Don't Blame Homebuyers: Part 2

This post is "Part 2" of my post "Blame the Homebuyers Only if You Reject Your Doctor's Advice…."
• http://corpania.blogspot.com/2011/12/blame-homebuyers-only-if-you-reject.html

Please only read the following post after having read "Part 1". Thank you.

Here is PART 2:

 Regarding Libertarian Banker-Apologists' second specious point: 

- "It's not the banks' fault at all. The government 'MADE' the banks loan to non-creditworthy homebuyers."

 

The federal government law to which those bank-apologists are referring is primarily the "Community Reinvestment Act" that requires banks to make loans inside their respective communities. Basically, a bank can't take all the deposits from one neighborhood (e.g. the ghetto) and then exclusively make loans to a different neighborhood (e.g. the suburbs).

http://en.wikipedia.org/wiki/Community_Reinvestment_Act

 

BUT THAT LAW HAS FUNDAMENTALLY BEEN IN EFFECT SINCE 1977!

 

So the libertarian bank-apologists really think that the cause of the housing bubble/bust of the GWBush years was only the community-reinvestment regulations that have been substantially identical for 30+ years?

No, that's simply laughably absurd.

 

Instead, all should consider the legitimate possibility that a major cause was the changes in regulations (i.e. the REDUCTION and RELAXATION of REGULATIONS) around 1999 & 2000. Yes, that's right, I'm blaming Bill Clinton and his Treasury Secretary Robert Rubin. While Phil Graham and the Republicans primarily were championing these horrible deregulations and strong-arming the Democrats to go along, they couldn't have done it without Bill Clinton. For you policy wonks, here's what they passed:

 

• http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act (which repealed the decades-long successful Glass-Steagal protections)

 

• http://en.wikipedia.org/wiki/Commodity_Futures_Modernization_Act_of_2000 (which enabled the proliferation of dangerously leveraged derivatives that Warren Buffet calls "Financial Weapons of Mass Destruction").

 

So when trying to diagnose the cause of a problem do you look at the nearest cause or the farthest cause? If you get food poisoning tonight do you think it was from today's lunch or from the cake you had on your seventh birthday?

 

Yes, I will concede that government action helped cause the GWBush financial crisis but it was the Republican-led government action of DEREGULATION that allowed the banks to ruin our economy in the 21st century.

 

Let's think practically here.

 

Say you control a casino.

Would you allow someone who is worth $1 million to bet $100k on credit you extend to him?

How about gambling $1 million on your credit? How about $6 million? How about $32 million?

How much would it matter if the gambler was a purportedly very successful poker player and only wanted to use your extended credit to play poker?

What if that poker player somehow lost half the $32 million he borrowed from you? 

But since the fundamental existence of the poker game in your casino was at stake when he lost that money, you fronted him the $16 million loss. His accountants then count that $16 million example of taxpayer generosity to fortify the gambler's balance sheet and ensure he appears to be profitable (despite the $16 million he lost).

Would you then be OK with him paying himself a $1 million bonus? How about a $2 million bonus?

 

Well that's all highly analogous to what the banks did to the American people.

Their "capital requirement" / "capital asset ratio" regulations were relaxed so that they could use depositors' funds as collateral for massive risk. And on that collateral they were allowed to "leverage" themselves and gamble at 32 times the amount they actually had (including their depositors' investments which don't even belong to the bank). This new, massive increase in leverage was tantamount to a commensurate (artificial) increase in "demand". That much more money being loaned out to buy stocks & real estate during the GWBush years meant increased prices (i.e. an artificial bubble).

Then, when the bust inevitably occurred the banks required the TARP bailout from us taxpayers (which, to be fair, they largely paid back already). But concurrently these banks also required the unprecedented moving of "toxic assets" off their balance sheets in the TRILLIONS with a "T" (not billions with a "B"). With these absurdly "cleaned-up balance sheets" they got to claim massive profitability and therefore shamelessly "justify" giving themselves gigantic bonuses that are virtually entirely unearned.

Please read Matt Taibbi and Robert Scheer for more about this…

• http://www.rollingstone.com/politics/blogs/taibblog/owss-beef-wall-street-isnt-winning-its-cheating-20111025

• http://www.truthdig.com/report/category/scheer/

 

But in the interest of true fairness and balance…

 

I will concede that the GSEs Fannie & Freddie must also share in the blame.

 

And, of course, the microscopic percentage of homebuyers who actively deceived their loan officers in a criminal attempt to get a bigger loan (that they knew they couldn't afford to repay) - well, sure, they're guilty, too.

