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Why is everyone cheating? Any why doesn't anyone seem to care?

by crankykarsten Tue Aug 24th, 2010 at 04:04:28 PM EST

The last 5 months I have been on paternity leave, mostly spending time with my son and wife but also staying abreast (as best as possible) of current events. Viewing the world a little bit through the eyes of a child, one thing that struck me again and again was that the world is full of cheaters.

I really wonder where the morals/ethics of our society have gone to (at least regarding the "elites" currently in charge).

Just some examples of stuff that any child learns that the elites (or whatever you want to call them) don't seem to need to follow:

  1. When you borrow a toy from a friend, be careful, don't break it and give it back.

  2. When you play a game, don't break the rules. If you do, you get punished and/or lose.

  3. When you play a game, you can't (retroactively) change the rules as you're playing just so that you can win (and others unfairly lose).

  4. Don't argue with your parents, it'll just make things worse (ok, a bit far fetched but I need it as an example later).

  5. Don't lie.

For all five "principles" you could find hundreds of examples where these basic rules are not being followed. I'll name just a few which have crossed me the last few days surfing the internets...

  1. "strategically defaulting" seems to be something on the rise among middle-class Americans whose houses are worth less than their debt. WTF? Taking on a loan is like borrowing a toy, except that it's money. So it has to be given back. Period. If my son ever borrows a friend's toy, sells it to someone else to get money (sorta like a home-equity loan) and then uses the money to buy ice cream which he eats and then doesn't have money to buy the toy back. Well, he'll get grounded for sure...

  2. OK, I assume we can safely say that all of Wall Street and most big banks just about broke all kinds of rules. Anyone get punished yet? No. Can't believe it. Worst of all the Hedge Fund industry with all kinds of insider trading ranging from classical insider trading to High Frequency Trading which should be outlawed immediately.

  3. Now, this is a nice one and one that is in some ways even worse than number 2. For example, the investment banks were exempt from all kinds of oversight but in return didn't have access to the Fed's discount window to refinance. The deal was essentially, investors in investment banks (bond and stock investors) knew the risk was a bit higher but so was the return. And then the market liquidity went away in 2007/2008 (in part because of the investment banks' shenanigans), suddenly the investment banks were able to use the discount window (and all kinds of other quickly set up lines/guarantees/AIG bailouts/etc.. to refinance/save their asses. WTF? The reason I hate this kind of cheating even more than upfront rule breaking is that if you straight out break a rule you get punished and the other players at get some sort of "reward" (if only retribution) for doing the right thing, but here, the honest player really really gets screwed and has no incentive whatsoever to ever be careful/law-abiding again. Be reckless, you'll get saved in the end anyway.... Another, albeit older example that really make me angry: back-dating / repricing of stock options.

  4. One current example, the German nuclear energy lobby blackmailing the government. Don't understand me wrong, I think nuclear needs to be used for a transition period (during which I'd much rather turn off coal powered plants than nukes) but the arrogance and audacity of the utilities (supported by certain bankers!!!) makes we want to throw up! Who are they threatening the GOVERNMENT???? It seems the financial crisis where everyone clamored for governments help has not made people/corporations humbler but even more obnoxious! It is really time that governments start wielding a more powerful fist against opportunist rent-seekers like bankers and in this case utilities!!! The teenagers called Wall Street and Utilities (oh, and Big Oil, see below) need to get grounded, get a real job and get their pocket money taken away.

  5. Lying. BP. Need I say more? Didn't think so. What also amazed me in connection with the spill was that for some reason stock market rules are more important than national law (e.g. it was not allowed to report in some areas as the information there might be materially relevant for the stock). WTF??? Same as above number 4, the governments needs to reassert who is boss!

Ok, enough ranting, my son is looking way too interested at that electrical socket, and regardless whether it is being fed by nuclear, wind or coal, that is just too dangerous...

... are a little more complicated than you portray them.

