The Real Causes of the Financial Crisis

By Dr. Boyce Watkins

www.BoyceWatkins.com

I am no fan of President Bush. I made fun of the silly man long before it was popular to do so. However, in this case, I have to be one of the first to stand up and say that you can’t put all the blame for this financial crisis on his back. The War in Iraq? Yes. Hurricane Katrina? Absolutely. Damn near everything else? Sure, why not? But this financial mess should not, as our leading presidential candidates want you to believe, be slapped on the political tomb of Mr. Bush. That doesn’t mean he didn’t play a role, but Bush was more of a supporting actor in this horror story, not the star.

The horror story to which I am referring is that little news event surrounding a $700 Billion dollar bailout being sponsored by the Office Underwriting Corporate Hedonism (OUCH), also known as the Federal Reserve. Now, this is a different brand of corporate welfare, as taxpayer dollars are not being given away. At worst, taxpayer resources are being put at risk, as the Federal Reserve is making huge capital allocations to some of the nation’s most troubled financial institutions. As a lender of last resort, the Fed is responsible for investing money where the rest of us certainly would not.

To put it in layman’s terms, this is like using your savings account to loan money to an uncle who was fired for drinking on the job. Sure, he has been responsible in the past, and will likely be re-employed, but his recent behavior leaves you a little concerned. In the same light, taxpayer dollars in a financial crisis are like little soldiers being deployed to provide stability to the deadliest parts of the world. Many soldiers will come back home, while quite a few are going to be killed. Depletion of our government capital is quite likely in this scenario, for solving a global liquidity crisis with available reserves can be like using a kitchen sponge to soak up the ocean.

With that said, let’s discuss what this crisis is really all about. We must first understand the nature of our financial institutions. Banks and other entities providing credit to the consumer are a lot like drug dealers (both legal and illegal drug dealers are included in this example). Drug dealers give you something that you definitely want and even think you need. The drug (cash) is powerful, makes your problems go away and has a long-term consequence if you abuse it. That’s where the government steps in. The role of government is to regulate our financial drug dealers to ensure that they are not encouraging substance abuse from the users (American consumers), and to also ensure that consumers are relatively well-educated about the consequences of using the drugs (that’s where terms like “predatory lending” come from).

In order to make the economy appear strong, our financial drug dealers were allowed to run wild. Loans were being made to people who could not afford to pay them, causing the prices of homes to be bid out of control (it’s easier to bid a higher price on a home when your banker loans you all the money you need). Ultimately, consequences were felt when millions of Americans suddenly realized that they could not repay the amounts listed on the dotted line. This situation is not much different from what we are now seeing in the pharmaceutical industry, in which drug companies are using ads to encourage patients to walk into the doctor’s office and ask for whatever drug they saw on TV the night before (you hear that Rush Limbaugh?).

Now, before you go and burn down the nearest bank in your neighborhood, realize that it takes two to Tango. As Bill Cosby (perhaps naively) believes, “making good decisions makes everything ok.” We must remember that if all people made good decisions, drug dealers would have no customers. The truth of the matter is that in spite of the fact that our institutions and governmental authorities have failed us, one of the greatest culprits in this mess is the financial greed and myopia of the American consumer. We as Americans are among the most gluttonous and short-sighted consumers in the world. We borrow money to go on vacation without thinking twice, we don’t save for retirement, and we tend to do P Diddy/Paris Hilton imitations on every shopping trip. Money is our drug and we all rejoiced when there were more drug dealers in our neighborhoods.

So while Barack Obama and John McCain want to attack the clearly unqualified man in the White House over this mess, the truth is that we mostly have ourselves to blame. This crisis affects us all, and the corporate problems are nothing more than an aggregated manifestation of very bad individual decisions. Simultaneously, our legislators must be held accountable when ensuring that corporations are given incentives to engage in responsible lending. Perhaps a hybrid of the Cosby model is appropriate here: let’s get the drug dealers out of our neighborhoods, but let’s also make our neighborhoods a bad place to sell drugs.

Dr. Boyce Watkins is a Finance Professor at Syracuse University and author of the forthcoming book “Black American Money”. He does regular commentary on CNN, CBS and NBC. For more information, please visit www.BoyceWatkins.com.