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Villain: The Credit Crisis

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Torontoist is ending the year by naming our Heroes and Villains of 2007––the people, places, and things that we’ve either fallen head over heels in love with or developed uncontrollable rage towards over the past twelve months. Get your dose, starting Boxing Day and running into the new year, three times a day––sunrise, noon, and sunset.
villain_creditcrisis.jpg
The subprime mortgage crisis, which began late last year but really picked up steam in the last few months, is not going away. In fact, it is a trigger incident that will continue to unravel the American economy into 2008, almost certainly leading to a recession and likely a depression. In his year-end address, the prime minister said Canada “cannot be immune from the growing uncertainty we see in the U.S. economy and the global economy,” which only hints at the challenges ahead. Clever as he is, however, the prime minister went on to link growing economic uncertainty with forthcoming actions on climate change (as in, fighting climate change will hurt the economy). This serves his own political purposes, but in a sense is the opposite of reality. The credit crisis is a symptom of an expansion and consumption-based economy that’s out of control and no longer working to improve our quality of life. The current orientation of the economy has also generated the climate and environmental crises we’re now faced with. In reality, applying smart solutions to the climate crisis can actually strengthen our economy, making it more resilient and future-oriented. Staying on the same path, on the other hand, would only make things worse. Over the next twelve months, it’s incumbent upon us as citizens in a democracy to pay extra attention to what’s happening to our economy, what the real causes are, and what set of policies will best equip us for the years to come.
Photo by Flo’s Diner from the Torontoist Flickr Pool.

Comments

  • x_the_x

    “almost certainly leading to a depression and likely a recession”
    Which is it? If it is almost certainly a depression (as an aside, lets revisit this one for correctness on the eve of 2009, shall we?), it is certainly a recession. If it is likely a recession, it is almost certainly not a depression.
    “The credit crisis is a symptom of an expansion and consumption-based economy that’s out of control and no longer working to improve our quality of life.”
    I know it has been tempting for political parties of all stripes to re-script the causes/effects of the credit crisis to serve their electoral purposes, but this is by far the silliest application I have witnessed. Credit crisis = the effects of excess liquidity seeking a return in higher risk markets, with the natural correction of less/more expensive liquidity. Most of which Canada has been insulated from because of our relatively small capital pools, but it is probably right for the Feds to sound a cautious note heading into the new year, though most forecasts aren’t as bleak as the headlines today suggest.
    Poor people with poor credit who are overextended didn’t buy sub-prime mortgages out of some fealty to consumerist goals fed to an automatonic population by powerful advertisers, which your silly argument implies, but because home ownership has a demonstrated correlation with social and economic mobility – i.e., aspiring to leave the working poor and enter the middle class. I understand if you do, but I don’t begrudge the poor for that.
    If “it’s incumbent upon us as citizens in a democracy to pay extra attention to what’s happening to our economy”, perhaps you would like to provide a fuller sketch of your alternate economic model that will soon replace the demonstrably failed economy we currently inhabit.

  • matty

    “almost certainly leading to a depression and likely a recession”
    yeah you might want to flip those two adjectives around.

  • matty

    also what the heck does climate change have to do with the mortgage crisis?
    This is an incoherent ramble if I’ve ever read one.

  • rek

    The sub-prime loaning wasn’t invented to help the working poor take a step up on the social ladder, so spinning it that way doesn’t make sense. Banks offer sub-prime loans, as risky as they are, to make money; trying to make it about class warfare is disingenuous at best.
    As for begrudging the working poor, I didn’t see where Chris said anything suggesting that. You may be peppering your comments with words relevant to the topic at hand, x, but you’re still insulting people without reason.
    All that said, 75% of this article was about the climate crisis and not the credit crisis. Might as well have made Climate Change Inaction (or whatever) the villain, Chris. The US’s economic problems haven’t exactly been bad for us this year anyway.

  • The Explosively Talented Christopher Bird

    Banks offer sub-prime loans, as risky as they are, to make money; trying to make it about class warfare is disingenuous at best.
    Banks offer subprime loans to just about everybody – however, the majority of subprime loans were accepted by people who lacked the education to know better, which definitely makes it a class issue.

  • rek

    Misrepresenting it as ‘poor people are dumb’ doesn’t make it a class issue either, C-Bird. The problem with widespread sub-prime mortgages isn’t that the people applying for them are dumb, it’s that their credit stinks and they can’t pay in the end. Nobody forced them to apply, and assuming anyone who couldn’t pay must be dumb and poor is asinine.

  • rek

    Misrepresenting it as ‘poor people are dumb’ doesn’t make it a class issue either, C-Bird. The problem with widespread sub-prime mortgages isn’t that the people applying for them are dumb, it’s that their credit stinks and they can’t pay in the end. Nobody forced them to apply, and assuming anyone who couldn’t pay must be dumb and poor is asinine.

  • matty

    Even the most iron clad loans can go unpaid. Sometimes people lose their jobs. I guess that makes them stupid, like C-bird would suggest.

