Blame to Go Around
I was ranting the other day about the evils of the finance sector and its denizens, and one of the people I was talking to, being a reasonable person, tried to get me to put things in perspective. “But,” she said, “don’t you also blame the people who took out loans they couldn’t pay back and bought prices they couldn’t afford?”
As it turns out, though, I’m not that reasonable. Either that or the world is crazy. Because I genuinely don’t understand why people say things along those lines. Someone who takes out a loan they can’t afford and then defaults doesn’t deserve to be “blamed” for anything. They suffer consequences for their actions. Much as the person who issues a loan the borrower can’t pay back doesn’t really deserve “blame.” Both parties to such a deal suffer from the collapse of the lending agreement. Everyone has an incentive to avoid lending money to bad borrows and an incentive to avoid becoming a bad borrow. But mistakes happen and people do dumb things, and then they bear the consequences. That’s life.
Now of course we had more than one person doing this. We had a whole real estate bubble, and lots and lots of bad borrowing fueled by the assumption that prices would rise indefinitely. And it’s true, as various people keep pointing out, that the blame for this is multifaceted, relating to some misguided government policies, to the Fed’s interest rate decisions, to the so-called “savings glut” in Asia, etc., etc., and of course to speculators and unscrupulous lenders and all the rest.
But even though the deflation of a housing bubble would lead to economic problems, it’s just not the case that “the economic crisis” (as folks have taken to calling it) was primarily caused by the rise and now fall of an asset bubble in the housing sector. Such bubbles and their collapse are problematic, but also somewhat banal. We had one just a few years back when the dot-com stock bubble collapsed. That provoked a recession and the loss of a lot of paper wealth in the stock market, but there was no crisis. There was no crisis because the big movers and shakers of the finance world didn’t build a giant house of cards built on the assumption that tech stocks would continue to rise in value indefinitely. Some people made bad bets along those lines, of course, but nothing close to the scale of what we’ve seen recently.
And the essence of the crisis is right there. Not in the deflation of the bubble as such, but in what was done on top of the bubble with leverage and so forth so as to create a situation so precarious that credit markets were on the verge of total collapse a little while back. It’s the people who did that who deserve blame.
Related: Everyone who spoke to us in Switzerland who works in the center warned against “the dangers of over-regulation.” And needless to say, it’s possible to regulate an industry a more-than-optimal amount. But at the same time, look who’s talking. I mean, what’s the “danger” of over-regulation exactly — that it might leave the global financial system on the verge of collapse, create the needs for over $1 trillion in global government bailout spending, and a worldwide recession necessitating a massive fiscal stimulus response to (maybe) pull us out of the ditch? Or right — that’s what’s happening now! You could imagine regulations that don’t “fix the problem” or else that “go too far” in some sense, but the amount of actual “danger” involved seems pretty minimal relative to the status quo ante.
62 Responses to “Blame to Go Around”
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November 15th, 2008 at 9:02 am
You could imagine regulations that don’t “fix the problem” or else that “go too far” in some sense, but the amount of actual “danger” involved seems pretty minimal relative to the status quo ante.
I still think it’s a valid warning. Lack of proper regulation led to a huge boom before it lead to a huge bust, and while boom-bust volatility is bad, it’s not yet certain how bad it is in the long term (example: the Great Depression was no picnic, but eventually growth returned to the trend).
Misregulation that lasts for many years can depress the whole trend, which could be even worse than boom-bust cycles in the long run. Which is why I think it pays to be very careful when making regulation.
November 15th, 2008 at 9:11 am
ER… I can imagine regulations that can increase the risk.
Regulations that tell banks that they need a certain default rate or else it will be assumed that they are too stingy in loaning money.
What about Paul Krugman’s statement that the government should force the banks to loan money right now in order to allow the bailout to “fix the economy.” The idea is that if the banks are tight with credit the economy can’t get going again, but you can’t imagine forcing them to loan winding up forcing them to loan ot bad risks?
What about regulations that force credit reporting bureaus and credit scores to increase people’s scores for things like taking a credit counseling course, regardless of any evidence that these courses improve credit risk?
