Avoid the Blame Game—Take Responsibility for Your Financial Affairs

The following is an excerpt from Your Life & Your Money.

We must become the change that we want to see in the world.—Mahatma Gandhi

We live in an age of delusion. It seems to be the inherent nature of mankind.

Our biggest delusion is a sense of entitlement. It permeates our country. People delude themselves into believing everything is fine while engaging in behavior that’s definitely not fine. Then, when something goes wrong, they stand there blankly and do nothing about it, expecting somebody else to pick up after them! Everywhere you turn, people are blaming everybody else for their problems.

Look around. It’s everywhere—in our neighborhoods, schools, big business. There’s the chain smoker who sues the tobacco company. Or the overweight, overfed cheeseburger eater who sues the hamburger chain, claiming that their food made him fat. Or the guy who drank too much, left the bar and then crashed his car, who blames the bartender for serving him too much alcohol.

Are you kidding? The next thing you know, the government will be bailing out all the homeowners who double- and triple-dipped into their home equity and are upside down, plus the brokerage houses that bought lousy loans and the banks that accepted those loans. Oh, wait—that’s happening too!

Worst of all are our politicians. They believe they can print money and manufacture prosperity.

I’m not making this up, it’s true. What in the heck is happening? And why is it happening? The answer is simple: it’s much easier to blame others than to take responsibility for yourself.

The Delusional Trap

We delude ourselves when we’re uncomfortable with accepting things the way they are as opposed to the way we want them to be. When we act on the way we want things to be instead of how they actually are, we make bad financial decisions and create painful problems that often end up hurting many others.

People become ensnared in the delusional trap when they create financial trappings in their lives without noticing or acknowledging or, even worse, deliberately ignoring reality. They’re afraid to face their financial lives head—on with brutal honesty. They’ll do anything to avoid the consequences, often at the expense of other people or businesses, and when it’s too late, they take down a lot of innocent people with them.

Every time someone claims bankruptcy, overspends on credit cards and repeatedly refi nances their home, they are lying to themselves and being negligent and disrespectful of their fellow humans.

As my dear friend Willy M. Nieman put it, delusional thinking is defined as:

1. Telling yourself a lie
2. Believing in that lie
3. Acting on that lie

The Sub-Prime Debacle

For a vivid example of how our entire society is ensnared in a delusional trap, look at the sub-prime debacle. As I write this, we are seeing millions of foreclosures nationwide, and it’s probably going to get a lot worse before it gets better. How did this happen? Let me give you my version:

In response to considerable housing discrimination against minorities and the poor, Congress over the years has been trying to make amends. It passed the Equal Credit Opportunity Act (ECOA) of 1974 which made it unlawful for any creditor to discriminate against any credit applicant on the basis of race, color, religion, national origin, gender, marital status or age. The Community Reinvestment Act (CRA) of 1977 further mandated that no lending institution could discriminate within various low-income and minority neighborhoods nationwide. Failure to comply subjects a fi nancial institution to civil liability for actual and punitive damages.

Talk about the road to you-know-where being paved with good intentions. Banks were accepting loan applications that in ordinary times they would have thrown in the trash. The reason was that as soon as the banks issued the loans, they could package them up and sell them to brokerage houses, which in turn packaged the loans and sold them as mortgage-backed securities.

The banks and securities fi rms were making so much money that they fell into a delusional trap themselves, believing the less-than-stellar securities they were manufacturing actually were sound. Nevertheless, the euphoric mood allowed many people to buy a house for the first time despite less-than-ideal (or sub-prime) credit.

To buy what most times were properties they could not afford by any conventional yardstick, many fi rst-time homebuyers of primary residences and rental properties used adjustable rate loans, which had low fixed rates for the fi rst two or three years of the mortgage. After that, their monthly payments increased signifi cantly.

What happened next shook the world—although anyone not deluding himself could have predicted the mess: those sub-prime adjustable loans started adjusting. For example, people paying $2,700 a month for their mortgage were receiving new mortgage payments at $3,400 to $3,600. And the monthly payments kept rising.

Borrowers began to default. Eventually, so many of these loans went into default that the capital structure of many brokerage firms, banks and hedge funds worldwide became questionable. The financial soundness of the world’s banking system and the ability to create the credit needed for the world’s daily economic functioning was being called into question.

Governments around the world had to bail out troubled financial institutions, leading to credit cutbacks and the recession we’re in now.

Everyone was deluded: the government, banks, loan brokers, securities firms and the sub-prime borrowers themselves. The problem spiraled out of control because there was so much money to be made in believing that a fantasy—taking on more debt than anyone could afford—somehow would work out.

A Solution

When you lose, don’t lose the lesson.—THE DALAI LAMA

The mortgage mess can teach us valuable lessons.

First, we must take responsibility for ourselves. Once you get the hang of it, it’s liberating. Yet taking complete responsibility for yourself is tough, which is why most people would rather blame others or deflect responsibility.

If you get anything from this book, it’s that taking responsibility for your own actions is the key to success and fi nancial and emotional well-being.

You will become empowered by taking full responsibility for your actions and for your role in all situations. If you blame and judge others without looking at your own actions, you will lose the essence of authentic accountability. It takes courage and practice to look at yourself first and foremost in all of your affairs, but it builds character in you and goodwill for your family, your friends, and your community. That’s what I call making a positive impact in your life!

Once you start taking responsibility, you’ll start noticing positive changes. You will feel empowered. You won’t waste time and energy on what someone else should have done. You will stay consistently focused on your role in all of your affairs.

By taking responsibility, you may be surprised to discover that you weren’t as much of a victim or as innocent as you initially believed. That realization is both humbling and enlightening, and it’s where your inner awareness takes place. Can you imagine how much better the world would be if all of us were accountable and took responsibility for our actions?

Let’s start wiping out the cobwebs of delusional thinking by asking a few questions. Do you overspend? Do you have a savings account that will last for three to six months in the event of an emergency? Do you know what your monthly expenses are? Do you know what you are invested in and why?

You probably don’t, and we’ll be giving you the tools to answer those questions over the course of this book. The fact is we all suffer from delusional fantasies, just some more than others. Notice how I use the word “suffer.” Suffering is usually the result of delusional thinking in any financial aspect of our lives. Some psychologists might say that this behavior is a necessary mechanism to cope with certain situations. They might be right. But when it comes to your financial affairs, nothing could be further from the truth. If you don’t meet your financial affairs head-on, you will eventually suffer. The more honest we are with ourselves in all of our affairs, not only the financial ones, the better off we will be, because we will always know who we are, what we are, and what we stand for.

It takes courage and bravery. But the rewards are worth it. If you don’t take care of your financial affairs, who will?

Comments

[Mark]

Good article. As someone with a credit score north of 800, money in the bank, a six-figure salary, and a RENTER, I cannot believe how much taxpayer money (and newly created debt) is being thrown at keep "homeowners" in "their" houses. Many of these people lied on loan docs during the bubble to get into homes they knowingly couldn't afford, then took out home equity money to buy those RV's, boats, big trucks, and vactions they otherwise couldn't afford. And when they inevitably can't make the mortgage in the absence of strong price appreciation, they are suddenly victims? Five years into this downturn, the media still portray those defaulting on mortgages as being overwhelmingly victims. The government continues to role out incentive after incentive to aid "struggling homeowners." Perhaps less greed and more financial acumen would have prevented the meltdown. Perhaps not giving incentives for people to strategically default on their mortgage and squat in the house for two years without paying rent and then giving them $2,500 to not deface the property upon finally being evicted would avoid the moral hazard currently going on. For many, foreclosure now is not the hallmark of personal irresponsibility, as it once was, but rather a badge of honor telling others "they beat the system" and "stuck it to the man." Well, honest taxpaying citizens of the future will be paying for this mess...for that McMansion, the boob job, the vacation to Tahiti, et al. And yet these are victims? What a country!

[Old Limey]

Mark:
How about the following comment that a poster left on another current FMF topic?

