Put The Blame Where Blame Is Due

[TheNiche]

So the people with the most money owe the most money? I find that very hard to comprehend. How can you label someone wealthy if he has more debt than a poor person?

Because debt can be an instrument of both consumption and investment, and wealthy folks don't become wealthy without investment activities that are highly-leveraged using debt.

I, myself, will be burdened with about three quarters of a million dollars in debt by the end of summer. And while the debt will be utilized to purchase assets with an book value equal to the debt, by reconfiguring how those assets are utilized in the context of society, I can realize much increased cash flows, thereby revaluing those assets at a market value that far exceeds book value. My balance sheet will look frickin' awesome--and if it weren't for my high propensity to invest any and all cash I have on hand within a few months, my annual income situation would also look much better...and this is something that wouldn't have been the least bit possible without massive debt financing and extremely high leverage.

I'm even financing the initial costs at 80% LTV, then upon completion, refinancing the revalued assets at 80% LTV, which in effect covers all of my initial debt, my initial down payments, and then provides me with cash in addition to that, which I can go out and use to put in as a down payment on a project twice the size. Hopefully I'll be on the third iteration of this cycle by the end of the year, in which case, my total amount of outstanding debt will be in excess of one and a quarter million.

But those interest rates are limited by usury laws. Inflation isn't.

The late 70s was a perfect example of this. Smart debtors realized that assuming debt at seemingly high interest rates made perfect sense because inflation was continually devaluing the dollars used to pay it off.

If I'm not mistaken, usury rates vary from state to state. Any ideas what the limits tend to be?

You're citing evidence of the Fisher Effect. Smart creditors (i.e. the ones that remained in business) were charging interest rates that already had inflation expectations built into them, meaning that people already in debt or that had assumable financing with a fixed rate and a term long enough to overlap significantly with the inflation (particularly the wage inflation) were made better off, while new debtors were no better or worse off.

[TheNiche]

You both make excellent points... Taken to the extreme, let's not just embrace inflation, let's embrace hyperinflation. If we can get the Fed to print money at the speed of light, everything we buy, consume, and our salaries would sky rocket. We could all be millionaires. That will let someone who, say, over 10 years who has accumulated large amounts of debt, to able to pay off that debt, almost instantly. We could pay off our 200+ year old national debt in a year. You're using inflated dollars to pay off non-inflated debt. Yippee!!! ... but the more sinister problem is... that person, as well as most working people in this country, have 401K plans. So a person who has built up a nest egg over 30 years and is about to retire suddenly finds out that his savings are now basically worthless.

In order to be politically viable, lots and lots of offsetting benefits would have to be given to those that were adversely affected. Otherwise, this kind of situation is just too incredible to speculate about.

But the truely sinister consequences are that if the U.S. paid down its foreign debt by intentionally devaluing the dollar, other countries would not be so willing to lend us money anymore without terms that reflected our apparent willingness to jack with foreigners.

[cottonmather0]

In fact, your even suggesting such suggests to me that you do not understand the basis of the mortgage crisis whatsoever. It is a worldwide crisis, not US based.

To hell with it, if you're not going to read what I said and instead accuse me of not understanding the situation when your own comments blaming "greed" are indicative of the same (I personally would like to blame another emotion, like melancholy or sanguineness, or perhaps peevishness) then there is no point in continuing. I wasn't speaking to the actual Fair Lending laws, I was speaking to the rhetoric surrounding the government's meddling in the economy when pushing measures such as those.

For what it's worth the situation was caused by mortgage lenders running out of good-credit borrowers but still needing to maintain their business volume so they expanded their offering to borrowers with worse credit who coincidentally paid higher interest rates and gave the image of a more lucrative cash flow than that from prime borrowers. In turn, the underlying riskiness of these obligations was forgotten and overlooked as the mortgages were sold and repackaged into various mortgage backed securities and CDO's that were overrated by credit agencies, and as the poor-credit borrowers began to default the securities were no longer as valuable or risk-free ('AAA') as had been previously thought. The consequences spread far downstream as many different parties both at home and abroad (most US capital is owned by foreignors and reinvested in US markets) struggled to determine whether or not they had any exposure to these securities and as such credit and liquidity dried up.

