Criminal defense in Austin Texas.

Something for Nothing

Posted By on January 27, 2009

The financial crisis, according to Newsweek, was caused by ordinary Americans, not just tycoons.

“None of this would have happened,” writes Justin Fox, “If millions of us hadn’t come to believe we could get something for nothing by taking on debts we couldn’t repay.”

“Thanks to the Panic of 2008,” he continues, “we can count on nobody making this mistake again, at least not for a while.”

A piece in today’s WSJ, though, shows why Justin Fox is wrong.

“Jae and Frank Shin bought a three-bedroom home in 2006 for about $280,000, and played it safe by making a 20% down payment… But [their mortgage broker] recently provided an estimate of the home’s current value: $180,000 to $190,000.”

So now they’ve lost their life savings, and they can’t sell their home, or buy another one.

So what was their mistake?

Did they borrow too much?  Did they take on debts they couldn’t repay?

No.  Their mistake was putting up their own funds.  And failing to take advantage of easy money in a speculative market, like so many other people did.

If they’d gotten a zero-down loan, they’d be $56,000 richer today.

More importantly, if they’d put up nothing, they’d have the advantage of getting to keep 100% of any gains, while shifting losses onto the bank.  (Sort of like what banks are doing to US taxpayers today.)

In gambling, this situation is called a free roll.  Economists call it an option.

Either way, it’s an opportunity millions of Americans took advantage of.  (If somebody offers you a free roll, by the way, you should generally bet as much as you can.)

The problem, in other words, was not that people THOUGHT they were getting something for nothing, it was that they WERE.

You can feel sorry for the banks if you want, but it’s a little like feeling sorry for a casino, because it can’t calculate the odds correctly.  It’s their JOB.  If they can’t do it, what the heck are we paying them for?


Leave a Reply

Security Code: