Jeff Neal for C.U.R.E. - Certain Unalienable Rights Endowment

Harry and Henry F. Potter are BOTH fictional characters

In Opinion on December 8, 2011 at 11:32 am

Who else believes that the conventional explanation about the mortgage bubble and ensuing financial panic of 2008 is full of lies and nonsense?  Everyday I hear another version of

“Those damn banksters did it”

“Those Wall Street fat-cats made loans they knew were bad and sold them for a profit”

“When will someone should go to jail over this fraud?”

“Robo-signing, illegal foreclosures are killing the economy”

“The GOP repealed Glass-Steagall law and all hell broke loose”

Yes, there were mortgage brokers and some ‘lenders’ (who were not lending their own money) marketing and making ‘no doc’ loans, and some of those players were fully-aware that some of their borrowers were of questionable creditworthiness.  Yes, some investors foresaw the fall in value of mortgage backed securities and shorted the sector to make money.  Yes, Glass-Steagall was repealed, but it had nothing to do with the mortgage market and home prices.

A.  None of those are crimes.

B.  Not one of those should excuse borrowers from acting responsibly – they should abide by their loan documents or move out of the houses they can’t afford – I did!  How people handle the fact that their mortgage balance is higher than the value of their home should not be a matter of political discussion or government policy, except to the extent the government must do its duty to make sure that all parties honor valid contracts.

C.  Those shady practices were not happening at a scale of hundreds of billions of dollars.  It’s not credible or even rational to postulate such a massive level of rampant deceit and fraud, unless one believes there were participants in the ‘fraud’ who knowingly chose to be on the losing end of all the trades, i.e. chose to lose billions – and remember, to lose billions, one has to have billions to lose.  There were no two-bit players or big-shots in the game letting themselves get tricked out of their money.

D.  It’s not good public policy to suggest that since Uncle Charlie (who is not a billionaire) lost 30% of his home’s value, someone has to make him whole – let’s go get some of the money the banksters took!! should not be part of a political party’s platform.  Uncle Charlie overpaid – the banks, George Bush, Barney Frank, Barney the purple dinosaur, Uncle Zack, you, and I all contributed to the bubble/burst.  We can’t socialize the losses – some people neither overpaid for new homes nor over-borrowed on their home equity line.  The losses are not made smaller by spreading them among the innocent.

E.  It’s possible but highly unlikely that one or a few banks made loans they hoped, planned or expected would not get repaid. However, to postulate that it happened at a scale of hundreds of billions of dollars is nonsense. Really – imagine some banker says to his boss or board: “Hey guys, I got an idea. Let’s make billions of dollars of bad loans, then maybe we can find some idiot to buy them all from us at a profit.  It’ll be great!  You in?”  Come on.  And not one of them said “Uh, no, that’s illegal.”  Really.  Thousands of them?  If you think so, you should get out more often – there aren’t that many bad people out there.  I’ve dealt in business for 30 years with pot-scrubbers and the senior-most executives of some of the largest financial institutions in the country and everyone in between.  Not once have I run across someone with the lack of character or ethics it would take to pull off the kind of conspiracy that is becoming some people’s version of “Another Day in the Life of the Man in the Gray Flannel Suit.”

It’s like this:  Housing prices escalated quickly because money was too cheap and easy.  Almost everyone participated in or benefited to some extent in the bubble in one way or another.  Then, some people, those who foresaw the collapse early enough, got out and made money on the fall in values by shorting the sector.  (It’s easy to say in hindsight “SEE, they KNEW” – but, remember that in every one of those trades, a knowledgeable, sophisticated financial institution took the long position.  They didn’t do so expecting, volunteering or planning to LOSE money.  The long side chose to be long and chose which packages of loans in which they’d take the long, i.e. “we think you’re wrong, [Goldman], they will not fail” position – and they knew as much about the package as did [Goldman].)
– Was there probably some shadiness along the way by some people on the margins and the fringe? – NO doubt about it.
– Did it rise to the level of widespread, calculated theft and fraud? – NO.
– Did that non-existent rampant fraud CAUSE either the run-up or the collapse in values? – NO.

 

In short, to understand the financial markets, one must get it out of his head that the banking world is filled with evil men who are looking for ways to screw grandma out of her pension.  One must, in other words, remember that there really and truly was never such person as Mr. Henry F. Potter; he was a character in a fictional movie about Christmas and angels getting their wings.

More on the 2008 financial markets here

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  1. First, Neal is I. You’ve misconstrued what I said. I did not (and you should know this) suggest a literal analogy between the bartender and the allocators of credit, especially when you try to equate bartender and government. More importantly, I will never and did never suggest the bartender is responsible for the drunks’ behavior. My point, which I think is clear in the video, was and is that the market correctly cut off the supply of credit and then the government tried to prevent the hangover by giving the drunk more free ‘credit’. Mistake.

    They weren’t drunk on ‘expected wealth’ they (I) were drunk on credit. To continue the metaphor to the moral responsibility you ascribe to the bartender makes the point silly. The players in market have one moral command – to pursue their own self-interest without regard to their counter-party’s self-interest (since the counter-party is solely responsible for that) but without EVER attempting to force the counter-party to do something against its own self interest. To purport make Party A responsible for Party B’s outcome is an attempt to allocate capital and other resources in the ‘fair’ way. That’s not possible unless there is an outside and interested force dictating outcomes. The market forces I want to dictate outcomes are disinterested powers.

    Never mind. Your comment is so random, I can’t respond further. Have a good night. Enjoy reading or not, but I can’t address random bullets.

    • Three issues worth addressing

      1. “The problem was putting the market in charge in the first place.” Who/What should be in charge in place of the market?

      2. Stretching a metaphor that I use rhetorically to the point that it doesn’t make sense is not an argument, it’s a silly tactic.

      3. Glass-Steagall’s repeal had no effect on the housing market. It’s primary purpose was to control what interest rates banks could pay on deposits and limited which financial institutions could own which kind of financial institutions and which kind could issue securities. It is not the case that commercial banks’ depositors’ money was ever in danger, or that letting banks act as intermediaries in the issuance of certain securities was a contributing factor in either the run up in home values or the ensuing collapse. Now, having made the point succinctly, if not comprehensively or exhaustively and given that the law is not in force, it seems fair for me to ask you to explain to me how (1) Glass-Steagall would have prevented any of the bad events that (a) happened after its repeal and (b) would have been susceptible to being prevented by that law; and (2) How it might act to prevent the next bad thing and what you think that bad thing so prevented is going to be. If you want to change a law, the burden is on you to convince law makers why that is a good idea, and saying “it’s better than nothing” or “I’m pretty sure it could have stopped _______” are not sufficient reasons for changing the law. As comprehensively as you please.

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