What He Said
I’ve long argued that the problem with economic libertarianism is that it ignores basic human nature, more specifically the tendency of people to strongly value their short-term wants and needs over their long-term best interests, such that they will favor the former heavily over the latter, and do so in ways that are harmful not just to their own best interests, but to the best interests of the economy as a whole.
E-Mart makes the case far beyond my poor power to add or detract. Go read.
December 9th, 2008 at 6:19 pm
As if the politicians who would run the economy would be any less short-sighted?
No one had to put their money in tech stocks in the ’90s. No one had to buy overpriced homes in the ’00s or buy risky securities based on those mortgages. People do have to pay the taxes the government levies or else men with guns will come and arrest them.
December 9th, 2008 at 6:27 pm
Les:
Umm, what has any of that got to do with anything being discussed here? Did you actually read the linked post?
Nobody’s arguing for a fully controlled economy, they’re just arguing that regulations — especially the kind governing transparency and conflicts of interest — actually help capitalism more than they harm it. To use the overused sports analogy, a game with referees is far better and fairer than one without them.
December 9th, 2008 at 6:27 pm
For that argument to carry any force, one must be able to support the claim that someone knows better what the “long-term best interests” of the people are than the people do themselves.
To whom do we grant that authority, and on what basis?
December 9th, 2008 at 6:37 pm
Well, there’s this thing called “learning from history…”
December 9th, 2008 at 6:45 pm
And economic non-libertarians don’t ignore human nature?
We realize that there are greedy scumbags out there who would rip off their own mother to make a buck. But unless the state is run by emotionless robots, the aforementioned scumbags will pay off other scumbags working in government to make rules which favor them.
Pro-regulatory people generally seem to forget the latter.
Granted, yes, there may be somewhat larger degree of oversight when it comes to elected officials. But I would still rather risk dealing with private scumbags by choice than having choices forced upon me at gunpoint by state scumbags.
Which is another thing regulators often forget. All your regulations come with implicit lethal force to back them up.
December 9th, 2008 at 6:46 pm
This article completely fails to address the actual failing.
The problem presented here is fraud. Fraud is already regulated against. The regulation didn’t help. Sure, greed causes people to make decisions are that are poor and short sighted. The best part of the free market (not “capitalist”) system is that it causes those who make poor, short-sighted decisions to lose all their money. This reduces their influence in the economy, and increases the influence of people who made wise decisions and still have money.
Of course, when you take people who made short-sighted, poor decisions that have lead them down the path to bankruptcy and you instead give them a good return on their investment, then you give the ones who’s decision making skills should have resulted in them having virtually no influence in the economy, and give them the same influence they had as before, if not more.
The people who chased these bubbles should be broke. They would be already if not for the government. Instead, we are putting them in charge of even more money. And if E-Mart had his way, the same sort of people would be in charge of our medical decisions as well.
December 9th, 2008 at 6:46 pm
Sorry, I gave up when I read “nuanced appreciation” which is weasel speak for “I have no f&*#ing clue so I’ll cloak my ignorance by being ‘flexible’ in my standards”.
The problem with capitalism isn’t capitalists, but a distinct lack of ‘em. The more people who look out for their own good create a better system than that where my best interests aren’t served because someone thinks ‘regulation’ and ‘transparency’ are interchangeable.
I’m 100% on board with everyone being able to get the most amount of information with each transaction. Pricing signals is one of the most efficient ways of transmitting that information. Unfortunately, most regulation tends to artificially scramble those signals and this current crisis is a blinding, white hot spotlight on that failure.
I can afford a Ferrari. I can’t afford a Ferrari AND feed my children. That’s a price signal.
Many people couldn’t afford a home. Home ownership is much more than making your monthly payments. There’s upkeep, lawns to take care of, AC’s to fix when they go kaput in the dead of summer, leaky roofs, etc. By artificially lowering the monthly costs by forcing the banks to make those kinds of risky loans (you know, the ones that even after getting ‘fixed’ still seem to have an inordinately large number of defaultings still?), the pricing signal is sent that hey, I CAN afford the Ferrari AND feed my kids, when in reality, I can’t.
