Part Two of a series.
Consider this scenario. You’re standing at a busy street corner when you see someone about to step off the curb right into the path of an oncoming bus. You have just enough time and you’re close enough to reach out and stop them before it’s too late. Do you? Conservatism says, no.
Now consider this scenario. You’re standing at a busy street corner when you see someone about to step in front of a speeding bus. Someone else beside you is about to reach out and stop the other person from becoming roadkill. Even if you don’t attempt to stop the person from stepping in front of the bus, would you actually stop the would-be rescuer from stopping them? Even if the driver was deliberately aiming for the would-be victim? Conservatism says, yes.
Conservatism apparently holds that some people should end up under the bus, or at the very least no one should try to keep them from ending up there.
In a Washington Post editorial, New York Governor Eliot Spitzer writes of how the Bush administration blocked states’ efforts to protect subprime borrowers. When Spitzer and officials in 49 other states attempted to stop predatory lending practices, the Bush administration stepped in to stop states from taking any such action.
Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.
Let me explain: The administration accomplished this feat through an obscure federal agency called the Office of the Comptroller of the Currency (OCC). The OCC has been in existence since the Civil War. Its mission is to ensure the fiscal soundness of national banks. For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers.
In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government’s actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.
In fact, when Spitzer’s office opened investigations into possible discrimination in mortgage lending, the OCC under the Bush administration filed a federal lawsuit to stop the investigations.
The full significance of what Gov. Spitzer is saying really becomes evident when you remember, as Bill Scher pointed out earlier, that when people who saw the hand writing on the subprime-mortgaged wall alerted the Bush administration to the impending disaster, they were ignored. Specifically, Alan Greenspan himself received direct warning about the coming subprime crisis, and did nothing to stop it.
And leaders of a housing advocacy group in California, meeting with Mr. Greenspan in 2004, warned that deception was increasing and unscrupulous practices were spreading.
John C. Gamboa and Robert L. Gnaizda of the Greenlining Institute implored Mr. Greenspan to use his bully pulpit and press for a voluntary code of conduct.
“He never gave us a good reason, but he didn’t want to do it,” Mr. Gnaizda said last week. “He just wasn’t interested.”
Today, as the mortgage crisis of 2007 worsens and threatens to tip the economy into a recession, many are asking: where was Washington?
Where was Washington? Well. Like Rip Van Winkle finally waking up from a long nap, Greenspan delivered astounding pronouncement that the U.S. economy is “on the edge of recession” due in part to the crisis of falling home values, set in motion by the very scourge he declined to do anything about even when the looming disaster was pointed out to him.
Where was Washington? Well. Dean Baker points out that, like the Federal Reserve’s very own Mr. Magoo, Ben Bernanke failed to even see the housing bubble, and then once it finally burst failed to see the “financial tsunami” (as Baker calls it) that was about to hit our economy.
Baker’s right when he says that there’s really no excuse for not seeing disaster about to strike, when (a) it’s your job to see it, and (b) people are going out of their way to point it out to you.
Allowing the housing bubble to grow unchecked was a mistake of monumental proportions. It was inevitable that it would end badly. There is absolutely no excuse for a competent macro economist to have missed the growth of this bubble. The country had never seen this sort of run-up in house prices. Furthermore, there was no explanation for this run-up, based on the fundamentals of supply and demand in the housing market, that passed the laugh test.
Yet, the Fed chairmen either did not see the bubble or chose to ignore it. As Greenspan said repeatedly in reference to the stock bubble, he thought it was best just to let the bubble run its course and then pick up the pieces after it burst. Well, it is not easy to pick up the pieces after bubbles burst, and that is going to be even more true with the housing bubble than with the stock bubble.
But there’s a third possibility, besides the two Baker mentions. First, you have to take into consideration that we’re dealing with an administration that got the memo about potential terrorist hijackings in August 2001, and didn’t classify warnings about Bin Laden’s network as “urgent.” We’re dealing with an administration that declined to study how to protect New Orleans from a hurricane, despite government agency reports in 2001 that such a catastrophe was highly likely. We’re dealing with an administration that ignored and then squelched intelligence suggesting that Iraq had no WMD.
So, where was Washington? Washington was standing on the street corner where we started this post. Washington saw the speeding bus coming, saw someone about to walk into the path of that speeding bus, and declined to stop them. Far from ignoring the impending crash, Washington saw the states about to stop the people from stepping in front of the subprime bus, and instead stopped the states from averting disaster.
In a previous post, I wrote that there are people who look on the disaster and see things as they should be. It’s important to remember that Greenspan “didn’t want to do it” when urged to stop the subprime debacle from happening, and “thought it best to let the bubble burst and pick up the pieces later.” Put that in the context of a remark that will be significant later in this series — that there’s nothing fundamentally wrong with financial system that made it all possible — and it’s clear that there are those who don’t see anything fundamentally wrong with some people ending up under the economic bus, don’t particularly want to stop them ending up there, and think it’s best to just let it happen.
Three guesses as to who’s a member of the ownership society and who’s not — the economic roadkill or the bystanders who watch it all happen and “pick up the pieces later” — and the first two don’t count.
Washington stood on that street corner, watched people go under the bus, and now that a crowd has gathered and at the scene of the accident, now Washington is concerned. Now Washington is declaring an emergency. This, after Washington saw the whole thing coming, watched it happen, and did nothing about it.
Maybe Washington just thinks it’s inevitable that someone will end up under the bus, and that some people just belong under the bus, however they get there.
It seems inherent in conservative philosophy to see disaster approaching, to know where and whom it will strike, and to simply stand out of its way. The problem is that the person stepping into that intersection, about to get mowed down, is all of us. Or at least the 99.2% of us who are not, have never been, and never will be members of the ownership society.
Even if that disaster can be averted, it shouldn’t be. That’s the heart of both the conservative love of deregulation and reluctance to intervene that makes economic disasters like this likely to happen, and to happen on large scales like the metastasizing subprime crisis, and on the small scale of millions of personal stories ranging from foreclosure to bankruptcy to never-ending debt.
There’s a motive for letting simply letting it all happen, though. It’s very simple. As easy as it might be to write off that kind of “devout neglect” to the plain old mean-spirited notion that survival — economic or otherwise — “is a matter of privilege,” the bottom line is actually the bottom line. None of this would have happened, or been permitted to happen, unless somebody — and not just anybody, but people already significantly privileged when it comes to economic survival — stood to profit from it.
Though not intended as a commentary on the passing of William Buckley, this post—and perhaps the whole series—could be taken as a “tribute” to his “legacy.”
it’s a very fitting tribute to his legacy.
I don’t understand how letting the bubble burst was good for either side. The banks give loans where the collateral (the home) has an inflated valuation, and then get hurt when the bubble bursts. Who is benefiting here?
The banks and non-bank financial institutions will definitely benefit if there is a bailout. In fact, the government is already bailing out banks like Countrywide in a sneaky way. Proposals are already being introduced to have the government basically buy these toxic loans from the banks. Their profits are privatized while their losses will be socialized. This is unacceptable.
And make no mistake about it. These proposals by both Democrats and Republicans will have the main purpose of bailing the banks out. It’s disgusting to see purported “free market” bankers demanding a handout.
Oh, and the bankers always walk away with the money. Duh. They probably knew most of these mortgages were crap but they wrapped them up in fancy financial products and leveraged the heck out of them and sold them to suckers for a nice profit.
Indeed, the bankers were handsomely compensated last year: http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2903546.e
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But you forget, Terrance, that the Right believes in the ethic of personal responsibility. For example, the idiot CEO of Countrywide Financial, whose reckless, stupid, and irresponsible behavior set off the current housing/economic meltdown, has been severely punished: he will walk away from his mess with only $24 million instead of the $70 million or so he was expecting.
This is what Bushies mean by the ownership society: you own the right to never pay for your mistakes, even though your deeds have caused the suffering of millions of your fellow Americans. That is the real American dream, and unitl we get rid of it, we’ll just be standing on the corner waiting for the next bus (or Brinks truck, actually) to mow us down again.