November 15th, 2008 at 9:13 am
Do we blame the terminally ill patient for getting sick and decide to let them “ride out” their “consequences”? We may get to that point with health care under centrists and conservatives, but it’s a preposterous idea for now and something that sums up the horrible circumstances foreclosed Americans are in due to Wall Street and Big Financial greed.
http://www.sunstateactivist.org/ssablog/
November 15th, 2008 at 9:16 am
“Much as the person who issues a loan the borrower can’t pay back doesn’t really deserve “blame.” Both parties to such a deal suffer from the collapse of the lending agreement.”
This is untrue. The loan originators packaged the bad loans and sold them – for cash - to the investment bankers who used them as collateral for bonds. The people who issued the loans got paid and walked away.
November 15th, 2008 at 9:19 am
Everyone who spoke to us in Switzerland who works in the center warned against “the dangers of over-regulation.”
The Swiss have an advantage in banking due to their bank secrecy laws. Without them, there’s no particular reason for a German depositor, say, to choose a Swiss bank over a German one. To a Swiss, “over-regulation” means regulation that would compel the Swiss to conform their banking disclosure laws to international standards. Of course they’re against it.
November 15th, 2008 at 9:31 am
A lot more people have/had a much greater percentage of their net worth invested in their homes than they ever did in tech stocks, and they used a significant portion of that net worth (i.e., home equity) to supplement consumer spending, which has/had been a driving force in economic growth. Consequently, the tech bubble analogy is really inapt.
November 15th, 2008 at 9:35 am
It is possible to summarize the housing mess in one sentence:
According to an article by Liar’s Poker author Michael Lewis at Portfolio.com, a subprime lender gave a no-down-payment $720,000 mortgage loan to a California man whose sole income consisted of $14,000 per year picking strawberries.
That says it all.
November 15th, 2008 at 9:52 am
Let’s start with regulations that maximize transparency. There’s never more-than-optimal transparency. One can’t be for “free markets” and be against transparency. Free markets REQUIRE transparency to achieve their vaunted efficiencies in allocating resources.
November 15th, 2008 at 10:06 am
You have to apply for a loan. It used to be that banks ONLY gave them out to people who could afford to pay them back. That’s what changed. You can’t fault individuals for aiming high and believing that their future would be brighter than their credit indicated. You can fault institutions who employ actuaries and economists for doing the same.
November 15th, 2008 at 10:12 am
while boom-bust volatility is bad, it’s not yet certain how bad it is in the long term (example: the Great Depression was no picnic, but eventually growth returned to the trend).
Exactly right. Similarly, fascism was no picnic, but eventually politics returned to the trend.
November 15th, 2008 at 10:13 am
Article by Michael Lewis that Peter refers to is at http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom?tid=true&print=true
worth a read. I’ve thought from early on in this thing that one of the most significant failures within the financial sector was that of the rating firms (Moody’s, S&P, etc). They were the (ineffective, as it turns out) gate through which the leveraging passed.
November 15th, 2008 at 10:15 am
Several points,
First, one important reason the dot-com crash didn’t result in a prolonged and fierce recession was that the economy was cushioned on the downside by a second, massive bubble in the real estate market. We’re getting hurt worse this time around because we don’t have a bubble to land on- we did in 2001.
Second, the housing bubble was an order of magnitude larger than the dot com bubble. I don’t have numbers at my fingertips, but Robert Shiller was pointing this out as early as 2002. The housing market is a lot bigger than the tech equities market- bigger market, bigger bubble, more pain.
I don’t think the differential between today’s crisis and the dot com bust is attributable to the wiser minds of 1996. Do we really think that sub-prime mortgages are substantially sillier than Pets.com?
Third, as I understand it, the danger of over-regulation is not that it results in more frequent/severe crises, but rather that it retards the rate of long-term performance in the regulated industry. Poor or heavy-handed financial regulation won’t cause another crisis (unless it’s REALLY bad), but it might cause the real economy to grow at a slightly slower rate year-on-year. This doesn’t sound too bad, but growth is compounded continuously- a .01% hit to yearly growth implies a country that is many billions of dollars poorer in 2020 than it otherwise would have been.
November 15th, 2008 at 10:23 am
Third, as I understand it, the danger of over-regulation is not that it results in more frequent/severe crises, but rather that it retards the rate of long-term performance in the regulated industry.
What exactly would “over-regulation” look like in this case? Too much transparency (see Econobuzz)? Has there ever in history been a time when the financial sector suffered from being “over-regulated?”
Please advise, (and please also don’t be cute by suggesting that Soviet Russia was “over-regulated,” as that’s obviously far outside the scope of the present discussion.)
