I went to a Liberty Fund conference on consumer credit this weekend, where a good time was had by all. This brought a number of thoughts to the fore, which I scribble down in no particular order:
1) There is an enormous amount of moral panic about debt in western society. (I presume in other societies too, but I don't know.) Over and over, the fact that people can and will make bad decisions about debt is presented as a legal reason for restricting their choices. Yet when I think about the bad decisions my friends have made, and the consequences on their lives, getting in over their head with credit cards or a house is probably the last thing on the list. Unless you are in a position that requires some sort of security clearance, the worst thing that happens to you if you borrow too much money is . . . you will find it harder to borrow more money. Much worse consequences have come from marrying the wrong people, procreating at the wrong time, majoring in the wrong subject, taking the wrong job, or choosing the wrong hobby. Yet almost everyone, including liberals, would be repulsed by the notion of trying to "fix" this problem by curtailing liberties--should we require poor people to get counseling before they change jobs?
2) The moral panic results in a huge amount of paternalism about debt. Credit alarmists frequently focus on college students, with the implication that they are still children who needed to be walled off from bad credit decisions. This is bad enough, but at least they're arguably still growing up. It becomes truly offensive when that attitude often spills over to other groups--minorities, the poor--who are also spoken of the way we talk about children: as people who presumptively cannot make good decisions. Better to restrict their options than let them make a bad decision.
Poor people are more likely to make bad decisions about credit than the more affluent, because people with bad decision-making skills are more likely to become poor, and also because the affluent have more knowledge about credit that they tend to transmit to their friends and offspring. The question is not whether some people will deeply regret their decision to borrow; it is whether you or they are more likely to correctly assess their situation. My money's on them.
3) The moral panic also extends to people who meet those needs: we view paycheck lenders as in broadly the same class as pimps, casino owners, and drug dealers. Particularly disturbing seems to be the notion that people make profits providing money to the poor. Yet there's little evidence that payday lenders make especially high profits; even non-profits who try to get into the business have found themselves charging interest rates they previously regarded as usurious. Poor people are, in fact, poor lending risks; the high interest rate compensates for the high default rate.
4) Many of the provisions supposed to "help" the poor with their credit end up helping the middle class. For example, capping interest rates means that people who cannot be profitably lent to at lower rates will be denied credit altogether. Some of them will benefit, because they will not borrow money that would have made them worse off. More of them will be pushed into worse alternatives: pawn shops, loan sharks. Meanwhile, the capital will towards the better credit risks, lowering interest rates for them.
5) A huge problem with reporting on credit markets, as with so many other issues, is that current harms are highly visible, but current helps are largely invisible. Because of our deep shame about debt, people who are in financial trouble rarely say so unless it is made public against their will--i.e., their house or car is repossessed. So the person who has been pushed into bankruptcy by high credit card debt tells her story to the New York Times; the person who managed to finesse a personal crisis with Mastercard keeps quiet and thanks their lucky stars.
6) America, more than any other countries, is a nation of debtors. Our laws and institutions are uniquely debt-friendly, from 30-year fixed rate mortgages with no prepayment penalty (a happy fantasy in other places) to remarkably easy bankruptcy. Even after our "draconian" reform, American consumer bankruptcy remains by far the easiest in the world; at least in 2005, when I wrote about it, no other country even had Chapter 7.
7) There's a remarkable tendency to view credit as the root of problems even when the causal links aren't particularly good. Expensive credit is more a symptom of poverty than a cause of it. And most American commentators view the housing bubble as a result of excessive credit (either from Fed stimulus or overseas savers). Yet Europe, where credit is much tighter, has had much more spectacular housing bubbles than we have. Having the price of your house fall 25% is a big problem even if you don't have a pricey subprime mortgage.
8) There's an enormous amount of folk mythology in the reconstruction of events in the debt markets. This is certainly exacerbated, and perhaps caused, by the fact that journalists writing about debt almost always find some incredibly photogenic family who were defrauded. In many peoples' minds, this is constructed into a narrative of innocent borrowers victimized by predatory lenders. On the flip side, others paint a picture of speculators committing fraud to secure unwise loans. These narratives are then presented as uncontested fact by commentators.
I am aware of no data that shows how many people were defrauded by their mortgage brokers, versus simply taking on an unwise amount of debt; or how many houses in default are owned by flippers who were speculating on price increases. I am aware of a lot of people confidently stating that one, or the other, is the problem in the subprime market.
9) Credit does have a lot of spillover effects--if everyone else defaults on their mortgage, the price of your house will go down and the price of your borrowing will go up.