The government is already bailing out Mozilo and Countrywide. The FHLB just loaned Countrywide $50 Billion. You think they’re good for those loans or do you think us taxpayers will be stuck with the bill?
http://blogs.wsj.com/economics/2008/02/27/roubini-fhlb-lending-reckless/
It’s also interesting to see some of the comments at that WSJ. Most of these people I am sure are right winger supply siders that hate them some liberal socialism–except when the socialism is directed at Wall Street. One can also observe another phenomenon there–right wingers have an amazing ability to ignore reality and just absolutely believe that the economy is humming along swimmingly (Go U.S.A.!).
That other .8% would serve themselves well by remembering certain historical events. Bastille Day would be a good starting point.
I’m glad that you focused on the regulation angle rather than on the angle I fear the Democrats will soon take–bailing out underwater “homeowners”. The Bush administration and the Fed did not do their jobs leading up to this mess. They indeed share the lion’s share of the blame. The Fed flooded the economy with cheap money and the banks did their part by loosening their underwriting standards and giving loans to anyone that could fog a mirror.
But it takes two to tango. And I bet most of the people that are underwater right now made a stupid economic decision by borrowing hundreds of thousands of dollars they couldn’t afford to pay back. They thought prices would always go up and they wanted the easy money train of a free lunch. We should not be bailing these people out. What if I made a bad economic decision that is impacting my life and my family by living beyond my means and buying things on a credit card that I can’t pay back? Can I have a bailout for that mistake? What if I lose money in the stock market? Can I have a bailout for that?
It’s better to let prices fall. It’s better for America to get back to the normal valuation of houses. Normal people will be able to afford a home quicker that way. Bailing out homeowners will simply delay the inevitable and make the crash even worse.
If a fraud or crime was committed then by all means punish the guilty party–whether that be the mortgage broker, the realtor, the “homeowner”, or the bank executive–but we should not be socializing private parties’ losses.
Except, one thing doesn’t quote sit right with me. If my neighbor made a stupid financial decision, got a subprime mortgage, and borrowed hundreds of thousands of dollars he couldnt’t pay back, I’m not sure I want him foreclosed on.
In fact, I probably want him bailed out. Because if his house is foreclosed on, that’s a potentially vacant house sitting on my street, affecting the quality of life in my neighborhood by being a potential magnet for crime, squatters, etc., and dragging down the value of my home and every other home in the neighborhood. Multiply him by several hundred in my city, theoretically, or several thousand in my county, and soon you have a local government with plummeting house values, and plummeting property taxes, which means infrastructure and education budgets dry up.
It’s already happening in several states. If a bailout can help stop some of that, I might not care if some fo the “wrong” homeowners get bailed out. Because in this case, their decisions impact and the consequences are borne by entire communities–including people who didn’t make stupid financial decisions, or engage in speculation.
I’m not sure how you arrest the damage being done to communities all over the country, without bailing out some of those people, because the consequences are to some degree collective, rather than contained in individual households.
Indeed. In this scenario those who didn’t fall into the trap will nevertheless suffer from the scattershot effect.Our county is just embarking on a series of hearings with our real estate tax appraisers as the value of so many homes has already dropped substantially yet the appraisals are only done every 2 years so the adjustment won’t catch up. Meanwhile, the county had already eartagged the anticipated taxes for local improvement projects so out of caution they’re talking about putting a hold on some of them. So to complete the circle, this adds to the flattening of values because without improvement to infrastructure or just plain maintenance, the values of our properties will stagnate.
As far as the community at large . . . . it is much better to not bail out underwater homeowners. In fact, keeping with the theme of this series, it’s PRECISELY what is needed to remedy the ills of the “ownership society” and the reckless economic course our country has taken the last 25 years or so. The “ownership society” has simply suckered American workers into being debt slaves.
The Fed and the government have killed the working family by propping up assets like housing and the stock market instead of keeping prices stable and encouraging wages to grow. The Fed suckered the average working man. He bought him off with the cheap goods made by cheap labor in China. He also bought him off by encouraging the average worker to take on a huge amount of debt. To be good citizen in the ownership society one must be a super consumer and own a house. The “ownership society” encouraged people to buy homes they could not afford.
The way to fix this is to let the market price homes at the appropriate level so that they are in line with wages and rents. That way more Americans can afford a house. What’s the point of keeping people in houses they fundamentally can’t afford at inflated values?
