This raises an interesting question: What did the lenders know about the borrowers that the borrowers did not know about themselves?
In theory, the people who got loans from the so-called predators had enough monthly income to pay the mortgage plus their other living expenses. The real risk was that the borrowers would become sick, unemployed, unlucky, or irresponsible. Apparently we expect lenders to be better judges of the strangers asking for loans than the would-be borrowers are of themselves. How did the conversation between lender and borrower go in the old days, before predatory lending?
Banker: "Well, Billy Bob, you can afford this loan now, but based on that dumbass hat you're wearing, I give you two weeks before you drink a case of beer and drive your Chevy into a silo."
If a potential borrower has the monthly income to repay a loan, how much external risk should the banker accept? I think it's somewhere in the 2% range. In other words, a good banker should turn down a loan for someone who has a 2% or greater chance of being doomed during the early years of the mortgage, before any equity has built up.
Lenders should be required to assign a doom factor to all loan applicants, like a fortune teller. It would be interesting to know, for example, that Wells Fargo has assigned a 20% doom factor to you. Then you could find out on the same day that you aren't going to own a house, and you have a 1-in-5 chance of becoming a hobo by 2010.
In one of my earlier career incarnations I was a banker. My job for a few years included reviewing and approving commercial loans for doctors and dentists. One day I declined a loan application for a dentist who, according to his recent tax returns, didn't have enough cash flow to repay the loan. My boss at the time reviewed my work and turned the decline into an approval without even looking at the financials. When I asked why, he explained that the borrower had a Chinese name. I questioned the wisdom of this lending procedure and he directed me to the files of delinquent borrowers, challenging me to find any Chinese names in there. There weren't any. I'm not judging, just telling you what happened.
I like the clarity of that explanation, but it seems incomplete. For one thing, there is no discussion of the positive aspects of a financial calamity, for example:
- Rent gets cheaper when housing prices fall. That's a redistribution of wealth from the rich to the poor.
- While it will be harder to get a mortgage for an $800K house, that house is only worth $500K now. That should make it a lot easier to qualify.
- Gas at $4 per gallon is a necessary condition for creating the next economic boom: renewable energy and green technology.
- A good recession now and then is necessary to purge the economy of things that need purging.
- College students are starting to choose technology majors over finance majors, probably because of the financial headlines, and this bodes well for the future.
I also wonder if the Internet will take some of the steam out of a credit problem. The problem is a lack of credit, not a lack of people who want to borrow, or a lack of money to lend. When lending is constrained by geography, you might find that your local bank is unwilling to help you. But with the Internet, it seems we could always find a match between a lender and a borrower, at some interest rate. The people who have money to lend aren't going to be keen on the stock market or real estate for awhile, so there should be plenty of capital for private lending at attractive rates. Arguably, banks are an anachronism anyway. This might speed up the inevitable.
I own some real estate (an empty lot) I have been trying to sell. Every recent offer on the property has included a component of seller financing. I expect to see a lot more of that if bank lending dries up.
And allow me to leave you with a pinch of optimism, just because I can. I call it Adams' Rule of Obvious Calamities. It states that any calamity that is foreseeable by the public at large won't turn out so bad after all. The best recent example was the Y2K problem, where computers worldwide were expected to fail. It seemed impossible that those issues could be resolved in time, but they were.
The problems that hit hardest are the ones that sneak up on you. Our current financial problem is big, but I expect a recession to be mild and even useful, precisely because so much human energy and attention is being focused on the fix.
I don't understand why having something in common with famous folks is supposed to make people feel good, but it does. Heck, it worked for me, and I'm on the list. So I tried to reproduce the feeling by seeing what other lists I am on. I found a few surprises. I listed them at the bottom.
This made me think that a good web site would be "famous people who are like you." It could start with famous people who have the same birthday, graduated from your school, once lived in your town, have the same sort of dog, watch the same TV shows, had your same profession at one time, committed the same crimes, are the same height, played the same instruments or sports, and so on. If you are like me, you will feel comforted knowing there are lots of famous people who have things in common with you. It's a shallow feeling, but a good feeling nonetheless.
The website would be extra cool if you could paste your own photo into the list of famous people, and create a web page, or print it out. Someone please go build that website.
Here are some more of the lists I discovered that include me.
Famous Mac Users (I switched to Windows years ago.)
Famous Unitarians (even though I have never been one)
Famous Mensans (I stopped paying dues in the eighties)
Famous Economics Majors
There is not yet a list of famous people who are CostCo members, but I could be on that list too:
With that in mind, today I saw two articles about human intelligence, as it relates to voting. I suggest you read both, and pause after each paragraph to contemplate the word "doomed." It might make the experience funnier.
Here's the first. This one made me laugh my "ars" off.
This one is almost as funny.
Now go out there and vote. Especially if you are sure you are right!
Yesterday I found myself in a political discussion that included my very lonely Republican friend. Eyes rolled when he claimed the Clinton administration was to blame for the mortgage fiasco. His argument is that during the Clinton era, lenders were pressured by the government, and by interest groups, to loosen loan standards in order to increase minority home ownership. This strategy reportedly worked splendidly while home prices were increasing. You know the rest of the story.
My Republican friend followed up with a link to an article that I have seen twice in the comments to this blog, so I hereby promote that link to my post:
I'm not persuaded by the article, but neither do I discount it entirely. My problem, as always, is that I don't have enough knowledge to make a judgment about it. It sounds credible, but that doesn't mean much.
