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I've been reading the posts at We are the 99 Percent and watching the Occupy Wall Street protests in fascination. While a lot of this is probably going to sound pretty heartless, I do have sympathy for the protestors. Most of them are in terrible predicaments, which will be very hard if not impossible to get out of. But none of them seem to have any idea how they wound up that way, or whose fault it is.


And that's the thing -- it's not really anyone's fault. Not even the rich people. It's an entirely natural consequence of the kind of economy we have, and a bunch of these weak spots breaking at the same time.

Here's the general principle: any time the cost for a product is dissociated in time or direct payment from the consumer who chooses that product, the price will rise, unchecked by normal market forces.

Currently-relevant examples:

  • Housing, when paid by loans.
  • College education, when paid by loans.
  • Medical expenses, when paid by insurance.

I was working for a real estate attorney in an expensive suburb when the housing boom was going on. Every day we boggled over the loans people were getting. How can buyers believe they can pay this much? How can banks be stupid enough to give out these loans? What is going to happen when this all falls apart?


We all saw: near worldwide financial collapse. And while banks are greedy, heartless bastards as a rule, it wasn't like this was their intent. It was just that people, banks, and builders all found a way to optimize that system to leak the most money. 


The same thing has been happening with college loans. You need a degree to get a good job, right? So it's worth going into debt. And if every student can get a guaranteed loan to pay any sort of tuition… what's to stop those tuition rates from rising forever? Unlimited demand! Unlimited money! Private schools with clever marketing pop up, and state school see an easier way than taxes to make a few dollars. And now it seems like everyone goes to an expensive college, winds up with a ton of debt, and can't get a decent job.


And finally, the big one: medical insurance. This is a double whammy, because you do pay for it before you receive anything, so if anything, people are motivated to get something for their money. Often the more expensive something is, the more desirable it is to the consumer, because the hated insurance company has to pay for it. 


None of these were organized eville big money schemes to shaft the middle class, working class, or poor. They're just natural consequences of things that were a good idea at the time, but under-regulated and taken advantage of for so long, have spiraled out of control. Without financing/insuring big-expense items, only the rich could buy houses or go to college or get serious medical care. No one wants that. 


The problem is simple and unavoidable: people. Given the chance, almost everyone will take advantage of a situation. If they can pay less for something than it's worth, or get paid more for a job than the value they're contributing, or defer payment, or get something for free… well, who passes that up? And when enough people behave that way, the whole system falls apart.


The guys on Wall Street -- the "top 1%" -- had enough luck, starting capital, and savvy to situate themselves on the side of the equation where the money flows, and avoid the building-up-debts side. While increasing taxes on the wealthy is completely reasonable given the amount of government debt, it isn't going to fix the problems of those protesting. 


I don't know a viable governmental solution. I'm afraid life is going to suck for a lot of people for a very long time. 


Comments

( 22 comments — Leave a comment )
rabiagale
Oct. 2nd, 2011 12:13 am (UTC)
Oh, I sooo hear you regarding the housing bubble. We bought our house at the peak of the market and it was astounding to me how much money banks were willing to loan us based on our rather paltry income at the time. We kept our heads and bought a fixer-upper at a low price, and are currently enjoying living in a fixed-up house with a very low monthly payment.

Of course... we are trying to sell said house so we can move down to where DH's job is, but that's a whole other story... (let's say the current market's not helping us much at this point).
amberdine
Oct. 2nd, 2011 03:42 am (UTC)
Oh man. And that's exactly the bind! We can't let the economy just tank, and we can't let tons of people be homeless, but what about people like you who were responsible? Why should you have to pay for everyone else's greed? I guess we need laws to prevent people from doing stupid things, but lots of brilliant, successful people got where they are by doing seemingly stupid things, so that would be bad too.

No good solutions. Bah. Good luck with the house sale!
rabiagale
Oct. 2nd, 2011 06:21 pm (UTC)
Yeah, I don't think it's possible to outlaw stupid choices--especially since we all make them and (hopefully) learn from them. And yes, it sucks that we're trying to sell in such a poor economy, but really, things could be a lot worse. We could be living in a war-torn country or the path of a hurricane. Thing is, we as a race--especially in the West--have gotten hold of the illusion that we *control* our circumstances, the general economy, the climate and environment, but we really don't. Bad things happen. We live with it.

