TRUTH in Lending

When my husband and I bought our new house, one of the plethora of documents we had to review and sign was the Truth in Lending statement from our mortgage company. The document basically ensures that you – the borrower – know exactly what you’re getting from your deal with the bank – the lender.

And that phrase – truth in lending – got me thinking: deep, weighty, ethical thoughts. And those thoughts led me to this conclusion:

Every major financial crisis over the past century – the mortgage crisis, the collapse of companies like Enron, heck, the Great Depression – ultimately boils down to a complete and utter breakdown in trust.

Think about it for a minute. And while you let that thought sink in, I’ll give you three examples to prove my point:

The Great Depression

It’s tough to pin our country’s most difficult economic period down on just one cause. After all, there were so many factors that went into America’s biggest financial collapse: the October 1929 stock market crash and subsequent run on the banks; bank failures nationwide; federal taxes on imports designed to help American businesses that only had the opposite effect. But even those causes have their roots in a breech of trust.

The rise of the stock market in the 1920s had everything to do with trust; people had an almost inherent, unshakable believe that stock prices would go up, up, up irreversibly. But when stocks started falling, investors’ confidence in the market was shattered; they started pulling out their money left and right, and no longer trusted the financial systems – banks included – that had once harbored their money. As banks and businesses – now low on capital – closed their doors, the U.S. Government enacted a series of legislation, most notably the Smoot-Hawley Tariff, designed to protect American enterprise. But the tariffs, which increased the prices of imports, had the opposite impact. They broke the trust of our European trading partners, and made it harder for Americans to get fair-priced goods from overseas, while at the same time making those international trading partners less motivated to do business with us.

The Collapse of Enron

By the late 1990s, the stock market was in the midst of a bullish phase – and no company was more bullish (or brazen) than Enron. The energy giant’s stock price was on a fast and furious climb toward it’s all-time high of just over $90 in the late summer of 2000. Yet even as the stock’s price began to go down (a descent from which it would never recover), investors – particularly Enron employees – were emphatically told by the guys at the top to “Buy now!” while the price was right. In fact, in September 2001 – just three weeks before an article in The Wall Street Journal would lead to the launch of an SEC investigation – CEO Ken Lay told employees that Enron stock was still an “incredible bargain.”

We now know that everyone but the guys at the very top of the Enron hierarchy was being lied to. Investors – many Enron employees who had staked their retirements on their company’s stock price – found themselves holding virtually worthless shares. The trust had been broken.

The Mortgage Crisis

The Truth in Lending Act was supposed to protect borrowers from predatory lenders; but 40 years after it was signed into law, America suffered its worst housing crisis in our nation’s history. And it’s all because of a violation of trust.

First, Americans believed that housing prices would always go up. Much like the fallacy of thought that led to the stock market crash of 1929, home buyers in the late 20th and early 21st centuries thought property prices would climb inevitably skyward. When that upward trajectory started to slow – and, ultimately, reverse – many buyers felt they’d been duped.

But that wasn’t the only cause of the mortgage crisis. Many borrowers took advantage of low-cost loans that, they believed, would give them an immediate return on their investments. They trusted the mortgage companies to act with integrity. Instead, many of these borrowers were taken advantage of by predatory lenders. Again, the trust was – and, in many cases, still is – broken.

What do you think of my hypothesis? Do you think all these financial crises can be pinned on a breech of trust? Why or why not?

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