 

But before you blow that miniscule fact out of proportion consider the ramifications. A mortgage is virtually always more expensive than rent. In a standard loan, you pay some interest PLUS SOME PRINCIPLE. Taking out a bigger loan than you can afford necessarily means eventually getting evicted (for being so "upside down" = owing more than the home is worth). Once you get caught like that you get evicted and all of your principle is lost. So you will have paid more in the form of a mortgage than you would have if you rented! Under normal/historic circumstances, even for a criminal there is no upside to getting a bigger loan than he can afford.

 

The only ways to "game" such a normal/historic system are to either:
a) "deliberately not pay until they actually evict you" (thus getting "free rent" until eviction).

OR…

b) get an "interest only loan", paying that artificially lower mortgage until the principal payments kick-in, years later, and then stop paying & move out (thus getting de facto "subsidized rent").

 

But both such immoral actions are minimally dangerous under 1960s/70s/80s style financial regulations. Whereas they are significant risks thanks to GOP-led deregulation.

 

In any event, you can't blame the homebuyers for the GWBush financial meltdown.

Firstly - The banks should have only given loans to those who could afford to pay. It's the banks' primary job to find good lenders. Otherwise you shouldn't want banks to exist and instead you should prefer only a system of "safety deposit boxes" coupled with a paypal-like money transfer system. When unemployment spikes to 9% the effect on the financial system should be tolerable. When in a massively-leveraged bubble (due to deregulation) such cyclical shifts can threaten to become cataclysmic dangers.

Secondly - The government/regulators shouldn't allow any industry to threaten the existence of America. Remember Warren Buffet's repeated warning that massively leveraged derivatives are still "Financial Weapons of Mass Destruction". We simply shouldn't let banks gamble at such absurd multiples of their net worth. And if one does need a bailout then draconian strings should be attached (e.g. I think "In the event of financial bailout, every one of the bank's management should be personally financially 'wiped out' to no more than $1million in net worth before a single dollar is borrowed from the taxpayer."). It's crazy "reverse-Robin Hood" GOP thinking that a school teacher should pay 20% of their 50K annual salary so that a foolish trader on Wall Street (who has lost more in his career than he has made) can keep his millions in ill-gotten gains (and pay a lower percentage tax rate).

For the record: I'm really not against Wall Street traders/investors/hedge fund managers etc. Some are good friends of mine (since high school). Those who, over the years, earn more on their investments than they lose should be well-compensated. Those whose clients' investments, over the years, earn an ROI greater than the market (e.g. S&P) deserve substantially greater compensation. Conversely, those so called "investment professionals" who underperform the market shouldn't be well compensated at all. In my opinion those who underperform are worth less than minimum wage because the clients would have been better off investing in a mindless index fund. It should be obvious to all with at least a minimal understanding of finance that, in a normal statistical distribution, the majority can't beat the average.

In a purported meritocracy, only those who excel should profit. The market can't fix this problem no matter what the delusional ivory tower libertarian economists think. We need regulation to protect us. We need a democratic government seeking to protect the 99% from the fundamental corruptions that naturally spring up in all markets.

Again, if you haven't yet, please read my post about how "Libertarianism is a Quaint Anachronism".

• http://corpania.blogspot.com/2008/10/regulations-are-crucial-libertarianism.html

 

 

 _____________

LINKS:

• http://en.wikipedia.org/wiki/Community_Reinvestment_Act - Basically, a bank can't take all the deposits from one neighborhood (e.g. the ghetto) and then exclusively make loans to a different neighborhood (e.g. the suburbs).

• http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act - which repealed the decades-long successful Glass-Steagal protections.

 

• http://en.wikipedia.org/wiki/Commodity_Futures_Modernization_Act_of_2000 - which enabled the proliferation of dangerously leveraged derivatives that Warren Buffet calls "Financial Weapons of Mass Destruction".

• http://en.wikipedia.org/wiki/Capital_requirement  & http://en.wikipedia.org/wiki/Capital_adequacy_ratio

• http://www.rollingstone.com/politics/blogs/taibblog/owss-beef-wall-street-isnt-winning-its-cheating-20111025

• http://www.truthdig.com/report/category/scheer/

• http://en.wikipedia.org/wiki/Government-sponsored_enterprise

Again, if you haven't yet, please read my post about how "Libertarianism is a Quaint Anachronism".

• http://corpania.blogspot.com/2008/10/regulations-are-crucial-libertarianism.html

Blame the Homebuyers Only if You Reject Your Doctor's Advice….

Blame the Homebuyers Only if You Reject Your Doctor's Advice….