I’m all for transparency, and in fact I wish the government would simply be in the business of ensuring that every company stayed as transparent about their products and practices as feasible. If you run a restaurant and get an F- cleanliness rating, so long as you put it on your door and people still decide to eat there, go for it.
Yes people make bad decisions. Yes it harms them. But that’s called freedom and liberty, both of which come with phenomenal risks. People make all sorts of bad decisions that harm others indirectly, sex being the biggest one I can point to. Yet, we allow people to make those decisions because freedom requires it.
Let me make my decisions. If I #$^* up, my losses don’t evaporate, they go to others. The house next door is now cheap as dirt in order to sell. Someone will move in, have a nice home at a decent price, and hopefully start building some equity. In 10 years, they hopefully realize that if they can get 105-110% of what they paid, they’re doing well. Expecting to buy a house and sell it for 200% profit in 3 years is not reality.
But it doesn’t require regulating the prices people are willing to pay by a government who cannot even balance a budget.
December 9th, 2008 at 6:48 pm
And I’ve long argued that the problem with economic socialism is that it ignores basic human nature, more specifically the tendency of rulers to strongly value their short-term wants and needs over the long-term best interests of the people, such that they will favor the former heavily over the latter, and do so in ways that are harmful not just to their own long-term best interests, but to the best interests of the economy as a whole.
That being said (and entirely ignoring human rights for the moment, which I submit are the overriding issue) it then comes down to who’s assertions are more proveably correct. Any economy that is more free than some other is also more prosperous. QED. Now quit waisting our time with silly, old, discredited, deadly, evil, socialist gobbledygook.
December 9th, 2008 at 6:56 pm
This is retarded. Bureaucrats and politicians don’t learn from history any better than anyone in the private sector. Just calling someone an expert doesn’t make it so. Instead of safety, you get inefficiency or outright brokenness.
This current mess was produced by well intentioned government officials whose social engineering attempt (increase ownership of homes by low income families) produced unintended consequences (everyone’s books are now full of risky loans at interest rates too low to justify that level of risk).
December 9th, 2008 at 6:57 pm
What he said..
I read that article and I have to say the magnitude of the writer’s blind spot with regard to the Government’s role in the current economic crisis is simply incredible. If they are to be believed, somehow the banking and investment industries came up with these problem all on their own because of their illegal greed (with unexplained backing from the evil GOP, of course) without any involvement from manipulative Liberals in government at all.
Sorry, but I’m not buying it (nor do I want to pay for it, but I may not get a choice in that).
December 9th, 2008 at 7:06 pm
Also, I resent the notion you have that economic libertarians are “ignoring human nature.” We’re not ignoring it at all. We simply recognize that the humans in government are prone to all the same flaws as people outside government.
The same greed and short-sightedness that leads to poor investment decisions also leads to corruption and regulatory capture by those same greedy private individuals that you intended to regulate.
When Congress and the voting public lose interest in a regulatory area, the only group with a real stake is the regulated party. In the end, the bad guys end up regulating not just their own behavior, but the behavior of everyone else in the regulated industry. At best it leads to high barriers to entry and higher prices for consumers. At the worst, it leads to more Enrons and Fannie Maes.
December 9th, 2008 at 7:30 pm
i have officially decided that i am not participating in this recession…
so i wish everyone else the best of luck
December 9th, 2008 at 8:33 pm
If you have regulations and they’re met with fraud, the prescription isn’t to get rid of the regulations.
December 9th, 2008 at 8:42 pm
Right on, Chris. A recession is a slow-down in production. Go thee forth and produce! This is not a “consumerist” society. Consuming never made anyone rich, and in any case, production is the prerequisite to consumption. This is in fact a producerist society, and there isn’t a politicain on the planet who understands that.
t; Once again, as a self-described moderate you are going out of your way to promote the very founding tenets of socialism. You know, Rush Limbaugh had you pegged years and years ago when he described “moderates” as leftists in denial. I’d have more respect for you if you went ahead and described yourself as a Marxist, or neo-Marxist, Marxist light, or etc.. But that would require some study before you’d know what Marxist even means. Getting on here and lying about your political leanings isn’t going to win anyone over.