November 15th, 2008 at 10:28 am
This is thoroughly unconvincing. Mortgage borrowers/lenders don’t deserve blame b/c they got their come-uppance through their deals falling through? How is that materially different from CDS and MBS originators? Many of these people lost their jobs, had their net worths scrapped, etc.
Maybe you might say that one party deserves more blame than another, but the idea that mortgage borrowers and creditors are somehow scott-free is a poor basis for a post of this length.
November 15th, 2008 at 10:33 am
“Someone who takes out a loan they can’t afford and then defaults doesn’t deserve to be “blamed” for anything. They suffer consequences for their actions.”
Well, they don’t suffer consequences if we bail them out, do they?
I lived in Baltimore from 1996 through 2001. When I got there, row houses in Fell’s Point could be had for about $50,000. When they got up to about $140,000, I thought, this is ridiculous. SO I didn’t buy one. When they got to $240,000, the people who HAD bought them saud, “See, you are an idiot.” Them when they got to $340,000, the said, “Ha ha! Told you so.” And it appeared that I had lost out on the windfall. My bad.
Now they are crashing. Although not all the way to $50,000. But the people who bought them are all crying, demanding that my tax dollars go to prop up their winnings.
Seems like someone has to get screwed here. Why would it be me? I kept my money out of the market. For an entire decade, I was the guy who lost out. Nobody seemed interested in bailing me out and ensuring that I saw a gargantuan profit on a bet I failed to make.
You are right. These people bet their money on the notion that prices would rise forever. That turned out to be a bad bet.
Look. If I might actually win if I spend $10,000 on Powerball tickets tomorrow. But that’s a dumb bet. So why do I get to demand a Powerball bailout?
November 15th, 2008 at 10:37 am
Matt, I completely disagree with the first part of your post (which is unusual).
Out here in California, many of the borrowers were speculators buying 2nd, 3rd, etc homes. Even the people who were buying primary residences kept saying “It’s a lot more that I can really afford, but I’ll be rich once it goes up”.
If someone comes up to me, and says, “Can I borrow a few bucks”, the onus to ensure that they can afford it should be on them, not on me.
And, the people who did borrow like crazy aren’t feeling the pain: They won. They got to live in nicer-than-they-could-afford houses for several years and then, because they had zero money down, just have to move back to where they would have otherwise lived at no cost to them. I see it all the time out here. Sure, they cry “they’re taking my house away, I have to rent again”. But I’d whine too if someone lent me a mansion for a few years and then said I had to move back to my current apartment.
Both parties deserve the blame. Either one could have chosen not to be greedy. I chose to stay out. But, since it’s clear that everyone won’t blame those responsible and feels the need to bail them out, next time, I am going to going the greedy ones. I’ve learned my lesson.
November 15th, 2008 at 10:42 am
Well, start with the obvious, people with subprime credit ratings, have that rating for a reason. They have a history of making bad financial decisions. They just aren’t the most financial savvy people around. They have problems making sacrifices for long term gain.
On the other side of the equation we have the lenders, an army of extremely well paid financial professional that must meet various State and Federal requirements who evaluates the borrower’s ability to pay the loan back. The vast majority of the lenders and their support staff have been to college and various master’s degrees.
Yet somehow, people are claiming both sides are at fault?
November 15th, 2008 at 10:43 am
1) I think “blame to go around” is a crock of bullshit. Who is to blame is obvious:
a) The goddammed News Media
b) The goddamned Republican-COntrolled Congresses
c) The Superrich patrons of a and b
November 15th, 2008 at 10:45 am
Most people would also add President George Bush to the blame list but I’ve always had trouble blaming the mentally retarded.
So lets just add the 50 million Republicans who voted for Bush to the blame list.
November 15th, 2008 at 10:45 am
Both parties deserve the blame, et al.
The housing bubble—and the underlying morality thereof—is essentially a separate problem from the crisis caused by the massive amount of now-near-worthless paper (”toxic waste,” if you will) that’s held by “too-big-to-fail” entities, and should be considered as such.
November 15th, 2008 at 11:00 am
I agree with those who aren’t nearly as charitable to the borrowers. Matt is certainly right in pointing out that those who promoted bad lending – and who repackaged and sold bad loans in such a convoluted away that the economic braintrust of the world is now unable to unravel them – deserve the most blame. Their actions are a level beyond greed or bad betting, and somewhat more akin to fraud.