Either way, the lenders, and the administration whose policies have rightly or wrongly enabled them, get blamed for the consequences (under the common euphemism of "greed"), all because the people to whom they lent money did not pay their bills.

Red, I very well understand the issues involved and I agree with the OP that the blame is not being fairly applied, as your blanket comments to "greed" exemplify.

[RedScare]

For what it's worth the situation was caused by mortgage lenders running out of good-credit borrowers but still needing to maintain their business volume so they expanded their offering to borrowers with worse credit who coincidentally paid higher interest rates and gave the image of a more lucrative cash flow than that from prime borrowers. In turn, the underlying riskiness of these obligations was forgotten and overlooked as the mortgages were sold and repackaged into various mortgage backed securities and CDO's that were overrated by credit agencies, and as the poor-credit borrowers began to default the securities were no longer as valuable or risk-free ('AAA') as had been previously thought. The consequences spread far downstream as many different parties both at home and abroad (most US capital is owned by foreignors and reinvested in US markets) struggled to determine whether or not they had any exposure to these securities and as such credit and liquidity dried up.

I agree with this recitation 100%. Reading it closely, it sounds like a textbook definition of greed overwhelming intelligence.

As for the borrowers, while it is true that they did not pay their (mortgage) bills, there are a multitude of reasons why that is occurring, from them gambling on rising home values that did not occur, to ignorance of the obligations they were incurring (ARMs), to a small group that never intended to pay the mortgage in the first place. The first group might be classified as greedy, or attempting to cash in on a hyper market. The second group was simply not well versed in mortgage contracts, making them susceptible to unscrupulous brokers, but not greedy. The third group may be described in many unflattering terms, but in the end, merely beat the lenders at their own game. The lenders dropped their standards so low that even thieves qualified, and the thieves did what they knew best.

If I'm not mistaken, usury rates vary from state to state. Any ideas what the limits tend to be?

Uury, for all intents and purposes, were eliminated during the banking deregulation of the 80s. Many credit card interest rates go as high as 39%. I have heard of one as high as 70% APR. All of these rates are now legal. Back when we still had usury, interest rates were capped at 18-24%.

[crunchtastic]

Could this be another indication that the economic outlook is far worse than the feds or most economists believe?

http://online.wsj.com/article/SB120347007609178711.html

Martin Feldstein is the guy who would have been our sitting Fed Chairman, had it not been for the fact that he sits on the scandal-plagued AIG board. ( the reason many believe Bernancke got the nod.)

This is a rather dramatic ideologial about-face for an economist of his stature. In the piece he advocates increased regulation of the credit markets and gives a dim picture of fed effectiveness manipluating money supply. Hmmmm. Advocating tighter regs is not something a chief harvard economist typcially does, if he wants to keep his friends.

[Subdude]

There's a similar very alarmist editorial in today's FT.

Recently, Professor Roubini

[TheNiche]

I'm not convinced myself.

Neither am I. Financial markets are volatile and subject to enormous upheaval from time to time. When it really comes down to it, an economic meltdown of catastrophic proportions is unlikely without a major disruption in the supply of goods, where the service sector is more or less an outgrowth of that.

I think that a depression may be plausible if a protectionist president and protectionist congress are elected in November--that is a very real concern. Left to its own devices, the economy reorganizes relatively quickly, eliminating deadweight, and then it chugs right on along.

[memebag]

Left to its own devices, the economy reorganizes relatively quickly, eliminating deadweight, and then it chugs right on along.

And in a global economy, the US may have become dead weight. Chug chug!

[TheNiche]

And in a global economy, the US may have become dead weight. Chug chug!

Uh huh...

Do explain.

[BryanS]

It's not unusual, during recessions, for equity markets to dip up to 25, 30%. We're down on the order of 8 to 10% and people are screaming bloody murder. This is nothing, but we'll be in for it, soon enough.

Bernake is just trying to keep the wheels on this thing long enough until the next sucker takes over... then it's off the cliff for us.

[memebag]

Uh huh...

Do explain.

What's to explain? There's nothing to worry about. The economy chug chug chugs along, sloughing dead weight as it goes. No worries. Who cares about those dead weight losers? The movement of dollars, er, euros is the important thing, not people.

[TheNiche]

What's to explain? There's nothing to worry about. The economy chug chug chugs along, sloughing dead weight as it goes. No worries. Who cares about those dead weight losers? The movement of dollars, er, euros is the important thing, not people.

