When Everyone is the Greater Fool

The presence of great societal action in America amazes me. Actually, it doesn't amaze me, it makes me laugh. Despite the claims of what truly collective efforts can accomplish in America (think the Space Program, universal healthcare, education reform, The Great Society, etc.) are, the truth is that Americans often do act collectively. And that collectivity is almost always rash and self-serving. This is no surprise to me and my vast skepticism of [good] human intentions. However, the current crisis is a perfect example. The Journal had a great editorial today that discussed this matter and I think its points are accurate.

First, no one was complaining when the banks informed them that they could take out mortgages they could not possibly afford previously - where funding was based on credit scores, not real data such as income, debt, and assets. Thousands of people swept up these loans and moved into mcmansions (at least here in Atlanta.) Then, those mcmansions amazingly jumped in value! "What luck!" those mortgage holders thought to themselves. "And really, what is the worst thing that could happen? My house is gaining so much value that when my ARM re-adjusts in 3-5 years, I'll just re-finance or sell my house at its new higher value. Stupid bankers, they're just GIVING money away. Woo hoo!"

Well, those bankers are certainly reaping the benefits of their stupidity. However, everyone - mortage holders, bankers, and politicians who gained initial vast popularity by saying that "Every American has the right to own a home!" - are now suffering largely as a result of a theory a friend introduced me to: The Greater Fool Theory. The theory is very transparent. Basically, the investors know they are buying bad debt, but are confident that there will be a "bigger fool" who will buy the debt from them allowing them to get rid of the bad debt while still turning a profit on fees (and hopefully a jump in value too.) This creates a market bubble - such as the tech bubble of the early 2000s and the housing bubble - which eventually must pop. The unfortunate thing is that the housing bubble showed that everyone was the greater fool. This was certainly aggravated by implicit governmental guarantees of mortgages, but that's a post for another day. Everyone believed that they were gaining "safe" money that would only continue to grow at unrealistic rates. After all, the housing market is the DisneyWorld of investing: It makes all your [Main Street American] dreams come true.

So, what does this say about American societal action? First, Americans are clearly capable of group action. And, apparently incredibly easily manipulated by anything they think will benefit them (which doesn't seem to be universal healthcare or education... maybe because they're not quite so bad as they're made out to be... that's simply a supposition though.) Second, crises rule the day. Americans (and most people who are above subsistence-level existences) LOVE to panic. This may also be a geographical phenomenon where Atlanta has the most concentrated group of panickers, but interesting nonetheless. Bank runs, gas lines, credit crunches which can be an amalgamated disaster if not stopped. The funny thing is that they can be stopped... if people insist on being calm and not fueling each others' fears. But, people don't want to take that kind of responsibility so the magical government must intervene to save the day. This will most likely will work because people will gain back their market confidence (in a subconscious way for most,) yet is certainly not ideal and even opposed by most because they see it as bailing out Wall Street, not Main Street. And all those "rich people" deserve it for being greedy. Wow - American hypocrisy at its very best.

So, what lessons are to be learned from this mess? In my opinion, the most important is a lesson learned in Econ 101: There's no such thing as a free lunch (or certainly not a free house.) If something seems to good to be true, it is. This obviously won't help the situation, but keeping it in mind for the future may help people immensely. The second is related: If people are taking a free lunch en masse, RUN! Or, exploit their stupidity for your own gains, just be careful because if you play the greater fool game there's always a chance that it will be you. And, just to be safe, my family will always own a large track of land with a fully equipped cabin in a rural, wooded area in case one day the government isn't able to bail [the collective] us out. Some politicians might call that an example of clinging to "guns and religion." I just think of it as good sense.