But the people borrowing from below were also engaged in a tremendous act of leveraging. As Robert Reich has pointed out many times on his excellent website, real income for many of these people has not gone up in 10 years, but spending continued to rise. Essentially they were levraging a tremendous amount of consumer spending (i.e. debt) on the bad bets they had made in their houses. They may not have been as consciously manipulative as those at the top, but they were cooking their books with every bit as much gusto.
And now, unsurprisingly, they too want a bailout. I have no firm opinion on whether or not such a bailout makes sense economically, but count me as unsympathetic. There is a culture of greed and corrupt accounting that has permeated our economic life, and the little guys were in no way immune.
November 15th, 2008 at 11:10 am
Re: First, one important reason the dot-com crash didn’t result in a prolonged and fierce recession was that the economy was cushioned on the downside by a second, massive bubble in the real estate market.
I am skeptical on that. The housing bubble didn’t really take off until several years after the tech bubble had popped. There is a connection between the two, but there was no housing bubble in 2000 to cushion the collapse of tech stocks. Rather the connection is that after the tech collapse had run its course the economy failed to pick up steam again– the long jobless recovery of 2002-2004. So the Fed kept the interest rates lower far longer than it should have. Normally when interest rates are lowered money immediately floods into real estate since mortgages become cheaper and people with existing mortgages will also refi. That’s OK as an initial shot-in-the-arm for a slow economy, but those interest rates should also induce businesses to borrow and begin expanding, putting into operation plans they have kept on hold during the downturn. In 2002-2004 businesses did not do this– they sat on their profits for the most part and did not undertake expansionary plans (thus: jobless recovery). So money just kept flooding into real estate instead and eventually the housing bubble took hold.
Re: When I got there, row houses in Fell’s Point could be had for about $50,000.
I live in Baltimore too and I am familiar with Fells Point. Many of those row houses were in dilapidated condition and the new owners poured a lot of money into them to rehabilitate them. Some of that jump in price was indeed honest (emphasis on “some”). Plus, the neighborhood became quite trendy which also boosted prices. Up on Butchers Hill it was even worse: there were houses going for 500 grand until recently. Meanwhile in my near-the-stadiums neighborhood there’s an astonmishing mix of prices: row houses going for as little as 70K, rehabed properties selling for four times that.
Re: people with subprime credit ratings, have that rating for a reason. They have a history of making bad financial decisions. They just aren’t the most financial savvy people around. They have problems making sacrifices for long term gain.
Some people who qualified for better rates were nonetheless talked into subprime loans since they are more profitable for the lender. Ditto with people who qualified for FHA loans. Some of the blame still belongs with the borrower for not doing his homework, but some mortgage companies were only a little removed from outright shystering.
November 15th, 2008 at 11:14 am
We had one just a few years back when the dot-com stock bubble collapsed. That provoked a recession and the loss of a lot of paper wealth in the stock market, but there was no crisis.
No, there was an almost crisis. The Fed rediscount rate was down to 1%, which is a point where you are paying bankers to borrow money from you….
There was no crisis because the big movers and shakers of the finance world didn’t build a giant house of cards built on the assumption that tech stocks would continue to rise in value indefinitely.
No, there was no crisis because the movers and shakers built a house of cards on top of the housing bubble. (So I am with K. Larson there.) Dsquared was not kidding back in 2002 when he said we needed a new bubble. The problem with creating a second bubble in an economy in crises was that the only was to do that was to unleash the giant house of cards demons, who promptly went bugfuck with the loaning and the financial innovation.
Some people made bad bets along those lines, of course, but nothing close to the scale of what we’ve seen recently.
The cure for the first bubble was the second bubble – the second bubble depended on vast oceans of monopoly money. We’re at the point now where creating ANOTHER bubble wouldn’t fix anything.
It’s all one big bubble (1986-2006, RIP) that has kept mushrooming in size every time the hot money shifts out of one of the side bubbles.
You could imagine regulations that don’t “fix the problem” or else that “go too far” in some sense, but the amount of actual “danger” involved seems pretty minimal relative to the status quo ante.
Amen.
max
['So, no big thing to bail out GM, eh?']
