Tuesday, May 19, 2009

Subprime Woes Self-Inflicted, An Economic Writer’s Tale

The other day, Edmund L. Andrews, an economics reporter for the New York Times, had a story published by the NYT titled My Personal Credit Crisis.  Andrews’ story details, to some extent, his personal experience with subprime lending.  A subject on which I have written extensively.

Megan McArdle notes and comments on Andrews’ story in a post titled Debt: A Writer’s Life and declares that Andrews’ tale is ”...the bravest thing I’ve read for a long, long time.”  McArdle’s piece then continues on noting that the writer’s life is often one of penury, and that Andrews’ tale is a cautionary tale to live within one’s means, which is sound advice.

But I think there is an even more important lesson than living within one’s means in Andrews’ tale, and this lesson is key to explaining the failure of the subprime lending industry and financial markets as a whole.  It was not fraud that caused subprime lending to fail, though as in all industries some fraud occurred.  Andrews provides the insight for the colossal failure in the following statement within his personal tale.

But in 2004, I joined millions of otherwise-sane Americans in what we now know was a catastrophic binge on overpriced real estate and reckless mortgages. Nobody duped or hypnotized me. Like so many others — borrowers, lenders and the Wall Street dealmakers behind them — I just thought I could beat the odds. We all had our reasons. The brokers and dealmakers were scoring huge commissions. Ordinary homebuyers were stretching to get into first houses, or bigger houses, or better neighborhoods. Some were greedy, some were desperate and some were deceived. (bold by ed.)

Read Andrews’ tale, it’s six (6) online pages long, and think about what he is saying.  Here is a credentialed economics writer who on multiple occasions went back to the subprime lending trough for more money, just as millions of other ordinary Americans did, until there was no equity left in their homes to borrow, and when the bill finally came due, and their incomes did not support payment of the bill, collapse followed, both personal financial collapse, and whole financial markets’ collapse.

Posted by John Venlet on 05/19 at 06:38 AM
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