"When logic and proportion have fallen sloppy dead"

"When logic and proportion have fallen sloppy dead"
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a ramblin' man. a ramblin' rant  

Posted by howard in nyc in , ,

an imaginary internet friend asked me a simple question about the housing bailout plan. my answer was not simple. four parts. 2600 words.

first and foremost, the obama, geithner, summers and the fools in congress do not understand the economic implications of these policies. neither did their predecessors, paulson, chris cox, and all the geniuses who used to run bear stearns, lehman brothers, aig, merrill lynch, who were smart enough to grab huge mountains of cash for themselves in the process of wrecking the system.

seriously. the folks in charge do not know what to do, and they do not understand the economic implications of their actions. they are stumbling from day to day, making it up as they go along.

the record to date, of drastic, expensive decisions. without a single positive result. 0 for $2 trillion. that's a slump!

so, don't feel bad not understanding the implications. the folks in charge don't either.

where i start, is revisiting a bunch of commonly held assumptions. first, the people running the show are not guided by what is best for the people at large. they are trapped by their own biases, and their own self interests.

i don't think the inside financial people, geithner, bernake, paulson, summers, are necessarily evil, greedy people. but they are trapped, probably unconsciously, by their lifetime of being insiders; into thinking that what is best for goldman sachs is best for the united states of america.

even if they stopped to consider the possibility that letting these huge financial companies fail might be the best course of action, within a minute they would dismiss it as nonsense. they sincerely believe that the world would end if goldman sachs failed.

even when confronted with the reality that lehman brothers failed, yet the world did not end, it will take them another year or two for that truth to sink in to their heads. and a dozen larger critical decisions will have come and gone in the meantime.

so, these well intentioned, really smart folks, are trapped in very narrow ways of approaching the crisis, which prevents them from even framing the questions properly, much less craft the proper answers.

another example, obama and the congress. let's assume for a moment that 98% of all the economic advisers reached a consensus agreement that the best course of action would be for the government to stop all bailouts, and let the market resolve all the debt and leverage imbalances, through bankrputcies, failures, and forclosures.

(funny thing about this hypothetical--it happens to be the real life correct answer, but forget that for now.)

obama would have to reject that course, because it would be political suicide. the greatest sin for someone who needs to be re-elected is to do nothing. inaction = death, at the voting booth. "we have to do something" is the politician's mantra. so one broad set of possible solutions is removed, because they are trapped by their reality of being politicians.

now, you layer on top of those two simple constrictions to the way these particular humans can possibly think about this crisis, a whole bunch of additional limitations. due to financial realities (how do they get paid? how do they raise money for re-election?); their particular political dogma (if nationalization is indeed the best way to manage these big banks, because that is so socialistic, so anti-american, it cannot even be considered until a whole host of other measures have been abject failures) their particular misunderstanding of history; their myriad assumptions about abstractions such as 'free-market', 'regulation and oversight', 'socialism', whatever. then the conflict between different actors, sectors, etc.

the folks in charge are severely limited in how they are able to view the problems, and how they consider approaches and solutions. these conceptual limits cloud and distort reality severely, a reality inherently much less defined because of the clouded, distorted nature of economics even under placid circumstances.

so, they don't know what to do, and what is best. and they are severely hampered in their quest to do so.


now, what was the question?

oh, next, let me take the assumption that massive foreclosures create a massive societal crisis. and several smaller assumptions hidden within.

first, the term 'homeowner' should be banned. the word just thrown away. because, of all the folks in america who carry that label, only about 30% own their house free and clear, w/no mortgage.

people with a mortgage are renting the house from the bank. and the percent of equity the average houseborrower has is at the lowest point since 1945.

so, we are not talking about homeowners being tossed out of their bought and paid for home. we are talking about people who have borrowed to buy a house, and for myriad reasons are unable to meet the repayment schedule on their loan.

