patrick.net

@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.

PermaRenter,

I think you're on to something here. The article I'd read in The Economist shared the view that the election may well hinge on having the "the right stance" on the subprime/bailout issue more than anything.

As far as using mosquito nesting as grounds for a bailout... well that is simply ridiculous. Drain the pool, o.k?

I'd like to point out that I wasn't the one who proposed the credit card example. Headset was remembering an article he had read once. My conclusion is that I can draw no moral conclusion about a person based solely on the information that they do (or do not) pay off their credit card bills on time. Hence I can have no particular moral indignation towards someone who carries a balance.

Now whether or not I think that is a fiscally sensible thing to do... IMO carrying a balance tends more towards foolish than wise. But it is not immoral.

The credit card example is very analogous in that it proves that the distinction between "financially moral" and "financially exploitative" is arbitrary. DS says credit cards do not constitute a social system. Given that these devices are the primary force behind 2/3 of the US GDP, I'd say they are as much a contributor to the "social system" as housing. There are a couple of other issues:

* credit card companies cannot discriminate broadly, so in a practical sense they cannot exclude monthly pay-off users; similarly they cannot charge an annual fee only to low/no balance users or a different fee to those users. This was tried a few years ago and reversed in a big class action suit.

* low/no balance users provide less contribution to marginal revenues.

* merchants pay transaction fees irrespective of whether the buyer was a low/no balance user or a high contribution user.

* Credit card companies require $X in marginal revenues or they will exit the business.

Therefore: credit card companies shift the burden of contribution towards their minimum marginal revenues to balance-carrying users. These users also correlate strongly with lower education, lower incomes and lower total wealth. Further, since merchants must pay incremental transaction fees for users who are not contributing to the cost structure of the system, they pass this cost through in terms of price inflation. And price inflation affects consumers proportionally according to the same above correlation, worsening the real burden paid by the non-free-riders.

This is meant to highlight the problem with making broad moral judgments about things financial or economic. Someone said it well above: financially moral is whatever *I'm* doing, and financially irresponsible is whatever *you're* doing.

FWIW, I'm seeing the bailout vs. no bailout issue as a major election issue for me. I have not been in love with the choices of the Republican administration of the last several years, so my knee jerk reaction would have been to vote Dem in the next election order to clean house a bit. However, the Democratic Congress has been so indecisive and pathetic that I'm not sure I want more of that, and most of the Democratic candidates would like to raise my taxes so that people who can't keep track of their finances can keep a house they can't afford at the expense of everyone else, but most especially at the expense of all the young families who can't afford to buy a first home in this market. Being a big fan of personal responsibility, I just can't stomach that.

Sigh. None of the choices are looking *good* here.

Credit cards constitute a private sales tax of 2-4% on each and every transaction you do every day,

I am baffled that one can even think that this obvious forced-upon-us margin-skimming scheme can be used as a backdrop for a discussion of financial morality. I'm even more baffled that one can even think that it is "immoral" or "freeloading" not to "do ones duty" and pay interest and financial charges on top of the 2-4% transaction fee that the company already collects.

Next someone is going to tell me that it is immoral to try and break he realtwhore 6% monopoly as well.

"Buyers don't pay transaction fees, merchants do".
(add big load of sarcasm here).

The credit card example is very analogous in that it proves that the distinction between “financially moral” and “financially exploitative” is arbitrary.

The Market is amoral. It is futile to assign ethical value to economics. It is everyone's responsibility to maximize his own gains. That's pretty much it.

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.

This is the crux of the issue for me --thanks, DS. And since we're also debating philosophical abstractions vs. real-world pragmatics, let's also consider what ideals our republic was supposedly founded upon:

1. "We the people" (not we the rich and privileged) and "consent of the governed".
2. Explicit rejection of feudalism, monarchy and class-based government.
3. "All men are created equal" = equality of opportunity (not outcomes), which can roughly be defined as "meritocracy".
4. "in order to form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare" = acknowledges there might be some collective social goals worth striving towards (universal literacy, education, public safety, general prosperity, ending hunger, poverty, etc.)

I'd say that "let the rich buy their way out of anything they want" violates both the spirit and the letter of those founding principles. And, for the record, I don't believe 'legal' equates with 'moral' 100% of the time. Not only do the rich and powerful have more options to evade consequences for actual bona fide crimes they have committed, but they also have a much greater-than-average say in what specific laws get passed. Look at your typical K-Street lobbyist. Whom does s/he represent? Working class people, or billionaires and multinationals?

Either philosophically or pragmatically, the extreme laissez-faire mentality breaks down for me.

HARM, HARM, HARM, How naive and idealistic of you!

I think my idea, shareholders of the cities, holds more promise.

One Dollar of Tax Paid = One Vote

I’m even more baffled that one can even think that it is “immoral” or “freeloading” not to “do ones duty” and pay interest and financial charges on top of the 2-4% transaction fee that the company already collects.

