Monday, May 2, 2016

Housing Debacle Revisited

Ok. Hiram and Sean want to beat this to death again instead of discussing how to better push people into the light...  So here is what they have to say on that topic.


"I assume one forced transaction is that government requires wealthier people to pay more taxes even though we all stand on the same American soil with the same rights and freedoms, and then government distributes this money to the less wealthy people.

Were the crooked transactions that led to the financial crisis any less crooked because rich people benefited from them?" Hiram


"Hiram,  No one forced individuals to borrow more money than they could afford to pay back. They entered into their mortgages of their own free will.

You are correct that this is a free country, and yet you want to burden the "800" group of citizens with the costs incurred by the poor choices made by the "200" group of people at the risk of the whole town. This does not sound very free.

Freedom comes with responsibilities in a society like ours. It is what enables our society to provide life, liberty and the pursuit of happiness for all. " G2A


"No one forced individuals to borrow more money than they could afford to pay back.

No one forced banks to create worthless financial instruments, or to put them in your mutual fund claiming they had value. But they did." Hiram


"Hiram,
As we have discussed before. It was the mortgage defaults that triggered the house of cards to fall down... Two key groups of people who freely contributed to the disaster, those greedy people who offered the loans to "underfunded greedy idiots" with little collateral required, and "underfunded greedy idiots" who bit off more than they could afford and bailed on their obligation when the going got tough.

Beyond these key players we had the government, investors and millions of other citizens who freely chased the expanding housing bubble and low interest rates. Somehow they thought that double digit home price increases would continue indefinitely... Even when the inflation rate was almost non-existent.  A Refresher for those confused by this. "G2A


"The problem really wasn't the mortgage defaults. People are always defaulting on mortgages and debt. The man Republicans are putting forward as their candidate for president has declared bankruptcy several times on a scale that is unimaginable for the ordinary home owner struggling to come up with a monthly house payment. And if you read what that candidate says on the subject, he explains to all of us, that there is nothing at all wrong with defaulting on debt, that it is a natural part of doing business.

No, the problem that that bankers created a system that disguised the nature of debt claiming that instruments were much more secure than they were." Hiram


"Has anyone around here mention "The Big Short". Among other things, it lays out in a pretty accurate manner a portion of what went wrong with our financial system." Hiram


"Hiram, The mortgage broker and investment firms contributed to the problem and have paid massive fines..." G2A


"The mortgage broker and investment firms contributed to the problem and have paid massive fines

Did they compensate people for the lost value of their houses? Or for the lost raises, and the lost jobs? Were the huge bonus packages paid to bankers in any charged to pay for the enormous damage they have done." Hiram


"Why are you afraid to discuss the reality of people like my friend's daughter and so interested in side tracking this comment string?

The questions are different and they are personal. But on a less personal level, you can see how these issues played out with our irresponsible bankers, and Donald Trump. If others weren't involved, weren't dependent on the situation, it would have been very easy to let the bankers, and Trump to go broke. But just like an irresponsible parent with a child, the bankers and Trump were to some extent in a position to use the innocent as hostages. So calculations were made, arrangements were imposed and everyone hopes for the best. Sometimes it works out, and sometimes it doesn't" Hiram


"Have the people who defaulted on their loans and crashed the house cards made any reparations to anyone?

Well, yes. They went through bankruptcy. They have seen their houses foreclosed, their wages garnished, that sort of thing. They aren't like Donald Trump who has the political and economic power to prevent that from happening. Nobody seems to have given them huge bonus packages financed by taxpayer bailout dollars, although the economic arguments for doing that are similar.

And the fact is, the folks who went bankrupt aren't really the losers because they didn't have any money to start with. The people who were hurt by the financial crisis were the folks who didn't do anything wrong. The folks who made the payments on their underwater mortgages. Who lost their jobs or at least income through no fault of their own, because of the financial misfeasance of people they never had dealings with at all. " Hiram


"Hiram,  Going through bankruptcy is the opposite of paying reparations... It cost the tax payers and the bank... " G2A


"By the account of most economists, the economy lost about $6T in economic activity in the Great Recession. Bankers have paid about 1/12 that amount in fines as a result of the behavior that was responsible for it.

I guarantee you today that the big banks are doing far better than the family that was forced into bankruptcy.

And again, let's remind ourselves how the big banks feasted on racial minorities to fuel the subprime bubble.

"According to one study, about two-thirds of all subprime loans between 2000 and 2007 were made to people who already owned their homes. The targets were often elderly, in particular men and women of color. Visiting loan officers convinced these borrowers to use the homes they'd poured their savings into their whole lives as ATM machines.

