in spades, right? Billions!

I agree that the cause of the economic distress, the fountainhead of wrongs and injustices, is indeed people — not banks or corporations.

But these harmful people are consumers, and not just 1% of them.

Who maintained all-time low savings rates during prosperity—preferring to spend and enjoy rather than protect against a rainy day? Consumers, tens of millions, hundreds of millions of them — particularly the less affluent.

Who is it that saw sky-rocketing home prices as a splendid investment opportunity and even a speculative bonanza — with little or no risk if down payments could be minimized or avoided? Millions of consumers.

Who is it that borrowed and leveraged more and more on cards and home equity, without worrying about affording the payments? Consumers. For every dollar that "Wall St." borrowed carelessly, how many hundreds or thousands of dollars were irresponsibly borrowed by consumers?

Who discovered and exploited the fact that you can improve your financial situation at least for a while by lying — and then deliberately choosing not to meet your legal obligations? Greece? Yes, but I was thinking of U.S. consumers.

So, will we cure consumers of their foolishness and prevent "next time" by educating them via handouts to virulently partisan groups?

Financial education of consumers has repeatedly been attempted, but has seldom if ever succeeded. Public schools in California taught kids to balance their checkbooks. Instead, why not teach them to conduct their personal relationships so as to avoid adding to the divorce statistics? Either way, education hasn't changed human behavior enough to reduce errors and grief.

Despite ample evidence of seemingly incurable consumer profligacy at the root of economic misery, the prevailing political narrative mendaciously blames banks rather than consumers for all the destruction.

The nostrums being promoted are fairer: they'll actually punish consumers more than banks.

When we hamstring lenders and limit financial choices, we're assuring that many people will get less of what they want. That's what will happen when the "CFPB" drastically reduces payday lending volume. (Will pawnshops be next? People borrow money they can't repay—and lose their wedding rings. Should we impose "ability to pay" on them also?) Likewise when the SEC makes money funds unattractive. And when lenders are required to record each transfer with local authorities rather than use MERS, guess who will pay the increased costs? All homeowners, not 1%

Prepaid cards are another dramatic example. Continuing exponential growth shows that, as now marketed and on today's terms, they're the preferred choice of increasing numbers of consumers. There are an enormous number of repeat purchasers. I've seen no data to show these cards are causing disproportionate complaints or harming their owners. Yet there is a cacophony of accusations aimed at limiting card terms, thereby restricting consumer choice.

The most prevalent argument is not that the cards are misleading customers, but that they are too expensive. Gasoline is too expensive — but the self-congratulatory pseudo consumerists in Washington are proceeding to make gas even more expensive by ring fencing Iran.

Where does "the consumer is always right" lead? You can watch the protestors in Greece or Italy and hear their sad stories. The hardships many of them suffer are genuine, and much worse than ours.

How did all that happen? Was it the fault of a selfish political, social or financial elite making up 1% or 0.001% of the population? No, I think this crowd, this mob — the voters, the consumers — got the rigid labor laws they wanted, the inefficient taxation system they wanted, the unmerited bonuses they wanted, the mendacious financial disclosure they wanted.

This did well for them while it lasted. Now they riot to demand that it continue—no matter how much Germany will have to pay for it.

We're headed in the same direction. Except that Warren Buffett and a few friends want the 1% to foot the bill. I applaud their generosity with other people's money.

Anrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was the founding chief executive of First Deposit, later known as Providian.

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Comments (6)
This is satire, right? Payday lenders? Right, because poor people NEED loan sharks! And leverage? You're saying that consumers borrowed MORE than the bankers? Do you even know anything about this subject? I'm curious, assuming this is not Candid Camera... who was it that destroyed the securitization market... you know the one that hasn't seen a single private securitization since '07? Was that consumers too? Consumers took down Goldman, Morgan, JPMC, BOA, WaMu, all of them... we did that? Consumers? Dude... tell me you're kidding. Oh wow... you're not kidding. I just Googled you... you're serious. Unbelievable. Well, I for one am nothing short of thrilled to have discovered you. I mean, how lucky could I be? Good luck in your next venture. LOL.
Posted by Martin Andelman | Tuesday, February 21 2012 at 10:03AM ET
"Too Big Too Fail", "Inside Job", "Margin Call",
The FBI estimates that 80 percent of all mortgage fraud involves collaborationor collusion by industry insiders. (http://www.ritholtz.com/blog/2011/12/fbi-estimates-80-of-mortgage-fraud-involved-industry-insiders/)

Audit Uncovers Extensive Flaws in Foreclosures
By GRETCHEN MORGENSON
Published: February 15, 2012

An audit by San Francisco county officials of about 400 recent foreclosures there determined that almost all involved either legal violations or suspicious documentation, according to a report released Wednesday. (http://www.nytimes.com/2012/02/16/business/california-audit-finds-broad-irregularities-in-foreclosures.html)

You either don't get out much or you are stuck in an era when banks were actually regulated to act with integrity and you absolutely cannot believe that this is happening.
Posted by ElaineG | Wednesday, February 22 2012 at 1:48AM ET
We're all to blame in this case, as a society, an industry, the regulatory framework, media and, particularly in my view, a failed corporate governance environment. But consumers cannot over-leverage themselve wtihout being over-granted credit by lenders or originators, some intentionally laced with '"snake in the wood pile" terms and conditions.

At this point, to tease out and allocate portions of blame is a fool's errand and obsures the path to recovery, whatever form it may take.

This lopsided view and the vehement style with which it is expressed is beneath AB's dignity and is inconsistent with its brand.
Posted by D Lewis | Thursday, February 23 2012 at 8:50AM ET
Everyone is to blame yes. But the narrow-mindedness of this article is astounding.
Posted by James F | Friday, February 24 2012 at 9:40AM ET
A predictable commentary by the founder of a massive sub-prime credit card company. For him to say anything less than what he said here would be to admit complicity in the crisis. Instead he blames the consumers in his sub-prime world who were ignorant and mislead by the thousands. Same BS spewed by another spineless predator lender....predictable. And shameful.
Posted by jake1964 | Friday, February 24 2012 at 12:31PM ET
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