Sunday, September 28, 2008

Crime and Crisis, Motive

After their country descended into deep financial and economic chaos in 1999, Ecuadorians started to reflect on the causes of their crisis. They came to the conclusion that the blame was widely shared - that, as in Lope de Vega’s play Fuenteovejuna, it had been “todos a una,” everyone together who had committed the crime, no one in particular, and no one more than anyone else.
Today, the United States is in deep financial disarray - God willing, the crisis will not spread. Why? What is the reason for this crisis?
I offer a simple explanation for the terrible crime of the destruction of the livelihood and the fortunes of many families. Motive, means, opportunity.
Motive. As many have said, high and low, greed is at the bottom of it. People wanted to make money, more money, more quickly, more easily, in ever-greater-quantities, for conspicuous consumption and excessive luxury. The problem with greed as an explanation, however, is that a) is an unavoidable part of the human condition and we wouldn’t quite know what to do with capitalism without it and b) it’s not enough. There has always been greed, no more now than ever. Why now?
Another important motive is that people, particularly working-class / middle-class Americans are financially strapped. College is ever more expensive. So is health care. Gas bills, food bills. And Americans love to consume, and after two decades of expansion in the expectations for consumption, Americans found that satisfying their needs and wants left them with little for saving. So (as Robert Kaplan has said), they did the rational thing, which is to borrow against their biggest asset, their house, to finance current and capital expenditures.
The scale of the borrowing against home equity is so astounding that it couldn’t be explained without noticing that house prices rose, consistently and breathtakingly, for years. And here is the key: consumers convinced themselves - they let themselves be convinced, they wanted to be convinced - that house prices could never fall. Betting on your house gaining in value was a one-way bet. And as Robert Shiller has pointed out, there was much evidence to support this wild-eyed conclusion, and people believed it because they wanted to believe it.

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