............... "If the majority can't retire without government help, they will vote in a government that will help them." ...............

Whatever happened to taking control of your own future by living within your means, saving hard for the future, not taking on more debt that you can safely handle, and standing on your own two feet? That used to be the American Way as practiced by past generations.

[Derek Clark]

It's been said that democracy stops working when people realize they can vote themselves a raise. We may be close to that point.

[KH]

Uh, hello?

The government didn't "bail out" the banks and homeowners who made these bad loans because of sympathy for these guys. At it wasn't because they were liberals, because the guys who started the bank bailout were actually the Bush & the GOP.

The government bailout was necessary to keep the financial system from crashing even more than it did.

Things went really REALLY bad in Oct 2008. We were heading for Dow 1000 in a few days.

The recession/depression we have is nowhere as bad as it would have been without the bailout(bush) and stimulus (obama).

Both political parties actually agreed at that time about how important it was to inject gov cash into the system to prevent a death spiral.

Of course, now that the danger is over the GOP is spinning and politicking about this, but that's pretty much expected behavior from the party out of power.

Because no matter how much you believe in personal responsibility etc, you just can't let an enormous number of loans go into default all at once without taking out almost the whole economy.

If you want to blame someone for the mess we're in, it makes more sense to blame the Fed for the loose money supply in the 90's (which gave the banks money to play with/lend).

or you could blame the loosening of financial regulations (again since the 90's) that allowed the packaging and selling of rank tranches of subprime mortgages while magically transforming them into triple-A investment vehicles (magic=delusion).

Or you could blame the regulations loophole that allowed investment banks to purchase tons of these mortgage tranches on deep margin (ie they "bought" them with air).

Feel free to blame the idiotic lenders and overspenders, too, of course.

But you have to realize that the bailouts etc aren't designed to ease their pain, but instead the bailouts are designed primarily to address instability in the financial markets.

That's also why the governments (Bush & Obama) have done nothing to specifically address unemployment during the downturn--high unemployment doesn't threaten businesses at all (it only threatens individuals).

[jim]

"It passed the Equal Credit Opportunity Act (ECOA) of 1974 which made it unlawful for any creditor to discriminate against any credit applicant on the basis of race, color, religion, national origin, gender, marital status or age."

I'm REALLY puzzled what they think the Equal Credit Opportunity Act has to do with anything here.

Re: the Community Reinvestment Act, Wiki says this: "However, many others dispute that the CRA was a significant cause of the subprime crisis. 2008 Nobel Prize in Economics winner Paul Krugman states that the notion "has been refuted up, down, and sideways."

[C]

So...once the poor and minorities were able to submit loan applications without being discriminated against, everything went to hell?

I would have been on board with this article if it had just contained the first and last sections about taking individual financial responsibility, and skipped the middle part where it tells you who to blame for the financial mess we're in. That middle part defeats the whole purpose of the article.

[Old Limey]

C: So I guess that if you were very wealthy person that was in the mortgage business you would be quite happy to give a large loan on a home in a terrible neighborhood, and with a very small down payment, to a person, regardless of their color, sex, ethnicity, and without proof of annual earnings from past tax returns, and without knowing their credit score or any other pertinent data. If the answer is "Yes" then you are being foolish.

Many years ago during the Jimmy Carter presidency when the stockmarket was doing poorly I decided to invest in small partnerships that made Second Trust Deed loans to people. Interest rates were very high at the time, 2nds. were going for between 16% and 18%. We could have cared less about who the borrower was - it didn't matter. All we were interested in was the piece of property. We insisted on having enough equity in the property, after subtracting the amount owed on the 1st. Trust Deed, to leave us with an amount of equity of at least 30% of the value of our loan as our protection. We made many such loans and never lost a penny. We had some defaults where the property was sold on the courthouse steps to a new owner and our loan was paid off in the process usually with early payment penalties. In addition to having our loans protected by 30% equity in a market where home prices were increasing I also inspected each property in person to ensure that it was in good condition and in a decent area. The only one I turned down was a Section 8 apartment building. Section 8 properties are state subsidized and where people on welfare usually live, and in this case the property looked bad, was in a bad neighborhood, and had a lot of deferred maintenance, such as a swimming pool full of thick green slime.
There was one property that went into foreclosure that I was really hoping that our partnership would end up with the property. We had the 1st. Trust Deed on it and the owner was a builder that had become overextended. It was a great home in a great neighborhood. Unfortunately for us the builder also owed the IRS a lot of money and they exercised their right to move ahead of us and to our dismay they bought the property and paid us off.