Essentially, people were being conned into buying a house at a wildly inflated price (or circumstances forced them to buy - e.g. because of a divorce or a childbirth). The immediate beneficiary of this scam is, of course, the seller of the house. But the mortgage lenders come a close second. And it's not like the banks were rubes just in with the 4 o'clock train from Nowhere. They knew perfectly well (or at least had no valid excuse not to know perfectly well) what was going on.

A bank that knowingly lends money to a person for the explicitly stated purpose of placing that money in a pyramid scheme, like the bank that lends money to a dictator in some banana republic, should be neither surprised nor entitled to cry foul when the former client walks away from the whole sorry business.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 24th, 2010 at 05:07:45 PM EST
I have heard those arguments before, but nonetheless, these were grown up adults, how can you force them to buy a house? I just bought one (well, it's currently being built) and it took me over a year to find and I did a lot of calculating, comparing to my current rent of my appartement, rent of a house, income, etc...

Buying a house is not something you do just like that. How can you spend many times your yearly salary without having a good look at that investment?

Having said that, I think financial education definitely needs to be course at school starting in elemetary school all the way to high school...

by crankykarsten (cranky (where?) gmx dot organisation) on Tue Aug 24th, 2010 at 05:31:21 PM EST
[ Parent ]
Whether the rubes were wise to enter into the pyramid scheme or not is beside the point. By originating, purchasing, re-packaging and marketing mortgages that they knew or should have known were fraudulent, the mortgage dealers aided and abetted a pyramid scam. Either knowingly or through gross and wilful negligence in their obligation to carry out due diligence.

The deal between banks and the rest of society is that the banks are permitted to operate as clearing houses under sovereign guarantees in exchange for exercising due diligence. When they so signally abscond from their end of the deal - particularly when their antics end up creating an extremely costly money market panic - they should be told to take a hike.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 24th, 2010 at 05:59:03 PM EST
[ Parent ]
In a sense, financial education might be poor by design. It's already three decades that people are pushed quite shrewdly into stock or real estate markets with the norm of intuitive or herd knowledge. Lay people succeed or fail there more by dumb luck than by their earnest knowledge. Asking (tellingly too late) people to overcome the "uplifting" noise of financial analysts, media cheerleaders and political clowns is like asking all first-grade schoolchildren to learn to play piano or chess without any hints or coaching. Yeah, a few Rahmaninoffs or Kasparovs can do that - but this is not education.

Even at universities, the popular economy or business courses probably prepare (for the crises times) more suckers than really knowledgeable investors. It's not science, but fashionable brainwashing for business cycles. Did you try to take a course on financial derivatives? Goldman Sachs gladly needed you.

And one more thing. Comparing mortgage with borrowing a toy is very unsound. It's more like you borrow a shovel and you are asked to return an excavator.


by das monde on Wed Aug 25th, 2010 at 03:00:51 AM EST
[ Parent ]
good point with the financial education, however I think that at least some sense would return to some people. Furthermore, no one could say that they didn't understand what they were doing! Not with buying a house anyway, really complicated structered products is another issue...

with the shovel and excavator example I assume you want to address the issue of interest? While that is indeed something that needs to be considered from an economic perspective, my point was purely from a moral perspective: you burrow something, you have to give it back. That simple...

by crankykarsten (cranky (where?) gmx dot organisation) on Wed Aug 25th, 2010 at 04:10:20 AM EST
[ Parent ]
It's not only the interest. When something is lent in abundance times and claimed back in meager times, you morally get the same shovel/excavator situation.

Besides, banks do not lend anything technically. They do not give something they have and then want that back (plus interest). The money they "lend" is not theirs nor anyone's. It's just money creation "out of thin year" - we discussed that.

What does that mean morally? For one thing, banks are in a privileged position. While everything goes right, banks get profit from the interest on money they did not have. When things get tough... at least for now, banks are the first to get a bailout, while obligations of the others remain the same (or grow).