Thanks for the good wishes. We're really all right. We're in Vermont in the fall, my husband's working from home so he's around a lot, we're saving a lot of money by being here instead of there... I'm focusing in on the blessings here. :)
aeriedraconia
Oct. 2nd, 2011 01:27 am (UTC)
I also have to say that having something like 70% of our country's economy dependent on consumer spending is pretty screwy too. Consumer spending doesn't produce anything or make any real things, it is nothing and that nothing is unreliable and unsustainable.
amberdine
Oct. 2nd, 2011 03:48 am (UTC)
Seriously. And so dependent on mood and propaganda.

Which reminds me of another factor -- energy costs keep going up, which eats into everyone's income and provides nothing. This automobile-worshiping society is so inefficient its crazy.
kehrli
Oct. 2nd, 2011 04:06 am (UTC)
And dependent on people doing the exact opposite of what we should be doing, which is not spending so much, and fixing what's broken, and paying off debts and trying to save...
rabiagale
Oct. 2nd, 2011 06:26 pm (UTC)
Yeah, it's scary that economic growth is based on the buying of STUFF. I feel a rant coming on, so I'm going to stop now before I go off on the whole idea of stuff and how it complicates our lives and clutters our homes and stifles our creativity and puts us in debt... :P
amberdine
Oct. 3rd, 2011 01:50 pm (UTC)
<3!

Yeah, I have to go sort through a few more boxes and do another round of getting rid of junk, too...
xiphias
Oct. 2nd, 2011 02:59 pm (UTC)
What happened? Deregulation. Once upon a time, government inspectors were allowed to audit the books of banks, and stop them when they were taking unsustainable actions. But that power was taken from them. One of the most common complaints from the people who were in the trenches during the worst of it was, "We were waiting for the grownups to step in, and they never did." And the people who knew it was a problem had no power to stop it, because, if they got off the tiger, the people still on the tiger would turn around and eat them. So they wanted -- NEEDED -- regulators to come in and stop EVERYBODY at once -- and the government had taken away that power.
amberdine
Oct. 3rd, 2011 01:43 pm (UTC)
Yeah, though that was sneaky too, because there were a lot of small acts of deregulation over decades, which did no harm at first, and probably helped a lot of poorer people buy homes who otherwise couldn't have. It was only when capital became easy that it was profitable for aggressive private lending institutions to get into the game and get crazy.
asakiyume
Oct. 3rd, 2011 03:50 am (UTC)
There are so many things where we have gone a long time without paying the actual cost of things... it's a rude awakening when you find yourself face to face with how much things really cost.

Fossil fuels, for instance. We pay way less in gasoline than people elsewhere, and it's not because we have less need for it, or because there's more available here.

amberdine
Oct. 3rd, 2011 01:49 pm (UTC)
Yes, that is it exactly! Perfect summation. We've gone a long time without paying the actual cost, and now it's all coming to a head.

I think all those protesters need a good motivational speaker. Declaring yourself a victim (even if you are) and making the rich guys the enemy (even if they kinda are) isn't going to get them anywhere. It's time to band together and be brilliant, not give up and wait for someone else to solve the problem.
asakiyume
Oct. 3rd, 2011 02:13 pm (UTC)
And meanwhile, a little bit of bravery and long-term vision on the part of the bank directors wouldn't hurt. They could make as much of a splash as William Buffett or George Soros if they'd just be brave. They think they owe it to their shareholders to keep thinking profit, profit, profit, but they're starting to see that these people in the streets are stakeholders too, and a really visionary bank director would make dramatic, public, for-the-people statements. That bank director's cred, and the cred of his bank, would skyrocket.


amberdine
Oct. 3rd, 2011 02:20 pm (UTC)
Yes! It makes me think the environment inside these financial institutions must be pretty brutal, that the people who excel within them get sifted by heartlessness. That would be such a smart, easy move.

Hmmm.
asakiyume
Oct. 3rd, 2011 02:39 pm (UTC)
I edit stuff that includes quotes from these people, talking on this subject. They really feel that they will be punished by shareholders if they don't keep profits up. And there are organizations such as Institutional Shareholders Services that advise shareholders how to vote for directors, and they *do* oppose people who lower profits. BUT, you have to have a viable institution in order to have profits, and what 2008 showed was that the institutions had done a lot of things that made them NOT viable.