I know that you know what rhetoric is, but do you know what an economy is?

And is your last name Obama, by any chance?

[crunchtastic]

It's not unusual, during recessions, for equity markets to dip up to 25, 30%. We're down on the order of 8 to 10% and people are screaming bloody murder. This is nothing, but we'll be in for it, soon enough.

Bernake is just trying to keep the wheels on this thing long enough until the next sucker takes over... then it's off the cliff for us.

Missing the point---at least the one I was trying to bring to light with the link to the Feldstein op-ed. His point is that the Fed is not and cannot keep the wheels on, given the ways in which the global credit markets have been currently manipulated.

[memebag]

I know that you know what rhetoric is, but do you know what an economy is?

Um ... is it your rhetoric? Or the little engine that could?

[crunchtastic]

Neither am I. Financial markets are volatile and subject to enormous upheaval from time to time. When it really comes down to it, an economic meltdown of catastrophic proportions is unlikely without a major disruption in the supply of goods, where the service sector is more or less an outgrowth of that.

I think that a depression may be plausible if a protectionist president and protectionist congress are elected in November--that is a very real concern. Left to its own devices, the economy reorganizes relatively quickly, eliminating deadweight, and then it chugs right on along.

I need to go back and read the link that Subdude posted, but at least in the case of Feldstein, he was not talking 'economic meltdown of catastrophic proportions'.

He was, I believe, strongly suggesting that in this case, the economy-- due to the depth of the housing market trouble and the complexity of the deals that can't really be written down (in the accounting sense)-- may not be capable of reoganizing itself quickly or efficiently. This is the part which struck me as an ideological about-face, for an economist of his background. This is a Reagan Republican pointing out that lack of fed oversight has failed us.

[BryanS]

I need to go back and read the link that Subdude posted, but at least in the case of Feldstein, he was not talking 'economic meltdown of catastrophic proportions'.

He was, I believe, strongly suggesting that in this case, the economy-- due to the depth of the housing market trouble and the complexity of the deals that can't really be written down (in the accounting sense)-- may not be capable of reoganizing itself quickly or efficiently. This is the part which struck me as an ideological about-face, for an economist of his background. This is a Reagan Republican pointing out that lack of fed oversight has failed us.

You bet it has. That is because all that Bernake does is chase short-term credit demand and feeding crack/lower fed fund interest rates to Wall Street to prop up equity markets. Where is Paul Volcker when we need him? Now that is a Fed Chairman who had a pair. I also find it ironic that, given the power the Fed has, that Reagan, who hated everything Carter, kept in place a Carter-appointed chairman, all the way up until the late 80's when Greenspan took over... If the election swings the way of the Democrats... it will be interesting to see if Bernake keeps his job... Until then, he can keep lowering interest rates, down to zero if necessary, to keep us afloat a little longer... but that's like straightening deck chairs on the Titanic: eventually, we'll hit the iceberg. That is... unless global warming melts the iceberg, then I guess there's no problem. Full steam ahead!

[TheNiche]

Um ... is it your rhetoric? Or the little engine that could?

It is the criticism of an empty statement.

[memebag]

It is the criticism of an empty statement.

An economy is the criticism of an empty statement? Very zen. You're blowing my mind.

[TheNiche]

An economy is the criticism of an empty statement? Very zen. You're blowing my mind.

Post #71 was an empty statement. Post #72 was the criticism. The basis for the criticism is that what you said was ladden with rhetoric and stated nothing.

[memebag]

Post #71 was an empty statement. Post #72 was the criticism. The basis for the criticism is that what you said was ladden with rhetoric and stated nothing.

Post 67 was your rhetoric, post 71 was my criticism of it. Saying that the economy eliminates dead weight and "chugs right along" isn't very comforting if you have become dead weight.

[TheNiche]

Post 67 was your rhetoric, post 71 was my criticism of it. Saying that the economy eliminates dead weight and "chugs right along" isn't very comforting if you have become dead weight.

You apparently aren't able to discern the forest from the trees.

[memebag]

You apparently aren't able to discern the forest from the trees.

Right, it's all about the big picture.

[crunchtastic]

Here's a gem of a story about the wonderful world of mortgage fraud:

http://www.chicagotribune.com/business/chi...1,7543625.story