patrick.net

There used to be a joke that "A conservative is a liberal who got mugged and liberal is a conservative who got arrested."

Adapting this to be the punchline for this topic is an exercise for the reader. :-)

SP

I was talking to a friend about this bail-out topic and it suddenly struck me that there is an excellent analogy for this.

Imagine if the government did for everyone gambling in Las Vegas! Would it be better for the common good? Would it even be better for the gamblers in the long run?

How is the wall street any different?

When it comes to the market, don't you need to have a loser so you can identify who the winner is ? I mean, what we call money is just a number that is used for keeping score. The smartest guys in the room can only play their games for so long before it all unwinds. Just once I would like to see the financially responsible win. Let's hope.

One might consider this an extension of Randy's point above---I'm often amused at how conviniently people define "financially responsible" in their own image. Who's to say that the savers are the financially responsible ones? Defined in traditional measures like putting down a 20% downpayment, that's the cultural notion of "responsible", as defined by the last few decades. In other cultures and time periods, a 20% downpayment would probably be seen as ludicrously small. Today maybe it's too much.

Perhaps the bulls, brokers, gamblers and hedge fund managers think they are the financially responsible ones. Instead of piling up money in dead assets, they are investing in the economy, which in turn creates wealth and jobs. They deserve to see that success protected. And there is nothing wrong with lobbying the government. It's a democratic republic, after all---every citizen can have their voice. Should wealthy people not exercise their additional influence simply because Joe Saver lacks such means?

Reserve your moral outrage for the people who lied on loan applications or deceived their clients. Getting busted for taking excessive risks is just a part of capitalism. But you can't expect the busted parties to just bow their heads and shuffle out quietly. Fighting to keep your assets is part of capitalism, too. So long as they don't break the law, that is a proper functioning of our economy.

Unfortunately, we will probrably have enough of a bailout to stop houses from falling in price to the proper level. This artificial higher level will increase house costs for future buyers/renters, since the pressure to sell or rent out will be relieved.

If new loans require down payments, that will put take people out of the buyers pool and add them to the supply of renters. Thus rents will go up for the houses that are available for rent.

People may have to realign their thoughts on home expense. A house cost that was typically 1/3rd of a families take home pay will now become 1/2 of the take home pay.

I know that higher mortgages should lower demand for house purchases and thus add to homes available for rent, but this is the factor I think a bailout will suppress. I say this because I live in a 1 million population metro area that has 5 large military bases. The military quarters allowance acts as a mini-bailout for this area. Asking rents here have increased, homes that were $1400 last summer are now $1800.

Brand,

Interesting point of view.

It reminds me of a newspaper article about credit cards. The article refuted the idea that people who paid off their credit card bills every month were acting responsibly. Instead, such "thrifty" folk were said to be merely freeloaders, using for their convenience a system supported on the backs of the minimum payment crowd. Exploiters. if you will.

Brand Says:
Defined in traditional measures like putting down a 20% downpayment, that’s the cultural notion of “responsible”, as defined by the last few decades. In other cultures and time periods, a 20% downpayment would probably be seen as ludicrously small.

Right. The ancient Aztecs required 30% down, and the Babylonians required 40%! (However, they had a base 60 numbering system which makes comparisons more difficult.) Further, the Trobriand Islanders require a pigskin full of conch shells AND high tide insurance, and that's no small potatoes...

The word 'mortgage' is feudal Anglo-Norman meaning 'dead wage' basically, an amount that was going to pay off your pitiful homestead and 1/4 acre farming lot to the guy you bought it off. The borrowing aspect has come about as banking products have evolved, and the 20% is a prudential amount set by the banks to cover their asses in the event of a property downturn of up to 20% where they also have to foreclose on you and they can therefore recover 100% of their costs at your expense. The banks have adjusted their risk profiles over time to the point today where we see 0% deposit loans with self-reported income and no docs, both inflating prices and setting up a credit disaster waiting to happen... and no-one in the banking or govt finance sector saw any of it coming! Amazing.

HeadSet: My objection is mostly to the emotion and moral overtones of these conversations. In your example, if paying off the credit card debt was the highest financial return activity for that person, then they made the financially responsible choice. They have certainly not deceived anyone by paying off the balance. However, a person carrying a balance hasn't deceived anyone either. They have simply made a different choice. We can argue the merit of that choice based on math and common sense, but not on moral grounds.