Obligations is the thing to look in this money alchemy. For someone to earn a million someone has to borrow a million. The urge of lenders can easily be larger than the urge of borrowers. Even if borrowers follow their own will, is the urge of lenders morally impeccable? Or aren't they worse than cash hoarders, as on balance they stockpile money faster?

Say, you are the only millionaire on an isolated island. Is it bad for you if other fellows on the island borrow from you? You actually need borrowers, because otherwise you would have to grow crops and build a hut yourself eventually. That "refraining yourself" from spending the cash is actually evil, as it enslaves others, especially when barbarous interest eventually claims more than the whole island produces.

by das monde on Wed Aug 25th, 2010 at 05:17:01 AM EST
[ Parent ]
das monde:
It's not only the interest. When something is lent in abundance times and claimed back in meager times, you morally get the same shovel/excavator situation.

Lending out snow in January and expecting it back in July to use a (north side of the planet, snow country-centric) playground metaphor.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Wed Aug 25th, 2010 at 02:53:09 PM EST
[ Parent ]
that the banks bear a heavy burden of responsibility and deserve to lose some money, I can't accept the lazy arguments that people were conned into buying houses. They were willing gamblers, and they certainly took the "wins" if they were lucky.

Now, if you are additionally lucky that mortgages are non-recourse to you, there is a very rational argument to default, but it's still a breach of a commitment you took so it does fall into the "cheating" category crankykarsten describes.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Tue Aug 24th, 2010 at 06:16:00 PM EST
[ Parent ]
Unlike gold or equities or the currencies of countries you never plan to actually visit, housing isn't optional, and renting isn't always possible (itself a signal failure of government planning, but that's a different story).

Of course, you could delay buying out your former spouse after a divorce. You could delay moving to a place closer to the job you just got. You could do a lot of things. But is it reasonable to demand it?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 24th, 2010 at 06:26:56 PM EST
[ Parent ]
"Cheating" that any company company incorporated in North America would do. Legally, of course, please refer to bankruptcy law.

Context is everything and all that is said usually in this regard in North America is that at is good for the goose (banks, e.g. corporations) is good for the gander (the rest of us).

In Europe, the rules don't apply quite the same way.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Tue Aug 24th, 2010 at 06:50:53 PM EST
[ Parent ]
Wall Street Journal Sees Parallel Between Commercial and Individual "Strategic Default"" When Solvent Commercial Property Owners Quit Paying? « naked capitalism
I think we all know the answer to the question in the headline, courtesy F. Scott Fitzgerald, "The rich are different than you and me." And the fact that they have more money means their defaults are couched as pure business decisions. But mere homeowners, told to view their house as an investment, are now castigated if they act as any professional would and cut their losses.

The Wall Street Journal article on, ahem, voluntary commercial real estate defaults points out that some of the very biggest names are in the walk-away camp and through the article points out the similarities in decision process between commercial real estate strategic defaulters and their retail kin:

Like homeowners walking away from mortgaged houses that plummeted in value, some of the largest commercial-property owners are defaulting on debts and surrendering buildings worth less than their loans.

Companies such as Macerich Co., Vornado Realty Trust and Simon Property Group Inc. have recently stopped making mortgage payments to put pressure on lenders to restructure debts. In many cases they have walked away, sending keys to properties whose values had fallen far below the mortgage amounts, a process known as "jingle mail." These companies all have piles of cash to make the payments. They are simply opting to default because they believe it makes good business sense.

"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char
by Melanchthon on Wed Aug 25th, 2010 at 06:21:37 AM EST
[ Parent ]
Another perspective is that jinglemail rules simply confer on homeowners a privilege that stockholders already have, namely limited liability in part of their business ventures. If a company is underwater, the stockholder can (and indeed is expected to) walk out of his commitment for no other reason than the fact that it is underwater. Stockholders are not asked whether they are in actual financial difficulty when they do their equivalent of jinglemail.

