All of which leads to the ultimate question, which is what can be done to prevent this kind of problem in the future? Certainly one answer is better consumer education. If these buyers had known their options and had more of an idea of what they were getting into and what they could afford, they would have behaved more responsibly. It's a great argument for personal finance classes in the public high schools. Another option might be closer regulation of bank lending practices, something which is probably in the hands of the state legislatures. It goes against some of my libertarian inclinations, but it might not be a bad idea to just prohibit some of the more ridiculous lending practices which got these banks into trouble. ARMs and even 80/20 mortgages aren't so bad, but some of the other behavior like lending money without any qualifications were just stupid and irresponsible.
This isn't a banking crisis as some have claimed. It's a responsibility crisis. Over-eager borrowers have paid their price for their irresponsible borrowing. Now it's time for the irresponsible banks to pay their price. If the government doesn't put the banks on the right track and they don't learn from this experience, then their shareholders ought to demand more responsibility, which is sort of what they've done by dumping their stock like it was infested with fire ants all last week.
You can see the limits of the crisis by looking at the stock of the responsible banks that weren't involved in this market. I own stock in a bank which didn't engage in speculative lending or backing high-risk lenders and as a result during a week when some other banks lost 50% of their share value, its shares went up almost 10%. There's a lesson there for lenders and for their shareholders.
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Article comments
1 - Lumpy
It really is shocking how ignorant most people are about personal finances and basic business practices, even college graduates. They can't even balance a checkbook much less handle anything involvimg credit. And so many of them are carrying huge student loan debt. It's ridiculous.
2 - Dave Nalle
I need to write an article about student loans and college costs in general - the one thing in the economy which has exceeded the rate of inflation every year. I'm particularly sensitive to the subject because I've got a teenager headed off to school in a couple of years and she's looking at colleges that cost $40K a year - how the hell is anyone supposed to pay that?
Dave
3 - Nancy
The colleges are also sinks of uncontrolled, unregulated spending. Talk about throwing money down ratholes, or good money after bad, IMO-! The irony is, they're notorious for not paying any but the top echelons of faculty (the "names") decent wages - & the Names are 'way overpaid, like all CEOs.
In any event, good article, & for once I agree w/your economic analysis & proposed solution, Dave. A combination of stupid, ignorant consumers & greedy, irresponsible sellers is a baaaaad thing. Very.
Speaking of education, they USED to make all of us (back in Neanderthal days when I was in school) take a semester of basic living skills, which involved balancing checkbooks, reading a bank statement, reading labels, basic consumer legalese, etc. Obviously they don't do that anymore, or are today's kids just too dumb to learn?
4 - Dave Nalle
I think it's been a long time since they had a practical skills class like that, Nancy, but apparently some effort is being made to bring them back.
As for college pay, I sure know what you're talking about. As a junior faculty member I had to teach all the most boring classes and got paid less than half what someone with tenure would get.
Dave