Sub-Prime Messiahs: Who Will Save Us From Our Bad Decisions?

(“PAY NO ATTENTION TO THE POLITICIANS BEHIND THE CURTAIN!”)

There are obvious financial lessons to be gleaned from the sub-prime crisis. Lessons like:

• Making loans to people who can’t afford them isn’t good business.

• If your housing strategy requires betting on rising incomes, appreciating housing values, interest-only payments and low interest rates, you have no chance.

But as the sub-prime mess continues to unwind, there are interesting secondary plots that merit comment. For example…

Whenever a story gets big enough, politicians will insert themselves. It might be to “investigate,” or perhaps to “fix it” through legislation, or simply to affix blame or take credit. And the story doesn’t have to be financial (think of the steroids-in-baseball scandal, Hurricane Katrina, toys from China). But once a topic registers on the national consciousness, politicians inevitably appear.

During the past six months of the sub-prime story, legislation has been introduced to better regulate the mortgage industry, governors and mayors have participated in “summit meetings” to pursue alternatives to foreclosure, and activist organizations have announced lawsuits against “predatory lenders.” Unfortunately, whether it’s because of partisan politics or philosophical disagreements, the people who believe “something has to be done” will not agree on either the problem, or the solution. Check out this headline from an article posted November 16, 2007 on consumeraffairs.com:

Consumer, Poverty Groups Oppose Predatory Mortgage Bill

Measure leaves homeowners worse off, they charge

But even as political figures bluster about a solution or blame each other for not fixing it, none of them even whisper about another aspect of the sub-prime mess: 30 years of political intervention is partly, or largely, to blame. Here’s a quote from a Thomas J. DiLorenzo article titled “The Government-Created Subprime Mortgage Meltdown, posted September 6, 2007 on LewRockwell.com:

“The thousands of mortgage defaults in the “subprime” housing market (i.e., mortgage holders with poor credit ratings) is the direct result of thirty years of government policy that has forced banks to make bad loans to un-creditworthy borrowers. The policy in question is the 1977 Community Reinvestment Act (CRA), which compels banks to make loans to low-income borrowers and in what the supporters of the Act call “communities of color” that they might not otherwise make based on purely economic criteria.

The article is worth reading in its entirety, but DiLorenzon points out that CRA forces banks into a catch-22 situation: Complying with government law will lead to more defaults, but not complying can put them out of business.

This illustrates an all-too-frequent sequence of events:

1. Politicians intervene to fix a problem.

2. The fix, because it attempts to circumvent natural economic principles, creates unintended new problems.

3. Conveniently ignoring that the previous fix was the reason for the problem, a new batch of politicians feels compelled to intervene once again.

 Which leads to a more cynical observation: If you’re going to take an imprudent financial risk, it’s to your advantage to find one everyone else is taking. If you were the only one who defaulted on a sub-prime mortgage, it’s unlikely that any politician would propose new legislation. Instead, you’d be scolded (“What were you thinking?”) and left to suffer the consequences of your ill-advised choices.

However, if a lot of people make the same mistake and default on their mortgages as well, it’s possible that the problem wasn’t your faulty judgment, but that the “system” was flawed. In that case, a default may not be your fault.

When a number of people have the same problem, it changes the psychological, political and economic realities.

• Instead of being foolish individual, maybe you are part of a victimized group – you are not stupid and you are not alone.

• Instead of enduring the legal consequences of your mistake, maybe the law can be changed.

• Instead of suffering financial loss, perhaps it’s possible to stop your monetary and material losses, and maybe even reward you for your suffering.

I’m willing to concede that most politicians, at any level of government, are well-meaning civic-minded individuals. But I also think the Messiah complex (the desire to “save” others) is a psychologically seductive persona that drives many politicians. They love the power of “doing something,” and the attention that goes with it. For these people, what better arrangement for satisfying your Messiah impulses than to repeatedly create a problem, then use your legislative “super-powers” to supposedly fix it? Over time, your followers/constituents develop a dependency on you, remaining so fixated on pleading for a solution that they conveniently forget the source of the problem.

It’s true that many stories of individual financial success feature a strong theme of independent action, of rejecting the status quo and running apart from the herd. But individual success doesn’t create a good environment for needing a Messiah – failure is more fertile territory. That’s why if you think you might fail, running with the herd may be the best way to cushion the consequences. Maybe your political Messiah will rescue you from financial despair.

(Intriguing spin-off thought: If you thought the stock market might crash, perhaps the best place to hold investments would be in a 401(k). Imagine the size of the “herd” of aggrieved investors, and what might be done on their behalf.)