The whole problem behind the sub prime fiasco was that the lenders became very greedy and made loans with little or NO down payment to people that, in former times, would have never qualified for a loan. The whole idea behind George W Bush's "Ownership Society" was flawed from the beginning, a sizable percentage of the population lack the finances and earning capacity to buy something as expensive as a home. It may have looked a good idea when home prices were increasing but they never looked beyond that.

[Bad_Brad]

The problem behind the subprime fiasco was you had a disintermediation of who originates the loan (usually a mortgage broker), who underwrites the loan (a commercial bank), and who ultimately bore the risk of the loan (usually an unsuspecting investor who bought an investment backed by mortgages which were somehow given investment grade ratings by the ratings agencies). The problems, in a nutshell, with this arrangement are:

1. Each player is motivated by volume. No player is motivated by quality / minimization of risk.
2. The ones who ultimately bore the risk (investors) did not know the risk they were taking on.
3. Zero accountability has been given to the ratings agencies. Zip. If nothing else, I think at this point we can throw their ratings on the scrap heap of worthless information, right there along with stock analysts' buy/hold/sell ratings

[C]

Old Limey: Nope, I wouldn't do such a thing in the scenario you described. You are being foolish to have made that assumption.

The point of the ECOA, as I understand it, is that all consumers are given an equal chance to obtain credit and you can't be denied *just because* of your race, color, religion, national origin, gender, marital status or age. Obviously, you could be denied solely on that basis before 1974 or they wouldn't need the ECOA. My understanding is that the ECOA wasn't designed to automatically give everyone on the planet credit regardless of income, expenses, debt, and credit history.

My point was that this article was supposed to be about each individual taking responsibility for his or her own financial situation. Yet it takes the mortgage mess, traces it back to the ECOA, and places blame squarely on a specific subset of people: "Banks were accepting loan applications [from all those poor people and minorities] that in ordinary times [when you could discriminate against people based on race, color, religion, national origin, gender, marital status or age] they would have thrown in the trash."

That just perpetuates the idea that someone else (of a certain race, color, religion, national origin, gender, marital status or age -- which is probably different than yours, if you're the kind of person who likes to blame others) is ultimately responsible for the financial mess you're in.

Like I said, the first and third parts of the article were good. The second was unnecessary and an incredibly poor illustration of how to "Avoid the Blame Game."

[Jeroen]

I agree with C, here.

First of all: why would it take 30 years for those acts to create that bubble?

secondly, (And I'll let Krugman explain it himself:)

http://krugman.blogs.nytimes.com/2009/11/02/cre-and-the-cra/ (summary: the majority of the housing bubble was in commercial real estate, not in private housing and a link to a paper debunking the CRA myth)

http://krugman.blogs.nytimes.com/2010/06/03/things-everyone-in-chicago-knows/
(summary:
1. The Community Reinvestment Act of 1977 was irrelevant to the subprime boom, which was overwhelmingly driven by loan originators not subject to the Act.
2. The housing bubble reached its point of maximum inflation in the middle years of the naughties
3. During those same years, Fannie and Freddie were sidelined by Congressional pressure, and saw a sharp drop in their share of securitization while securitization by private players surged)

So yeah: leave blaming the government out of the article, and it would have been a good one.

[El Gaupo]

> Re: the Community Reinvestment Act, Wiki says this: "However, many others dispute that the CRA was a significant cause of the subprime crisis. 2008 Nobel Prize in Economics winner Paul Krugman states that the notion "has been refuted up, down, and sideways."

Ha ha, who wrote that Wiki line? Paul Krugman himself?