 

This post is for those who reject (or simply don't understand) the Occupy Wall Street movement.

 

Libertarian, bank-apologists who are against "the 99%" all too often make two particularly specious arguments that I will definitively debunk here. They fraudulently claim...

 

1) "It's not the banks' fault at all. The only guilty people are the homebuyers who took out loans they couldn't afford."

 

2) "It's not the banks' fault at all. The government 'MADE' the banks loan to non-creditworthy homebuyers."

 

BOTH OF THOSE STATEMENTS ARE VIRTUALLY 100% BULLSHIT.

 

Here's why…

 

1) Consider this analogy: You go to the doctor thinking you are OK but he hypothesizes that you may be sick with cancer. He states the only way for him to find out for sure is for you to get an expensive high-tech scan.

 

Now, how often do you reject the doctor's recommendation? I wouldn't be surprised if the average person (with insurance) probably gets the recommended test 99 times out of 100.

 

Why? It's because the doctor is the professionally-educated, government-regulated expert with explicit obligations to look out for the patient's interest. Well over 99% of the time the patient is necessarily less-educated than the doctor is on medical issues. So, naturally, the patient defers to the expertise of the doctor. In an advanced economy with an increasingly specialized division of labor this is as it should be; standardized deference to expertise.

 

Now examine how analogous that is to a typical homebuyer going to his "personal banker" at the bank where he has been a checking/savings customer for years. He goes in because he wants to buy a house. (Maybe he was even "cold-called" and invited to come in by that banker). This typical homebuyer knows what he spends every month for rent but has no knowledge whatsoever about the rules, norms & pitfalls of home-buying.

Virtually identical to the doctor's relationship to a patient, the banker is a professionally-educated, government-regulated expert with explicit obligations to look out for the customer's interest. But instead of sticking to decades-proven norms of "Always put at least 20% down" and "Mortgage shouldn't be more than 30% of your income" the entire banking industry (most especially from 2000 to 2008) was exploding with "Liar Loans" that were outright fraud as well as "Interest Only Loans" that doubled after an introductory period. These shady loan sharks might have delusionally rationalized to themselves "Hey, if the real estate prices keep going up these poor schlubs can always refinance." But these bankers were wrong and you simply can't blame the customers for trusting their banker.

 

"Caveat Emptor (Let the Buyer Beware)" the libertarian, banker apologists scream. But unless you expect everyone to become expert in everything then you don't really believe that. The world has simply evolved to a level of complexity that requires expertise and therefore trust in experts.

(See my post "Libertarianism is a Quaint Anachronism")

• http://corpania.blogspot.com/2008/10/regulations-are-crucial-libertarianism.html

 

If you don't think the customer should be able to trust his professional, regulated expert then how do you feel about the following hypothetical situations?

 

a) Your accountant says certain deductions are legitimate (which seems intuitively plausible to a reasonable person) but when the IRS comes to arrest you for tax evasion he flees and bears no responsibility.

IN TRUTH: You can sue your accountant in such situations and the judges in tax court generally give such suckered filers some leeway (at least compared to self-filers).

 

b) Your lawyer assures you that it is completely legal to use Mickey Mouse's image in your company's advertisements because the Mickey Mouse character first appeared in the animated short "Steamboat Willie". Copyrights expired 50 years after the death of the author and Walt Disney died in 1956. But then Disney corp sues the crap out of you and your attorney flees responsibility claiming that he told you true facts.

IN TRUTH: I am not a lawyer but you CANNOT use Mickey Mouse's image in your advertisements without permission from Disney (in part because copyrights have since been extended and in part because Mickey Mouse is also protected by trademark law).

 

C) While getting your oil changed on a cross country trip, the mechanic (who is very sinister, unbeknownst to you) advises you to get new brakes and, in the interest of safety, you agree. But he switches your fully-functional brakes with used/worn-out garbage brakes. You drive right on to the highway and the brakes fail completely causing you to rear-end another car. The accident kills the baby who was going to grow-up and cure cancer.

IN TRUTH: (again I'm not a lawyer) While there is such a thing as a true non-negligent accident it doesn't really apply here. In this example the mechanic is more culpable for manslaughter than you are. Plus that baby was just going to save his cancer cure for his cult-followers on his racist micro-nation island and then unleash a cancer epidemic on the world like a Bond villain. So don't be too hard on yourself for getting your brakes changed.

 

Ok, that's enough for one post.

 

On my next post I will address libertarian, bank apologists' second specious argument - "It's not the banks' fault at all. The government 'MADE' the banks loan to non-creditworthy homebuyers."

Don't worry I will completely debunk that, too.