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I'm not inclined to excuse the buyers of all the toxic junk in any way.

They could have know - should have known - what they were getting into. I saw a prospectus by Goldman Sachs for one of their Mortgage-Backed Securities salamis. There were 40 pages expalining in loving detail the risks for each tranche, including the possibility of a housing downturn.

People chose not to read these, or to ignore them.

Now, that the system pushed everybody in that direction is a reality, and a smart policy decision would be to change that system, but people still chose to follow the herd.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Oct 1st, 2008 at 04:57:02 AM EST
[ Parent ]
Depends who you mean by "people".
Let's face it Jérôme, even when it is explained, the vast majority of people cannot understand such implications. Hell, even the simple concept of actualisation is very difficult for the majority of people.

I do not say that as an insult, as implying that people are stupid children and should be despised. First, there is nothing despisable in not being among the cleverest of people, provided you don't run for the (vice-)presidency. Second, this is a very narrow field of human understanding. I would probably be unable to understand the implications of events on a variety of subjects even if they were explained in a leaflet, though I believe I happen to be fortunate enough to be in the top centiles of the intelligence distribution (OK, I own it, one letter of the previous sentence is not even completely honest).

So, prospectus notwithstanding, if people who could not understand either the implications or the likelihood of a housing downturns were being agressively advised to put money into such products, I won't place most of the blame on them. I know the libertarian meme of each person being the best placed for making all of his decisions for what it is, a fallacy.
Besides, when you say that people chose to follow the herd, it would be nice to be clear at what the alternatives were. If there is no landlord that lets you in, if you are not allowed to build a small house because of lot sizing, do you sleep outside?

Anyway, in any system, you can't rely on blaming the people. If human nature means that, unchecked, the system will crash, it's easier (terribly difficult OK, but still easier) to fix the system than human nature.

Now if you mean bankers by "people", I'm with you and have been wasting time typing all that ;-)

"It failed because Nacy Pelosi said some unkind things about George Bush in her speech"

by Cyrille (cyrillev domain yahoo.fr) on Wed Oct 1st, 2008 at 05:54:17 AM EST
[ Parent ]
well, the prospectus was going to bond buyers, whose job it is presumably to analyse the risks of whatever they are investing (other people's) money in. So THEY certainly have no excuse.

As to people, isn't buying a house - and taking the relevant mortgage - pretty much the biggest financial decision they'll ever get to make? Shouldn't they worry just a tiny bit about whether they can actually pay it back, and not just over the first couple years?

I have more sympathy for households, as they were brainwashed about perpetually rising house prices, and probably sold tainted goods by not very honest brokers (they are many cases of outright fraud), but (i) many of them were greedy and took on deals they knew were not quite right, and (ii) bondholders do not have that excuse. A rating does not eliminate the need to actually do your homework.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Oct 1st, 2008 at 06:45:55 AM EST
[ Parent ]

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