I'm baffled that anyone would be baffled by this. Since credit card companies are not allowed to freely choose which customers they accept our society has already determined that there is more at stake here than simple "libertarian" personal responsibility.

Otherwise credit card companies would simply be allowed to exclude or charge other fees to "free riders". Then your baffledness would be founded. But so long as we regulate credit card companies to be non-discriminatory in pricing and selection, it is possible for some participants to shift their burden to others.

Whether that is "fair" or not is in the eye of the beholder, even if you're the beholder.

I have a sexier name in mind: Market Democracy :)

One Dollar of Tax Paid = One Vote

Sounds good but then you've created a direct-path by which those who control tax policy can engineer elections. With deferred taxes alone I can imagine a dozen ways to concoct a system that guarantees single-party rule.

Randy, there is no perfect solution. ;)

A better way: just get the government out of as many unrelated businesses as possible. This way, the appearance of democracy will be intact and The Market can still operate freely.

With deferred taxes alone I can imagine a dozen ways to concoct a system that guarantees single-party rule.

I see wealth as reflection of power. Throughout history, wealth tends to consolidate, despite minor occasional disruptions like revolutions.

Power too tends to consolidate. Eventually, single-party rule will return, at least in effect.

Are there real differences between the two parties in the US?

Randy :

I agree with you that since we monitor/regulate credit card companies, and they don't have the choice of canceling cards (or charging a fee) for those who pay it off every month - there is a shifting of burden.

But they can charge annual fees to cover these expenses. Some cards do. Many used to and competition forced them to reduce/eliminate the fees.

Also they definitely need at least some customers to pay a lot more than minimum. Else they will have a cash flow problem. So although people like me don't give them a boost in profit, we help them with the cash flow so that they can earn the profit from people who carry a balance. It's arguments like these that create the problem with the analogy.

Nevertheless, I am convinced that the behavior of people who made bad loans and who are now begging for a bail-out are immoral. It may be legal to behave this way, it may be an expected way to behave this way for most. That hardly makes it moral.

Are there real differences between the two parties in the US?

Yes. They each have different cartoon animals as mascots.

Red’s Eats in Maine
Funny you should mention them as we just passed by there last week. I have returned from my hiatus; what did I miss? A bank run, nice... Thankfully, I withdrew some pocket cash before leaving as it would have been quite disconcerting to have my Wells Fargo account "locked down" while on vacation.

On the real estate front, still a lot of for sale signs in the area where I was staying. The property next to my inlaws place is still for sale (on the market for at least two years). I would say the the market probably peaked in their locale around 1-2 years ago. The house was inherited (I think) 2+ years ago, and I'm sure the daughter saw (and is still seeing) the property as a gold mine (after all, we can't just give it away). One has to wonder after how many years does the maintenance and various other carrying costs finally get to you (give it another five years of stagnant to falling prices). And, of course, it goes without saying, this place is special: it's an island, so they're not making any more land (pay no mind to the collapse of the the vacation/second home market). Anecdotally, it seems that ferry traffic may be down for this time of year... of course, this just means that folks went home early (not that there actually may be fewer people visiting :-) )

I only forced one person to listen to my REIC rant as I explained the "securitization food chain" and how everybody involved had an interest in keeping it going... Didn't have the heart to pull out the CS ARM reset chart.

SF seemed to take a nice hit (pdf alert) with the June Case Shiller Index numbers (6-7% annualized). My favorite city to watch, though, is Miami. They rose the highest, had the most staying power.... and of course, are falling hard (down 1.7% month-to-month). Will be interesting to watch Boston as they are being pegged as the canary in the coal mine -- now being monitored to see if they bird is able to breathe again. Oh, and Stumptown continues to show relative strength as their numbers are still positive...

O.K, we can argue about, is it ethical, legal, moral but what stands out most in my mind... is it embarrassing?! Should Bill Gross (who btw was dancing on equity traders graves barely 3 short years ago) should feel humiliated by his own comments? My guess? Yes.

SO... just b/c something *isn't* unethical, illegal or immoral certainly doesn't mean it can't be as embarrassing as f@ck! :)

So DinOR,

What you mean is that instead of writing to "The Ethicist" guy in the NY Times about these guys, we should be writing to Miss Manners?

EBGuy,

Glad you had a nice vacation! So, where you there primarily to look for vacation property? No, wait don't tell me! Let me guess, HELL NO!

Thanks for bringing to light the absolute collapse in the vaction home market. With the bank run, credit crunch and all I was afraid that would get lost in the shuffle? What I find interesting is the similarities in the ME market (and it's proximity to Boston) and what that might tell us about the future of the Bend, OR market?

And yes, the Stumptown market is "alive and well"!

I'd say they're more like communists, than socialists; but they're actually worse than that. Communists are those less fortunate that take from the wealthy; these guys are the exact opposite. Since there isn't a term worse than communists; I will make one up: scumbags! or scumbagism!

EBGuy,

Did you stop at Red's Eats? Man, I still dream about their lobstah rolls.