The pitch was: refinance your home, and get a little extra spending money each month! Lots of people went for it. But there was mischief hidden in the fine print of many of these "refi" deals, which often quickly exploded. Before long, the now-departed agent's promises would evaporate into a toxic quicksand of debt, unforeseen penalties and foreclosure.
...
Thanks to a number of settlements, we now know that some companies got many of those new signatures via intentional strategies targeting black and Hispanic customers. The most infamous example was Wells Fargo, which paid a $175 million settlement for systematically overcharging black and Hispanic borrowers.

It came out that a Maryland office of the bank referred to subprime loans as "ghetto loans," and pushed its loan officers to unload as many as possible on the "mud people" of Baltimore and the surrounding suburbs. A crucial element involved pushing expensive and dangerous subprime loans on people who qualified for the safer, lower-interest prime loans.

The New York Times did a study of New York-area home lending and found that African-Americans who made more than $68,000 were five times as likely as white people in the same income category to be marketed risky subprime loans. The ratio was even worse at Wells Fargo, where it was more like eight to one."

Taibbi on the connection between Wall Street and race" Sean


"Going through bankruptcy is the opposite of paying reparations..

They take all the bankrupt's property to pay the debt. Nothing more can be done than that. Punishment or not, we can't take more than people have, and if we take away their reason for working, we can't really expect that they will work that hard.

In any event, it wasn't the broke who were hurt by the financial crisis since they were already broke. It's the people who were playing by the rules who lost income and wealth. And it's the people who broke them who became immensely rich. "Hiram

31 comments:

Sean said...

You can't discuss how to push people to the light until you fully comprehend why they are in the dark.

It's easy to moralize and point fingers and poor people. It's much harder to address how as a society we have kept a boot on their throat and made it difficult for them to stand up.

Anonymous said...

"You are correct that this is a free country, and yet you want to burden the "800" group of citizens with the costs incurred by the poor choices made by the "200" group of people at the risk of the whole town. This does not sound very free."

Because we are. Banks made bad loans and then insisted the rest of us pay for them and accept the burden of their making those loans. I don't see this as controversial, it's what always happens to some degree or another because banks always make bad loans. But in the case of the financial crisis the loans they made were so improvidently made, and incompetently handled that they caused a near depression.

Did you insist that your loan be bundled with bad loans? Did you turn them into financial instruments whose risk was impossible to assess? Did you sell them to people after claiming they were creditworthy when they were not? If you didn't do any of these things, why should you suffer the consequences when this financial house of cards established without your knowledge or consent came tumbling down?

--Hiram

Anonymous said...

Freedom comes with responsibilities in a society like ours.

Were you free to order your bank not to bundle your loan? If not, why were you responsible for the disastrous consequences when they did? Does responsibility come with freedom?

--Hiram

Anonymous said...

"I guarantee you today that the big banks are doing far better than the family that was forced into bankruptcy."

Bankruptcy is one of my favorite subjects. Bankruptcy isn't so much used by the poor, because the poor don't have assets that creditors want to reach. Republican presidential candidate and serial bankrupt, Donald Trump is much more typical. As the Donald has really quite candidly explained, bankruptcy and defaulting on one's debts isn't wrong, it's just a business tactic. Old debts are shed, and the bankrupt's credit is reestablished allowing him to take on new debt while preparing to run for the nomination of the political party whose members are known for their advocacy of fiscal responsibility, for others if not necessarily for themselves.

--Hiram

jerrye92002 said...

"It's easy to moralize and point fingers and poor people. It's much harder to address how as a society we have kept a boot on their throat and made it difficult for them to stand up." -Sean

That is a correct statement, but it's not particularly relevant, IMHO. First, I think it IS the job of society to "moralize and point fingers." It is how we "correct" our fellow citizens when they do stupid stuff and make poor choices. When government gets in the way of that-- of people suffering the social and economic consequences of their bad decisions and learning from them-- we get more bad decisions, not fewer, leading to more government freedom-eating intervention. Really, does anyone think the stimulus or Dodd-Frank or Sarbanes-Oxley actually SOLVED any of the problems that caused them to be made into law? Or did it simply create new problems and new distortions of the marketplace?

Anonymous said...

Really, does anyone think the stimulus or Dodd-Frank or Sarbanes-Oxley actually SOLVED any of the problems that caused them to be made into law? Or did it simply create new problems and new distortions of the marketplace?

I don't know if you can solve the irresponsibility of the banks, but you can make it more difficult for them to be irresponsible.

Margaret Thatcher liked to say that the problem with socialism is it's tendency to run out of other people's money. What she generally failed to observe is that can be a problem with capitalism as well.

--Hiram

jerrye92002 said...

And in making it more difficult for the few to be irresponsible, government makes it very difficult for the vast majority to behave responsibly.

Sean said...

We haven't had a large publicly traded corporation taken down by an accounting scandal since SOX was passed. Undoubtedly, there will be one at some point in the future, but it's been a fairly quiet 14 years since it was passed on that front.