November 15th, 2008 at 11:24 am
I think the idea that defaulting borrowers don’t deserve any responsibility/blame for borrowing an amount they couldn’t pay back is overstating the case. From a policy standpoint, obviously the issue is the lenders’ failure to give a rat’s ass whether the loan could be repaid, but ethically at least the lender held up their end of the bargain by providing the funding for the house.
Meanwhile, you’re pretty seriously overstating the impact of the derivative House of Cards. If no one had ever sold a mezzanine CDO we’d still have had huge borrowing against tremendously inflated home values, the decline in those home values, and the widespread mortgage defaults. Plus huge bank leverage in general. It’s not as though everything would have been fine if not for those crazy new financial products.
November 15th, 2008 at 11:35 am
James,
You asked what “over-regulation” might look like. First, I’d like to make a semantic point that I think is worthwhile:
“Over/under-regulation” is, as a term, misleading and loaded- I shouldn’t have used it in my initial post. Regulations are either optimize success criteria (economic growth in this case) or they don’t, you can’t have “just enough” regulation, you either have the right ones or the wrong ones. If you think “add more” or “cut more” then you’re starting in the wrong place.
Second, as to what “over-regulation” (read, miss-regulation) might look like- a couple of possibilities spring to mind:
~ Excessive capital requirements or excessive restrictions on leverage. We had too much leverage, but push the limits too far and we compromise the ability of the financial system to allocate capital efficiently. We need some very smart math to arrive at the right amount of permissible leverage, not grandstanding congressmen.
~ A ban on short-selling. Popular, but I’ve yet to see a single economist who thinks this is wise.
~ A ban on debt securitization. This got seriously mishandled, but securitization remains a powerful tool for smoothing risk across sectors and preventing panics. We need regulatory tools to make it work, not make it go away.
Given the complications of the sector, there are a number of other bad-but-plausible ideas that could be enacted.
In regulating our way out of this mess, we need to be ever-mindful that we are tinkering with delicate, adaptable machinery. The urge to do something big NOW is much more likely to lead to ruination than it is to lead to a good outcome. We must be as cautious and thoughtful as neurosurgeons excising a brain-tumor… this is not the native tendency of electoral democracy.
November 15th, 2008 at 11:48 am
“Someone who takes out a loan they can’t afford and then defaults doesn’t deserve to be “blamed” for anything. They suffer consequences for their actions.”
Quick point: the consequences bad borrowers suffer will be to some degree or other a function of how we collectively choose to deal with the situation. Relevant to our decisions will be the extent of moral culpability. If we decide that they are more rather than less blameworthy, we will help out less rather than more, and vice versa.
So, assigning blame–determining moral responsibility–does matter.
November 15th, 2008 at 11:56 am
K. Larson, I don’t know you so maybe this doesn’t apply to you, but “In regulating our way out of this mess, we need to be ever-mindful that we are tinkering with delicate, adaptable machinery,” demonstrates precisely why the free-market is complete bullshit. The free-market requires regulation and, in your argument, precise regulation to ensure that it works properly.
November 15th, 2008 at 11:58 am
Specialisation is a natural part of our lives. For example, though the ultimate responsibility for one’s health is borne by oneself, if the doctor should prescribe a given antibiotic for a given drug most people will assume this is a good idea, or at least the best idea.
Similarly, I can easily see a newbie to The Way Financial Things Work—who is likely to have a bad credit rating in the first place—would trust that the loan originator’s representative is right when he or she would say that the borrower _can_ in fact afford the loan. I strongly doubt that many loans were made on the basis of “you can’t afford this”.
The borrower’s fault is one of lack of due dilligence. There is fault there, but it is the fault of one who leaves his door unlocked or locked inadequately—it is a Burglar’s Morality holds that an apartment-dweller “deserves” to be stolen-from because the place’s windows are open…in that case, the renter is a fool, but not a rogue, and stupidity happens to all of us sometimes, and so should be something that we would have rachmones therefor.
(See also: Tobacco Executives and the Ad-men They Loved.)
November 15th, 2008 at 12:08 pm
RE: blame.
There has always been demand for no documentation, low interest rate, high value loans. Always. Ever since money was invented. It took a truly special class of idiot to supply them.
November 15th, 2008 at 12:11 pm
Sensible regulation does not have to mean excessive capital requirements or excessive restrictions on leverage, or a ban on short-selling or debt securitization. Markets and market participants are quite capable of punishing those who fail to hold sufficient reserves, take on too much leverage, engage in overly speculative short-selling, overrating of debt instruments, or over-investing in mysterious derivatives — IF THEY KNOW IT IS GOING ON.