10) People who want to use regulation to keep other people from taking on debt they can't pay forget that lenders also want to keep those people from taking on debt they can't pay--and the lenders have a lot more information about those people than regulators ever will. If you can find a reliable way to separate the people who will default from those who won't, I promise that the banks will use it. If not, the only way you can stop those people from defaulting is to deny credit to broad classes of people, the majority of whom would not have defaulted.
11) It's not clear to me how much consumer credit changes net happiness, rather than simply time-shifting the pleasure and the work required to obtain it. If time shifting payment back actually causes us to misprice the good (because we erroneously put it in the "free" mental basket), then debt is actually a hedonic negative. On the other hand if it allows you to peg your activities to the hedonically maximizing time (take a lavish European vacation before you have kids), then it's a plus. Or it could just be a wash.
I suspect that some of our strong cultural preference for deferring gratification is simple puritanism: as someone once said, "if the hangover preceded the inebriation, drunkeness would be regarded as a virtue". This has probably made us as a society vastly richer than we otherwise would be. But we're pretty rich now. Can't we take a break?
"But we're pretty rich now. Can't we take a break?"
MM,
could you expand on this?
"If you can find a reliable way to separate the people who will default from those who won't, I promise that the banks will use it."
Strongly agreed; credit risk models have known problems (mostly because popular ones get "gamed" pretty quickly) but anything that separates risk creates possibilities for profit by better targeting of credit to mis-priced customers.
I do worry about the speed with which "customers in trouble" become "profit centers" due to fees and escalation of credit card rates. On the other hand, if this level of penalty is grossly mis-priced then this creates market opportunities for one back to undercut the others.
I think the real access of concern is fraud; if you mis-represent the actual risk of a portfolio then you may be able to sell it off before the true costs become known. Most of my thoughts about improving credit actually revolve around tougher penalties for fraudulent behavior.
"10) People who want to use regulation to keep other people from taking on debt they can't pay forget that lenders also want to keep those people from taking on debt they can't pay--and the lenders have a lot more information about those people than regulators ever will. If you can find a reliable way to separate the people who will default from those who won't, I promise that the banks will use it. If not, the only way you can stop those people from defaulting is to deny credit to broad classes of people, the majority of whom would not have defaulted."
Wasn't the subprime crisis caused by banks (or at least mortgage brokers) encouraging people to take on debt that they couldn't pay?
Wasn't the subprime crisis caused by banks (or at least mortgage brokers) encouraging people to take on debt that they couldn't pay?
Mortgage brokers != banks. Classic agency problem, actually.
I find it odd that if you offer loans with high interest rates to Bangladeshis, you win the Nobel peace prize. If you do the same for... name your far more local constituency... you get vilified.
Eh, what do I know.
"we view paycheck lenders as in broadly the same class as pimps, casino owners, and drug dealers"
As do I, but of course I'd rather see the latter three legalized (regulated appropriately, especially during the transition period where many people will be in shock and fear) rather than the former criminalized or regulated further.
Wasn't the subprime crisis caused by banks (or at least mortgage brokers) encouraging people to take on debt that they couldn't pay?
It speaks volumes in support of Megan's arguments that someone could think that "encouraging" someone to do something could be the root cause of anything. The confusion of moral agency around the subject of debt is massive.
Actually, the subprime crisis is actually two crises, which are related but best considered separately:
1. a foreclosure spike crisis
2. a market crisis where bonds owned by banks suddenly dropped precipitously in value, threatening the stability of those banks.
The foreclosure spike is less of a "crisis", if we consider the fact that for most of a decade foreclosures were at multi-decade lows. Many foreclosures were "deferred" by the fact that home prices were rising and easy credit was available, so homeowners in trouble refinanced their way out of trouble, or sold into a rising market. The foreclosure spike we're seeing now is largely a result of many of those "deferred" foreclosures hitting all at once in one or two statistical years, now that the music has stopped. If foreclosure rates had stayed at their historical average for the last decade, more foreclosures would have occurred than are now occurring during this "spike" - so it's questionable whether what we have here is a crisis, or a reversion to the mean. Obviously it's a crisis if you're in it.
