Friday, January 25, 2008

On Stimulus and Majerus

- The House and Dubya just passed a stimulus package that will hopefully, when combined with a drastic Fed rate cut, get the economy out of this little hole we're in. While I'm not one to complain about an extra $600 in my pocket, and I agree that putting money in the hands of those who are more likely to spend it rather than save it will help spur growth, I'm not sure I like the idea. It reeks of a temporary solution to a deep-seeded, long-term problem. If we hadn't spent the past 25 years eviscerating the social safety net, we might be able to let the economy go into the recession that we probably need to scrub the markets clean of this subprime crap, but since our safety net is so lacking, doing so now would just create a far greater social cost than it's worth. There isn't a better option, I guess, but I still don't see how a problem caused by overspending and cheap money is going to be fixed by cash handouts and cheap money.

Anyway, the free market's great and all, but we have to realize that sometimes it screws up. This is the main difference between American liberalism and conservatism when it comes to economic issues - liberals realize that the market's not perfect and is driven by people who often make mistakes. Furthermore, markets are also driven by a herd mentality that turns small disturbances into national crises, and national crises into catastrophes. Conservatives have too much of a tendency to fetishize the market - that is, to pretend that the market is an entity unto itself that functions as if it has a rational mind of its own. But it doesn't. It's made up of people, and people are stupid. It often takes snafus like this to remind us of that fact. Decreased regulation is great and all, but large groups of skittish people sometimes need regulations to keep them from going apeshit. The subprime mortgage market was one of those cases where regulations (ones preventing the securitization of predatory loans, for example, which was passed in NY, NJ, NM, and GA before the Treasury overrode them - read here for more info) could have kept things under control. And it's times like these when we realize that investing in a safety net for the poorest Americans isn't such a bad use of our tax money after all.

- As a University of Utah fan, I have a soft spot in my heart for Rick Majerus, the coach who made Utah basketball relevant. (My hatred for Kentucky can be traced mostly not to my days as an undergrad at Vandy but to the 1998 NCAA finals, where UK came back from way down to beat the Andre Miller-led and Majerus-coached Utes.) I always thought that the man basically lived off of basketball - I think he lived out of a hotel room in Salt Lake City during the season. So imagine my surprise when I found out that he has political views. And that the reason that his job at Saint Louis University is in trouble is because of those views.

Of course, the main person attacking Majerus for his support for Sen. Hillary Clinton's pro-choice, pro-stem cell views is Archbishop and professional douchebag Raymond Burke, who famously ordered his diocese to not give communion to Sen. John Kerry during the 2004 election. (Being forbidden from receiving communion - or an interdict - is kind of a big deal to Catholics. It's kind of like being condemned to Hell while still alive, as far as I understand. Matt, you can correct me on this if you want.) Burke has an massively inflated sense of his own power and importance - apparently, he pines for the days when a pope could declare the kingship of a country open simply because he didn't like the guy currently holding the job. Either way, SLU hired the man to be a basketball coach, and he's an excellent basketball coach. His political views are immaterial, unless the Democratic Party puts a plank in their platform opposing the three-point shot, in which case we can talk. If he goes 5-22, then maybe you could talk about firing him. But until then, Burke needs to go back to issuing interdicts to the bullies in his fourth grade class (I just kind of assume that's what Burke does with his spare time) and leave Majerus and SLU alone, since what Majerus does with his spare time is none of Burke's damn business.

Oh, and you know that David Horowitz guy who goes around "defending" conservatives who think they're being attacked for their views at liberal universities? What about when a liberal is clearly being attacked for his political views at a conservative university?


Mike said...

"It reeks of a temporary solution to a deep-seeded, long-term problem." And how. Social safety net or no, for the long-term good of the country, we need to go into a recession.

"It's made up of people, and people are stupid." You'd actually be hard-pressed to find a conservative who doesn't agree wholeheartedly with this statement. I think the difference is how forgiving one is willing to be of willful stupidity.

The Majerus thing is just ridiculous.

-Dave said...

Another conservative here. The short, but incomplete answer is that yes - conservatives think people are stupid. But we also see the market as a place where people's stupidity is checked against other people's stupidity. The government, on the other hand, is full of equally stupid people to whom we cede the authority to express their stupidity largely unopposed.

If you pit a gritty, real-life market against an idealized government that is somehow able to overcome its stupid-people roots, it's rather a given that the government comes out the winner.

Jacob said...

"...large groups of skittish people sometimes need regulations to keep them from going apeshit. The subprime mortgage market was one of those cases where regulations (ones preventing the securitization of predatory loans, for example, which was passed in NY, NJ, NM, and GA before the Treasury overrode them - read here for more info) could have kept things under control."