In the case of this latest debacle, many of those who were selling, buying, and rating these CDS didn’t even know what they were, how many there were, or who held them. Neither did those who were insuring them.
The true-believer-in-deregulation’s notion that individuals in the market don’t need to have — or must spend an inordinate amount of time or money trying to find out — information that is key to sound investing is absolutely ridiculous. None of the activities or instruments are inherently evil if pursued and held in a transparent market in which investors have accurate and timely information about exactly what is going on.
The government’s interest should be directed toward maximizing information, not banning activities or instruments outright — unless illegal of course.
November 15th, 2008 at 12:11 pm
There are two kinds of regulation that are important. One provides transparency in how a business operates and another provides limits or definitions on what constitutes a product.
Transparency includes things maintaining an accounting system so you can run your business and prove to others that it is being run well.
Product regulation allows consumers to escape from the unknown by being able to assess the value of a product or the risk associated with buying it.
When the lack of regulation allows for the production of products with unknown risks, and allows them to be promoted., you get into huge problems.
In theory large businesses should love regulations as it is much easier to comply with them on a large scale. Small companies have a hard time keeping up. Instead, it appears that the economies of scale attack from the cost side of the equation where shaving off .02 cents for each screw saves you $100,000 a month, or using melamine to boost nitrogen values in food products allows you to use less actual food.
November 15th, 2008 at 12:23 pm
I’ve noticed that the Michael Lewis piece, which depicts the devastating consequences of allowing the financial service sector to operate without regulation, has been picked up by the rightwingers for that one sentence, about the Mexican strawberry picker. Which is sort of hilarious. The real data point that animated the guy at the center of the piece was that housing prices were going from a 3:1 ratio – three times as expensive as the household income – to a 4:1 ratio nationwide. And in some areas, like Los Angeles, to as high as a 10:1 ratio. Why? Well, if you look at how the average income increases by decade, in the sixties, seventies, eighties and nineties, you would have to say that it is reasonable to suppose that it would increase in the naughties. It didn’t. It didn’t because the right, finally holding a complete lock on the government, made sure to increase inequality enormously, load the game for the wealthy, and discourage any kind of labor bargaining power that could fight for part of productivity increases – which were all, astonishingly, engrossed by the wealthy. Meanwhile, rightwingers of the usual stripe pulled out their economist stooges to assure us that inequality either wasn’t increasing – look at the cheap tat from China that the working class boobs could now buy at Walmart! – or that it wasn’t a problem.
As this sick syndrome was going on, the Bushies and the right were also encouraging a “society of ownership” in which people would be encouraged to take more risks – be more entrepreneurial. Hilariously, this succeeded: people did take more risks, bought houses on spec in a market in which houses were going up and incomes weren’t. Since, in fact, most people shouldn’t be entrepreneurs, as most entrepreneurs fall on their faces, the results were easy to predict, just as it was easy to predict that after rightwing policies had managed to make the lower 80 percent depend on risk taking ventures just to stay afloat among skyrocketing medical and educational costs, they would, of course, blame the lower 80 percent.
Of course, the rightwing has no choice than to take these wildly varying and completely braindead positions, since it exists solely in order to protect the interests of the wealthiest, and those interests shift with circumstances. However, there’d be no sport if there were no targets, and what better targets than a Mexican strawberry picker? Somebody who has produced a mulitiple more of value in his life than, say, Vice President Dick Cheney.
November 15th, 2008 at 12:35 pm
I’m wondering how many of the borrowers who went the subprime route were unable to comprehend the basic math involved. I would guess quite a few, as basic education in this society has been abysmal for at least a generation. This produces consumers who are easily gulled, voters who can’t parse a simple argument or deconstruct blatant propaganda, and a lot of easily exploitable sheeple, which makes for easy profits. Alas, when the stuff hits the fan, everyone, including those who can read and understand what a percent is, also gets smeared with it.
Ironic that those who rail most against Darwin’s ideas favor an economic philosophy that replicates in a most brutal fashion the survival-of-the-fittest (BTW, not Darwin’s phrase) world.
Doubly ironic that those are the largely the same people who get smeared the most. But then, if they expect the world to end next week, why should they care?
