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Caveat Emptor
By Tim Holland
There is no question that the cause of much of the current financial difficulties the country is experiencing can be laid firmly at the feet of both the dumb, vain, gullible consumer and the slick salespeople who managed to talk them into buying too much of what they didn’t need. Yes, there was fraud and dishonesty all around but it is believed that much of it wouldn’t have worked if the buyers themselves didn’t think they were the ones putting something over on the seller, a concept the sellers themselves were most adept at encouraging. However, as with most things in life, it is never quite as simple as it seems.
"Caveat emptor". Latin isn’t taught in public schools anymore (some say English isn’t either, given the number of twelfth graders unable to read at a sixth grade level) and it has been disappearing from the private school curriculum at an alarming rate. So permit me to translate the hallmark legal phrase of business: "Let the buyer beware". That’s right, the person doing the buying has the ultimate responsibility in the sales transaction – it’s called the word NO.
Words are important and those who use them well tend to make good salespeople and those who understand them well tend to make good consumers.
If "caveat emptor" doesn’t resonate then try the American version: "If it sounds too good to be true then it probably is".
“I can put you into this house for no money down and a monthly payment for the first two years of at least half of what you’re paying in rent.” Boy, what a deal! You can actually live in a place two or three times larger than your current residence for considerably less than you’re now paying.
Why wouldn’t someone question such a transaction?
Well there are some reasons. The problem with "caveat emptor" is that it requires an equal playing field to be a valid principle. To say that it is the buyer’s responsibility to reject an offer puts all of the responsibility on the buyer and none on the seller. Also, by its very nature, the use of the word “beware” implies that in the sales transaction the seller has an implicit advantage and the buyer should be wary of the seller’s argument.
There are those who would argue that "caveat emptor" should always be the pure guiding principle in a sales transaction and that it is needed in order to have capitalism as the engine of the world’s economy. I respectfully disagree.
Capitalism and the profit motive engender greed, which in and of itself is not necessarily evil. However, to make capitalism work efficiently there needs to be a balancing or controlling element to bring us to the equal or level playing field. Capitalism on a leash, so to speak, will enable it to survive through the 21st century. Placing limitations on "caveat emptor" will not destroy capitalism but ensure its continuance.
As a purchaser can never know as much about a product as its creator or seller, it is essential that the purchaser be given tools to balance the “beware” element in the transaction. It would be an unreasonable expectation for a legally untrained individual to fully comprehend a document developed by a team of legal experts. It would also be unreasonable for a purchaser of a credit agreement to employ the services of a legal expert for each sales transaction, especially if the “expert” bares no liability should his interpretation be inaccurate or incorrect.
The problem we are experiencing in the recession of 2008-2010 is one that stems from the assumption that the buyer always has the ability to say “no.” Be the transaction the purchase of a house or a credit default swap, the truth is that the opportunity to say “no” is not always as easy as one would first suppose, as there are other forces at work.
The purchase of a house is not an “isolated” contractual event but one in which raising one’s family in a three room rented apartment in a questionable neighborhood versus an eight room stand alone building in a safe, desirable location presents an additional level of analysis and moral obligation that the purchaser must evaluate. Even if one’s first instincts are to say “no” do they have a moral obligation to say “yes” in an effort to give their children the possible opportunity for better lives?
For the corporation, the same is true when buying that credit default swap, which is to protect the company purchaser from potential loses. Does not the financial purchaser have the obligation to maximize return for the company and then protect it from potential loses where possible, even though the asset purchased is rated investment grade and presented as a safe investment by the rating agencies ?
So while “buyer beware” and “too good to be true” are fine principles, they are only half the equation and in the modern economy of the 21st century, capitalism on a leash should be our guiding philosophy.
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#1 |
on October 16 2009 19:05:33
#2 |
on October 17 2009 01:42:35
#3 |
on October 18 2009 18:20:31
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I see in today's news that the only place to get a mortgage of 90 to 95 percent leverage is from FHA these days. Does this mean that the only "subpar" mortgages are those guaranteed by our government?