Photo by Sam Hodgson
It wasn't just Wall Street that created the mortgage bubble and resulting meltdown.
A lot of anger about Wall Street is spilling into the streets these days.
Before it was Occupy Wall Street, the Tea Party had its own brand of anti-Wall Street and anti-The Man outrage.
Elizabeth Warren, who’s running for Senate in Massachusetts, put it succinctly: “The people on Wall Street broke this country, and they did it one lousy mortgage at a time. It happened more than three years ago, and there has been no real accountability, and there has been no real effort to fix it.”
But one thing that’s been a bit lost is it wasn’t just Wall Street that created the mortgage bubble and resulting meltdown. Wall Street may have been the drug smugglers, but a whole bunch of people were the dealers and users. It was a culture.
It was a culture we got to know quite well in San Diego. Mortgage brokers, Realtors, local banks, even municipalities and newspapers cultivated this home-buying frenzy and a vicious machine that would attempt to squelch any discussion about its irrational indulgences.
Our own Rich Toscano put up an observation the other day — one that I’ve been thinking a lot about. It’s both jarring and freeing in a way.
First he put up his usual charts about local jobs, updated with new numbers. And this is the one I always scroll down to look at first.
It’s a chart tracking jobs in three sections: 1) the government sector 2) the private sector and 3) the bubble sector.
The bubble sector is what he calls finance, real estate, construction and retail. These were the sectors that boomed earlier in the decade. They built us up and then let us down.
If Wall Street screwed us, it was by luring us to put all our hopes and our future in those bubble sectors.
It’s important to remember how we got here because we can’t go back and, if we’re going to recover, we have to go in a different direction.
Wall Street’s geniuses gave people the chance to buy homes with loans they never could pay off. Mortgage brokers were making a bundle just processing the paperwork. Realtors as well. Developers were racing to build homes.
Newspapers were filled with ads for homes. The whole newspaper industry spawned a bubble of its own. The estimates of what David Copley could have sold the Union-Tribune for in 2004 are insanely higher than what he did end up selling it for two years ago.
Governments like the city of El Cajon held condo-buying festivals. Chula Vista officials planned their future based on the home-building frenzy never ceasing. Nobody would dare say it could not last.
Home sales soared. Downtown was a condo factory. The price of homes went into the stratosphere. People who had already bought before the boom suddenly noticed their homes were worth hundreds of thousands more than just a few years before. They began borrowing money against that. Home equity loans fueled remodeling, and more construction jobs.
Those loans also gave people the chance to make major purchases: cars, pool tables, necessities, cruises, whatever. Whatever they were lacking in income, homeowners made up for it in borrowing. So retailers boomed as well.
Then, of course, it all stopped. Like all asset bubbles, at some point, people stopped buying and started selling. Home values came down almost as fast as they went up. Mortgage brokers and Realtors (and newspapers) had assured residents for years that their homes would never go down in value. They did not need to worry about the big loans they were taking out: They could either sell or refinance when the banks came calling.
Those people were nowhere to be found when the banks did come calling. Many of them lost their jobs as mortgage brokers closed up shop; newly minted Realtors found themselves without clients. Construction workers had no work. And with home equity loans gone, retailers collapsed.
Foreclosures became the story.
As Toscano observed to me in an email and on the radio, it was a difficult correction, not just the downside of a cycle.
“The problem is that there wasn’t just a cyclical slowdown, but rather the destruction of a bunch of jobs that never should have existed to begin with,” he said.
Look at that chart again. The non-bubble private sector is recovering well. Government has shed some jobs but not a ton. What we lost was the bubble.
When you hear people say we have to boost home prices to get the economy back on track, this is part of what they want to rebuild.
But it’s lost. It was product of a culture that believed you didn’t have to make anything to make money.
To recover, we can’t look to the bubble with nostalgia at the same time we curse it. We must have innovation and create things: new ideas that turn into new businesses and new jobs.
And how do you support that? You demand excellence and invest in education. You build schools and universities that produce enthusiastic entrepreneurs and skilled workers. You create a city in which people want to construct their ideas and businesses and, yes, buildings — an attractive quality of life and reliable state-of-the-art infrastructure.
Put another way, you can’t just demand jobs, you have to create more Steve Jobs. (RIP)
As we reflect with scorn on what Wall Street did, let’s remember what we did too and pledge not to do it again.
I’m Scott Lewis, the CEO of voiceofsandiego.org. You can contact me at firstname.lastname@example.org or 619.325.0527 and follow me on Twitter (it’s a blast!):
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