November 15th, 2008 at 1:35 pm
Everyone just forget about blame for a second. Macroeconomics has nothing to do with our opinion who deserves what. Government bailout efforts should be focused on nonrich individual citizens for a simple, obvious economic reason. Demand-based direct spending interventions, such as unemployment compensation, are the most cost effective Keynesian stimuli available.
Matt has the charts. Demand side interventions are better investments, returning more than a dollar of growth for each dollar spent. Supply side interventions are wastes of money, returning only pennies on the dollar.
This is why conservatism fails so badly. The debate is not big government liberals versus small government conservatives. It’s big, liberal, demand-side government that creates more growth than it consumes by helping individuals who need it, versus big, conservative, supply-side government that sucks the life out of the economy by effectively funneling its Keynesian stimuli into a giant black hole, known loosely as “Wall Street.”
And bailing out General Motors is about the biggest supply side stimulus I can imagine right now. It would be far better to let the company liquidate itself and just give every GM worker cash up front.
November 15th, 2008 at 1:55 pm
OK I’m done forgetting about blame now. I blame lenders. Who wrote the old fashioned rules of thumb that supposedly made it so obvious who could afford what? Lenders, that’s who!
Who told people their mortgage payment can be more than 30% of their monthly gross? Who rewrote loans to not require any down payments? Who designed hybrid ARMS with the specific intention that the buyer would refinance when the teaser rate ended?
Lenders, lenders and lenders.
November 15th, 2008 at 2:10 pm
Bubble on bubble is right. Bubbles were us. We’ve been pretty much manufacturing air since Nixon led us out of Bretton Woods in 1971. That check is still in the mail. And now we have no more bubbles left. Unless maybe green technology? One hears a certain amount of buzz from the bubble-pump machinery sputtering. But no doubt a smaller bubble, given the industrial scale and some let’s hope not entirely unregulated dismantling of a globally toxic roulette wheel.
But “not the deflation of the bubble as such, but what was done on top”? And your point is? Sure, if the car hadn’t been moving when it crashed. And if there hadn’t been all those Viet Cong in the hills, Dien Bien Phu would have would have been a walk in the park. And if it didn’t snow in Russia in the winter…
November 15th, 2008 at 3:07 pm
Aatos sez: “Who wrote the old fashioned rules of thumb that supposedly made it so obvious who could afford what? Lenders, that’s who!”
Well, who listened to that same pitch and said, “That sounds like rubbish?” Um… me. And millions of others like me.
Your standard would basically absolve anybody of any blame in any situation. Who said I should have another one for the road? The bartender! Who said I can’t get pregnant the first time? My boyfriend! Who told me heroin isn’t really all that addictive? My junky friends! Who said no one can eat just one? Lays! Those damn chip makers! No wonder I’m fat!
Lots of people offer me all kinds of shit all the time. Some clown keeps telling me my life will be a bajillion times better if I sweat to the oldies and send him $99.95. Whose fault is it if I believe him?
Um… mine.
I mean, all this time, I keep hearing that if I listen to this band or wear that shirt or drive that car, I will be really cool and get laid a lot, or whatever. And it hardly ever happens. Should I get my money back? Or should I just be more careful with my money? And shouldn’t I be EXTRA careful if the amount of money in question is 10 times more than I make in a year?
Keep in mind that the majority of people in the nation are not, in fact, in foreclosure. Most of us bought houses we could afford, or chose to wait until we could afford something we want. Why should we have to bail out the people who thought they could afford a $750,000 house making $40,000 a year? Sure, some banker told them that. But they also told me that. I told them to go pack sand. I should win here. Not spend the next 10 years paying extra taxes so Johnny Jackass can sleep snug as a bug in his McMansion.
November 15th, 2008 at 3:34 pm
Who is responsible for the banks?
November 15th, 2008 at 4:28 pm
Matt, you’re really missing the point. The homeowners didn’t owe nearly enough money to collapse the market. Really read that portfolio article: it explains it well. Here’s the nutshell summary:
In the US, there are only 1.3 trillion dollars worth of subprime mortgages. Only a couple hundred billion in defaults occurred. A couple hundred billion sounds like a big amount, but it’s not, not compared to this number: 65 trillion dollars.
Poor people bought homes. Meanwhile, banks placed side-bets on whether or not those homeowners would be able to pay their mortgages. The banks gambled a total of 65 trillion dollars that there would only be 5% default rate. Hedge funds took the other side of that bet. When the homeowners defaulted, the banks lost a substantial chunk of the 65 trillion-dollar bet, and the hedge funds and small investors won that money.
