Industry Insider: A Financial Perspective
Marketing and the Economic Meltdown
Rogier Slingerland
The “Great Recession” is what most newspapers are calling our current economic crisis. The situation was triggered by the financial insolvency of the global banking system, covered by trillions of dollars in complex derivatives, credit-default swaps and (sub-prime) mortgage-backed securities. They were all nicely hidden in off-the books- special purpose vehicles (SPV) with no capital to cover any potential losses. In short, investment banks made profits exceeding the GDP of the world’s smallest nations, and when the house of cards came down they turned to the government and taxpayers to bail them out. This is what destroyed our prosperous economy… Or is it?
The public and our current government have been quick to fault the banks. After all, they were the ones that sold mortgages to people who couldn’t afford them. The banks didn’t fully explain that ‘Adjustable Rate Mortgage’ actually means a mortgage rate might increase. They were handing out mortgages like hot cakes, all while betting on a market recovery to provide the needed capital to back it up. For years and years we loved them for it!
We keep on ripping at corporate fat-cats (with their multi-million bonuses) because we need a scapegoat. We need to blame them for the greatest marketing scheme in human history. Banks had a product to market, the (subprime) mortgage, and we all bought it. The government promoted it, the regulators funded it and the public embraced it. Being a homeowner is the American Dream, and the banks were willing to provide us this dream at affordable rates and no money down. They gave us exactly what we wanted. Factory workers making $80,000 a year were living in half a million dollar mansions. People working three jobs traded in their mobile homes for brick and mortar and heated pools.
Meanwhile, the White House had its own marketing scheme. It was called the ‘1994 how-to-get reelected marketing campaign’ of President Clinton and cohorts. According to Business Week, The answer came to them in a document named: “The National Homeownership Strategy: Partners in the American Dream”. This document has now been deleted by the department of Housing and Urban Development, since it is considered embarrassing to them. Many economists believe this document planted the seeds for the current crisis.
Consider the following excerpt: “For many potential homebuyers, the lack of cash available to accumulate the required down payment and closing costs is the major impediment to purchasing a home. Other households do not have sufficient available income to make the monthly payments on mortgages financed at market interest rates for standard loan terms. Financing strategies, fueled by the creativity and resources of the private and public sectors, should address both of these financial barriers to homeownership”
So now we have fallen for two marketing schemes: the financial and the political marketing scheme. But there’s a third scheme. It is our own marketing scheme. We told ourselves that we deserved this big house. We had earned that privilege simply by showing up at work every day. We wanted these enormous mortgages and outside patios. We never questioned the person selling us the Dream. We didn’t read the fine print. We didn’t want to. Have you ever gone to buy a used car and fully trusted the salesman? Have you ever gotten a credit card bill and not checked to make sure it was right? You are probably answering no. However, with the biggest purchase in a person’s life, we somehow didn’t question the person giving us the money. We didn’t stop to think that the banker didn’t work for a charity or non-profit. We didn’t stop to think that he was not an independent adviser.
In many ways, a banker is like a used car salesman. He sells a product. A product that is technical and complex and he doesn’t care what happens to it once you drive it off the lot. And why should he? We are adults, human beings capable of making sound decisions. And if we aren’t, we should ask for advice. Unfortunately, we didn’t. We trusted the marketing schemes of our bankers, our President, and our own feeling of entitlement.
So who’s really to blame?
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Rogier Slingerland specializes in capital markets and investment analysis. He currently works as an analyst at CEM Benchmarking in Toronto, ON. He has a Bachelor’s degree from Miami University, a Master’s in Strategic Management and a Master’s in Finance from the Rotterdam School of Management, Netherlands.
Category: Welt | Tags: Advertising, branding, great recession, marketing, Rogier Slingerland, Welt Branding 24 comments »
April 30th, 2010 at 2:48 pm
Mr. Slingerland,
I think there is a separation between scheming and marketing that you are overlooking. If you are truly marketing, it is never a scheme. I think you are caught up in the debate between what is a plan and what is a scheme. In our society, scheming has a negative connotation. It was actually a brilliant scheme, but it was an even better marketing plan.
Someone in charge set out with objectives that were purely aimed at driving profit. You can call this greed or human nature; the name doesn’t really matter. The problem lies with the objectives. They were bad objectives that simply used marketing, which we all know is a tool, to promote false products. If we are going to point fingers, I think they should be directed towards sales, which will lead us right back to the banks.
You point out that the banks were doing what everyone else would have done in their shoes. I contend this is an incorrect notion. For instance, if I took over a bank tomorrow, I would only sell products that I knew were quality. The banks that sold the mortgages, and the governments that allowed it, knew they were selling junk products. As for all of us, we just went along with it. We knew something wasn’t right.