December 9th, 2008 at 9:29 pm
Retard:
The regulations aren’t being “met with fraud,” the agendas of the regulatory agencies are set by the people who take interest in them. Those people are usually the regulated parties. Complying with regulations costs lots of money and it can as a shield against liability by creating standards of care for the industry. Regulations play to the strengths of established industry players with deep pockets.
In the end, the regulators end up serving the interests of the regulated- a government enforced and government financed barrier to entry for the established players in the industry.
December 9th, 2008 at 9:34 pm
t; Since you like handing out reading assignments, you’ll surely not mind having one handed to you. This is from Thomas Sowell, and it hits right to the heart of your post. It’s all you really need to know about politics and it’ll take you just a couple minutes to read.
December 9th, 2008 at 9:59 pm
Hi tgirsch,
What you’re trying to describe is time-preference and perfect information. I have a Bachelors in Economics and work in the industry. Capitalism is the only method of producing goods, i.e. using tools to produce goods, and within the free market no greater amount of goods can be produced the current stock of capital. Efforts to direct the capital with violence can only reduce the effectiveness off the capital because it’s not being used most efficiently.
People’s time-preferences, choosing how much capital to consume or save, are affected by many factors, namely the information they have at the time of the act. Saying you shouldn’t bought yahoo at $300 5 years later when it’s $30 is ignoring reality because the reality was it went from $40 to $400 in a matter of months. Did anyone predict that oil would fall over 75% within 6 months? Seems stupid to have bought that Prius when gas is $1.50 huh? It may have been stupid, but we can only know that after the fact. That’s how profit is created- ‘sure things’ don’t exist.
The free market is self governing. Government regulation isn’t motivated by profit; it’s motivated by ignorance, greed, or a desire for power. Wall Street was the most regulated industry in the world. Banks are basically tools of the government anyway, and they literally create money out of thin air and still failed. Government control of the money supply enabling fractional reserves and backdoor taxation by fiat is the cause of the Greatest Depression.
The government has ended Investment banking; too bad for the current start up companies like google was a few years back. Look how much that company has improved our economy, and government regulations will choke similar it in the cradle now. And for the companies that received bailouts – do you really think the government will pick better management? Investors sure don’t think so, and have dumped those stocks, and therefore those companies’ futures, and those employees too.
I encourage you to educate yourself by reading mises.org.
December 9th, 2008 at 10:04 pm
A small example – Here in Tampa, Fl. there is no licensing to be a photographer. However, there is a large group of people who are constantly pushing for the city to regulate and require licensing of photography studios and those who do photography as a business.
Take one small, wild guess what line of business those calling for the regulation are in.
What makes you think that people who want to do the regulation are doing so out of the kindness of their hearts or are truly disinterested parties?
December 9th, 2008 at 10:12 pm
Here’s how regulation is done in the free market – you sign a contract governing the behavior of the parties involved. Government is trying to take the place of freedom by creating inept bureaucracies hat arbitrarily enforce regulations upon the productive sector. Give me a so called ‘free market failure’ and I’ll show you where government has exonerated the guilty parties liability or has created a legislative liability where none truly exists.
Take this example to why govt can’t help: Everyone agrees that people should have houses. Where we disagree is how to get there. Say the free market assigns a credit score of 650 as the lowest score someone should have to get a mortgage. Now add in the government who has destroyed the private mortgage market long ago with its subsidized beast Freddie and Fannie. They say you can have a score as low as 550. Now all those people below the 650 score have been deemed unprofitable by the free market already. So what happens? The government takes losses. Now let’s say the government got burned and pulled back its qualification level to 700. If it tried to enter the free market, it wouldn’t put any more people into housing because the free market can outcompete it. But say the government has already run off the competitors and raises the bar – now all those qualified buyers between 650 and 700 and out of luck when they would have been fine in the free market. If there isn’t profit to be made, it’s probably not a smart idea to do it.
December 9th, 2008 at 10:20 pm
Another empirical even regarding regulation. As a good socialist tgircsh, i’m sure you support the minimum wage. Did you know wal-mart also supports the minimum wage and everyone it employes makes more than the minimum wage? They do this and lobby for its increase because competitors have higher overhead costs than Wal Mart and they want to leverage the government to hurt thier competitors. Government programs are a double-edged sword.
