Common sense on the Wall Street crisis

R.R. Reno, "The Wall Street Crisis" (First Things, September 23, 2008):

And not just greed, but also stupidity. Anyone who bought a house in the last two years was as stupid as the Bear Stearns traders who bought and held securities backed by sub-prime mortgages, which means very stupid. Buy a house in Florida for $600,000 with 5 percent down in 2006, and you’re pretty much in the same sinking boat. What could have possibly motivated such a stupid purchase? Are rentals unavailable? Did you really believe that house prices would continue to go up at two and three times the rate of increase of family incomes?

We don’t need a degree in psychology in order to know why people bought houses at the peak of the market. The dollar signs clouded vision. The go-go hype from the real estate agents and media and friends who made tons of money buying and selling houses was overwhelming. Anyway, you gotta live somewhere, and the government lets you deduct the interest payments. Banks were intensely eager to give you the money. “And what the heck,” we tell ourselves, “it can’t ever really go down too much, because there are too many home owners like me for the government to let it all go to hell.”

Substitute mortgage-backed securities for houses, and we have a pretty clear picture of the Wall Street crisis. It’s not the case that financial barons are uniquely wicked. No, they mirror us all rather well: blinded by the prospect of quick profits, victims of a herd mentality, and prone to making stupid decisions. The partners at Bear Stearns were not taking advantage of poor ol’ Main Street. On the contrary, they had their own capital in mortgage-back securities, and they were wiped out when reality caught up with the very same housing-bubble fantasies that infected Anywhere, USA.

... The Paulson plan, no matter what its final form, will be huge. And because it’s huge, it will be fatefully consequential for our future economic and political system. We need to get this right, or at least as right as possible. That’s all the more reason to focus on the details rather than grandstanding about Wall Street greed and bellyaching about the supposed unfairness of a government bailout.(Read more here ...)

[Hat tip to E.E.]