Is it so wrong for us to feel that we deserve a bigger house? That we deserve to dream? I can’t help but believe that this is the exact sentiment that propels our society forward. The truth is, the banks never cared about the people. It all came down to their bottom line.
The banks had bad objectives from the very beginning. I caution you to be careful when you use scheme and marketing together, because it makes marketing sound nefarious.
Jake
April 30th, 2010 at 3:07 pm
Great analysis, especially considering the length of the article (books are often devoted to such subjects). The assigning of blame for the financial crisis is indeed now in vogue.
I couldn’t agree more with Rogier’s assesment of where blame should rest. Everyone who bought a house, funded a house, or allowed legislation that made it easier for “common” people to acquire homes are co-conspirators.
I find it disturbing that the government from Bill Clinton, to Barney Frank, have denied that they were the cause of any problems. From their bully pulpits they have effectively turned on one of their former co-conspirators (banks) for a more lenient sentance in the court of public opinion.
The only party to be spared blame in this mess is the people of the United States. For some reason the abscence of blame seems more damning than anything else.
April 30th, 2010 at 4:20 pm
Excellent analysis Rogier; like DV I can appreciate how concisely you were able to tackle such a massive topic. Jake you seemed to be a nice counter-point to what Rogier had to say, and I agree with your objection to his using marketing and scheme somewhat interchangeably, but that is a pretty insignificant aspect of the greater piece. I also disagree with a couple of specific points, and basically the premise of your response overall.
“For instance, if I took over a bank tomorrow, I would only sell products that I knew were quality.”
Well it’s a good thing you are never going to take over a bank Jake, because there is an inherent risk in investing – if quality is ‘known’ before the investment it falls under the category ‘insider trading.’
“Is it so wrong for us to feel that we deserve a bigger house? That we deserve to dream?”
I will let you answer your own question with your previous sentence, “We knew something wasn’t right.”
I can appreciate your optimism, but you can’t very well consider a guilty party blameless because they did it under the intoxication of “hope” and “dreams.” Throwing around intangibles can be dangerous. A huge demographic of people bought things they had no chance of being able to afford; the fault could possibly be shared with the people who allowed them to put themselves in a no-win situation (in some very rare instances involving some sort of legitimate mental handicap on the part of the buyer) – but at the end of the day we are responsible for our own actions.
If someone buys a car they can not afford and it is repossessed do you blame the car salesman? Why would you blame the banks? As someone who works in sales (I am driven by greed, apparently) – if someone wants to sign a contract I assume this is not going to be their ruin; because people act in their own self-interest. I assume this is something they are moving on because they believe that doing so will improve their life in some way. I have no reason to believe these bankers believed otherwise.
So yes Jake, I think it is wrong to “feel that we deserve a bigger house” if our personal economics dictate that no, in fact, we do not deserve a bigger house because we can not afford a bigger house. A good friend lamented the other day, “The amount of people on earth that don’t understand basic tenants of life or can’t apply them to modern day life simply astound me. You work for what you get, nothing else.”
May 1st, 2010 at 10:52 am
Jake,
I realize scheme may have a negative connotation to you. However, a scheme is mostly used in the positive sense and for a variety of purposes. Just to clarify the meaning of the word scheme, please see below (note that out of the ten meanings produced only one may be considered negative):
Source: Dictionary.com
scheme
/skim/ Show Spelled [skeem] Show IPA noun, verb, schemed, schem·ing.
–noun
1.
a plan, design, or program of action to be followed; project.
2.
an underhand plot; intrigue.
3.
a visionary or impractical project.
4.
a body or system of related doctrines, theories, etc.: a scheme of philosophy.
5.
any system of correlated things, parts, etc., or the manner of its arrangement.
6.
a plan, program, or policy officially adopted and followed, as by a government or business: The company’s pension scheme is very successful.
7.
an analytical or tabular statement.
8.
a diagram, map, or the like.
9.
an astrological diagram of the heavens.
May 1st, 2010 at 11:00 am
You guys seem to think that anything economic that is negative happens as a result of Democrats-What a joke!
You guys seem to forget that Phil Gramm and Jim Leach worked Worked alongside Frank and Clinton. And further it was passed by a Republican majority 54-44 vote in the senate.
Taken from Wikipedia (but I agree after further, independent analysis):
The argument for preserving Glass–Steagall (as written in 1987):
1. Conflicts of interest characterize the granting of credit (that is to say, lending) and the use of credit (that is to say, investing) by the same entity, which led to abuses that originally produced the Act.
2. Depository institutions possess enormous financial power, by virtue of their control of other people’s money; its extent must be limited to ensure soundness and competition in the market for funds, whether loans or investments.