December 9th, 2008 at 10:28 pm
Alright, Lyle, I must now officially call bullshit on you. When have I ever self-described as “moderate?”
December 9th, 2008 at 10:59 pm
As in, “Who’s scruffy-lookin’?”
December 10th, 2008 at 1:20 am
Well, there’s this thing called “learning from history…”
To pick up from the previous theme: For that argument to carry any force, one must be able to support the claim that someone has learned from history better than the people do themselves.
To whom do we grant that authority, and on what basis?
There are many lessons to be learned from history. Case in point: many people look at history and learn the lesson “Violence never solves anything” since warring countries typically did so multiple times. Others learned the lesson “Violence, naked force, has settled more issues in history than has any other factor…” (- Heinlein) as it solved the issue of slavery in the U.S., it solved the holocaust in WWII, etc.
So who gets to be the arbiter of which is correct? You? Me? Scholars who agree with you? Or should we take a vote? Because we all know voters have never been wrong. /sarcasm
December 10th, 2008 at 8:52 am
Interesting. E-Mart and I then take it you use the sub-prime market conflagration as an example. Of course that ignores the part that Government regulations and GSE’s had in making the disaster. Greed no doubt was involved, but Government intervention made a simple issue into a major disaster.
Start with CRA fanned into a flame by ACORN which forced some banking entities to make loans to those who couldn’t afford it so they would obtain better ratings and thus better borrowing entitlements from the government. Then add the FM twins buying up sub-prime loans under the guise of a government sponsored entity giving a false sense of security. This spins for more than 5 years and ends with a crushed market.
Yeah, it’s the greedy libertarians and not the meddling politicians that made the mess. If laws like CRA hadn’t interfered with normal lending practices, and the FMs hadn’t distorted the market by giving security to highly volatile securities, the market would have corrected itself.
As for “Learning from History” I think you may want to look elsewhere for the true lesson.
December 10th, 2008 at 9:56 am
tgirsch: it strikes me that several people have made civil, well-reasoned responses to your “reading assignment” – yet all you can bother to address is a comment about your “label”? In the real world, that’s called rude and disrespectful – what would YOU call it?
December 10th, 2008 at 11:04 am
I’ve only skimmed the articles in question, but I have one comment to make:
Why is it so easy to assign blame to one party (greedy financiers, or attention-hungry politicians who use tools like the CRA to burnish their public image, or power-hungry politicians who use their relationship with FNMA to cover FNMA’s market-distorting excesses), and ignore the fact that a confluence of blame-worthy events all contributed to the current problems?
In short, each of the problems were troubles in themselves, but all of them together were worse than the sum of their parts.
Thus, it is hard to announce a simple solution.
Yes, we may need to re-think the current regulatory scheme on Credit-Default swaps. Yes, we may need to loosen rules in one place, and tighten them in others. Yes, we definitely need to punish politicians whose self-serving goals threatened the fundamental health of the nation’s economy.
Yes, we as a nation need to ask ourselves why the national savings rate went from 10% to near-zero over two decades.
But I think it should be abundantly clear that the first question we need to ask is this:
Quis custodiet ipsos custodes
Who guards the guardians?
December 10th, 2008 at 11:38 am
Hartley:
I call it “I got busy, and only had time for a quick response to an ongoing misconception that that particular commenter has had about me for some time, and continues to hold, even though I’ve repeatedly corrected him.”
I promise to comment with more substance later today.
December 10th, 2008 at 1:42 pm
tgirsch, you really don’t get it do you? Forced altruism is not altruism. Why not call your desire by its proper name, Social Democracy? It doesn’t work. Anywhere. Just an Oligarchy in progressive clothes.
Why not come clean? Just call it what it is.
December 10th, 2008 at 3:56 pm
OK, sorry about the delays in responding.
Ombudsblogger:
one must be able to support the claim that someone knows better what the “long-term best interests” of the people are than the people do themselves.
I don’t think that’s a particularly outlandish claim. We rely on the expertise of others, in both government and the private sector, all the time. Nobody can ever be an expert in everything.
To whom do we grant that authority, and on what basis?
Same way we do lots of things. The executive appoints a committee, with the advice and consent of the Senate. For example. Or the legislature creates such a committee, with the signature of the executive. And so on.
illspirit:
We realize that there are greedy scumbags out there who would rip off their own mother to make a buck.