"The word ‘mortgage’ is feudal Anglo-Norman meaning ‘dead wage’ "

I noticed the "mort" (dead) in "amortize" also. I assumed it meant the loan "died" after a series of payments.

Getting busted for taking excessive risks is just a part of capitalism.

Agreed.

But you can’t expect the busted parties to just bow their heads and shuffle out quietly.

And why the hell not? When I went close to 4 years with mainly marginal/temp work in the early 90s recession, I ended up with thousands in late/collection fees tacked onto my already large student loan balance, which I had to repay with interest. I faced what (at the time) appeared to be lousy future prospects of ever paying it off, and felt incredibly depressed and quite hopeless.

At the time, I was told by many a more fortunate Boomer/Silent Gen (who themselves had little or no college loan debt at my age) that I should "suck it up" and "stop whining". I was told that learning to repay my debts was a character-building experience and would teach me the downside of leverage. In the end, of course, I did just that, and I later realized that they were basically right. Took me 11 years and much in the way of fogone gratification, few luxuries like eating out/movies, vacations, no new cars, etc.

If I had to make good on my debts, why should parasitic motherf*ckers like hedge fund managers and Ponzi scheme specuvestors get a free pass courtesy of taxpayers?

"they are investing in the economy, which in turn creates wealth and jobs. They deserve to see that success protected.

I hope you were being tongue-in-cheek with this. What "wealth" have these debt-pushing parasites created? What product/service have they produced that was of any benefit to society? What have they accomplished except lining their own pockets via asset speculation, with the added "benefit" of bankrupting a sizeable chunk of the middle and working class?

You were joking here, right?

here used to be a joke that “A conservative is a liberal who got mugged and liberal is a conservative who got arrested.”

Even more OT, but a variation on this I've heard is that, "if you're young and not a liberal, you're heartless. If you're old and not a conservative, you're stupid."

The word ‘mortgage’ is feudal Anglo-Norman meaning ‘dead wage’

I've heard that, too. However, I was always hoping that the real meaning for "mortgage" re: mort = death was that you paid the thing until you were basically dead.

Brand,

My post was intended to be in the same spirit as your post.

Instead of logos, the newspaper article used good ol' ethos. The article claimed it was immoral per se to pay the balance each month.

HARM says: If I had to make good on my debts, why should parasitic motherf*ckers like hedge fund managers and Ponzi scheme specuvestors get a free pass courtesy of taxpayers?

Let's separate the emotional aspect from the financial mechanics. You can't argue that your life sucked thanks to your finances, and thus all financial failure must result in peoples' lives sucking. Sometimes people get lucky and sidestep a bullet, and you can't really begrudge them that.

From a pure financial mechanics perspective, if you had access to a method of curing your debts via your contacts and influence, would you not have done so? These guys have the importance and means to tap their powerful friends for favors. Unless it's outright corruption, what moral flaw exists there? The printing presses don't run for Senor HARM, but they might run for Bernanke's buddies. Is that wrong? Money is just a tool, after all, and it can't be "fair" to everybody at every moment ("fair" in quotes because that's subjective anyway).

HARM says: What “wealth” have these debt-pushing parasites created? What product/service have they produced that was of any benefit to society? What have they accomplished except lining their own pockets via asset speculation, with the added “benefit” of bankrupting a sizeable chunk of the middle and working class?

They used their cleverness to generate very large returns on their investments. Isn't that what all of us aspire to financially? A great many VCs, private equity firms and hedge funds have invested into sectors like biomed, tech, industrial, financial and real estate. Those investments create jobs and keep the economy moving forward. Sure there are a few real jerks, but for the most part these guys are straight-up investors who become employers and producers in the U.S. economy.

I fail to see how anyone has "bankrupted a sizeable chunk of the middle and working class." You're going to have to fill me in there.

Brand :

Appreciate your contrarian point of view. But pimping houses to each other does not CREATE real wealth, only an illusion of wealth.

Now how much of the responsibility rests with borrowers, mortgage brokers, brokers of MBS, buyers of MBS, rating agencies, politicians, Fed etc will be an eternal debate.