3. Securities activities can be risky, leading to enormous losses. Such losses could threaten the integrity of deposits. In turn, the Government insures deposits and could be required to pay large sums if depository institutions were to collapse as the result of securities losses.
4. Depository institutions are supposed to be managed to limit risk. Their managers thus may not be conditioned to operate prudently in more speculative securities businesses. An example is the crash of real estate investment trusts sponsored by bank holding companies (in the 1970s and 1980s).
The argument against preserving the Act (as written in 1987):
1. Depository institutions will now operate in “deregulated” financial markets in which distinctions between loans, securities, and deposits are not well drawn. They are losing market shares to securities firms that are not so strictly regulated, and to foreign financial institutions operating without much restriction from the Act.
2. Conflicts of interest can be prevented by enforcing legislation against them, and by separating the lending and credit functions through forming distinctly separate subsidiaries of financial firms.
3. The securities activities that depository institutions are seeking are both low-risk by their very nature, and would reduce the total risk of organizations offering them – by diversification.
4. In much of the rest of the world, depository institutions operate simultaneously and successfully in both banking and securities markets. Lessons learned from their experience can be applied to our national financial structure and regulation.[8]
The year before the Republican backed (and House Democrats ratified) the repeal, Sub-prime loans were a mere 5% of all home loans, they rose to 30% by the time of the peak of the crisis in 2008.
Let’s be honest. It isn’t “wrong to want a better home”. It is wrong to think you can afford something that is “clearly outside your pay-grade”, however.
AK, a friend of mine remarked the other day:
“don’t be such a pompous ass, when you are talking about another persons perceptions of their finances. Particularly when they are simply taking advantage of programs that they were told were legal by the government, reinforced through marketing by the real-estate community, and further made more real by lenders”
I agree that people should have paid attention to their own realities, but all you needed to do was sit down with a mortgage broker in that time frame, and you would have seen (particularly from ’05-07) the sort of monumental “car salesmanship” that was being pushed at these people. This is why Countrywide Mortgages faced such pushback.
This is about Greed- Consumers, The Banks, The Non-bank entities and the Government.
We all wanted this (Republican, Dem, T-Bag), and it did what bubbles do…
May 1st, 2010 at 6:23 pm
“You guys seem to think that anything economic that is negative happens as a result of Democrats-What a joke!”
I made no mention of anything political, although you trying to somehow make this political is exactly agreeable to what both Rogier and DV said – this is personal failure being pushed uphill. Seriously, do you read what you type or do you just hit the keys? I normally would not take the time to argue with someone on the internet, but there was something about your specific kind of incompetence that managed to piss me off.
In a few paragraphs you managed to: Cite Wikipedia regarding something controversial, come full circle on three different arguments you seem to make against yourself, fail miserably in some attempt at snark, chalk it up to non-descript ‘greed’ (“banks and ‘The Non-bank’ entities,” what exactly falls under that umbrella?), and do it all with the grammatical prowess of a oxygen deprived manatee.
I took your lead and did some wikipedia research of my own:
Taken from Wikipedia (but I agree after further, independent analysis and editing the fucking wikipedia myself):
“Anything economic that is negative happens as a result of Democrats.”
I must admit, I was surprised to find something so damning from a source as reliable as Wikipedia. And while I was looking at unbiased resources, I navigated over to 911truth.com and found this article http://twilightpines.com/08.Fetzer_Firmage.pdf.
It turns out you’re totally right! The intangible “greed” not only brought down not only the housing market but the world trade center towers as well! The good news is with this logic there is no one person (or group) to blame with the bubble or the towers – this is always best because when people are forced to take responsibility and live up to their actions it can be really uncomfortable!
PS. Don’t worry about my safety, I am posting from a public computer so the “bank and The-Non bank entities” have no way of tracking me after blowing the whistle on their bringing down the towers and all.
May 3rd, 2010 at 8:21 am
Rogier,
After researching you further, I have come to understand that you are a foreign citizen. In the United States, scheme does have a negative connotation. Ask any American.
That said, I still think you make some good points and I think we can both agree that http://www.ireport.com/docs/DOC-438191?hpt=Sbin are not the brightest of citizens.
May 3rd, 2010 at 8:25 am
AK,
I would say that this is exactly what I would expect from you. Nice job, you heve proven yourself to be an insufferable twat.
I think it is great that you don’t know what a “non-bank entity” is. It further qualifies my assertion that you are a pompous ass, who shouldn’t be discussing things (particularly not writing them down in a public forum).
DV was the one who blamed “Clinton and Frank-Democrats” for the meltdown. I just lumped him in with you, because you both share the ability to lose any sense of rational perspective.
For him, it was “the democrats did this”. For you, it is the “lazy and easily duped”.
My favorite part of your latest missive?:
Your comment on my grammar.
Your last name must be Massengill, because you seem to be able to broadcast douche chills form a great distance.
