As someone who tries to teach students about evidence, support, reasoning, etc., stuff like this just makes me mad, and I”m not sure if it’s because the cartoonist is ignorant of basic background information and economics, or because he thinks his readers are that ignorant, or because he’s right. (I’m sure he’s right a lot, I’m just not sure how right).
The cartoon is correct as far as it goes, but it leaves out a key point, a point that would establish whatever blame there is in this more accurately.
Even if you didn’t know about the Community Reinvestment Act (which we’ll consider in a moment), a little bit of thinking based on what’s presented here should bring you to a different conclusion than the cartoonist implies, and it’s contained in this statement: “And taxpayers with no connection to the bank had to pay all the money to fix it.”
The eye-opening question should be: “Why?” To expand a little bit, “Why did the taxpayers have to fix it?” Because they told the banker ahead of time through their congresscritters that they would.
Think of it this way: if you go to Las Vegas and gamble, and you only have $200, you’re going to gamble fairly cautiously. If I tell you, “Go ahead and gamble. If you screw up, I’ll back your losses up to $10,000,” are you going to gamble as if you have $200, or as if you have $10,000?
Take it further: if you gamble as if you have $10,000, and you win, you win BIG. But if you gamble as if you have $10,000 and you lose, you lose NOTHING.
You’d have to be an idiot not to gamble as if you have $10,000. [Note: students in one of my classes heard a very similar, but not identical, metaphor recently to illustrate another aspect of this problem.]
If Mr. CEO had run the bank as if there were no federal guarantees, the board of directors would have fired him and hired someone who would, because that was the way to maximize the potential benefit to the stockholders. I would go so far as to say it was his moral imperative.
When you add in the Community Reinvestment Act, which basically said, “We want you to make loans to people who obviously don’t have the income to pay it back, and are therefore a very high risk,” then you have not just an incentive but a practical mandate to make loans with a high probability of going bad.
Many of the low-income families who received the loan worked hard and followed through and benefitted from the CRA, getting into homes they couldn’t otherwise qualify for, and making good on the bet. They won, the bank won, and society won. This was the upside, the good intention claimed (no implication intended as to its genuineness) as the motive for the act. For people who looked bad on paper but whose moral character actually made them a good risk, it was a godsend. As with many well-intended acts, there were unintended side effects (and I’m just cynical enough to believe there may have been some intended side effects, i.e., to make us look prosperous just long enough to make it through the “next” election, which is why this has nothing to do with Democrat or Republican).
Many other low-income families got in over their heads, and defaulted. They lost, and lost big because they were enticed into something they couldn’t afford, and what little credit they had built up disappeared. In that case, the bank came out even, because the government had set it up that way. And the taxpayers? They lost, of course, because government officials don’t use their own money to back up such schemes.
And why would the government do that? I don’t know for sure, but I suspect it has something to do with votes. The appearance of prosperity is more important than actual prosperity.
So, folks, if you keep buying into the popular pastime of blaming the evil, rich CEOs, you are cooperating in the charade. Pay no attention to the man behind the curtain; you’ll feel better, and the man behind the curtain, who is sweating profusely, will certainly feel better. He’s waiting right now to see whether you’re going to buy it.
At least dig a little first.
(In case you miss the point, this is not primarily about the specific crisis, but rather about questioning evidence and motives. Dig.)