It was all probably perfectly legal. If no one broke the law, no one gets punished. Clamoring for the bail out is also their legal right. Ridiculing them as cheap un-capitalistic is our right and we are right in doing so.

@Brand,

So "might makes right" then? The end justifies the means, especially if your rich/well connected enough to be above the rules and basically buy your way out of debtor's prison?

Hmmm... questionable ethics, there.

I fail to see how anyone has “bankrupted a sizeable chunk of the middle and working class.” You’re going to have to fill me in there.

In case you haven't heard, a lot of people out there took on some dodgy mortgages to buy houses they could not afford --some by choice, others due to questionable bait-n-switch tactics and/or outright fraud by commission-hungry brokers. Foreclosures and bankruptcy filings --despite so-called BK "reform"-- are up and rising. As we get further into the current multi-year cycle of option-ARM resets, we can reasonably expect these levels to rise even higher.

A great many VCs, private equity firms and hedge funds have invested into sectors like biomed, tech, industrial, financial and real estate. Those investments create jobs and keep the economy moving forward.

Conflating actual entrepreneurs (like Randy) who add real value, create real jobs and build real products with toxic-debt pushers insults the real entrepreneurs. These assholes (brokers, neg-am/NINJA lenders, MBS/CMO pimps) are the Wall Street equivalent of neighborhood drug pushers.

Changing tracks here a little bit.

Isn't Evergreen area of San Jose part of Bay Area ? It was another "hot" area which the rich Asian immigrants were supposed to keep high forever. It seems to be in a bit of trouble though.

The inventory id over 500 now ! It never went above 400 in 2006. ZipRealty shows over 100 reduced listings for prices less than 1M.

One sad case is for MLS 743115.
Desperate situation. Running out of time. Divorce sale huge house with a pool and spa.

And an interesting case where the cut the price by 40K after one week on the market. MLS 744952.

It's time to officially declare Evergreen as not part of BA. Prices can never fall in BA.

Brand,

Are you just jerking my chain here/playing devil's advocate, or are you being serious?

Anyone else seeing rents rising in their area?

If so, another reason not to have a bailout.

Brand subscribes to the 'every man is an island, entire unto himself' belief system that never questions the logic of where the money comes from, or the utility of the work performed, or the question of equality of human reward and a stable and decent social settlement. Fortunately, other people do think of these things, which prevents societies falling apart totally at the seams.

skibum Says:
Even more OT, but a variation on this

Actually, the joke I referred to was very much on-topic to this thread about opportunistic capitalists.

Ob-housing:
12973 PIERCE RD, Saratoga, CA 95070
Price Reduced: 07/24/07 -- $1,978,000 to $1,928,000
Price Reduced: 08/03/07 -- $1,928,000 to $1,850,000
Price Reduced: 08/15/07 -- $1,850,000 to $1,780,000
Price Reduced: 08/16/07 -- $1,780,000 to $1,699,000

Nearly 300K drop in 45 days on the market. Are sellers finally catching on?

SP

And here's another one - a 6 acre vacant lot on Peach Hill Road, adjacent to Villa Montalvo arboretum.

Price Reduced: 02/10/07 -- $3,500,000 to $2,500,000

SP

The sale history on the 12973 PIERCE RD, Saratoga, CA 95070 is 10/31/1996: $480,000.
The 10yr graph shows that the value was $600,000 on Jan 05. How the heck can it be valued at $1.6 mil in another 2 yrs??

@Brand

Say a developer likes your choice piece of real estate that you are living upon. Convinces your city to evict you under eminent domain, paying you only what you originally paid 10 years ago (so you lost out on appreciation and inflation gains, not to speak of speculative gains). By your thesis, them's the breaks, the developer simply used legal avenues of influence to equitably pursue their interests. By what standards and values do you say this scenario is equitable?

If there is a bailout, then I will know as a rational investor that the American financial system has truly taken leave of its senses to assign ever-increasing valuation to the simple activity of trading houses to each other irrespective of fundamentals. And I'll feel even better about my wife's and my decision to leave, start a new business offshore, shift out of dollar-denominated assets in our investments, lay low, and pursue multiple citizenships, while sitting out the hopefully temporary fiscal insanity that grips the nation. Remember, you wouldn't even be able to so glibly talk about the equitability of a bailout were it not for the American dollar's reserve currency status. Lesser currency regimes that talk of such imprudent ventures are thoroughly and roundly thrashed in the FX markets pronto, so I have no idea where you get the notion that the dollar regime can get away with the same.