On my citation of Wikipedia:
The reason why I cited it, was so that you can take it with a grain of salt, you see, when you argue, citing your sources allows the person receiving the information to decide for themselves. If you don’t like it, cite a better source, or refute it through your own research.
I think it is amazing how you both “blow hard” and suck simultaneously.
Please keep it up, you are a pneumatic wonder of the world!
May 3rd, 2010 at 8:35 am
Thanks for all the response so far… A couple of thoughts
1. Rogier-Thanks for writing this post, great guest blog entry…I begrudgingly have to agree with Jake that scheme does have a connotation. However, it’s irrelevant to the conversation.
2. Not sure how this turned into a political conversation, but it is entertaining.
When it comes to our current situation, I have to agree with Rogier on most of the things. I think everyone is responsible, not just the banks and government. It’s easy to blame them because they are smaller entities. It would be more difficult to blame all the millions of us who just let it happen. So before I ramble even more, take some responsibility America, it’s not just the “fat rats” faults. lol, Jake, your points are lack lustrous but your video is classic.
steve
May 3rd, 2010 at 10:33 am
Pen,
Please stop the clownish behavior. You only make yourself look like an idiot.
If a post online can get you so bent out of shape, perhaps you should stay off of the internet.
A Side note: Isn’t it funny that Democrats like this guy can use insults regarding homosexuals, but also claim to defend their rights? But that’s an argument for another day.
May 3rd, 2010 at 8:13 pm
DV,
1.) not a democrat.
2.) not bent out of shape. Look to your boy AK for that.
3.) never mentioned sexual preference.
I, for one, wish you mattered,
Pen
May 3rd, 2010 at 9:27 pm
Holy Christ nerdrage. It’s been a long day, so I’ll just be blunt.
Pen, I will go on and give you the advice you are so clearly missing from your absentee father.
Son, you are not witty. You are tragically transparent. You are not Jon Stewart no matter how desperately you try to play him on the internet; and to be honest his type of humor really only works with an audience of sheep to fill the laugh track. There’s no laugh track here, just you embarrassing yourself before strangers.
If you are going to try to turn a relatively unrelated discussion into a standard red vs. blue argument; know enough about what you are attempting to argue to not have to resort to using “douchebag” every 5th word.
May 4th, 2010 at 10:21 am
http://news.hereisthecity.com/news/business_news/10502.cntns
May 4th, 2010 at 9:37 pm
AK,
You got me. I am a nerd. I want to be John Stewart. I turned into “red v. blue”. Oh yeah, I almost forgot my absentee Father.
“I am white
I am a fuckin bum
I do live in the trailer wit my mom
My boy future is an Uncle Tom
I do got a dumb friend named Cheddar Bob who shoots himself in his leg with his own gun
I did get jumped
By all 6 of you chumps
And Wink did fuck my girl
I’m still standin here screamin f-ck the Free World!”
You got me, AK. You are a real winner!
PS. One question?:
“You went to Cranbrook, that’s a private school
What’s the matter dog you embarrassed?
This guys a gangster?”
Seriously, AK, Is your name “Clarence”?
All y’all C’mon!
“Now everybody from the 3-1-3
Put ya muthaf-ckin hands up and follow me
Everybody from the 3-1-3
Put ya muthaf-ckin hands up”
I guess it is your turn, AK. You wanted an “Internet Rap battle”(IRB), right?
Before I go- Five, Four, Three, Two…Douche! That was the fifth word, right?
October 4th, 2011 at 9:56 pm
I found your posting to be insightful! Thank you.
October 5th, 2011 at 5:41 pm
We’re a group of volunteers and opening a new scheme in our community. Your site provided us with valuable information to work on. You’ve done an impressive job and our whole community will be grateful to you.
October 23rd, 2011 at 8:09 am
When issues head out horribly incorrect for one’s country, as is currently the case based on the Usa, what’s fundamentally expected will be trust and expectations, not fury in addition to give up hope. There is a shortage with the the previous and a flood of the second option from the afflicted nation. The real difference in attitude between Clinton and also Barack obama in reaction for this dilemma informs us almost all that we have to know regarding the two presidents
October 31st, 2011 at 1:48 am
not realy news…
November 18th, 2011 at 1:25 am
well written article. Good work.
November 23rd, 2011 at 6:51 am
very useful post, bravo!
December 25th, 2011 at 12:40 am
Well..yes because it shares something that is happening now.
December 31st, 2011 at 7:52 am
Very good post. Will you please write much more about this subject.
January 23rd, 2012 at 7:24 am
Well..yes because it shares something that is happening now.
July 7th, 2012 at 4:14 am
Why don’t you consider the the present condition individuals overall economy how would you think this will have an effect on people?