The foreclosure crisis is related to the bond crisis, obviously. The historically low rates of foreclosure experienced during the boom created a "data trap" where subprime bonds were performing very well. This led to banks' regarding these instruments as relatively safe. As long as they were regarded as safe, they were also pretty liquid. Again, when the music stopped, the data set that predicted the performance of the bonds changed, and this led to a sudden decrease in the bonds' value, which rapidly became almost total as the bonds became illiquid. But it's difficult to describe this process as "banks encouraging people to take on debt they couldn't repay" when the data was telling the banks that subprime bonds were safe and were paying off with no problem. You can say that "common sense" should have told banks that underwriting was getting too loose, regardless of what the data said - but that's not how modern business people are trained to operate, unfortunately.
"Unless you are in a position that requires some sort of security clearance, the worst thing that happens to you if you borrow too much money is . . . you will find it harder to borrow more money."
This seems more than a little wrong to me. There are pretty significant costs of moving to a new neighborhood. If you can't get a new house loan with your now-destroyed credit rating, you'll be stuck renting. No tax break there. Even assuming that you can get a new loan, wherever you move, you're probably going to be farther away from your job. So, more money spent on gas, more wear and tear on your car, more time spent away from home. The logistics are worse if you have two people needing to commute. You're uprooted from the social circles you've spent time and energy building. Your child may well be in a lower-performing school district. Your neighborhood might not be as safe. Your house might not be as big as the house you've left, forcing you to either throw away or sell a lot of your possessions. Your new house might not be in as good repair, forcing you to spend money on fixing it. Basically, a lot of the value you've built up gets eaten away, and your costs increase dramatically.
That said, I do agree with the larger point - there's a bit too much panic going on.
It's not clear to me how much consumer credit changes net happiness, rather than simply time-shifting the pleasure and the work required to obtain it.
A non-trivial amount of "consumer" credit finances personal "capital" investments, whether in education, transport needed for work, small business launches, and probably other categories I'm not thinking of. Presumably this capital investment does increase net happiness, by increasing total stock of wealth.
I am aware of no data that shows how many people were defrauded by their mortgage brokers, versus simply taking on an unwise amount of debt;
http://calculatedrisk.blogspot.com/2008/04/crl-brokered-loans-cost-some-people.html
We find significant differences between broker and lender pricing on home loans, primarily on mortgages originated for borrowers with weaker credit histories. During the first year of the loan, borrowers with credit profiles in the subprime range pay statistically more for brokered loans than they would have if they had obtained their loan directly from a lender. Over a four-year period, a typical subprime borrower pays over $5,000 more, and over the 30-year life of the loan, the cost gap grows to almost $36,000. . . .
Significant disparities exist between broker and lender pricing. After matching loans on objective factors that affect interest rates, the analysis reveals that interest payments were significantly higher on broker-originated mortgages in the majority of risk categories we examined. Disparities are greatest for subprime borrowers. For people with weaker credit, brokers consistently charged higher interest rates than retail lenders. A typical subprime borrower was slated to pay $5,222 more during the first four years of a $166,000 mortgage compared to a similar borrower who received a loan directly from a lender. Over thirty years, this borrower would pay $35,874 more in interest payments, equivalent to an interest rate approximately 1.3 percentage points higher than a similar borrower with a retail loan.
On the "you can't cheat an honest man" principle, I expect there was a lot of something for nothing going on. But we do know for sure that brokers were gaming bank systems to qualify loans that would not have qualified if accurate information had been supplied.
We do know for sure that banks had access to income verification software, through the IRS that they did not use.
Almost all mortgage applicants had to sign a document allowing lenders to verify their incomes with the Internal Revenue Service. At least 90 percent of borrowers had to sign, seal and deliver this form, known as a 4506T, industry experts say. This includes the so-called stated income mortgages, affectionately known as “liar loans.”
So while borrowers may have misrepresented their incomes, either on their own or at the urging of their mortgage brokers, lenders had the tools to identify these fibs before making the loans. All they had to do was ask the I.R.S. The fact that in most cases they apparently didn’t do so puts the lie to the idea that cagey borrowers duped unsuspecting lenders to secure on loans that are now — surprise! — failing.
http://www.nytimes.com/2008/04/06/business/06gret.htm
which disproves this claim by Megan:
If you can find a reliable way to separate the people who will default from those who won't, I promise that the banks will use it.
We do know that: The median first-time buyer put down less than 2% to buy a house in 2007, according to the National Association of Realtors. Many put down nothing, even borrowing to cover closing costs.
http://articles.moneycentral.msn.com/Banking/HomeFinancing/HomeownersWhoJustWalkAway.aspx?GT1=33010
This analysis entirely skips over the central difficulty. The agents who brokered and approved the loans made money by brokering and approving loans, not by brokering and approving loans that were unlikely to default.