next assumption--when a family has their mortgage foreclosed, are they tossed out into the street, and end up living in a tent in the park? well, sure, sometimes. but the vast majority of folks who have been renting from the bank, and the market value of the house falls, or the interest rate adjusts upward, or for what ever reason they have to move--they continue to rent, just from someone else, other than the bank.

yeah, it sucks, to 'lose the dream of home ownership'. but it is not a societal crisis. if you can afford a $2k a month mortgage but the interest rate resets up to a $3500 payment, you move into a smaller house that rents for 2k a month.

if you were making the payments, but you lose a job, yeah that sucks. but that is hardly a unique circumstance, and there are all kinds of ways to address that situation already in place, and as unemployment increases, there are much more cost effective ways to deal with housing a family that has lost a job short of these mortgage games. like dump the mortgage, and have uncle sam pay your rent, until you get a job.

my point is, you don't go from foreclosure to the homeless shelter, in 90% of the cases. most of the time, you go from renting from the bank under terms you never could afford, to renting from some landlord under terms you can afford.

and 92% of mortgages in america are current. the spectre of millions of homeless people due to the mortgage clusterfuck is just not realistic.

much more likely is millions of homeless people because of job loss. and a lot of those folks will have never 'owned a home' and go from renting a crappy apartment to the shelter. they are gonna need the help; and if we waste $250 billion on this mortgage rescue plan, we won't have money to help those out of work folks who never sniffed a mortgage.

so, i am not denying that we may well have a societal crisis of millions of people without the financial resources to shelter themselves w/o serious government assistance. the source of those millions will not be people foreclosed upon. they will be renting the vacated crappy apartments.


next on the hit parade. the goal of keeping people in their houses that they cannot afford. i just don't see that as necessarily worthy. there is a downside to rewarding mistakes. there is also a downside to perpetuating the original mistake. part of the downside, it just doesn't work.

remember, bush had a program to assist 'homeowners' to stay in their mortgages. (i hope all the folks calling barack a commie remember this, but i have a feeling they will forget.) and, without any help from the government, lots of banks all by themselves reworked mortgage terms with borrowers, to avoid foreclosure.

a huge percentage of these reworked mortgages ended up back in default within a year. lots of them within a few months. even when monthly payments were significantly reduced, they were back in the same boat shortly afterward. and those payments that the borrower did make--just pissed away. could've rented for less.

if someone falls behind on a mortgage because they lost a job, even if you cut their payment in half, they won't be able to make the payment until they get another job. even a government makework job, until the economy finally recovers, is a much better solution for that person than having a government makepayment plan. (well, except for the bank and for wall street).

a paired goal with keeping homeborrowers in their bank-owned house is to stop housing prices from falling. i'll be briefer here.

using tax dollars to prop up the price of houses prevents people who can't afford a house at today's price from being able to buy tomorrow, at the lower price.

using tax dollars to attempt to prop up the price of houses is doomed to fail. throwing $250 billion at an $11 trillion mortgage market cannot work. the numbers do not lie. the price of housing will inexorably fall to their historic norms (average house = approx 3.5x average annual income). every time house prices have deviated from this level, they return. disregarding government interventions to attempt to prevent it. government efforts usually only distort the process, often contributing to an overshoot, and worsened effects than the ones they were trying to prevent.

using tax dollars to try in vain to prop up house prices will cause unforseen effects. almost always does.

using tax dollars to try in vain to prop up house prices will be lost from better uses, like jobs programs or direct welfare aid.

as appealing as the imagery of saving the dream of ownership, of preventing a hard working family from losing their home, or turning them out into the streets, and the appeal of keeping everyone's property values from dropping, this or any large scale mortgage support program is just not realistically going to forward those lofty aims.

finally, bush's plan and this plan ultimately proffer greater benefit to the banks and the wall street investors (or at least they intend to) than to the individual borrower. and when there are lots of conditions and safeguards placed, the program ends up being applicable to a tiny number of people. bush's plan ended up enrolling some absurdly small number, something like 300 mortgages. one criticism of obama's plan it very few people will qualify for aid. which i see as a good thing.