I don't think that limited liability is inherently counterproductive in the mortgage market (though the mortgage market itself may well be, because the pwnership society it promotes is counterproductive). Similarly, I don't think that exercising limited liability as a matter of convenience rather than necessity is inherently immoral, whether in the stock market or in the mortgage market.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Aug 26th, 2010 at 07:56:46 AM EST
[ Parent ]
Sorry for being late to the discussion, but I, too, am taking exception on your characterization of "breach of commitment".
I have these interesting tidbits in my bookmarks on this very subject:

First, about "norm asymmetry": I have already posted that snippet before, but it bears repeating:

Economic View - Will More Borrowers Walk Away From Their Mortgages? - NYTimes.com

Some homeowners may keep paying because they think it's immoral to default. This view has been reinforced by government officials like former Treasury Secretary Henry M. Paulson Jr., who while in office said that anyone who walked away from a mortgage would be "simply a speculator -- and one who is not honoring his obligation." (The irony of a former investment banker denouncing speculation seems to have been lost on him.)

But does this really come down to a question of morality?

A provocative paper by Brent White, a law professor at the University of Arizona, makes the case that borrowers are actually suffering from a "norm asymmetry." In other words, they think they are obligated to repay their loans even if it is not in their financial interest to do so, while their lenders are free to do whatever maximizes profits. It's as if borrowers are playing in a poker game in which they are the only ones who think bluffing is unethical.

Note the jab aimed at the "investment banker" calling strategic defaulters "speculators" (no, this was not for you Jerome :-)).

So, shocker #1: The Poor are Honest! (who would have thought?)

Then, this:

Walking Away From Million-Dollar Mortgages - NYTimes.com

More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.

Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.

"The rich are different: they are more ruthless," said Sam Khater, CoreLogic's senior economist.

Shocker #2: "The rich are different than you and me." (F. Scott Fitzgerald quoted by Yves Smith)

And what is my own opinion on this "moral issue"?

To me the one thing that is truly reprehensible, morally and practically, is that famous "norm asymmetry" described by Brent White of the the University of Arizona: the social expectation that the less well-off people keep up their commitment more often (and at greater cost and suffering) than the richer individual or corporations.

Truly, if there is one cause for outrage in my book, this is it.

And I'll note that, in your reaction to strategic defaulting, you definitely are on the same line as the less well-off. Too bad your norms are so asymmetrical...

by Bernard (bernard) on Thu Aug 26th, 2010 at 11:52:56 AM EST
[ Parent ]
Of course, while the heavy coverage is of middle class strategic defaulting, the highest rates of strategic defaulting appears to be at the top rungs of the income ladder.

It is, after all, not a personal loan but a mortgage: the penalty for not paying is losing the property that is collateral. If everyone originating a mortgage held it until maturity and expected to own the property if they lent ended up under water ... the housing bubble would never have inflated in the first place.

And indeed, at least in the US, all the property that was sold at asset-inflated prices was valued as being worth the mortgage by a professional valuer.

Indeed, on the "toys" analogy, the improper behavior would be someone who, knowing that they are going to default, lets the property run down. Just because you are walking away from a mortgage does not mean you should behave irresponsibly: mow the lawn, call the utilities to turn off the connections, and clean the house out properly before you walk away.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Aug 24th, 2010 at 05:29:12 PM EST
that housing loans in the US are only covered by the mortgage on the house and not a loan by the person is something that I was quite shocked to find out and something that indeed did not help prevent a bubble.

Here in Germany, you are always liable for the house loan with your entire personal wealth...

What I still don't understand, though, is how prices could go up so high? Did rents also go up? If developers were selling overpriced housed didn't anyone check what the costs of building a house were compared to buying one from a sleazy developer?

by crankykarsten (cranky (where?) gmx dot organisation) on Tue Aug 24th, 2010 at 05:36:05 PM EST
[ Parent ]
Prices went up because they went up. Galbraith put it well in The Great Crash of 1929:

However, the time had come, as in all periods of speculation, when men sought not to be persuaded of the reality of things but to find excuses for escaping into the wide new world of fantasy.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 24th, 2010 at 06:05:57 PM EST
[ Parent ]
Oh, it certainly has prevented multiple housing bubbles.