It's ridiculous to lend hundreds of thousands of dollars without any collateral, which is what a no downpayment loan is. It's ridiculous to permit a borrower 50x leverage, which is what the median first time buyer (who has the worst credit history among borrowers) was getting in 2007 when these problems were already clear. And, I guarantee you, it was worse than that, because some of the money people were using were unreported loans. I sit on my co-op board, and I see the purchase packages. First time buyers often do not have the necessary 10 percent downpayment there in cash, without borrowing or getting gifted from parents. We have an incentive to find this out. Brokers have an incentive not to find this out, and a bank that is going to sell the mortgage in the after market also has no incentive to rind this out. They DID have a due diligence requirement they signed off on in order to securitize the thing, but hey, they lied.
On poor people's credit, I don't understand why there are good market results (paycheck lending services) and bad market results (loan sharks, pawn shops). I thought all market results were inherently good....
"This seems more than a little wrong to me. There are pretty significant costs of moving to a new neighborhood. If you can't get a new house loan with your now-destroyed credit rating, you'll be stuck renting. No tax break there. Even assuming that you can get a new loan, wherever you move, you're probably going to be farther away from your job. So, more money spent on gas, more wear and tear on your car, more time spent away from home. The logistics are worse if you have two people needing to commute. You're uprooted from the social circles you've spent time and energy building. Your child may well be in a lower-performing school district. Your neighborhood might not be as safe. Your house might not be as big as the house you've left, forcing you to either throw away or sell a lot of your possessions. Your new house might not be in as good repair, forcing you to spend money on fixing it.
But, for most of your points witn tighter lending standards a person would never had owned a house in the first place. So they would have rented, or been in a smaller house or been further from work or in a worse neighborhood with worse schools. At least they got a chance if someone was willing to lend to them. With tighter mortgage rules they will never even get a chance.
"3) we view paycheck lenders as in broadly the same class as pimps, casino owners, and drug dealers. "
I gotta agree with Mike above. Whether you approve of them or not, I think you have to put them in the same catagory.
"3) The moral panic also extends to people who meet those needs: we view paycheck lenders as in broadly the same class as pimps, casino owners, and drug dealers. Particularly disturbing seems to be the notion that people make profits providing money to the poor. Yet there's little evidence that payday lenders make especially high profits; even non-profits who try to get into the business have found themselves charging interest rates they previously regarded as usurious. Poor people are, in fact, poor lending risks; the high interest rate compensates for the high default rate."
The profit levels of usurers are irrelevant to the issue of whether society would be better off without them. As with spammers.
Pace Tel's point, I think I got lost here somewhere. In 1), Megan says, "Unless you are in a position that requires some sort of security clearance, the worst thing that happens to you if you borrow too much money is . . . you will find it harder to borrow more money." And then in 5) she says, "Because of our deep shame about debt, people who are in financial trouble rarely say so unless it is made public against their will--i.e., their house or car is repossessed." Call me crazy, but seems to me that having one's house or car repossessed is a good deal worse than not being able to borrow more money.
Also, in 2) she says "Better to restrict their options than let them make a bad decision," implying that options should be restricted because only the debtor is affected, and then in 9) notes "Credit does have a lot of spillover effects--if everyone else defaults on their mortgage, the price of your house will go down and the price of your borrowing will go up." I'd say this statement is much too weak; it takes a lot less than "everyone" defaulting before everyone else feels the effects, as the current situation shows. That to me is a good enough reason to regulate lending and borrowing better--not so much that it can't happen, but enough that stupid lenders and borrowers at least some deterrent from taking actions that hurt the rest of us.
I leave it to others to sort through the other flaws in this post.
My instinct is to let people make decisions and enjoy/suffer the consequences. But in this current subprime debacle, Bear Stearns has already been bailed out and proposals abound to bail out homeowners. Whether you're a large investment bank or a significant constituency, the lesson is clear - there are groups in this country who are too big to fail. If this is the case, is it really optimal to have minimal regulation?
Personal finance can be counterintuitive, and behavioral finance has started to show insight into all the bad decisions we make. I launched the 401k at the small company where I used to work, and very few of the employees (even the college kids) had any idea what to do. Some academic took a peek into a pool of 401k's and saw the same thing.
I hope this inconvenient observation came up at the conference somehow. I'm not advocating the nanny state, but if you keep leaving out the guns, and if people keep shooting themselves in the foot... that's a lot of trips to the hospital... or something.
Ah, the pernicious passive voice.
It's not that "there is" panic and a desire for paternalism. There are two entirely different set of actors here.