Plus, owning is overrated. We need shelter–not to own a home. In fact, it is probably cheaper for these underwater “homeowners” to rent than to continue paying a mortgage on a house they are underwater on. We’ve made homeownership sacred in this country for some reason (I guess to sucker the American worker into the “ownership society”).
So yes, the neighbors will be upset that their comps will look bad. But the comps are going to look bad no matter what because the natural forces of economics are doing their thing and will pop this bubble if we like it or not. Anyway, I look forward to when homes will once again be available for honest people that work hard and save their money to buy a house they can afford. That is far more important to society than artificially inflating houses for the benefit of current homeowners.
Interesting points. This has been an educational exploration for me, as I’m not an economist and am trying to make sense of this as I go along, seeing how various things are connected.
I agree that we probably need to re-evaluate home ownership. It’s extolled as the key to building wealth. But equity isn’t really tangible wealth with a stable value. The value of one’s home isn’t really wealth either. It seems that way, because you can borrow against it, but then it’s not really wealth. It’s debt. The value is just the market price the home might get on the market today, and that’s subject to change too.
It seems as though we need to come up with another way for people to build real wealth. I don’t know what it is. Saving is a good idea, but given how wages have not kept pace with inflation, it’s a lot harder to do than it might be otherwise. Of course, there’s a larger discussion to be had there.
Also, I think the housing boom contributed to the problem, because the housing industry wasn’t focused on building affordable housing, because building affordable housing wasn’t profitable, or as profitable as building housing that lots of people couldn’t afford. Subprime loans helped some of them get into those homes, for a while. But now what?
And, from what I’ve read, the rental market is suffering in lots of places. People are actually being evicted, even though they’ve always paid their rent, because their buildings are being foreclosed, and banks usually want them out because empty buildings sell easier than buildings with tenants. Add to them the foreclosed subprime borrowers who are looking for shelter, and you have a great situation for remaining landlords, who then raise rents.
Again, I don’t have all the answers, I’m just trying to connect the dots. I look forward to continuing this series, and continuing the discussion.
Thanks for the series. I’ve been sick of politics lately and this is a nice change.
Looking forward to the rest.
Some of the people caught up in this didn’t do so out of greed. I’ve seen people given interest-only mortgages who weren’t aware what they had signed. Others got locked into balloon loans that couldn’t be paid off early – one phrase my neighbor showed me said “we may decide to penalize the pre-payment of this loan”. Of course, that meant that they did penalize any prepayment.
Elderly people where I live often trusted mortgage agents – particularly some of the Countrywide scum – that they were signing a conservative, reasonable document. Predatory doesn’t just mean playing to people’s greed, it also means taking advantage of poor or elderly or undereducated or just plain trusting people.
And many of the lives of those people are ruined, and their neighborhoods and neighbors, no matter how responsible, are being ruined, too.
Of course elderly and poorly-educated homeowners should have legal recourse if a fraud or misrepresentation has occurred. No new laws or bailouts need to be created to do this.
But your stereotype of the underwater homeowner as a toothless elderly nincompoop is a bit patronizing and over-the-top. The vast majority of underwater homeowners simply got caught up in bubble mania and made a bad financial decision. Maybe it wasn’t pure greed but it also wasn’t noble. They knew what they were doing. They took a risk and lost–like a lot of us do in this wacky ride called life.
And you know what? I don’t necessarily blame the people now underwater. It was a rational decision. They got to live in houses they could never afford with a traditional mortgage. They put little to no money down. And they had low teaser interest rates and often only had to pay the interest and not the principal (and sometimes only part of the interest). Sure, they would have to start paying off the loans for real in a couple of years but they willingly took on that risk because, hey, home prices always go up, right?
Underwater homeowners are no better or worse than any other market speculator–I’m not making a value judgment–but they surely knew the underlying risk involved–your strawman stereotype of the hapless homeowner notwithstanding. In fact, I bet it was the elderly that had the wisdom to know that home prices do not always go up and not to jump on the real estate bubble of the last few years.
What makes an underwater homeowner more deserving of a bailout that other hardworking Americans that make poor financial decisions, say with credit cards?