But then banks stopped holding most of the mortgages they originated and in many sectors non-bank lenders became the dominate lenders.

In the main areas of the housing bubble, the presumption was that the housing prices were only going to go higher, so if you found you could not afford a payment, you could always borrow against the capital gain in the interim, or if you found that you could not afford the mortgage entirely, you could always sell out again at a profit.

Now, why were the lenders lending when surely they should have realized that the presumption is nonsense: that when the house price was so far out of line with rental prices that house prices were almost certain to experience a downward correction?

Because they were not expecting to hold the mortgage long term. With CDO's, they bundled the mortages into a stream of repayments, and sold off positions in line to get the money used for repayments. If not enough CDO's attracted an investment grade rating, they were put into a pile and positions in line to get their earnings were sold off.

Since the mortgage originators were not holding the mortgage long term, but rather making their money as income to create the loans, they started acting like shonky used car salesmen.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Aug 24th, 2010 at 09:16:36 PM EST
[ Parent ]
Interestingly enough, Germany is one country in Europe that has not experienced the housing bubble seen in France, the UK, Ireland, Spain,...
Causes are not entirely clear: some people think this is due to the brief asset bubble post-reunification in the early 90's.
by Bernard (bernard) on Thu Aug 26th, 2010 at 11:58:32 AM EST
[ Parent ]
A monetary policy designed to throw your economy into a permanent state of depressed domestic activity is not conducive to speculative behaviour in the majority of the population.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Aug 26th, 2010 at 12:20:01 PM EST
[ Parent ]
I don't think speculative behavior alone can explain housing bubbles: it has also much to do with cultural attitudes and social status regarding home ownership (property owner vs. simple tenant), property laws vs. renters protection laws, and most of all, shared beliefs and myths about real estate: "safe investment", "never loose value in the long run", "security for the retirement days", etc...

Of course, different monetary policies can add fuel to the fire or siphon-off your tank altogether.

by Bernard (bernard) on Thu Aug 26th, 2010 at 12:41:37 PM EST
[ Parent ]
Promoting home ownership has historically been little more than an attempt to infect the public with a speculative mentality. In point of fact, this was a deliberate strategy of the Thatcher regime. "Shared beliefs and myths about real estate" is the relevant speculative mentality (or its absence).

But you're right in the sense that speculative bubbles are fragile things: Monetary policy can puncture them, if it is applied with some care; fiscal policy can puncture them with ease; a depressed public mood can prevent them altogether; and even a dose of vigorously voiced pessimism from someone who enjoys a reputation for being Serious can snap some people out of it. So the presence of a speculative bubble indicates failure on several level, from cultural myths to regulatory inaction.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Aug 26th, 2010 at 12:52:28 PM EST
[ Parent ]
There's a more benign explanation for US housing policy to promote ownership too.  The US experience of the Great Depression and earlier recessions were marked by the stirring tragedy of mass homelessness.  People by the millions, with families and children, were pushed out on the streets without homes when they could not pay the ever higher rents.  (Which had to go higher to justify the ever higher costs of building new residences for a growing population.)

The policy solution was to give people more control over their housing through ownership entitlement to their homes instead of through rental contract entitlement, but the problem was that no bank in their right mind would lend more than 5 years out to working homebuyers on modest wages and salaries, and home building prices required mortgages of 20 to 30 years before middle class families could expect to be able to buy and own their own homes.  Thus the federal government created long term mortgages through establishment of secondary market for them by copying the already successful federal farm credit system model of GSEs (government supported enterprises) of a generation earlier, which was itself an adaptation of the 19th century German Landesbank model. Fannie Mae and Freddie Mac were born and to this day remain the only stable market which provides for home mortgages. Despite all the problems such as the recent crisis, mass homelessness has never returned to the pre-1930's levels again.  

by santiago on Fri Aug 27th, 2010 at 06:14:24 PM EST
[ Parent ]
That's a cute story, but it does not explain the recent push to expand the "ownership society."