On one side, there are coastal trust fund and hedge fund liberals. These are the people wringing their hands about what poor widdle darkies are doing with their money, and what would happen if those authentic, but small-brained po' people would be allowed to act as, you know, citizens. Why those red-state rubes might make decisions that would hurt the stock market, and then the stock market would go down, bringing down the trust funds. Then our trust fund daughters would have to *share* a Gulfstream on the way to the global warming conference. And that's why we need paternalism, you see. It's good for them, and it's good for us, and it's good for Gaia!
Oh my heart, it bleeds for the injustice in the world.
On the other side, of course, are red-state rubes, including unsophisticated dusky-hued Orientals such as myself.
Let's see. I am but a working Chinaman, prone to mistakes. Thus, I am limited as to what I can invest in, and soon shall be limited as to what I can borrow, to save me from the irrational, hedonistic, low-income brain. Makes sense.
On the other hand, rich people don't make mistakes. That's why rich people are allowed to invest in hedge funds, and borrow whatever they want, however they want.
You see, I could be hurt if I make bad investment decisions. I might lose my retirement. Rich people, on the other hand, don't get hurt when they make bad investment decisions. The federal government bails them out, and I get hurt by their bad investment decisions.
So wait, I'm should be prevented from investing and borrowing as I please, because it might hurt me.
Rich people can borrow and invest as they please, because the only one it'll hurt is me, right?
It's too much for my tiny dark-skinned brain. I think I need a paternalist to help me figure it out.
jayackroyd:
Just a little clarification on a couple of your points:
The agents who brokered and approved the loans made money by brokering and approving loans, not by brokering and approving loans that were unlikely to default.
The overwhelming majority of loans originated by brokers - approaching 100% in subprime - were underwritten and approved by lenders or mortgage insurance companies. Brokers don't underwrite or approve loans. That's what makes them brokers.
The lenders have an incentive here to transfer the blame to their brokers, so they can just shrug their shoulders. But the products that were most harmful to subprime borrowers [loans with steep adjustments after the fixed period, or with prepayment penalties that extend past the fixed rate period, or with very low down payments and no income verification] were invented by lenders and marketed to brokers, not the other way around.
Almost all mortgage applicants had to sign a document allowing lenders to verify their incomes with the Internal Revenue Service. At least 90 percent of borrowers had to sign, seal and deliver this form, known as a 4506T, industry experts say. This includes the so-called stated income mortgages, affectionately known as “liar loans.”
Actually, prior to the subprime era, "stated income" loans were invented precisely because it was assumed that the true income of self-employed people was not the income they reported to the IRS. Pulling the 4506 would not have made much of a difference in "liar loans", because the 4506 was typically obtained by the lender to confirm the existence of a type of income, and not its amount. If a borrower claimed self-employment or partnership income, the lender's underwriter would verify with the IRS that income in these categories had been reported - but not its amount. This means that as a practical matter the underwriting guidelines and procedure set for these loans would not have stopped them from going through, even if all the tax transcripts had been ordered.
With regard to the premium paid by subprime borrowers who went through brokers, I think you are correct that a portion of that premium represents a "mark up" on broker services that gamed the system to find approval methods a customer would not have known on their own. But you are also seeing a "relationship premium". In general, consumers in all areas who make purchasing decisions based on "affinity relationships" get screwed, because that type of sales carries the biggest margins. Subprime borrowers, particularly minority subprime borrowers, were snapped up by brokers in their own communities selling loans via relationships built in neighborhoods and at churches. Those borrowers paid more. Every borrower who finds a loan "in their community" or "from a friendly face" or "at church" will pay more. It's unfortunate that to avoid paying this premium all they would have had to do is make a relative handful of phone calls to find competing offers - but you can't force people to comparison shop, and you can't claim systemic failure if people refuse to comparison shop.
"10) People who want to use regulation to keep other people from taking on debt they can't pay forget that lenders also want to keep those people from taking on debt they can't pay--and the lenders have a lot more information about those people than regulators ever will. If you can find a reliable way to separate the people who will default from those who won't, I promise that the banks will use it. If not, the only way you can stop those people from defaulting is to deny credit to broad classes of people, the majority of whom would not have defaulted."
This is wrongheaded. The danger to society comes from the lenders not the borrowers. If a poor person ruins their life by unwise use of credit this is too bad for them but doesn't much impact the rest of us. If Bears Stearns goes bust by lending money to people with no income and no collateral this is a danger to us all. I want to prevent the bad lending that endangers the entire financial system. The lenders have proven they have no sense at all so it appears to me that regulation is needed.