My business is having its best year ever this year, and there are increasing confirmations that I've developed a niche that is relatively recession-proof (as if successfully starting the business in the middle of the dot bomb wasn't verification enough), but that doesn't blind me to the steady erosion of the middle class. If wage to housing expense ratios and other fundamentals don't re-align, then the consequences aren't going to be pretty for an economy so heavily dependent upon consumer spending. A bailout will only exacerbate the erosion.

StuckInBA says: It was all probably perfectly legal. If no one broke the law, no one gets punished. Clamoring for the bail out is also their legal right. Ridiculing them as cheap un-capitalistic is our right and we are right in doing so.

Stuck, I believe you understand what I am saying, although perhaps we disagree. While people may have been financially irresponsible during the bubble, I do not feel that is the same as a moral infraction. Foolishness is not necessarily immoral. Likewise, I do not think that offering liquidity to big banks is a moral issue. It is one of financial responsibility within the nation. Our leaders must decide who gets the money and who doesn't. There will be some immoral behavior during that process, but the vast majority of it will be with good intentions. I think we can scoff at foolishness, but I get annoyed when fools are automatically painted as morally stunted misanthropes.

HARM says: So “might makes right” then? The end justifies the means, especially if your rich/well connected enough to be above the rules and basically buy your way out of debtor’s prison?

In effect, I proposed that from the morality point of view, the end justifies the means UNTIL you do something truly immoral. Asking for money is not immoral. Providing money is also not immoral until it seriously affects another moral obligation.

I happen to think many such actions are unwise, but foolish is not the same as evil.

In case you haven’t heard, a lot of people out there took on some dodgy mortgages to buy houses they could not afford –some by choice, others due to questionable bait-n-switch tactics and/or outright fraud by commission-hungry brokers.

The former is simply foolish, the latter immoral. The latter should be punished with the full pressure of U.S. criminal and civil law. My point is simply that being stupid and buying a house that you can't afford is not immoral. It is obviously foolish, but those are not the same thing. Read my reply to Headset. I am not disputing that a lot of fools did financially foolish things in the last years. I am simply disputing that all the fools are uniformly bad people, and that our tremendous wisdom gives us the right to judge them from a moral standpoint. I am extremely tired of the self-righteous attitude of people celebrating others' folly and the resulting humiliation and pain.

Sidestepping a financial blunder might make people here wiser. It does not necessarily make them morally superior.

Brand's perspective is reasonable, and I don't think anyone should get exercised about out. It's just that he's arguing an abstract point from a relativistic philosophy point of view. I'm a bit surprised DS doesn't see the irony in that, what with relative bias in narratives and all. After all, isn't it the ruling regime that defines the normative, by definition.

The problem with Brand's type of argument is that they difficult to refute on an equal footing. But they also strike many people as viscerally "wrong". So the counter arguments are practical in nature, and you end up with people getting bent out of shape when they're comparing apples to oranges anyway.

The credit card example was a perfect one. From the credit card providers' point of view, people who pay their balance in full are categorically free-riders. They not only cost the credit card company profits (boo hoo), but they cost the merchants transaction fees, and they cost all the other credit users their aggregate portion of burden. Add in reward points or airline miles and the burden spreads further. But from the perspective of the credit holder who pays in full -- like I admittedly do and have done for years -- they are anything but free-riders. They're responsible/smart/clever/moral/etc.

And the line is somewhat arbitrary. Most here would probably say that paying your credit cards in full every month is just plain smart and not at all immoral or otherwise unseemly. But I suspect many of us would also say that someone who habitually transfered money from card-to-card before paying it off only to create free rewards was somehow working the system and exploiting a loophole. (I know you can't do this much anymore, but a few years ago you could cycle money through 3-4 cards every couple months quite easily).