enough on the mortgage plan. as for your middle class collapse, i agree completely. however, the fucking of the middle class began back in the late 70s, was raised to an art form in the reagan years, and then just when an economic boom in the 90s was reviving the middle class, they resumed the fucking by encouraging the middle class to borrow and consume. the collapse is almost complete, and preserving mortgages is the last step.

debt is what collapsed the middle class in this country. the best thing that can happen for your prototypical middle class household as we enter this depression is to have as little debt as possible. a mortgage, even a low interest rate note on a modest dwelling is a liability, not an asset. there is much more downside than upside.

i think you said you just bought a place, so i hope my opinion does not offend. and i hope i am dead wrong. and hell, if your monthly costs are pretty close to what you would be paying in rent, then wrt your case i am wrong. but for most of middle class america, they can still rent for a significant fraction of that mortgage + taxes + insurance + repairs and maintenance. if there are no job losses/health care emergency costs not covered by insurance/sick relative that need help/etc.

one more thing. bush's mortgage bailout plan had this little clause in it. the workouts the banks did usually had the same clause. the recourse clause. in many states, a mortgage is a non-recourse loan. meaning, it is secured only by the house. if you are foreclosed, the bank cannot go after your savings account, your car, or any other assets. all they get is the house. if you get underwater, the value of the house falls below the amount you owe, you can just walk away. you don't even have to declare bankruptcy. sure, your credit number takes a hit, but there is no other recourse for the lender, they are stuck with the house.

however, under the bush program, and most bank programs, if you are in a non-recourse state, or loan, your new terms are recourse. you waive several rights, and if you end up foreclosed, you can lose your savings, your car, your other assets. bankruptcy may be required. in fact, the new mortgage debt may even follow you after bankruptcy.

i have not heard any analysis of obama's plan in this regard. but it is a vital point that has been little discussed.

this mortgage assistance plan could hurt the middle class much more than it helps.

my take on the fdr programs in the last depression, briefly, is that they hurt the economy, and prolonged the downturn. but, they met vital social needs (jobs food and shelter) and prevented societal crisis and collapse. it was not their intention, they thought it would save the economy. but it worked out by saving the country.

and this is the lesson i wish our leaders would take from the 30s. if we piss away our resources on these bailouts that are doomed to fail, we won't have any remaining to provide jobs, food and shelter necessary to prevent social collapse. economically i don't like bailouts and welfare, for corporations and for individuals. but i am willing to suffer economic damage, including paying higher taxes, to provide food, shelter and jobs, TEMPORARILY (til things get better), for social, and for humanitarian reasons. sadly, we are on a path to being broke, and to being unable to borrow any more from china, when we have those problems rising.

again, aren't you glad you asked?


felt like a bunch of verbal diarrhea, but i'm glad you liked it. i was reading a bunch of opinions and articles this week about the whole mess, and last night trying to put it all together. writing it out helped me make sense of it. few if any of those ideas are original, just rehashing and compiling stuff i have read.

i think the myth of home ownership as the centerpiece of the american dream is a huge ripoff, and has caused many to suffer. (i can go on at length on this topic as well as the ripoff of the 401k retirement racket, both that have hammered the shrinking middle class, but i will try to restrain myself.)

the conditions that made the assumption that signing up for a 30 year mortgage was a no-brainer widely existed in the 50s and 60s, but no longer. the conditions have changed drastically. and they are in the process of changing again, even more drastically.

yet very few carefully consider the downsides of buying and taking a big mortgage. they just assume the myth still applies. i just want people to set aside this myth and consider the realities, particular the economic uncertainties of the future that were not a part of the past several decades, when making the choice to rent or buy.

i would never be so arrogant to suggest no one should take a mortgage today. just that the decision parameters are quite different today.

of course, our leaders make their decisions well within the bounds of this myth. which really sucks.


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