John said...

Hiram and Sean,
The question is at what cost?

Often I think Liberals are out to pass enough regulations so that no consumer / investor incurs a loss no matter how foolish and/or irresponsible they are. This is a very noble ideal...

However the problem is that many of the regulations drive significant increases in the compliance costs incurred by the American companies and the American government. And that is money that could be used in more positive ways in many cases.

These links mostly focus on the accounting and auditing costs, they don't even seem to address the days to day costs that people like me incur while trying to ensure perfect compliance.

On the upside, my daughter is getting her degree in accounting and finance. If the Democrats get their way she will have great job security.

Anonymous said...

The question is at what cost?

I don't see an upside that we should be concerned about to financial fraud. Con men and women just aren't that productive in the terms of the overall economy.

"Often I think Liberals are out to pass enough regulations so that no consumer / investor incurs a loss no matter how foolish and/or irresponsible they are."

Why should we have regulations requiring Chipotle to serve safe food? Consumers need to understand that getting sick is just a risk they assume when they decide to dine out.

--Hiram

Sean said...

"Often I think Liberals are out to pass enough regulations so that no consumer / investor incurs a loss no matter how foolish and/or irresponsible they are. This is a very noble ideal."

No, that's not the idea at all. An investor in Enron couldn't do accurate due diligence because senior executives at the corporation and the auditing firm conspired to hide the true financial condition of the company. The impact of that was to put tens of thousands people out of work and wiped over $60B in shareholder value out.

And then when you consider that Enron was just one of many such scandals in that timeframe (WorldCom, Global Crossing, Tyco, Waste Management, on and on...), it's clear that regulation was required to address these issues.

John said...

The question is was it like swatting a fly with a baseball bat?

SOX Pros / Cons
SOX Cost / Benefit

What is the balance point of incurring regulatory costs on the 100% to catch the 0.1%?

See Figure 1... And I think that is only the Federal rules and Regs...

As for Chipolte, they are a lot more scared of customers fleeing than the regulators...

Sean said...

"The question is was it like swatting a fly with a baseball bat?"

Hey, if your schtick is that everyone should behave as they are supposed to and take responsibility for their own actions, then you ought to stand behind efforts to make people live up that. If sticks and shaming are good enough for poor black people, they are good enough for C-level executives and Big accounting and auditing firms.

"See Figure 1... "

So federal rulemaking is at its lowest levels in 40 years under the Obama Administration? Less than half of what it was under Ford, in fact. Is that your point?

jerrye92002 said...

Maybe this distinction can help: Many federal regulations are intended to force all companies to do X,Y and Z simply because one company, at one time, cheated their customers/shareholders that way. Yet we have laws against what that one company did. Why should we presume all other companies are criminals and impose massive costs trying to prevent some future criminal behavior? We don't do it with ordinary criminals, do we, requiring every parent to certify in writing their kids won't steal cars or sell cocaine?

We have laws and lawbreakers should be treated accordingly. The government should leave the rest of us alone and not try to prevent us from being mistreated; and let us accept the risks of living.

Anonymous said...

What is the balance point of incurring regulatory costs on the 100% to catch the 0.1%?

Depends on the amount of damage the .1% can do, I suppose. Last time around they came very near to wrecking the economy.

"Why should we presume all other companies are criminals and impose massive costs trying to prevent some future criminal behavior?"

Because companies are under enormous pressure to replicate the behavior of other companies. That's one of the things competition does.

--Hiram

John said...

Sean, I am fine with "sticks and shaming" for anyone who breaks the law. The point here is that 99.9% of the companies are not, and yet they and our society bear the cost of making them prove it everyday.

As comparison, maybe we should make the poor turn in receipts in order to get tax money. Kind of like I need to do before getting reimbursed after a trip. Or maybe we should make them keep a financial ledger that can be audited yearly.

No my point is that in 1972 there were only 25,000 and now there are 76,000. We know that population has grown, but has life really changed that much to justify the increase.

Jerry, I agree. It is a bit like everyone is guilty until they can prove their innocence.

Hiram, "Wrecking the Economy"... Can you be any more melodramatic... ~6 years later and things are about the same or better.

Sean said...

You're asserting the poor people who receive government assistance don't have significant government meddling with what they do and what they spend it on? Are you really that ignorant?

John said...

Please tell me about the accounting, record keeping and audits they must undertake to keep receiving benefits....

Last I heard they can take cash out of ATM's. How exactly is that those tax payer dollars are controlled?

Sean said...

Their income is verified by tax records. If they are on food stamps, they can only buy certain products in certain locations. If you are unemployment, you have to keep records of your job search activities and can be ordered to attend training. On and on and on and on...

