Another thing is risk management with regard to housing, for example. We have a huge mess-up here, because people have been urged by experts and by national leaders to invest all of their life savings in a single risky investment, a home in a city, in a leveraged way. They would borrow 80 percent, 90 percent, or even more of the money to buy the home. And so they’re putting their life savings on the line in a crazy way. So this shouldn’t be the new normal; but we have to then redesign our mortgage institutions.
We have over 12 million people who are underwater—that is, they have negative net worth in their homes. And, typically, these people have nothing else, so they’re wiped out. How can it be that we were anywhere close to the right system? There are some people who doubted it would ever happen. I’ve talked to these people, and it seems to be often based on the assumption, one way or the other, that home prices would only go up. Well, we’ve just learned that they don’t just only go up.
We didn’t have the right system. It was normal. We thought that the conventional mortgages that were being issued represented some kind of enlightenment, but that was a group thing. That was taking for granted that what we have now is right, and it’s not right. So it has to be fixed. So I’m hopeful that this event that we’re going through now will trigger a lot of institutional rethinking that will make our economy work better.
SOURCE: The McKinsey Quarterly
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