It’s okay if you hate me… I still want you to know I am responsible for the financial crisis.
Me and a few others like me, but let me explain.
By way of background, I should tell you I have an MBA in Finance from NYU and I worked on Wall Street for 20 years. I’d like to blame all of this on Dick Fuld, but the truth is the financial crisis did not start "out there." It did not start with the executives on Wall Street. The financial crisis started with me. And with you. And with some false assumptions that many (if not most) people bought into.
The financial crisis started with the assumption that the value of homes doesn’t decrease — at least not very much. It started with the assumption that your home is the biggest (and possibly best) investment you will ever make — encouraging people to buy ever bigger homes and leverage them as far as they could. The financial crisis started with the idea that banks could lend us money against the value we had "built up" in our homes. No one worried too much about the ability to repay loans because, it was assumed, if we only borrowed 75 or 80 percent of the market value of our home, there would still be plenty of room for the price to go down and the banks to recoup their loan money in the event the home buyer was unable to pay.
But there was a little glitch in these assumptions… They were wrong.
I don’t think anyone purposely started the financial crisis — I know it never even occurred to me I might play a part in such a thing. But I did.
It started when I lost my job and started my own business. I used my savings to pay start-up costs and my mortgage. Unfortunately, I had purchased my home at the top of the market — May 2005. I realized within a year that I wouldn’t be able to continue to pay both the start-up costs of my business and my mortgage for very long. However, I couldn’t actually afford to sell my house because I didn’t have the money to pay the bank and the transaction costs. So I made my second incorrect assumption — I thought the downturn in the housing market was temporary, that in time I would make more money, and at the very least, in a year or two, I would be able to sell my house for more money and pay off the loan.
So I took out a home equity line.
You can probably guess the end of the story, but I’ll give you a quick summary. The real estate market didn’t turn around. It got worse as people like me, and other people who probably shouldn’t have qualified for loans in the first place, became unable to pay. The banks started to foreclose and sell houses at auction — driving the prices of home down further. The more prices declined, the less people wanted to spend money — creating a softer economy. As a result, more people lost jobs and couldn’t pay mortgages. And there were even more foreclosures — driving down the prices of homes some more. Banks began to fail, more people lost jobs, more foreclosures… and so on. I think you’re probably starting to get the picture.
To their credit (pardon the pun), banks realized they were shooting themselves in the foot — the more homes they foreclosed on the more money they lost. So banks started trying to work out mortgages with people — but they were overwhelmed — they literally did not have enough people to handle all the work outs. Homes were automatically going to foreclosure faster than they could work out new loans.
Wall Street, in fact, had almost nothing to do with this. Wall Street has just been doing what Wall Street has always done — act as the market place for raising capital to fund businesses (and governments). Wall Street raises money to help businesses grow (it’s called stock, and it’s sold in the market that Wall Street creates), raises the money for local, state, and the federal governments to operate, build sewers systems, and create highways, tunnels and bridges. Wall Street raises money to build dams and other infrastructure, allowing countries to move from "third world" status to industrialized nations, and, yes, Wall Street and the banks created the market for mortgages to be made into securities and sold. That, by the way, happened in the early 1980s. Without the mortgage market, there wouldn’t have been the liquidity in the housing market that’s been there for the past 30 years.
Now most of the investment banks are gone and the mortgage market has effectively dried up. The banks that have money won’t even lend other banks money — much less individuals who want to buy a house. Everyone is afraid. Afraid they won’t get repaid, afraid the market will go down more, afraid they will be accused of making a mistake.
You can say the government shouldn’t bail out the financial system — but it’s not like the government hasn’t been involved. Ever heard of the FEDERAL Reserve? They make the decisions and set the policies that govern the entire banking system. Someone with significant resources has to stand up and say, "I believe in the fundamental soundness of our system." Who besides the government could do that? And who, by the way, is the government? Last I heard the government was "of the people, for the people, BY the people."
As mindful moms, we know what happens when people act from a place of fear. There is constriction, anxiety and, ultimately, failure. The boogeyman becomes a self-fulfilling prophecy. Isn’t that why we compliment and encourage our children? Because we know if we tell them they are incapable of doing anything — if we expect them to fail — that is exactly what they will do. The government, that is, me and you, has to step up to the plate and give our vote of confidence. We have to put liquidity back into the system. Maybe we don’t want to. Maybe it isn’t fair. But it has to be done.
And if you’ve ever considered taking a mortgage assuming you would be in the same economic circumstances you’re in now, if you ever believed the real estate market was a fairly stable market, if you’ve ever thought of your house as an investment, if you ever considered taking a home equity line to improve your home, or purchase goods with money you didn’t yet have, you bear part of the responsibility as well. There is no one villain in this story. Most of us contributed and most of us will have to be a part of the solution.
Written by Kelley McCabe, founder of emindful