And your solution to this is: don’t do anything to prevent it! Let the law of the jungle work everything out!
Pro-regulatory people generally seem to forget the latter.
Some of them perhaps do, but many of them don’t. That’s why some of us have been screaming for oversight and accountability in government for quite some time.
All your regulations come with implicit lethal force to back them up.
And this is relevant how, exactly?
Phelps:
The problem presented here is fraud. Fraud is already regulated against. The regulation didn’t help.
That’s rather like arguing that because laws against murder don’t prevent murder, we shouldn’t have laws against murder.
Don’t confuse me with someone who thinks that all regulation is good, all the time. I favor effective regulation, and would gladly get rid of ineffective regulation. Eliminating regulations that prohibit explicit conflicts of interest, and then allowing an industry to effectively “self police,” as happened with the financial markets, is not effective regulation, no matter how many regulations still exist.
Which brings me to another problem with libertarian-types: they’ll always prefer a pound of cure over an ounce of prevention, claiming that prevention would somehow infringe upon freedom. Well, that depends on what sort of prevention, and what you’re trying to prevent. Society is always working to balance freedom and stability, and I don’t see why it should be any different here.
The best part of the free market (not “capitalist”) system is that it causes those who make poor, short-sighted decisions to lose all their money. … Of course, when you take people who made short-sighted, poor decisions that have lead them down the path to bankruptcy and you instead give them a good return on their investment
If only it were that simple in real life. But as with so many other such scandals, the worst actors made their money and got the hell out of dodge well before the bubble burst. In other words, the people who “lost all their money” weren’t the ones directly responsible for the underlying problems at all.
It would be different if the only people harmed by a particular meltdown were the ones who made “poor, short-sighted decisions,” but again, in a complex modern economy, things are never that simple.
Which brings us to yet another libertarian failing: it fails to recognize that what works on a micro scale doesn’t necessarily work that way on a macro scale.
The people who chased these bubbles should be broke. They would be already if not for the government.
You realize that this would be virtually everyone with a mutual fund account, a 401(k), CDs, etc., right?
Robb Allen:
See above, about confusing the micro/macro stuff.
When my decisions effect only me, that’s one thing, but when they snowball and effect lots of unrelated others, that’s an entirely different matter.
By artificially lowering the monthly costs by forcing the banks to make those kinds of risky loans
You seem to be of the belief that Fannie/Freddie and the CRA caused the current crisis. That’s simply not true. Exacerbated it? Absolutely. Caused it? Hardly. As I linked before:
Lyle:
Checks and balances, my friend. Checks and balances.
Jim W:
This current mess was produced by well intentioned government officials whose social engineering attempt (increase ownership of homes by low income families) produced unintended consequences (everyone’s books are now full of risky loans at interest rates too low to justify that level of risk).
See above. That exacerbated things, but didn’t cause them. If the numbers I’ve seen are accurate, only about one in five bad mortgages is of the CRA variety. Try as you might, you can’t blame the other 80% on the government (unless you’re accusing the government of failing to do its regulatory duty, in which case, you’d be right).
We simply recognize that the humans in government are prone to all the same flaws as people outside government.
See above, about checks and balances. Even though it’s admittedly far from perfect, government officials can still be held to a much higher level of accountability than John Q. Privatesector.
Andy:
The free market is self governing.
But the effect of that governance is a cycle of bubbles and bursts. Most people want more stability than that, and would gladly sacrifice some of those absurd short-term profits if it meant protection from the huge losses that result from a burst.
Historically speaking, the really painful depressions and recessions have come as a result of lax regulation, not too much regulation. The current crisis largely traces back to GLB. The S&L crisis traces back to a similar weakening of Glass-Steagall. And so on.
For that argument to carry any force, one must be able to support the claim that someone has learned from history better than the people do themselves.
And as I mention way up in this comment, nobody can know everything. At some point, we have to rely on outside experts. That some administrations (like the current one) have by and large resorted to bad experts (or, more often, simply ignored them) doesn’t make the very idea of consulting and relying on experts a bad one.
