Justice and the Mortgage Meltdown

The American public hasn't learned a damn thing from the mortgage meltdown. What they should have learned, in my view, is that highly leveraged investments, including investments in real estate (such as buying a house with less than 15% down, something a majority of American adults has done), are dangerous, and to avoid them. They should have learned that it is not a fundamental law of physics that real estate values will always rise, and that in fact we should not expect real estate values to reach their 2006 peak again within the lifetime of anyone over 35. Furthermore, with mortgage rates below 3%, people should realize that there is an inverse relationship between interest rates and real estate values, so that when the Fed stops all this aggressive quantitative easing, real estate values will sag.

Instead, the public believes what it wants to believe. The public believes that it really is a fundamental law of nature that real estate values will always rise forever, and the fact that they stopped doing so in 2006 was just a reflection of some sort of unspecified immoral activity on Wall Street.

So the public demands justice, and has been frustrated that heads on Wall Street haven't rolled. So now we see a $13 billion settlement against JP Morgan Chase. It is unclear whether that will appease the masses, who probably want to see people going to jail.

The Wall Street Journal has an article about this (http://online.wsj.com/news/articles/SB10001424052702303448104579147881111406764?KEYWORDS=Morgan+Shakedown), while the New York Times has a different view (http://dealbook.nytimes.com/2013/10/19/jpmorgan-said-to-be-discussing-13-billion-settlement-over-mortgage-loans/?_r=1).

A few years ago, there was a very well-publicized lawsuit against Goldman for selling securities while simultaneously betting those securities would fail. But regardless of how you may feel about the morals of that action, it definitely did not cause the mortgage meltdown.

The public is angry that the mortgage meltdown happened, that so many people are under water in the mortgages, that so many people are out of work, that so many people got foreclosed upon. I don't think any of these legal actions are getting to the causes of any of those unfortunate outcomes.

The fundamental cause of the foreclosures was that people bought houses they couldn't afford. The fundamental cause of the mortgage meltdown, and the recession they followed it, was the mass hysteria among 90% of the people in this country who believed that real estate prices would go up forever. Wall Street was not alone in this delusion -- the fantasy was shared by the politicians, the voters, and the home buyers. If the public wants to see who is responsible for all this pain, it should take a look in the mirror.