It's not that clear that this is case of large groups of people going apeshit. Under Greenspan and now Bernanke, speculators have been taught that the Fed will lower interest rates to mitigate losses whenever there's an asset bubble. This is a classic case of moral hazard. If the Fed and Congress are going to bail them out when they invest exuberantly, it's perfectly rational to be irrationally exuberant. Bernanke and Congress are proving their expectations correct, and encouraging this sort of bubble in the future.

I'm also wary of portraying loans as predatory. Excessive regulation prevents prices peope out of the mortgage market, denying them a shot at home ownership. We should beware using a temporary panic to put in place rules that could hurt people with poorer credit for decades.

Matthew B. Novak said...

Jacob -

Switch jobs with me for a week. You'll be fully confident that the loans that were being made - and not just subprime loans, but a good number of regular loans too - were most certainly made in a predatory fashion. They were brokered in a manner that didn't get people their best possible rates, there were massive kickbacks (yield spread premiums) that encouraged brokers to flat-out lie to buyers, tons of fraud in several key components (such as income or value of the home) used to calculate loan rates, breaches of the Truth In Lending Act, ridiculous payment terms including negative amoratization, a targeting of minorities and non-english speakers, a secondary market that (continues to) shelters the "investors" who are really funding the whole problem, and, perhaps worst of all, when buyers saw the problems and attempted to address them before signing on the dotted line they were often faced with threats (both criminal and pecuniary) that coerced them into buying.

Yeah, I think it's fair to call them predatory loans. And I think it's fair to call the people making these loans predators. And I think I'm angry enough now that I'd better just stop writing before I say something really mean about libertarians and/or economists.

Jeff - more response to follow. Good post.

Jacob said...

I count at least two activities you mention that are already illegal -- anti-fraud laws that I suspect most economists and libertarians would support -- so I doubt we disagree as much you think we do.

I also suspect that in the course of your job you deal with the most dubious lenders. I'm still wary that their real transgressions will be used to pass regulations that will hurt lots of potential home buyers in the long run.

Miguel said...

There isn't a better option, I guess, but I still don't see how a problem caused by overspending and cheap money is going to be fixed by cash handouts and cheap money.

This may be a wild stab in the dark, but I think maybe not overspending and not creating cheap money out of thin air may help fix the problem.

Anyway, the free market's great and all, but we have to realize that sometimes it screws up.

And government doesn't? Government is made up of stupid people too(ironically, some of them have, or probably would be, complete failures in the "real world"), with probably more of a tendency to go apeshit. Why trust them more to try and correct the free markets faults? The main point of supporting a true free market (not this government/"free" market hybrid we have now) is that when things do go wrong, that even those who get totally screwed can bounce back.

As for all the predatory loan problems, a lot of this could have been avoided if the government wasn't trying to socially engineer all americans, regardless of their economic situation, into "owning" a house. "Come on, everyone deserves to own a home, the good ol' government will help you!" Surprise, surprise, people who were not financially ready to own a home got into terrible debt situations and got royally fucked, house prices skyrocketed due to artificially inflated demand, and now the housing market is suffering. The road to hell is indeed paved with good intentions.

Matthew B. Novak said...

Jacob -

First, yes, there are illegal activities in these transactions that ought to be outlawed. Even libertarians and free-marketers can agree on regulations that encourage the free-flow of information. But what you're probably still missing is that there is a terrible lack of enforcement to these laws. Given the complexity of mortgage transactions it is often difficult to prove fraud or other abuses. Even if you can the remedies are often ineffectual, or come too late; It's damn-near impossible to stop a foreclosure. Plus you generally need to have some money in order to even access the possibility of defending yourself against these frauds (attorneys capable of handling this kind of law don't come cheap, and there's a dearth of them available to start). If we're really going to address the problems that even libertarians would see as such we need significantly more regulation to do so.

Second, as things currently stand the secondary market is a huge problem. Abusive loans (ballon payments, adjustable rate mortgages, expanding adjustable rate mortgages, and negative amoratization are becoming quite common, even in mortgages that aren't sub-prime. You don't think these are good things, do you?) are being made to unsophisticated buyers who don't understand the complicated transaction they're entering into, and then the loans are being immediately sold to a secondary market. Currently there is NO enforcement mechanism against a secondary purchaser. And without a secondary purchaser, many of these loans wouldn't be made in the first place, because the primary knows they'd be on the hook for all the trouble they've caused. But instead they sell it away and the real money behind the operation is protected. This secondary market is composed of exactly the people you're saying we don't want to get rid of. You wrote "excessive regulation prices people out of the mortgage market". You present it like it's a bad thing. Getting rid of the secondary market would be a good thing because then there would be nowhere for abusive sellers to turn, and these abusive loans wouldn't be made. Most mortgages out there would have to be made as the market itself dictates, with risk actually factored into the decision.