Of course, you complain about the dangers of relying on experts, but never pause to consider the alternative — just flapping in the wind. Do you really think that would somehow be better?
karrde:
For once, we largely agree.
The watchmen problem is a big one. That’s why government accountability really needs to be job one. And it’s admittedly a tough job. But that doesn’t mean it’s impossible.
December 10th, 2008 at 4:01 pm
#9:
What does any of this have to do with “forced altruism?”
December 10th, 2008 at 4:12 pm
Lyle:
Your Sowell article is interesting (even if I don’t agree with it), but I fail to see how it’s relevant here. I, for one, am not particularly hung up on executive compensation.
December 10th, 2008 at 9:52 pm
Tgirsch:
Thank you for taking the time to respond to everyone. I know it takes time but I think you do want to understand the truth. Regarding your theory of experts, I suggest you read this book
Omnipotent Government, by Ludwig von Mises and especially reading chapter 11.
Regarding: “But the effect of that governance is a cycle of bubbles and bursts.” Can you answer the question then
I hope you’ll find there is only one obvious reason…
December 10th, 2008 at 10:16 pm
Andy:
It’s not so much that there’s a “sudden cluster” of errors. It’s that the errors accumulate, and make the house of cards even worse. What happens, instead, is that the more pervasive the problems are, the worse everything is when the problems finally come to the surface.
The argument of The Black Swan — and I think a compelling one — is that deregulation actually does serve to make financial crises less common; the problem is, when those now-less-frequent crises do occur, they’re orders of magnitude worse. So it’s a matter of picking your poison: more frequent, milder corrections; or less frequent, dramatic corrections. I think most reasonable people would choose the former over the latter. Now maybe there’s a way to have our cake and eat it too, to have the less frequent corrections, and have them be not very big, but I don’t see that.
December 11th, 2008 at 12:30 am
Really? I’d say that deliberate fraud taking place at the highest levels of the regulated mortgage industry, taking place contradictory to and despite existing regulations, would pretty much be regulations met with fraud.
Hugs and kisses to you too, sweetie.
Signed,
Retard
December 11th, 2008 at 12:38 pm
What does any of this have to do with “forced altruism?”
Everything. The subprime mortgage debacle started with Jimmah Carter’s desire for poor people to own homes they couldn’t afford. The government forced lending institutions to do something they would never do. Loan money to people who couldn’t pay it back.
The government forces business to do many stupid things in the guise of altruism.
Face it, Social Democracy doesn’t work. All of us now have to pay for this. Your entire point is that this should be done. Government should force social structure. It is really stupid.
December 11th, 2008 at 1:06 pm
Government should force social structure
Corrected, Government should NOT force social structure
December 11th, 2008 at 1:22 pm
That’s rather like arguing that because laws against murder don’t prevent murder, we shouldn’t have laws against murder.
And E-Mart is like arguing that since we have laws against murder and people still get murdered, that we should drown everyone at birth so they don’t get murdered later.
You realize that this would be virtually everyone with a mutual fund account, a 401(k), CDs, etc., right?
This is a case where hyperbole isn’t amusing.
This scandal was one small segment of the market. Most people aren’t that heavily invested in this segment — and if their 401K and savings are that narrow, then yes, that was a short sighted decision that could only be from them chasing a bubble.
And I don’t buy the “directly responsible” weasel language. It takes two to tango, and no one took that money from by force.
December 11th, 2008 at 1:31 pm
Number 9:
That’s the right wing’s favorite talking point, but that doesn’t make it true. The overwhelming majority of bad subprime mortgages were NOT of the CRA variety. Low-income urban borrowers, of the sort covered under the CRA, were among the LEAST likely to default. The most problematic borrowers were the aspirational suburban buyers from the middle class trying to live beyond their means.
And even with the CRA, nobody in government forced banks to start offering — and heavily marketing — ARMs with ridiculously low teasers and ridiculously high post-teaser (“reset”) rates; interest-only mortgages; 110% value mortgages; etc. These mortgages were overwhelmingly made by banks NOT COVERED under the CRA.
This isn’t to say that the CRA is totally blameless, of course; especially after the changes enacted in 1999, coupled with GLB, it certainly played a role. But that role is at most one in four bad mortgages, and probably nowhere near that. To pretend that CRA is the proximate cause is silly.