It wasn’t the couple hundred billion in defaults that brought down the banks. It was the 65 trillion in side-bets. To understand the mechanism by which those side-bets were placed, read the portfolio article. Basically, it amounts to hedge funds selling promissory notes short, which in turn enabled the banks to buy 65 times more promissory notes than there actually were houses.
November 15th, 2008 at 5:10 pm
The traditional control in business that prevents someone from taking out a loan they obviously cannot pay back it that the lender will be the one who loses his money.
The lender is also the expert in the market and in the risks of the kind of lending they are doing.
It is easier to sell a borrower to take out too large a loan because the seller – the lender – is the expert. The borrower is the supplicant. You do not blame the supplicant for the fact that the lender whose money it is acts stupidly of venally. Blaming the supplicant is simply trying to shift the blame from the real responsible party.
November 15th, 2008 at 6:34 pm
“You do not blame the supplicant for the fact that the lender whose money it is acts stupidly of venally.”
The other thing you don’t do is give the mistaken borrower a big pile of money to make sure he keeps the thing he never had any business buying in the first place.
For instance, maybe it is Visa’s fault if they give me credit to buy a 64-inch plasma TV and I don’t pay it back. Fine. But does that mean that some poor shmuck should see his tax money sent to me so I can be sure to keep the TV?
Similarly, if the banks were wrong and the people could not afford those houses, at least the borrowers can do is MOVE OUT.
I decided to rent and not buy a house. The housing market seemed out of whack. If this buyer bailout happens, I am a huge idiot. I should have bought a house I could not afford. Because, you know, I would have the house, paid for by someone else.
As it stand, I have no house, and appears that huge chicnk of my money, through taxation, will go to those who chose to live beyond their means.
So tell me: Am I some kind of super genius? Why is it that I figured out that a house that cost $50,000 in 1996 prbably wasn’t worth $800,000 five years later? Doesn’t seem to take all that much analysis to me. And the fact of the matter is, the vast najortiy of Americans are not in default. They did not become real estate speculators.
If we do end up bailing out the home buyers, this much seems clear: I should have bought a house I could not afford.
November 15th, 2008 at 9:16 pm
Obviously you all should have bought a house in 2003 when you could have locked in a 30 year fixed at 5.5% but you were too chickenshit to pull the trigger.
Many minority borrowers were prime-qualified but their broker only offered sub prime loans.
November 15th, 2008 at 9:45 pm
This reminds me of an excellent book on the desperation of the poor and the would-be middle class (or desperately trying to stay middle class to outward eyes): payday loans, rent-to-own, credit cards with usurious rates, and, yes, subprime mortgages.
Shortchanged: Life and Debt in the Fringe Economy (2005) by Howard Karger
November 16th, 2008 at 3:35 am
“There was no crisis because the big movers and shakers of the finance world didn’t build a giant house of cards built on the assumption that tech stocks would continue to rise in value indefinitely.”
So all that talk about how “the rules have changed,” about the “first mover advantage,” about how “profit and loss are so old school — it’s about eyeballs” — that didn’t happen after all?
I guess WebVan was a good idea after all.
November 16th, 2008 at 11:52 am
So Matt wants to appoint himself, or some buddy of his, as a central planner who gets to decide who gets to do what kind of finance when and how.
That’s silly.
The point of a free society is that people get to do whatever the hell they want, so long as they bear the consequences and harm no one else. The right way forward isn’t to regulate and tell people what to do, it is rather to completely deregulate, let people do whatever they want, but make sure that they and only they bear the consequences.
So, if you feel like investing your life-savings in some magic “guaranteed high-return low-risk” piece of wizzardry, go right ahead. But when it crashes, you have no right to come to anyone to ask them for help.
November 16th, 2008 at 8:25 pm
Re: The right way forward isn’t to regulate and tell people what to do, it is rather to completely deregulate, let people do whatever they want, but make sure that they and only they bear the consequences.
Um, in order to do that you would need to have regulations, lots and lots of them, and even then it probably wouldn’t work. That’s because “consequences” do not stick with individuals who invoke them, but quite naturally flow outward to affect people quite innocent of causing them. The market knows nothing of justice, and it is not a synonym for karma either.
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