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.
© 2009 Timothy Holland First
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#1 | ethwc
on Thanks, Tim. As
usual, your comments are clear and well thought out. Much as I would love to
have a world of unfettered independence and capitalistic trade, I realize
that there are predators out there who prey upon those people unable to
protect themselves. I recently described the atrocious conduct of the
investment "advisor" at a branch of Chase Bank in steering
relatives of mine toward fixed despite their age (mid 70s) and lack of need
for tax sheltering. What disturbs me is the apparent lack of oversight by
regulator agencies. Not too long ago, I read an article that ascribed the
failure of #2 | hok917 on While I definitely
believe that consumers impulse buys have put us in the economic state that we
are in, the change in society also plays a dominant role. I think that values
are changing and people are more focused on maintain things that represent
status and support the materialistic culture. This is also why so many people
go into debt. They are unable to control their spendings and irrationally
spend on frivolous purchases. #3 | MplsVala on
Hi, hok917. I see
you are posting quite a bit and that is great to see. Glad you joined us. |
#4 | rlndirect
on
Thanks Tim. A very interesting article. Another factor that exists today that was not years ago is the speed in which everything is done-the fast pace of life today.
#5 | egoh72bor
on
Tim: The paragraphs below under the captioin Caveat Emptor come across as -- its primarily the (dumb) consumer's fault, accepting (for the bankers and the Government) little if any of the fault for what developed. From the viewpoint of this retired engineer, at least 50% of the fault belongs the Barney Franks and their ilk - in the government, and the very willing acceptance by the banks of government encouagement to engage in a lending practice which was very lucrative to the agencies in the retail loan business.
Granted, there is doubtless a huge sector of our citizens which hasn't a clue about the meaning of Caveat Emptor.