December 11th, 2008 at 1:38 pm
Here’s a handy subprime mortgage primer.
December 11th, 2008 at 1:42 pm
Phelps:
Nice try, but people all across the spectrum are invested in that segment without even realizing it, thanks to the securitization of bad mortgages and the pervasiveness of those bad MBS.
As for your “two to tango” objection, well, that’s another fine example of ignoring human nature. People can be manipulated, and often are. The person who gets manipulated isn’t blameless, but to argue that that person is just as much to blame as the person(s) who manipulated them is like arguing that the date rape victim “had it coming” for going out with the guy in the first place.
December 11th, 2008 at 2:29 pm
The most problematic borrowers were the aspirational suburban buyers from the middle class trying to live beyond their means.
So? So what? That in no way takes from the fact that the government forced an industry to self destruct so “poor people” could have homes they couldn’t afford.
It was forced altruism. The drug Social Democrats are addicted to. Why should we have to pay for your addiction? We can’t afford your habit.
December 11th, 2008 at 3:35 pm
tgirsch, here is what happens when we are all finally equal.
December 11th, 2008 at 3:56 pm
For non-QuickTime people:
http://www.youtube.com/watch?v=YKHzFWkH0Po
Forced equality will be fascism.
December 11th, 2008 at 4:12 pm
…and even with the CRA, nobody in gov’t forced banks to start offering…
Well, except for the threat of lawsuits if not enough low-income and minority customers were granted loans. Given that not being qualified for a standard product wasn’t considered a valid excuse how else were banks to lend money to to customers who otherwise couldn’t have afforded even their first payment? Or were they just expected to eat the loss and take the house (those damn predatory lending bastards!)?
As for the middle income suburbanite borrowers, do you really expect a lender to turn someone away because their credit is too good? “Sorry Mr. Safe Loan but we can’t approve your application. Tell you what though, tell your wife to quit her job, go shopping, max out your credit cards and don’t pay them for a couple of months and then we’ll be able to get you right into that house”.
Your right, that makes much more sense.
The fact is, until the gov’t essentially subsidized these loans through Fannie and Freddy, there was practically no market for these loans and so few lenders were willing to originate them. If the gov’t had kept it’s nose out of things, there would never have been a market for these loans in the first place. At that point all this mess about Credit Default Swaps etc. wouldn’t matter at all.
December 11th, 2008 at 5:15 pm
Number 9/Yu-Ain:
The problem with your objections is that the types of predatory loans that were being issued that were most likely to default were not covered under CRA, and were not being offered by CRA-regulated banks! So I’m sorry, but you’re going to have to connect the dots more explicitly:
1) CRA-regulated banks offer subprime and Alt-A loans to lower income borrowers in urban areas, the vast majority of which are responsibly written and do not foreclose.
2) Non-CRA regulated banks offer subprime and Alt-A loans with onerous and irresponsible terms largely to middle-class borrowers in the suburbs, and these loans end up defaulting at alarming rates.
How does #1 cause #2? How does it have anything at all to do with #2? You’re not just talking about different classes of borrowers, you’re talking about completely separate lending institutions. A law that doesn’t apply to Bank B somehow forces Bank B to make irresponsible loans en masse to borrowers who also are not covered under said law?
It’s like the Underpants Gnome Theory of the Subprime Crisis:
1) Law encourages banks to make loans to low-income, urban borrowers
2) ????
3) Overextended middle-class suburbanites default en masse!
The fact is, until the gov’t essentially subsidized these loans through Fannie and Freddy, there was practically no market for these loans and so few lenders were willing to originate them.
The government subsidizing 20% or fewer of the loans caused the whole mess? See the three step process above.
The fact is, there was a market for these iffy mortgage products because traditional mortgages had largely dried up, and banks who wanted to grow had to expand into “non-traditional” markets to do so. So they actively sought out higher-debt middle-income borrowers (remember all the nonstop advertising for refinance loans and HELCs?). It’s not as if borrowers were banging down the doors just looking to refinance under unfavorable terms. They had to be sold on those terms, at length. Home equity loans and refinancing were continually offered as ways to “better” manage your personal debt, lower your monthly payments, etc.