Yes, people can access their TANF cash benefit through an ATM. This is not meaningfully different than how it was before, where the state would deposit money into a checking account for use by a family. (And, sometimes, people need to pay cash for things, because not all stores accept EBT cards.)

John said...

Sean,
The reality is that the government doles out nearly $1 Trillion in benefits annually, thankfully many of them have systemic controls. Unfortunately many of those dollars are poorly controlled.

If the "welfare agencies and recipients" were a public company they would need to have a receipt for every expenditure over $35... And they would need to be audited internally and yearly by an outside auditor.

Sean said...

"Unfortunately many of those dollars are poorly controlled."

The state of Massachusetts spends about $5B annually on welfare programs (according to usgovernmentspending.com). Your link identified $42.4M in possible fraud (not all of which was confirmed) over 2+ years, or about 0.38% at the high end.

No one supports welfare fraud, but the notion that $42.4M in possible welfare fraud over 2+ years and the loss of $70B in shareholder value and the destruction of thousands of jobs are equivalent is absurd. The latter (and that's just Enron, not the cumulative effect of the literally dozens of companies that went through those scandals) has a much higher societal cost.

But you're more interested in shaming poor people than doing the right thing by the economy.

John said...

What do you think happened when Enron imploded? Do you think the equipment, jobs, etc just disappeared?

The nice thing about big holding companies is that they unpackage well.

Now I need help. You complain that the rich are just getting richer when companies do well. And now you complain about how bad it is when they implode. Make up your mind.

And in this case the law breakers actually did go to jail.

Sean said...

"Now I need help. You complain that the rich are just getting richer when companies do well. And now you complain about how bad it is when they implode. Make up your mind."

Are you really this dense?

John said...

As for Massachusetts... Please remember that it was only an audit. They only looked at 10,000 recipients...

"The investigative arm of State Auditor Suzanne Bump's office completed more than 10,000 investigations in fiscal year 2015, identifying welfare fraud in around 1,100 of them, according to a report released Wednesday."

I wonder what the total cost is each year in that state.

John said...

Now that hurts... But I will get over it...

Remember key rules of investing: always stay diversified and never hold too much of your company's stock. You would hate to lose your income and your retirement funds at the same time.

Sean said...

Your new link is a different study than the first link.

It should also be pointed out that the two large instances of fraud specified in your new link weren't perpetrated by poor people -- one was by an agency that submitted false billing and the other was by a rich guy who covered up his income.

jerrye92002 said...

I happen to think EBT cards, or the further extension of the idea, a (graduated) negative income tax, are great ideas because it lowers the administrative overhead of government transfer payments. I would also eliminate the 80 or so means-tested programs and consolidate them into 2 or 3 cross-linked services. (A recent study of Minnesota EBT cards, BTW, found them being used as far away as Hawaii. That's probably fraud.)

I don't want to bash poor people, but the current system is simply ineffective and rather than put more regulations on them as to how to conduct their affairs (similar to what government tries to do to business), we should be continually on the lookout for fraud and abuse as criminal endeavors. THEN, we should be adding some educational component to the welfare system, so that these folks know about and have the opportunity for better decisions. Best way to have folks do right is to make that easier than doing wrong, and offering additional disincentives for doing wrong.

Anonymous said...

Hiram and Sean want to beat this to death again instead of discussing how to better push people into the light..

Light wise, the obvious thing to do is create more and better jobs. And in one area where both pro life and pro choice people agree, find ways to support a mother's decision to give birth to a child.

--Hiram

jerrye92002 said...

Sometimes the obvious is unworkable. WHO is going to "create" these jobs, and what good does it do if people are unwilling or unqualified to take them? And why should ANYBODY other than the parents have any responsibility to support a child? Voluntary support from family, friends, charity, certainly, but not through Government. That's not support, that's encouragement for irresponsibility.

Anonymous said...

WHO is going to "create" these jobs, and what good does it do if people are unwilling or unqualified to take them?

Anybody who is concerned about the underlying issues, I suppose. But if no one steps forward and do the things that make our society better, it seems useless to complain when things don't in fact get better.

" And why should ANYBODY other than the parents have any responsibility to support a child?"

Because children are vulnerable and we care about them.

"That's not support, that's encouragement for irresponsibility."

Things have multiple effects. Easy access to bankruptcy laws encouraged Donald Trump's financial irresponsibility. The other day he told us how he loves to manage debt, that he borrows money knowing that if economic conditions change for the worse, he won't have to pay it back. The question I asked myself was whether our laws encourage this kind of irresponsibility? My tentative conclusion was that it didn't, that even families who take on a bit more in a mortgage than they can afford, or who suffer unforeseen financial difficulties, don't do so, unlike the man Republicans are putting forward for the presidency, in the expectation that they can manipulate their lenders.

--Hiram

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