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What can We Learn from the American Housing Crisis?
The Pains of Financial Gluttony
Domino Effect of Bad Financial Choices
January 13, 2010 the U.S. Congress opened hearings of America's top financial institutions searching for answers to the housing crisis debacle that sent the U.S. economy over a disasterous edge.
To his credit, the CEO of Goldman Sachs opened his testimony with a confession of his firm's guilt; apologizing for his organization's role in the mortgage disaster. No doubt Goldman Sachs and the other major players on Wall Street are culpable.
Those who should have and probably did know better led the folks of Main Street astray.
Together big man and little got caught up in a severe round of fiinancial gluttony in which financial responsibility was set aside for instant gratification. When offered jumbo loans at low interest rates, the American Dream was made a reality for nearly everyone who could pass the mirror test.
If they breathed on the mirror and it fogged up, they qualified for the house of their wildest dreams. What they did not realize was their new mortgage was a ticking time bomb set to blow up their found financial status to smithereens at an inopportune time.
The American Dream became the American Drain, the ultimate end of each family's financial gluttony.
However, the ill effects of the poor financial choices did not begin with the massive foreclosures. Larger loans led to higher home values which pushed up the value of other homes. Families living in these other homes then had huge amounts of equity. However, they did treat these value gains as mere paper gains. No, they took home equity loans against the new values to fix up their homes and buy toys like boats and motor homes. Instead of owing $200k they now owe $400k, even $600k. Their $1500 per month housing payments were replaced by $2500 to $3000 per month payments and the financial dominoes began to fall.
It Was the Best of Times
Your Dream House Now!
Who wouldn't want to move into their dream house? If there was a way to experience that dream now, wouldn't you jump at the chance? Isn't sooner better than later? It seemed like the best of times. From 2000 to 2006, folks all over the country were given their chance to own their dream house now. The whole thought of discipline and personal responsibility was overruled by a sudden flare up of a financial sweet tooth egged on by home mortgage sugar daddies.
And It All Came Crashing Down
The Financial Dominoes Fall
However, those who chose to participate in this temporary slide into financial ectasy did not realize what was about to unfold due to their impetus behavior. With house payments dominating their household budgets, they began to have money problems and less discretionary funds to buy other things.
Since folks had less money for other things, state and local governments like California and the County of Riverside in California were left with taking in less sales tax. Furthermore, as families begin to default on loans they could not afford, the financial institutions had to foreclose and those same government entities began taking in less property tax funds. Simultaneously, the housing construction industry came to a screeching halt and less money was spent at retail establishments. These led to downsizing and business closures and the loss of jobs. The loss of jobs closed the loop of a triple whammy because the loss of jobs meant less income tax taken in by state and local governments, too.
Since the state and local governments are unable to collect sales, property, or income taxes at the same pace as before, they are forced to cut services including education.
The long-term effects of instant gratification and financial gluttony is more people out of work and less educational services for our children.
The current economic crisis is the result of poor financial choices by everyone who chose to participate in this round of financial gluttony including financial institutions and individual investors or homeowners.