It was predatory lending on a large scale, and it had nothing whatsoever to do with the CRA. I don’t see how anyone with two brain cells to rub together could think that CRA did anything more than somewhat exacerbate an otherwise widespread and wholly unrelated problem.
December 11th, 2008 at 5:31 pm
Nice try, but people all across the spectrum are invested in that segment without even realizing it,
So, the willfully uninformed are somehow entitled to benefit from the market without bearing its risks? That because they invested in an uninformed manner, they are somehow blameless?
I’ve got a 401K. I make a point of being informed about the vehicles in my program, and to diversify my investments so that if something like, say, a housing finance crash happens, I don’t lose all my money. Your theory seems to suggest that my effort should not perform any better than someone who just throws money into the account and expects it to be magical.
December 11th, 2008 at 5:50 pm
Phelps:
Bully for you, but there are plenty of people who thought they were a lot more informed than they actually were. After all, a big part of the problem here was that through securitization and bundling, the pervasiveness of the bad mortgages was obscured from the investing public — many of the funds tainted by them even had AAA ratings. Now you can tell me that you go and track down those ratings by yourself and independently verify them every quarter, and I’ll tell you that you (A) have no life; or (B) are full of shit (and probably both.)
And perhaps you’re luckier than most, but most people only have perhaps half a dozen different choices in which to invest their 401(k) contributions. Given that, any attempt at diversity meant they were virtually guaranteed to be at least partially invested in companies tainted by bad MBS.
Then again, maybe I’ve misjudged you. Maybe there’s some widely-available-in-401(k)s investment vehicle that isn’t off close to 40% as a result of all this. And that, again, is the part that you still haven’t explained. If “smart” investors who “make it a point of being informed” about their investments are unharmed by these bad lending practices, then where the hell can I find them? From what I can tell, they’re all right next to the leprechaun’s pot of gold at the end of the rainbow, just past the third unicorn on the right.
December 11th, 2008 at 9:24 pm
1) I never said it was only the CRA. If you had paid attention I also included the subsidization of Fannie & Freddie. The CRA hit FDIC insured institutions and Fannie & Freddie got the non FDIC insured institutions.
2) Subsidization: You’ve never heard of the domino effect? The .gov doesn’t have to subsidize everything, or even a majority to push the market significantly. Once a market is subsidized you encourage entry. Especially when an entity that was supposed to have the country’s best interest at heart (congress) basically told them it was. It doesn’t absolve the lenders of their responsibility in this fiasco for not doing the necessary due diligence, but the fact remains, if you don’t knock over the first domino the others don’t fall either. And even at *only* 20%, Fannie and Freddy are frakin’ huge dominoes.
December 11th, 2008 at 10:41 pm
They may be “huge dominoes,” but there’s simply zero evidence that you wouldn’t have seen similar behavior in the absence of subsidization. Zip, zilch, squat. As it is, CRA and Fannie/Freddie combine to form at most 20% of the problem. And in any case, it’s not like a line of dominoes, it’s more like a house of cards. Any card can fall, and you wind up with the same result.
As to the “all CRA” thing, well that’s imprecise addressing on my part. Number9 is clearly arguing that CRA is either all or most of the problem, and that simply isn’t supported by the evidence.
In any case, you still haven’t explained the magical Step 2.
December 11th, 2008 at 11:49 pm
Number9 is clearly arguing that CRA is either all or most of the problem, and that simply isn’t supported by the evidence.
No. Good effort though.
Government and Union interference with American car companies is another example of forced altruism.
When altruism is forced economies become uncompetitive. Markets don’t care about altruism. Most knew that but yet sat by as we allowed government to create the largest bailout in history.
How well will the rewarding incompetence theory work? It’s our money. We allowed this.
December 12th, 2008 at 12:59 am
Better to let the economy crumble, I suppose. That’ll teach ‘em!
December 12th, 2008 at 11:05 am
So your point is that markets reward altruism? How?
December 12th, 2008 at 12:26 pm
Number 9:
Come back when you graduate to a seventh grade reading comprehension level.
December 12th, 2008 at 1:47 pm
Come back when you graduate to a seventh grade reading comprehension level.
As interpreted by a Social Democrat?