From time to time, I have heard the refrain that the credit crisis of which we are faced is largely due to reckless Liberal policies. The chief issues that the Right have reiterated repeatedly (how’s that for redundancy), are the Community Reinvestment Act, and government backing of Freddie Mac and Fannie Mae. Recently however a more sage voice has spoken:
“The renowned investor Warren E. Buffett chided himself and the business world at large in his annual letter to shareholders of his holding company on Saturday as he sifted through the wreckage of his worst year in four decades.”
Mr. Buffet elaborated about the real issues facing Americans, as we seek to understand the how and why of our current predicament. You will notice that Mr. Buffet neither mentions the Community Reinvestment Act nor, Freddie and Fannie. In fact, he mentions that responsible loans could have been made within the realm of the sub-prime mortgages, if these loans were managed more prudently.
“In reviewing the performance of Clayton Homes, a Berkshire Hathaway subsidiary that sells manufactured homes, he pointed out that its lending arm had managed to keep foreclosure rates to less than 4 percent, even among subprime borrowers, or those with weak credit ratings.
He contrasted that relative success with the failures of just about everyone else in the same business.
“The stupefying losses in mortgage-related securities came in large part because of flawed, history-based models used by salesmen, rating agencies and investors,” he wrote.
He went on: “These parties looked at loss experience over periods when home prices rose only moderately and speculation in houses was negligible. They then made this experience a yardstick for evaluating future losses. They blissfully ignored the fact that house prices had recently skyrocketed, loan practices had deteriorated and many buyers had opted for houses they couldn’t afford.”
Also blissfully ignored, he wrote, were the perils of relying on mathematical models devised without worst-case situations in mind. Too often, he wrote, Americans have been enamored of “a nerdy-sounding priesthood, using esoteric terms such as beta, gamma, sigma and the like.”
Some skepticism about these models is overdue, he added. “Our advice: Beware of geeks bearing formulas.”
Mr. Buffett was just as scathing on the subject of derivatives, which he had likened to weapons of mass destruction long before they started eviscerating the balance sheets of banks around the world.
In his letter, Mr. Buffett explained that the danger of derivatives was not merely the difficulty in assessing their value; rather, it was the “web of mutual dependence” they create among financial institutions. Derivatives contracts keep various parties entangled for years, which, as he vividly explained, can create real hazards once those assets start deteriorating.
“Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease,” he wrote. “It’s not just whom you sleep with, but also whom they are sleeping with.”
It is time for an honest conversation. It is time to stop using labels, when you disagree. If all you can say is; this is just another liberal talking… then you do not know me very well. If all you can do is, obstruct by setting up straw man arguments about poor people bringing us all down. Then you have not looked at what has been happening to the top one percent of earners in our country. They have flourished while the Right tells you to fear those bound in poverty from taking away your American Dream.
Warren Buffet would tell you that it was reckless policies of lenders, salesmen, traders, rating agencies and those who regulate these businesses, that led to the economic downfall. The right will tell you not to trust government while they have systematically sought to “starve the beast”. The beast they call our government can only be as effective as those who run it believe in it.