You've done a decent job presenting your argument as pro-consumer/pro-home buyer. But that's simply a mischaracterization. For a couple reasons.

1. You're assuming the market is functioning, and that loans that are being made to the sub-prime market are the best they could get. That's just not true. Consider first that the abuses aren't seen in just the sub-prime market but throughout the mortgage market (specifically yield-spread premiums which are at the heart of much of the fraud). This indicates consumers across the board aren't getting the best possible mortgages they'd be elligible for - that's a failure of the market (unless you're selling mortgages, in which case you're making a bundle more than you would be if the market were actually functioning as would be expected). Consider also that, though the return on investment in the mortgage market would be smaller without these abuses, it would still be quite steady and substantial. Homes are an excellent investment - everyone knows that - and mortgages make banks a ton of money. Always have, always will. Regulation addressing these abuses isn't going to change that one bit.

2. Consider that right now people who have been victimized by these loans are plain and simple getting hosed by the system. How is this good for consumers? Oh, that's right, it let them buy a house! Except that it didn't, because now they're all getting foreclosed on, and kicked out into the street. Yup, that's real good for people with poor credit. If we keep these loans available in the future as you propose, we'll just have more of the same. And temporary home ownership before foreclosure doesn't quite fit the American Dream.

You're presenting your view as pro-consumer, saying this will enable even people with poor credit to become a home buyer in the future. Except, one, there's no real indication that more regulation preventing these abuses will significantly decrease the mortgage market (I'm willing to concede that there be some marginal decreased investment, but how much? Given the steady and secure nature of the mortgage market, probably not a ton of decrease). And two, the loans that are being made now are full of things like negative amoritazation, which, although it might temporarily allow someone with poor-credit to become a homeowner, hurts their chances in the long run. These loans are designed to milk as much money as possible from individuals and families with poor-credit, and then collect on the collateral home.

I'd much prefer a slightly-trimmed mortgage market with fewer abuses than a massive mortgage market full of fraud and abuse. But hey, if you love money and hate people, then yeah, your idea is good too.

Matthew B. Novak said...

Jeff -

I don't know that's it's quite as bad as being condemned to hell when still alive, but it still kind of sucks. The basic premise is that if you've committed a mortal sin you're not supposed to receive communion without first going to confession. So to decide someone can't recieve communion the Bishop is in effect saying "he's committed a mortal sin and not had it forgiven". Of course, sin and forgiveness are all very personal things that most people outside of the individual don't have much knowledge about. Which is why, with only rare exception, Bishops aren't supposed to routinely deny people access to communion. This guy seems to do it routinely, which tends to indicate that he thinks any dissent with the Church's teachings is a mortal sin, and any public dissent must be publicly renounced in order to be forgiven.

As a note: although the actual Catholic teaching isn't aligned with what this Bishop is doing, this has become more and more frequent in practice, which has me greatly concerned. Some days the Catholic Church seems to be slipping further and further from Vatican II. Time for some new theological enlightenment me hopes.

Jacob said...


I willingly acknowledge my ignorance about specific problems in the mortgage market and if you say there are some existing practices in need of regulation, then I'm open to that. But here are my concerns:

1) The national subprime foreclosure rate is about 8%. This is very high. But I see a great risk of over-reacting to these 8% of loans and using them to excessively regulate the 90% that aren't in foreclosure.

2) Many of the proposed remedies take the form of bailouts that will only encourage such risky lending in the future.

3) Other remedies change the terms of mortgage contracts ex-post, discouraging lending to all but the most secure recipients.

There might be some good that comes out new mortgage regulations, but given the options on the table so far I'm very skeptical that the net effect is going to be very positive.

Matthew B. Novak said...

I understand your fears about some of the potential remedies - the huge bailouts are pretty maddening in the way they aid these abusive mortgage companies. And they probably don't do enough to help the victim homebuyers.

But I'm encouraged by the fact that much of the attention has been on the abusive loan types themselves (such as the exploding ARM and negative amoratization loans). Flat out bans on abusive loan structures would be a good thing, as would prohibitions on the yeild spread premium kick-backs that encourage brokers to defraud buyers. Restrictions on the types of loans and the loan making process would be good results.

And if there's any shot at making secondary purchasers liable (there's not) that'd be a good thing too. But no, we want to protect the investors, even if they're knowingly investing in abusive and/or illegal loans.

I'm also not too afraid of the regulations on the small amount affecting the large amount, as you describe in your first point. I don't see anyone overreacting, and instead regulations will more likely target problem mortgages (because everyone wants the functioning mortgage market to continue to function as such); in fact, even the bailouts remedies that are happening really are affecting just a tiny percentage of mortgages. Just more good evidence that there's no reason to really be afraid of overreaching.