" If Bear Stearns goes bust by lending money to people with no income and no collateral this is a danger to us all. I want to prevent the bad lending that endangers the entire financial system. The lenders have proven they have no sense at all so it appears to me that regulation is needed."
Posted by James B. Shearer
JBS,
excuse my brusqueness, but you're an Idiot.
Bear Stearns lent no Money to anyone. Put that in your "Regulatory" pipe, tamp down, and ignite..
I mainly agree with you, eccdogg; I just took issue with the idea that somehow there are no costs involved other than difficulty borrowing. There are costs, and they have to be acknowledged if people are going to make good policy decisions.
Brian--
Yes, I understand the roles played by brokers vs lenders. Hence the use of the two nouns and verbs. But if that was not clear, I appreciate your clarification.
In the Morgenson NYT article, she was talking to a vendor selling income verification services (let's the blockquote tag and see if that works better)
This implies strongly, although it doesn't state that income amounts could be verified through this service. Is the article incorrect?
On "affinity premiums," I think it is still worse that people use personal relationships to give less than a fair deal to members of their community. But Megan seeks quantification is there. Whether those differences can be attributed to "affinity premiums" is speculative. In a later post, Calculated Risk mentions an NPR story I happened to hear, where former (broke and laid off) ex-brokers were being hired to help people solve credit problems created by this process. These brokers, who were making middle 6 figure incomes, had also drunk the Kool-Aide, moving back in with parents after mortgages on properties they'd owned had gone upside down.
The overall point here is that regulations requiring, say, minimum capital requirements for banks and shadow banks, and for consumer borrowing prevent these kinds of bubbles from happening. While that means a lower rate of home ownership (which I think is wrongly subsidized already through the mortgage interest loophole), it also means a more efficiently developed housing stock and no real estate manias.
Megan,
Your issue framing clearly balances freedom to act as an adult or beware complete lack of control of our lives. There is certainly a middle ground. The middle ground is a requirement for clarity in both written and spoken forms. Predatory lending is facilitated by a dichotomy between verbal promise and written requirement. I think that folks should make their own decisions, but since there are very few who have the opportunity to study and opine like you, most of us could use help in understanding the terms to facilitate comparison and smarter shopping. I would suggest 1) mandated clear offer terms 2) 48 hour permitted out if upon review and reflection the deal is obviously bad and 3) review of what rights may be signed away with the deal (such as losing the right to sue).
It is quite nice to be smarmy about all of us being treated like children, but, just like health insurance, the lack of clarity is hurting more people than helping.
Josh
Could you please provide an example of "choosing the wrong hobby," especially in the context of the other choices, some of which are quite irrevocable? I really can't imagine what you mean by that. Most hobbies are hardly permanent choices that will do one much harm.
MB:
Deep-sea diving, mountain climbing and ATV riding come to mind immediately. Street racing or recreational drug use, also.
MEH: "Bear Stearns lent no Money to anyone. ..."
Well, they somehow ended up owning a big pile of bad loans. Are you claiming the difference between making bad loans yourself and buying other people's bad loans is significant?
I would suggest 1) mandated clear offer terms 2) 48 hour permitted out if upon review and reflection the deal is obviously bad and 3) review of what rights may be signed away with the deal (such as losing the right to sue).
I'm pretty sure everything you are describing has been legally mandated in most US jurisdictions since at least the late 1970s.
JBS,
"Are you claiming the difference between making bad loans yourself and buying other people's bad loans is significant?"
No, I'm claiming that the difference between Money and Currency is significant.
Malignant: I've known several people who were killed or severely, permanently disabled by their choice of hobby: rock climbing, horseback riding, motorcycle riding, recreational drug use, etc.
As we've learned since the fall of communism, well-functioning capitalism depends on social capital and internalized norms.
Among them, 'defer gratification' is really important.
It may be that smoothing consumption using debt is a rational course of action to maximize some set of preferences.
But as per hyperbolic discounting, we often find ourselves in need of strategies to promote the interest of the long-run self over that of the present self.
I suspect moral panic over making consumption smoothing too easy/prevalent is meta-rational.
"Even after our "draconian" reform, American consumer bankruptcy remains by far the easiest in the world; at least in 2005, when I wrote about it, no other country even had Chapter 7. "
Can you post a citable source for this assertion? I assume you're asserting that no other country allows any of their debtors to erase debts, not that no other country has a section numbered '7' in their bankruptcy code :-) .