I learned this lesson when I was a kid in bumpkusville Ohio. My friend and I figured out a loophole in a Dairy Queen contest that effectively allowed you to go get a free banana split every hour, after buying the first one. We did this one Saturday a few times, then we started getting them for other kids and showing them how to do it too. The owners canceled the contest when they ran out of bananas. In the end I ended up losing most of what I'd eaten and the owners refused to run any more contests. I'm not sure who was more clever.

apostasy says: Remember, you wouldn’t even be able to so glibly talk about the equitability of a bailout were it not for the American dollar’s reserve currency status.

It's only money. The rich already have massively more of it than I. That was true before a bailout, it will be true after a bailout, and it will even in the absence of a bailout at all.

What I consider quite "equitable" is the fact that I live in a country with hugely better healthcare, technology, nutrition, infrastructure and entertainment as compared to any previous generation. I can vote, write and worship as I please; I have a considerable list of human rights. As long as that progress keeps steadily marching along, I have relatively few objections to the obscenely rich getting even richer. If they dodge a couple financial bullets by having the right connections, it doesn't bother me until they break the law.

Somebody posted an article about how the middle class chases the appearance of luxury, effectively lowering its own standard of living in the process. I am not one of those people. In fact, I've posted many rants about people nearly bankrupting themselves to drive a Lexus, hold elite club memberships and install granite countertops. I don't believe that the rich people in this country are shafting the middle class, so much as we're shafting ourselves.

Let the dollar erode, I guess. Strong dollar and weak dollar each have their own benefits, as do many other financial forces. I do object to your point about housing costs getting too expensive. Our houses have gotten huge and stuffed with luxuries compared to all previous centuries. People don't need such oversized structures, and if the middle class is eventually faced with that understanding, I will not be shedding any tears.

Randy, thanks for pointing out the futility of arguing specifics vs. an abstract philosophical view. Perhaps that will frame the debate differently.

Put succinctly, I think that rich people might be able to use their influence to more effectively save themselves from their financial blunders. While that seems intuitively "wrong" to a lot of middle class people, I question if it is truly immoral by definition.

"I happen to think many such actions are unwise, but foolish is not the same as evil."

There are cases in which foolishness is not the same as evil. However, large-scale foolishness is indistinguishable from evil. It is not always possible to separate the two.

"Put succinctly, I think that rich people might be able to use their influence to more effectively save themselves from their financial blunders. While that seems intuitively “wrong” to a lot of middle class people, I question if it is truly immoral by definition."

It is good to question this, I think. Given that all things are connected, it is also valid to wonder who pays when the rich use their influence to save themselves from financial blunders. I doubt the rich necessarily imagine doing any harm when they take steps to keep life as it should be for themselves and those they love. But what are the unintended consequences? Maybe there is less money in the government coffers to provide health insurance for poor children, and some kid dies when an untreated ear infection becomes meningitis.

The above may not be the best example, but in general, we Americans are not so fabulous at considering the consequences of our actions. And I think that the unwillingness to do so may in fact be a moral failure.

Phil,

ignore the zillow graph. Since it doesn't have the year-by-year data of neighborhood transactions sorted out, it just plotted the graph randomly.

The Pierce road property is grossly over-priced at $1.7M even based on today's "fair market value". A comparable property in Saratoga sold for around $1.5M before the jumbo loans got yanked.

If I am not mistaken, this property is situated very close to a cemetery. That will definitely discourage all the Asian buyers.

Graveyard next door? Wow quiet neibors that won't complain!

OO said:
If I am not mistaken, this property is situated very close to a cemetery. That will definitely discourage all the Asian buyers.

As far as I can tell, there isn't a graveyard around it. Here is the G!Map for what it be worth.

http://tinyurl.com/2gx77e

Agree on the overpriced angle though. It seems to have recently (Aug 8) sold for 1.3M! The lot appears to be a narrow, triangular sliver of land, not particularly desirable.

SP

The credit card example was a perfect one. From the credit card providers’ point of view, people who pay their balance in full are categorically free-riders. They not only cost the credit card company profits (boo hoo), but they cost the merchants transaction fees, and they cost all the other credit users their aggregate portion of burden.