Besides, there's nothing wrong with increasing rent that can't be solved with better public housing provision.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Aug 27th, 2010 at 07:01:27 PM EST
[ Parent ]
That's a cute story, but it does not explain the recent push to expand the "ownership society."

There is no reason that the "story" should "explain the push to expand the "ownership society." The story explains an honest attempt to create social stability by provision of a financial service by the government. The "ownership society" was a cynical attempt to extend and justify a developing real estate bubble that would produce economic results that would be politically useful in the short term, particularly the 2004 election.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Aug 27th, 2010 at 11:57:07 PM EST
[ Parent ]
You live in the pwn3rship society.

(part of the ET's ClassicalTM Series)

The housing bubble has been indeed very useful: unlike the previous Internet bubble that only enrolled the stock owning people, housing bubble allows to enroll just about everyone. And this "wealth effect" was sorely needed to offset wages than have been stagnant or declining since "Morning in America".

by Bernard (bernard) on Sat Aug 28th, 2010 at 04:18:50 AM EST
[ Parent ]
Fanny and Freddie had not led to bubbles -- on their own. But in a prolonged low interest rate environment they ended up holding the bag for an enormous amount of fraudulent credit issuance, all disguised with self regulating lipstick and rouge.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Aug 28th, 2010 at 11:25:29 AM EST
[ Parent ]
Your five "rules" and the routine, casual manner in which they have come to be violated, especially by the powerful in Anglo society, are examples of the application of Gresham's Law to personal behavior. In its application it is completely corrosive to the integrity of a society, as has been, is and will further be shown in the USA. As Charles Prince of Citi testified: "When the music is playing you have to dance!"

The whole financial system is competitive by design and if Goldman is doing something arguably illegal, but getting away with it and profiting handsomely, their competitors are forced to try to do the same. If Goldman gets away with its actions on account of having Goldman alumni at Treasury and the NYFed, the competetors have to attempt to match their clout. Rent enough US Senators and support the nomination and confirmation of enough Justices of the Supreme Court and you are good to go.

Of course Lady Justice has to remove her blindfold cuz she needs to use it as a G-string, but that is just the price of progress. The end result is that democracy comes to be denominated in dollars, not votes and Justice is a high priced prostitute, but democracy is reconciled with capitalism and we have the best justice and democracy that money can buy. Pity they couldn't be a bit more subtle and discrete about it. What will the children think?

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Aug 24th, 2010 at 11:48:31 PM EST
The dodgy mortgage companies that wrote--knowingly wrote--the NINJA loans(No Job, No Assets, on the part of the borrower) were wholly owned subsidiaries of well-known "respectable" banks, who in turn owned the dodgy mortgage companies for the sole purpose of generating loans (they did not need to be good loans) that they could buy and repackage and as Collateralized Debt Obligations (CDOs) that they could then sell at top dollar as AAA quality securities to unsuspecting pension funds, Norwegian town governments, and the like.  

It worked.  

And this is documented.  It is not like there is anything to, you know, debate!  

Now, several years later, in the ensuing melt-down of value as the CDOs and other alphabet securities turn up bad, some of the smaller people decide to follow the lead of the big boys and walk out of their obligations.  

If their obligations were to the same big boys, well, that is just strategy and survival and I have no problem with that.  

Worrying about the wrongdoings of the little people is like worrying about carpenter ants in the woodwork--and people do!--forgetting that carpenter ants do not show up until after the wood is already rotted out and useless.  

The Fates are kind.

by Gaianne on Thu Aug 26th, 2010 at 12:30:53 AM EST
good point, but then I would argue all the people involved in the "value" cahin of mortgages is/was a cheater.

