Marketing and the Economic Meltdown
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.