It's probably tangential and the least important part of what is being said by way of analogy, but I don't actually see anything wrong for anyone paying off a credit card 'early'. The rules of credit card use created by the bank allow for early pay-off, 55 interest-free days, or whatever, so there is nothing 'immoral' in doing so. It's not an interconnected social system of wellbeing, it's a product from a bank. They know that 1/3 of customers will pay early with no interest, 1/3 with some interest, and 1/3 will carry huge balances forever and get gouged, which is up to the individual customer to manage. Certainly the interest payers are not subsidising the early payers per se in the business model. Given the framework of use knowingly created by the bank, it's not even using a loophole. I also see rotation of monies owed across credit cards as allowable and smart use of a facility -- it's arbitrary how much you will 'owe' the bank in interest anyhow, depending on your circs, so you may as well minimise it.

I'm struggling with the credit card analogy with the housing market and ethics, my generalisation circuit isn't working very well today. But it doesn't seem a very useful analogy, and I reject the other arguments that 'it's a democracy, so the rich have disproportionate influence' when a representative democracy is more or less defined as 'one person, one vote', forgetting the existence of lobbies, donations and various other distortions of democracy for the moment.

I'm not really in the loop on proposed bailouts and reasons why. I'm concerned that many of the takers of the subprime loans that were offered were relatively disadvantaged minorities who often had the loans misrepresented to them, based on some US TV coverage I've seen. These people are being hurt more than the relatively well off. And only a small % of mortgages have been issued in the last 5 years of all the mortgages there are, also, so not all mortgage holders are suffering equally -- that would make a bailout cheaper. Govts are struggling with the idea of whether house values should come down, whether they want the blame for dysfunctions in the housing market or perceived lost value from boomers, etc, because they fear it will hurt them at election time, which makes it harder for them to decide on an appropriate course of action.

"And only a small % of mortgages have been issued in the last 5 years of all the mortgages there are, also, so not all mortgage holders are suffering equally"

That may be true, but enough mortgages and refis have occurred to run up house prices. Although you say a bailout may be "cheap", it will still have the effect of keeping house prices less affordable for future buyers.

Temporary OMO: Fed adds $2.00 billion with overnight RP

AP
Home Prices: Steepest Drop in 20 Years
Tuesday August 28, 9:58 am ET
By Vinnee Tong, AP Business Writer
S&P Says Housing Prices Fell in 2Q by Steepest Rate Since Its Index Was Started in 1987

NEW YORK (AP) -- U.S. home prices fell 3.2 percent in the second quarter, the steepest rate of decline since Standard & Poor's began its nationwide housing index in 1987, the research group said Tuesday.

The decline in home prices around the nation shows no evidence of a market recovery anytime soon, one of the architects of the index said.

MacroMarkets LLC Chief Economist Robert Shiller said the declining residential real estate market "shows no signs of slowing down."

@Headset,

Well I can't say as I've seen rents rising in our area but they have stopped falling! At least the "asking rents" and as you can imagine I have a theory on this. Simply put the C/L posters for most PNW markets have come to the realization that "just any" rent won't keep their specuvestment afloat. In response to even a "flat" market and their state of arrears "just any" rent won't cut it. (Neither will "just any" selling price!)

Look, I'm already ____ months behind, I've advertised this thing... through a realtor (first) then on C/L and my mailbox is stuffed with threatening letters from law firms I've never heard of! Now either I'm going to get what I need to break-even on the sale (and Lord willing out from under this thing) or I need a rent payment that will give me a shot at working this out with the lender. So I might as well take my chances with getting rid of it at break-even or just 'let it go' back to the bank!?

How else can we explain all the vacant vacation homes in areas "just outside of Bend, OR" continuing to sit vacant? At this point, it's "all or nothing".

Politicians in Washington have launched a debate over whether the government should step in to help homeowners facing a wave of foreclosures expected to hit this fall. The foreclosures are causing problems for up to two million potential voters with adjustable-rate mortgages. As foreclosures rise, Los Angeles officials are bracing for problems, such as mosquitoes breeding in stagnant swimming pools. Squatters are already moving into empty homes. "If you know what you're doing, you can get six months in a place with a kick-ass view," said Los Angeles police officer Chris Ragsdale.

U.S. consumers are defaulting on their credit cards at a sharply higher rate than in 2006, according to a report in the Financial Times. The report, citing Moody's, said credit card companies are writing off 30 percent more payments. Moody's said the higher defaults may stem from the subprime mortgage crisis.