At best, the pressure to increase minority home ownership was only part of the problem. The executives in the mortgage industry must have known that the increased lending activity would make them even more stinkin' rich than usual, at least short term. In the long term, they would be living on their yachts. Without the greed angle, the executives might have better resisted what they knew was a risky path.
Second, as Warren Buffett said when he saw all the complicated financial derivatives based on mortgage activity, "My eyebrows are huge!" He didn't actually say that, but he did warn that trouble was brewing in the derivatives game long before it was obvious to people with normal sized eyebrows. So the exotic and complicated financial derivatives market made a bad situation worse, and that had nothing to do with the liberal agenda.
If there is any truth to the idea that the Clinton administration was a major cause of the mortgage crisis, you have to ask yourself why the media is mostly ignoring that angle. If it isn't true, does anyone have a link to a rebuttal?
In other words, public opinion is starting to line up with the opinion of economists. Did the Dilbert Survey of Economists have any impact on that move?
The biggest reason for the move in the polls probably has to do with McCain's support of Republican policies that are widely seen as the source of the problem.
Second, the financial problem is complicated. The only thing we ignorant voters know for sure is that we want someone with a high IQ to sort out this mess on our behalf. No matter how much you love McCain's philosophy, track record, moral compass, common sense, or anything else about him, he doesn't come close to Obama in pure brain power. For most issues, that probably doesn't make much difference. For an issue of this complexity, it might.
Third, I think the Dilbert Survey of Economists probably had some impact, at least with the free thinkers of the Internet. A lot of people, including me, assumed before the survey that most professional economists would lean Republican. The fact that so many economists are Democrats, and support Obama, is both a surprise and hard to ignore.
I wouldn't have funded the survey if I didn't have this blog. And I wouldn't have this blog if people didn't leave comments. So if the Dilbert Survey of Economists ends up changing the world, and you have ever left a comment here, you were part of something important.
User Shaqbark had a great comment about the notion that the rich don't have enough money to put a dent in the financial problems:
[The "rich" don't have enough money to make everyone else rish. Confiscate all the wealth of the wealthiest ten percent and I'll bet it would not pay our debts for a month. Then what?]
The United States is one of the richest countries in the world, and in 2000, the mean wealth was $143,727 per person. In the United States at the end of 2001, 10% of the population owned 71% of the wealth, and the top 1% controlled 38%. On the other hand, the bottom 40% owned less than 1% of the nation's wealth.
Hence, the rich actually DO have enough wealth to make EVERYONE in the US rich - if it were possible to redistribute this wealth without causing massive inflation, which it would not be.
One of the best-kept secrets of the rich is that being wealthy (not just having lots of zeros in your bank balance, but being able to have a life of leisure, space, and privacy) requires other people to be poor.
When famous bank robber Willy Sutton was asked why he robbed banks, he reportedly replied "Because that's where the money is." And when our next President, no matter who it is, and Congress try to unscrew this financial mess, they will quickly realize two things:
- It will require a crapload of money.
- Poor people don't have money
Like a group of Willy Suttons, they will come after the rich because no one else will have any money. The fairness part of the debate will become moot.
The problem is that the rich are the only group powerful enough to stop the government from raising their taxes. So my question to you today is this: What is the best way to confiscate money from the rich?
There must be some way to give the rich a spoonful of sugar to make the medicine go down. Somehow the impression of unfairness has to be mitigated so they comply willingly. Allow me to jump to some bad examples to make the point.
Suppose the next President made the following pitch. "This is a once-in-a-century cash crisis. To get us through, we are going to tax the rich heavily for the next ten years. In return, the rich will each get two votes in every election."
Now remember that the spoonful of sugar can be more psychological than economical. A double vote is the one sort of thing a rich person can't already buy. And it wouldn't have much impact on democracy because there aren't that many rich people. Everyone gets something. The poor get money, the rich get slightly more influence.
Or suppose the rich were required to fund alternative energy projects directly, and in return get some equity, like a mandatory venture capital model. I would much rather give my money to a specific venture with a tiny chance of payback, as opposed to the general tax fund.
I would also feel okay about a tax increase if 100% of the extra money went to buy healthcare for those who couldn't afford it, and I knew how many people that was. For example, if I got a tax bill from the government with a specific dollar amount, and next to it an estimate of the number of people it will give healthcare to, I couldn't feel so bad about it. I'll only get pissed if my money goes into some general fund to buy bridges to nowhere.
Or suppose Congress makes a deal with the rich, something along the lines of raising their taxes only if the government reforms something in particular that is widely agreed to need reform. I wouldn't mind paying extra taxes if it inspired the government to be more effective or efficient going forward.
Or how about requiring the rich to buy foreclosed houses, with a requirement that they rent them to others for the next 15 years? The rich can qualify for the lowest loan rates (or pay cash), so the credit problem would be solved. While the rental income wouldn't cover the loan and other costs, there is some potential that the investment could turn at least neutral when home prices rise in the future. Low income people would get extra places to rent, and rich people wouldn't feel so screwed if they owned property that had some chance of breaking even. And banks would be solvent.
And suppose you require the rich to install solar panels and other energy solutions to each foreclosed home they purchase, and optionally roll that expense into the mortgage. That would create lots of jobs and reduce national energy consumption at the same time.
In business school we learned that you can usually reach a deal whenever two parties put different values on things. Do you have any better ideas for how the government can confiscate money from the rich and make everyone happy about it?