There’s a lot of finger pointing going on in regard to the banking collapse, the government takeovers, and resulting market turmoil. If blame is to be assigned, then I think it needs to be assigned broadly. We’re in this fix because when it comes to finances, almost nobody really understands what they’re doing. This applies to bankers facing illiquidity as much as it does homeowners facing foreclosure. A lot of very tricky deals got created in the 90’s and 2000’s. People didn’t understand them so they believed what they were told. Sometimes the dealmakers were crooked but sometimes they were unwitting accomplices to the destruction that followed.
I’ll be the first to admit I’m part of the problem. When I went to buy my home in 2000, I got a call from my agent telling me to come to the closing and sign papers. I asked if I’d have a chance to read the papers first. My agent (sighing at my newbie question) told me that the papers were a stack three inches tall and that there would not be time for me to read them all. I’d have to sign them blind or there would be no house for me. So I came in, sat down, and signed and signed for what seemed like three hours. The lawyer gave me one-sentence summaries of each document as I signed, but there wasn’t much I could do to check up on her. At the end, I had a stack of papers three inches high and some keys to my house. I trusted the lawyer. I didn’t know what I was doing.
I own a number of ETF’s (Exchange Traded Funds) which are supposed to simulate stock market index performance. How they accomplish this, I don’t know. But if the index goes up, my shares go up. I also don’t know the compositions of the indexes beyond a one-sentence summary. Once again, I don’t understand what I’m doing.
Add in some malfeasance and you get cases like this one, where a homeowner in foreclosure thinks she’s making a deal to stay out of foreclosure, but in fact she’s giving away her house to the crooks. She didn’t understand what she was doing.
Banks bought bundles of mortages without being able to determine what the default rate would be. They treated these vehicles as “good as cash,” but they weren’t. Not even close. They didn’t know what they were doing.
I install software all the time without reading the EULAs. Even if I read them, I doubt I would understand them. I don’t understand what I’m doing.
So why is anybody really surprised that after doing things we don’t understand, we get results we don’t expect? I’m not sure I know what the answer is. Can we live in a modern society and truly understand all the underpinnings of everything? Maybe this is a user interface problem in disguise? Maybe we don’t need to know everything about all our investments and contracts, but just the basic properties they exhibit. Perhaps this is what regulators aim for with “transparency.” Or maybe we just all need to be a lot more cautious. Even if we have to engage in deals we don’t fully understand, maybe we should keep those deals as simple and as standard as possible, understand as much as we can, and hire advisors on our own dime to check the fine print.