Making matters more complicated is the fact that in the category of shareholders are things like institutions like pension funds--companies that invest people's pension money, which they then pay out as pensions to auto workers in Detroit and schoolteachers in California-- but only if the things they've invested in have made profits.

... One thing the current world situation is really showing me, and I'd think it's showing this to anyone with [metaphorical] eyes to see, is that we really are all connected, both economically and politically. Political events in North Africa, Europe, Russia, China, South America, Central Africa--these all have ramifications for all of us. And if things go wonky in the economies of Europe, or the US, then that affects the rest of the world, eventually. The way the Asian financial crisis in 1997 affected us--or the way flooding in Pakistan or the earthquake in Japan affect us.
amberdine
Oct. 3rd, 2011 04:35 pm (UTC)
Oh right, of course. Just like a lot of industries. MOAR MONEYS NOW is rarely a good long term strategy. Unless you've got oil wells or something.

I have suspected, but haven't bothered to confirm, that a lot of the weird issues I'm seeing with cuts in public services -- despite the services being in high demand -- comes down to the pensions and health care of the workers and retirees eating up so much of the budget there's not much left for actual operations anymore.

asakiyume
Oct. 3rd, 2011 04:38 pm (UTC)
MOAR MONEYS NOW
MOAR MONEYS NOW is rarely a good long term strategy.


except for MEEEEE!!! :D

SEND ME MOAR MONEYS!!

(do you think if I put up a donate button and that message, I'll get some?)
amberdine
Oct. 3rd, 2011 04:40 pm (UTC)
Re: MOAR MONEYS NOW
Hahaha! I bet you would. :D :D :D
merriehaskell
Oct. 3rd, 2011 02:47 pm (UTC)
This is really, really perceptive.
amberdine
Oct. 3rd, 2011 04:24 pm (UTC)
Thanks!

I get a little frustrated seeing thoughtless support of the protests, because encouraging people who have only complaints doesn't get any closer to a solution.
februaryfour
Oct. 3rd, 2011 05:36 pm (UTC)
Nothing useful to add except "I hear you".
(Anonymous)
Apr. 7th, 2012 01:01 am (UTC)
Laurel, I think the core insight is excellent.

John Stossel did a great piece on 20/20 about this very disconnect with health care. Watch it here: http://johndbrown.com/2009/06/health-care-solutions/

I also don't know that the banks should be blamed for the mortgage crisis. I think you alluded to this. They don't give loans if they don't think they're going to get their money back. And people who ask for loans, well, hey, it seems to me they need to take responsibility for taking that loan. As long as a bank doesn't lie about the true cost of the loan (and they're required by Federal law to provide a Truth in Lending statement) and the monthly payments, then they've met their obligation to the lendee. The bank's goal is to make money and protect its own assets in an honest way. They're not supposed to babysite people.

The question is why would they make what we all called "liar loans"? Loans you can get by simply stating your income? Loans to all sorts of credit risks?

It appears they made them because Congress told Fanny Mae and Freddie Mac to guarantee them. When the government is going to guarantee the lenders they'll get their money, then risk goes way down. So the banks said, hey, we can make these loans and protect our assets and make some money. Then the rating agencies on Wall Street factored the guarantee into their ratings. Loan pools that should have been priced one way because of extreme risk were priced another way. There were people saying it didn't make sense, but you had the government guaranteeing them. Congress forced an intenable pricing scheme onto the market.

And then the agencies who were mandated by government to guarantee something that should never have been guaranteed finally ran into reality. And it all came down. The banks weren't unregulated. They were behaving in a rational legal way. It's that Congress was artificially lowering the cost of loans to high credit risks.

As for the people who made bad decisions, well, you talk about disassociating a choice from its consequence, choosing a product or service and paying for it. It seems to me that the same would apply to making bad choices and disassociating the consequences by pushing them onto strangers. I certainly don't want to be the kind of person that snottily says, "You made your own bed, idiot, sleep in it!" I don't want to live in a community with those types of folks. At the same time, there's got to be a better way than simply taking from those who made good choices via the IRS.
( 22 comments — Leave a comment )