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Brandeis University's Community Newspaper — Waltham, Mass.

A Goodman is Hard to Find: Healing the economy means dealing with debt

Published: November 3, 2011
Section: Opinions

The entire industrialized world is dealing with the after-effects of recession. The National Bureau of Economic Research declared it started in December 2007 and ended in June 2009, with many analysts calling it the worst recession since the Great Depression of the 1930s. Banks are being rescued by the federal government, families are walking away from their homes and unemployment rates are the highest in decades.

The last two depressions (1990-91 and 2001) both lasted only eight months. In comparison, this last recession lasted nearly two years and its effects are still being felt. Others believe this is just a small bump in the road, nothing near what America faced in the early 1900s. Mark Vitner, the CEO of Wachovia, described the recession: “The Great Depression was like a hurricane. This is really a bad storm.” Vitner has no doubt in the scale of this “set-back.”

There are hundreds of different theories about how this recession came about. There is one concept behind them all: debt.

Debt appears to be the root of all evil. The first of many theories is the surfeit of mortgages that were sold to people who couldn’t afford them. There seems to be two sides to this argument: One, consumers failed to evaluate what they were buying, and two, the industry defrauded consumers through unclear contracts and promotions. I believe the industry is to blame.

Before taking a side of any argument, a well-informed person must understand the facts. In 2005, housing prices around the world peaked. Little did homeowners know that real estate increases are historically followed by decreases. In 2006, housing prices plummeted.

When the prices began to fall lower than expected, many families saw a shift between mortgage payments and home values. As a result, homeowners saw “negative equity.” Negative equity occurs when a mortgage debt is higher than the value of the home. As a result, homeowners could no longer pay off their mortgages, leaving them in debt and forcing the banks to foreclose the properties. Many made the decision to abandon their homes and “walk-out.” The cost of staying and paying their mortgage was more than their equity.

Homeowners realized that selling the house would leave them with more debt than before. There seemed to be no other way out. As the foreclosure rates increased, banks began to see losses. They had lent out money as mortgage loans and now had no way to get it back.

You all have seen the television commercials promising “low equity rate” mortgages with “little money down.” They’re marketing traps. These false promotions put many homeowners in negative equity situations. The industry used unclear promotions to get buyers to sign unclear contracts that eventually trapped them. The consumer doesn’t understand economics as well as an economist and doesn’t read contracts like a lawyer, so why should they make decisions and sign papers like they were? It’s the industry’s fault we entered a recession.

An economic crisis is happening right now—globally, nationally and locally; everyone’s felt the effects. There is a lot of controversy surrounding the cause of the recession, filled with blame and despair. We need to stop looking at what caused it. We have no way of going back to fix it.

We must unite as a global community and make repairs. It is our responsibility to bring our economy back. We have recovered before from far worse circumstances and will do so again, becoming stronger and healthier than before. As a country we will pull through, make a difference globally and learn from what happened. Through knowledge of our past, we can control our future.