How the current financial crisis occurred, part 4
Posted by Mike Sylvester - 9/24/08 @ 5:11 am - Filed Under 2008 National Elections, National Politics
The current financial mess was created by several things. This is the fourth post in a series of posts discussing many of the items that caused this crisis.
The mindset of Americans has changed in the last thirty years. People used to plan on paying off their homes in a reasonable amount of time and they made reasonable down payments. Thirty years ago few Americans would have even considered an interest only loan.
The American mindset has changed so much that Americans are incurring huge mortgage debts that they would not have even considered thirty year ago.
The mindset of Americans has changed for many reasons including:
1. The Government is doing everything it can to convince Americans to purchase homes and spend their money on all kinds of items in order to grow the economy.
2. Realtors, Mortgage Brokers, Banks, and lending institutions have done everything they can to convince the public that home ownership is the key to wealth and that the real estate market will always go up.
3. The Government has made mortgage interest tax deductible if you itemize your deductions. This has allowed people to incur even more debt due to the tax savings.
4. Our culture has changed. Many Americans are interested in keeping up with their neighbors, friends, relatives etc.
5. We have become a “charge it” culture rather then a “lay-away” culture.
6. Interest only loans have grown in popularity along with loans with little or no down payment. There are many financing options available today that were illegal 30 years ago.
In short Americans have decided to purchase more expensive houses then they can afford and they have done it mainly through mortgage debt. This has been encouraged by the Government. Lenders have lowered their lending standards (Much of this was forced by the Government).
Even worse many Americans have continually been taking the equity out of their house. Please go back and read my post from March 3rd about this topic. Pay particular attention to my statement where I predicted: “In the last few days I have modified my predictions about a recession. I used to be convinced that a massive recession was coming; however, I was not sure if it would hit us in a few months or in a few years. I now feel that it will hit us within the next five years. I feel this recession will be nearly as large as the “Great Depression.”
Since so many Americans have taken the equity out of their homes that has allowed even more home owners to default on their mortgages and has increased consumer debt significantly.
Thirty years ago you would not have seen very many people with 2, 3, 4, or even 5 mortgages on their house. It just was not done.
Many Americans have willingly incurred more debt then they can afford to pay.
Mike Sylvester
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5 Responses to “How the current financial crisis occurred, part 4”
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Mike…here’s an article I think you’d appreciate!
http://townhall.com/columnists/JohnStossel/2008/09/24/what_happened_to_market_discipline
Tim,
I always enjoy Stossel…
He is very smart…
Mike Sylvester
Hi Mike!
I am from a tiny Island named Mauritius, found in the Indian Ocean near Madagascar. Being a financial student, I am currently working on the mortgage crisis in the US for my final project.
It would be nice if I could read the 3 previous posts since I am really confused on what has created such a meltdown (affecting the whole financial world!).
I can only get information about the crisis on television and the net… After having read so maaaaaaaany articles, I am lost in a mixture of different point of views about the crisis.
Thanks for your help.
Hoping to hear from you very soon,
Kim
Kim,
You can use the search bar in the upper right hand corner or you can click on Mike’s name at the bottom of the page to find a list of all his articles.
Thank you Jeff :)