I've long suspected it, but to be honest I've never had the time to prove it up, so if you can do it for me it would do wonders in my discussions with the lefties in my world -- of which there are many.
-dk
Megan it seems like much of what your saying assumes a direct relationship between borrower and lender. I've heard a lot, however, about these loans being backed by bondholders or other investors who were misled about the security of their investment. Even if they weren't purposely misled, but just miscalculated or weren't paying attention, in these cases the person with the most expertise and direct knowledge of the borrower, the broker, gets compensated regardless. That undermines your claim that people who can't pay back loans will be denied them as often they can be identified due to the enlightened self-interest of lenders because both lender and borrower are reliant on a third party, usually more experienced in financial matters, to explain the risks to them. And if that explanation is wrong, either intentionally or not, that third party suffers no direct harm when the loan defaults. Or are these situations another of the worst cases you're saying have been over-publicised? (I haven't followed any of this closely)
MM wrote: If you can find a reliable way to separate the people who will default from those who won't, I promise that the banks will use it.
Of course they will -- until the very second that the pattern of results is discovered to fall along the same lines as someone's pet class or racial grievance, at which point we'll merely get more regulation in the form of additional anti-redlining laws.
I think you aren't giving fair consideration to quite how much somebody venal and unscrupulous can achieve in manipulating people.
Note that we outlaw pyramid schemes. By the most pure libertarian logic, they should be legal. They're a private contract between individuals, not everybody loses, smart people know to generally stay away from them, and as long as there's no blatant fraud in selling them, no other crime has been committed. So why not let the con artists loose?
My answer is that we should still outlaw them for two reasons. First they harm a shared resource, the public trust in the market's offerings. Second, because they disproportionately target the poor and disadvantaged, they perpetuate that disadvantage, reducing the ability of those people to participate as effective citizens in a democracy that we are counting on them to run.
The con artists behind pyramid schemes present information in a biased and manipulative way, taking advantage extensive knowledge of human foibles to extract money from people wildly out of proportion to the value of the service on offer. Their extensive study of manipulation invalidates the natural model of a contract between equals. "Never give a sucker an even break" might as well be their motto. And so we now outlaw it, even though it was once legal.
I view the latest round of credit practices as in the same vein. A hundred years ago, con games were a very personal thing. With the rise of personal-to-person marketing, we had a wave of industrial-sized MLM scams, and we outlawed those. Now we have the even larger scale debt-driven scams: the credit card companies boldly conning people via bulk mail, while the mortgage brokers did it in person. I look forward to outlawing these scams as well.
The con artists behind pyramid schemes present information in a biased and manipulative way, taking advantage extensive knowledge of human foibles to extract money from people wildly out of proportion to the value of the service on offer.
So does the Coca Cola company.
I think one should differentiate between "recreational drug use" (pretty much a choice, & usually meaning smoking reefer in private) & serious, debilitating substance (includes booze, kids) abuse.
I knew/know people who've died or been permanently disabled simply by being on the wrong part of the road at the wrong time, which doesn't necessarily mean one shouldn't drive or ride anywhere.
Maybe "bad outdoor recreation choices" would've been clearer. To me a "hobby" is needlepoint, model railroading, collecting vinyl recordings or whatever, not going nuts in nature or speeding on the highways.
But that's just me.
It's lame to see people talking around this and trying to lay the blame for this at the lenders. People borrowed a lot of money to buy houses that they thought were going up.
Would any of the commentators who lust for "justice" to be done to the lenders feel the same way about pursing borrowers who fraudulently stated their incomes?
What if we helped bail out borrowers by retroactively taxing people who sold out at the top and took large cap gain profits? No, that wouldn't be popular. Better to blame those evil lenders who knowingly made (or purchased) loans that they knew the borrowers could pay. Now all we have to do is to connect these evil borrowers to AIPAC and we have a perfect leftie hate fueled cocktail.
Josh, you talk about blame as if only one party could have it. Surely, many borrowers were to blame. But why would that mean the lenders weren't?
The "lack of interest" in pursuing verification of the borrowers income by Veri-tax or anyone else is symtomatic of the organized criminal behavior of many industries in this country. Another example is the trucking industry where dispatchers and fleet owners are always "too busy" to use GPS or computer records to verify truckers logs [called "comic books" by truckers] required to show they get a few hours downtime/sleep every day.
"People who want to use regulation to keep other people from taking on debt they can't pay forget that lenders also want to keep those people from taking on debt they can't pay--and the lenders have a lot more information about those people than regulators ever will."