To say that cheating is ok because others do it is the wrong way. Cheating is always bad.

I would rather argue the other way and say that the big boys should be punished for their cheating and not cheat because the others did it. If every one cheats then this equates to lawlessness and then society is doomed. In many ways I think this process is already underway in some countries and this will lead to revolution-like stuff happening. Unless of course, everything magically becomes good again...

That the big banks got rescued by honest little people tax payer money is not fair, sure, but it is no reason to be a cheater like the big boys too. At least that's how I see it...

by crankykarsten (cranky (where?) gmx dot organisation) on Thu Aug 26th, 2010 at 07:25:48 AM EST
[ Parent ]
In an environment where cheating is more profitable than any other activity, those who do not cheat go bust or are bought out. Either way, they cease to exist as independent economic actors. Call it a variant of Gresham's Law.

Individual homebuyers do not have enough market power to resist this mechanism, even if they don't get caught up in the speculative frenzy. Large financial houses may have that power, and the sovereign certainly has, should it choose to exercise it. So "cheating" is the wrong sort of framing for this - it is a political failure, first on the part of a deregulation-obsessed sovereign, then on part of quasi-sovereign banking houses.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Aug 26th, 2010 at 07:37:04 AM EST
[ Parent ]
I think you're fundamentally misunderstanding how this works.

Finance and politics do not have the same morality that ordinary people do. Certainly not ordinary decent people.

The whole point of finance and politics is to screw everyone else for personal advantage to the maximum extent possible. That's the basis of Wall St and Washington morality.

The problem isn't that this 'isn't fair' - of course it's not fair.

The problem is that most people in Western democracies don't appreciate how systemically dysfunctional these cultures are, and they expect moral standards from so-called leaders, experts, and powerful people which those people have absolutely no interest in.

As for mortgages - this kind of creeping immorality corrupts everything it touches, so it's not difficult to understand why people will do the strategic default thing.

But a lot of people in strategic default have no choice, because they'll have lost jobs they would have preferred to keep, or suffered pay cuts they would have preferred not to suffer, and they haven't been given an affordable housing option.

There's a clear difference between that and someone who has no financial issues simply walking away from a debt because they can, and don't care to repay it.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Aug 26th, 2010 at 07:40:21 AM EST
[ Parent ]
call me optimistic dreaming naive young guy, but I always thought that at least part of the political sphere was there to represent the people...

But I do get your point, as soon as the government does not represent the poeple anymore but is bought by wall street and big oil, well, then that's the beginning of the end as soon as things don't go continually up for everyone (some more than others) thanks to practically free energy the last 50 or so years.

The energy credit will soon be gone and then it won't be that easy and those socities where citizens are still more or less represented by their government will fare better than those ruled by dictator-like cartels of MBA alumni...

by crankykarsten (cranky (where?) gmx dot organisation) on Thu Aug 26th, 2010 at 07:46:13 AM EST
[ Parent ]
Government is supposed to represent the people, and there's a narrative that it represents the people. But in practice - not so much.

In the UK in the last century there was maybe a decade when government was truly popular and representative. And as we've just seen - when there's danger of instability or change, the posh boys always ignore their nominal party labels and close ranks.

It's not unlike the US where one party despises poor people and wants them to die or live as slaves, and the other party despises them but understands that some concessions to their welfare are expedient.

I don't think it's a coincidence that offshoring has made it possible for those in power to ignore the working poor and shift policy right-wards. All those workers are no longer necessary, so there's no longer any need to pretend to be polite to them.

If more people realised how excluded they are, it might not be a bad thing.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Aug 26th, 2010 at 08:37:48 AM EST
[ Parent ]
If we brought in some medieval usury laws and gave whippings - with the number of lashes depending on how much you got - to everyone involved in a speculative bubble, maybe people would think twice. (Or the rich would become bloody pulp.)