  • x_the_x

    (1) “The sub-prime loaning wasn’t invented to help the working poor take a step up on the social ladder, so spinning it that way doesn’t make sense. Banks offer sub-prime loans, as risky as they are, to make money; trying to make it about class warfare is disingenuous at best.”
    If you think my point was about class warfare (did you have to blow the dust off that term before you used it?), you are obviously projecting some of your own views. Mine was a small, honestly made point: the poster was maligning the credit crisis as consumerism run amok and evidence that consumerism has failed us, and I merely provided a reason why sub-prime mortgagors were buying the high-interest rate products in the first place.
    You are right, I didn’t mention that banks were lending to make money. I’ll try to be more clear with the strikingly obvious in the future.
    In any event, I never suggested anything other than lenders with excess liquidity seeking returns in higher risk markets. I certainly didn’t suggest that lenders were behaving like some social welfare agency helping the working poor meet their aspirational goals. So I don’t know where the spin comes in.
    “As for begrudging the working poor, I didn’t see where Chris said anything suggesting that. You may be peppering your comments with words relevant to the topic at hand, x, but you’re still insulting people without reason.”
    Chris’s argument is that the credit crisis is a manifestation of consumerism which, without getting too technical, in these parts usually boils down to the argument that people buy too much worthless shit. The implication is that the defaulters under subprime mortgages – i.e.,poor people/people with bad credit/overextended people – are really just practising consumerism in buying more than they can afford. The solution, though not express, is that people should buy less shit/live within their means. In this application, this is saying to the working poor who have aspirational goals of homeownership because of its demonstrated effect on social and economic mobility (in increasing borrowers’ capital (which is the theory behind microlending, incidentially, which is a major econ development tool) and, in the US where mortgage payments are tax deductible, income) that they should live within the means of the working poor. So he does begrudge them their needless consumption.
    If I was being kind, I would say that the argument fails because it fails to consider that houses for the poor might not be worthless shit, and therefore not “a symptom of an expansion and consumption-based economy that’s out of control and no longer working to improve our quality of life.”
    If I had thought the author had thought hard about these questions, I probably would have been less glib, but as you note, this was someone on the environment beat covering the economy very ineptly.

  • Patrick Metzger

    The cause of the mortgage crisis isn’t class warfare, or some uniquely modern culture of consumption, or jes plain workin’ folk looking to achieve the American dream. It’s simple, traditional human greed and stupidity – the greed of people buying houses they could never afford on the premise that prices would rise forever, and the greed of lenders who sold those homes knowing that when the bubble inevitably burst they wouldn’t be left holding the bag because the risk would have already been sold off to bondholders. It’s just like those famous fucking tulips.

  • x_the_x

    Mostly agreed, Patrick, except the lenders were very much left holding the bag, as the end of fiscal year write-downs attest. It wasn’t the case that those initiating the mortgages had no exposure as most initiating institutions were also large investors or holders at other points in the marketplace, which is why everyone has been parked in a hotel in Montreal for three months trying to figure out how to roll everything over so that real losses are mimimized.
    Re: “jes plain workin’ folk looking to achieve the American dream”, certainly greed is part of desire for social and economic mobility, but I don’t think that explains all of it.

  • WannaBinToranna

    Yes, but who will get the “bail-out”? Certainly not the people who lost their homes.

  • Patrick Metzger

    x – I agree a lot of lenders are having to suck it up, but in other cases, the institutions getting hit didn’t underwrite mortgages themselves, but bought paper from big players looking to lay off risk. There was a story the other day about Goldmans Sachs supposedly having sold $3.5 billion in subprime exposure to CIBC, who are now having to write it down. Those city slickers’ll take advantage of us Canadians every time.

  • matty

    I actually blame anyone who ever took out a subprime loan for killing polar bears. They knew that the ice caps would melt when they signed on the dotted line. but did they listen to me, personally? No they did not. That is because they are stupid people or as I like to call them, “sheeple.”
    - Chris Tindal
    Sent From My iPhone.

  • x_the_x

    (1) “Yes, but who will get the “bail-out”? Certainly not the people who lost their homes.”
    Many states have announced bailouts or financial assistance to those in defaulting mortgages, and president Bush announced a federal bailout plan.
    So you are dead wrong.
    http://www.bloggingstocks.com/2007/08/31/president-bush-plans-to-bailout-subprime-mortgage-holders/
    http://useconomy.about.com/b/2007/08/24/states-bailout-subprime-mortgage-borrowers.htm
    (2) An assignment for Wannabe:
    Low income people who lost their homes in the sub-prime mortgage collapse would benefit from a general collapse of US banks and capital markets. Justify in 50 words or less.

  • rek

    x_the_x -
    You spun it as a class issue in your first comment, summed up in this line: …aspiring to leave the working poor and enter the middle class…. If you think ‘class warfare’ is such an outdated term, why cast home buying in such a classist light? Nobody buys their first home to escape the working poor or move up on the class ladder. If anything you make it seem like conspicuous consumption (particularly conspicuous because that demographic can’t afford it) which is more in line with what Christopher (poorly) argued.