While I agree with most of Megan's points, isn't one of the problems here that the agencies (banks or whatever) making the loans were often acting as middle men, repackaging and selling the mortgages to the Bear Stearns of the world. Thus the lenders who had all the information on the potential home buyers didn't care about their credit worthiness, because these lenders weren't going to be left holding the bag if the borrower couldn't pay. And the Bear Stearns of the world didn't have any more information on the borrowers than government regulators would have - maybe less.
WHO is behind the Barack Obama for President
"moo-vement"?
.................. GE ......................
and a gaggle of other corporate elitists.
Are a lot of working class Americans Bitter?
Well, they SHOULD be: Another GE candidate for President SOLD to the public by the Corporate-Controlled "Mainstream MEDIA ... Ronald Reagan ... began the MASSIVE Robbery of the American people that has continued to this day.
About every day,& sometimes several times a day, the TV Talking heads say: "The Rich are getting richer and everybody else is getting poorer"
... & You'd Think ... after nearly 30 years they would FINALLY ASK: ( & Answer) WHY?
The answer is simple: Reagan cut the top tax rate down from the 70%'s to the low 30%'s.
(If you made $100 million & your tax rate was 70% you would pay $70 million to Uncle Sam & keep $30 million ... earning interest, or dividends THE NEXT YEAR on that $30 million. If, instead, you paid $30 million in taxes and KEPT $70 million --- You'd make a lot MORE money the next year on that $70 million - in interest, or dividends)
Simple, tax the rich a lot less AND they damn sure WILL get a whole lot richer a whole lot faster.
There was 2 PARTS to Reaganomics tho. The second part was: The Two-Tier Wage Structure"
i.e. Pay the Top level "executives" a Whole LOT MORE; Pay everybody else a Whole LOT LESS. (Newspapers & TV in the early 80's had articles & coverage of the "Two-Tier Wage Structure" that CORPORATE America trotted out IN CONCERT with Reagan's election & tax cuts.)
IF its CORPORATE POLICY to PAY Everybody else a WHOLE LOT LESS ... everybody else is going to get ... a whole lot poorer ... huh.
a. It was deliberate. b. Its been going on for nearly 30 years.
Next Question: Is Obama likely to fix it?
Answer: Hell No. Because THE SAME PEOPLE are running him for President - The SAME WAY they got Reagan/ Bush1 / Bush2 elected: MEDIA PROPAGANDA.
GE owns MSNBC & NBC. AOL Time Warner owns CNN. Westinghouse owns CBS.
(GE is the 2nd largest corporation on the planet).
They have interlocking directorships. THEY ARE the Corporate-Controllers of the Corporate-Controlled Media.
MSNBC/NBC have become the CHIEF propaganda mouthpiece of the Obama Pushers ... (BOPN - Barack Obama Propagands Networks) - just like FOX has been the the Bush Propaganda Network all these years.
There are no more Journalists, no more NEWS People. They have all become court jesters and clowns doing their bit to please their corporate masters ..Top Level PAID A WHOLE LOT MORE -----------Media whores.
Here's a glimpse of one of the $Billions of Dollar TAXPAYER RIPOFF Reasons GE wants to "elect" Obama President: GE & Westinghouse are in the business of building nuclear power plants.
The Cheney Energy Bill passed in 2005 - made it possible for the nuclear industry to begin planning to build 29 new nuclear power plants (licensing hearings are already scheduled for the first few of them).
No new nuke plants were built for 30 years because the banks wouldn't loan the money - too risky. The Cheney Energy Bill solved that problem for them by Guaranteeing TAXPAYER PAYBACK of any of the nuke building loans that default (The Congressional Budget Office rated the risk of default at 50% or greater".
Obama voted FOR the Cheney Energy Bill. Clinton voted against. Clinton says her Energy plan does not include nuclear & if they want to be considered in the future they will have to FIRST Make it Cheaper and find a safe way to dispose of the nuke waste.
McCain, this week on the Campaign trail said ... we just have to face it we need to start building new, CLEAN, nuclear power plants.
i.e. The Corporate Elitists are running OBAMA AND McCain for President.
("Getting off coal to go to nuclear is like giving up cigarettes to take up smoking crack".)
.... & then ... IF ... Bushco had dealt with the subprime mortgage crisis a year ago ... by putting up $30 Billion to refinance homeowner loans ... do ya THINK they would have had to bail out Bear Stearns to the tune of $30 Billion?
--- (DEALT with the problem the Right way - from the bottom UP instead of top down?)