The Pigs Have Won Tonight

           The title of this particular blog entry was lifted from the lyrics of a song by Nine Inch Nails, “March of the Pigs.” The song essentially is about a mass of people or society as a whole devouring something it values according to fan posts on various lyrics sites.

            While it would be harsh to suggest the average person caused the melt down of the global financial system, one thing that always strikes me about the financial crisis is not just the magnitude of its impact but how deep the roots of financial instability are. It is a crisis that went all the way across the board from the credit card user who extended themselves to the point were they couldn’t afford minimum payments to the most respected financial experts who were crafting elaborate mortgage-backed investment packages based on the assumption that people had strong incentive to their honor mortgage obligations.

 Of course we blame the large banks, with their highest paying executives making more money to get fired than most people throughout the course of their careers. But then again, we also blame McDonald’s and other fast food entities for rising obesity rates.

With many financial assets tied to the housing, not to mention hundreds of thousands of small business, the importance of the housing market cannot be over stated. It is the largest investment most people make during the course of their lives. So people getting into the housing market have a responsibility to enter this market in a sustainable way.

Early in the 2010, CBS did a series “Where America Stands,” in which they reported in the past three years approximately 6 million homes in the United States have been foreclosed on and another 3 million are expected to face foreclosure in 2010. This would mean by the end of 2010, more than 10 percent of the 75 million homeowners in the United States will have lost their home, according to CBS statistics.

While one could argue people can not afford their homes because they are out of work, the foreclosure process began on about 2 million homes in 2008, which coincided with an unemployment rate of less than 6 percent. This suggests foreclosure preceded job loss, not the other way around, particularly when one considers how long it could take for a bank to begin the procedure when the homeowner stops paying the mortgage.

So what does all of this have to do with financial reform? The point is when legislators drafted the Frank-Dodds Wall Street Reform and Consumer Protection Act, a lot of lip service was given to the Bureau of Consumer Protection which will be responsible for protecting consumers from unfair practices in the lending market. Last week, President Barack Obama delegated Harvard professor Elizabeth Warren to the task of helping to create Bureau of Consumer Protection, which is meant to be up and running by the end of July 2011.

            Over the course of the next few blogs, I will examine Warren’s history including an analysis of her interviews in the Michael Moore film “Capitalism: A Love Story,” reported plans for the new government agency and predictions for how the bureau will be shaped under her discretion. But a big question remains. How is the bureau going to protect consumers from one of their biggest adversary? That is the consumer themselves.

            The intent of the bureau is to provide consumers with clarity in all of their financial transactions. If the bureau is able to increase transparency in the housing market, then it will have taken positive strides in helping people understand the terms of their mortgage. But the question is how does a person buy a house and not take a good hard look at their finances to see if they can afford it? There are many considerations to take into account when purchasing a home, including unexpected expenses. Will the Bureau address these issues as well? My feeling is that it will not.

            In addition, it puts the burden of making sure a consumer can afford a mortgage on the bank. Personally, I find this quite frightening. Banks absolutely should be held responsible for the mortgages they give out. In fact, I believe that is where the Basel decision comes into play. Requiring banks to hold onto more capital is a great start. Additionally, the selling of mortgages to third parties needs to be regulated.

            But to create an agency where individuals can sign a business contract and then hold the other party responsible because the individual is not able to uphold their end of the bargain is insanity. Life does happen and sometimes events, beyond a person’s control render them in capable of upholding their obligations. But we are talking about a flawed system, where millions of people entered into mortgages they could not afford. Granted, in an overheated housing market, demand may drive prices beyond affordability. And as I explored in a previous blog topic, the federal government did its part to heat things up. But the point is everyone, not just the “bad guys” need to be held accountable for their financial failings. Just because a person isn’t a multi-billion dollar multi-national firm doesn’t mean it’s ok to be financially reckless. If financial reform is to improve long term stability, the Bureau of Consumer Protection will need to address the issue of individual responsibility as well. Until then, truly what victory have “the pigs have won?”