When it comes to the houses I have no problem with people using their limited liability on mortgages. The bank gets the collateral that was put up, ie a house. The bank can then sell it or rent it out or build something else on the lot. If they absolutely did not want a house, they should not have made a loan with it as collateral.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri Aug 27th, 2010 at 04:02:35 AM EST
[ Parent ]
Better than whipping, those involved should be made responsible to the full extent of their personal wealth and future earnings for high financial crimes.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Aug 28th, 2010 at 12:03:20 AM EST
[ Parent ]

The Fates are kind.
by Gaianne on Sat Aug 28th, 2010 at 11:17:21 AM EST
[ Parent ]
The trick was that the implications of a NINJA loan were built into the system. I remember reading the trades at the time telling us what a blessing it was to be living in times that these new financial tools were able to give the AmericanDream to so many people down the ladder, that we were being racist and unkind to say that it was a fraud, that the mirror of spreading the wealth was spreading the risk.To not take a loan, especially after your friends had taken loans and had them re-financed several times as the notes became onerous ('promised' by several of the conn artists) or refi'd when the value of the house when up -- these conditions, nor the people who were not as financially clever or honest as you, should not be sneered at.

Back just after the dinosaurs left, loans defaulted routinely at a small rate. Adjustments were made (such as insurance for the loan payer) to mitigate against some percentage, But always within the cost of any loan is some percentage betting on default.

What the CDOs did was pre-bet that this cost could be spread about, so that looser money could be spread about. But there was a mistake made, in that too many people were cross betting. All the cards that we supposed to be supporting the other cards turned out to be reliant upon upper cards.

And thus it is called a ponzi scheme...though that tends to dilute the rank and number of people involved.

I just hate this 'holier than thou' attitude when discribing those who were buying in with offers that got them out of the economic cycle they were in.

That this was part of the disguise and repercussions of the Savings and Loan bailouts from 15 years before is a whole 'nuther tangent.

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Sun Aug 29th, 2010 at 11:57:06 AM EST
[ Parent ]
That was exactly the point of my reaction to Jerome's argument that subprime loan borrowers were "willing gamblers": actually, they were clueless gambler. The very definition of a bubble is a shared belief, that the asset in question (housing here, but works the same for tulip bulbs, dot-com stocks...) will keep increasing in value and that when the mortgage resets, you'll just take a fresh new one or resell the house for a profit (to buy an even nicer one).

Plus the very strong pull of the "American dream": owning one's home (the US legal system is based on the property laws; unlike Europe, tenants have nearly no rights -- I know, I've been there).

When the nice mortgage broker explains that you too can be part of that home ownership dream: this is entirely legal (would I lie to you?) and when the introduction rate expires you'll have build plenty of equity in your house and refi will be a snap, not many people could resist the "dream".

Of course, the whole system worked (for a time) because neither the broker, nor the bank, nor the big guys like Goldman were holding the bag: they found a way to offload all the risks onto someone else while keeping the profits -- the very definition of modern finance.

A good opportunity to watch again this excellent presentation "How Subprime Works". Should be required reading on ET.

by Bernard (bernard) on Sun Aug 29th, 2010 at 12:43:26 PM EST
[ Parent ]
Is cheating getting worse? Has there ever been anything but cheating? It's just been swept under the rug in the past. Next door neighbor had a pipe-burst in his main water line. Contractor showed up, gave him a reasonable bid. Did the work. Then told him that the city's pipes were at fault, it was a much bigger job than anticipated, he charged him 4x the quoted amount, and told him to see so-and-so down at City Hall, and to take a good friend of his--a lawyer--with him. Within weeks, the city settled with my neighbor for 3x the amount that he was charged. My neighbor called a friend of his at the state level, and now the Feds are involved.

This would have been a seamless scheme to bilk the city.

by Upstate NY on Sun Aug 29th, 2010 at 09:40:35 AM EST
Hope neither your friend nor any of his family have any unfortunate "accidents" over the next few years.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Sep 5th, 2010 at 12:44:44 AM EST
[ Parent ]

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