Elfman, I must disagree with your assessment. This crisis has nothing to do with altruism. I would not call it generosity to take other people’s money for a ‘good cause.’ If Jim holds a gun to Bill’s head and takes his money to give to Bob that is not altruism. In fact, if Jim does so because he expects Bob to support his rise in power and influence then the proper word to use is thuggery.

This, in a nutshell, is what leftists (read Democrats) do with our tax system, and with the CRA pressure on banks to lend to unqualified borrowers. It was nothing more than an attempt to buy people’s votes. I wouldn’t call that selflessness.

That first sentence couldn’t be further from the truth.

The financial crisis was sparked by altruism – the principle that we should strive for others’ benefit, not our own.

Few really achieve that of course, but it’s the foundation behind Democrat redistribution policies and promotion of regulations and institutions that put large numbers of people into homes that they can’t afford. The rest of society is now paying for them. That’s not greed. It’s not even selfishness. It’s selflessness.

Selflessness is fine between family members, maybe among friends, but disastrous in financial systems and government.

It is clear to me that “a long-lived product (up to 30 years) was sold by people who had a very short time horizon (get rich quick)” is the essence of the problem. That certainly applies to the ones who bought houses just to flip in a couple of years. It probably even applies to many who bought them to live in, figuring that something would turn up when the rates inevitably ballooned – they figured they could always refinance the appreciated house at some point in the future and pocket the difference.

I was flabbergasted to hear that people were getting interest only loans – but this makes perfect sense if all you are going to do is flip a piece of property – or just use it as low cost rent and then walk off when the time comes to pay the piper.

I am afraid I count as one of those evil people who see the issue now as how do we punish the idiots and crooks strongly enough to make clear our displeasure. It is not just a matter of Social Justice, to coin a phrase, but also to serve as an object lesson to people who are not naturally so venal or dumb. Many thousands of people are asking themselves now “Okay, why should I continue to pay my mortgage, even though I can well afford to do so? If I prostitute myself though self-destitution, why is that either a social stigma or financial burden?” Maybe that is the essence of the moral argument.

P.S.: You can use that phrase “if I prostitute myself though self-destitution” if you like at no charge. Just give me credit. Has a nice ring to it, don’t you think?

Just a footnote, a persistent ambiguity in vocabulary is failure to distinguish between mickey-mouse “do and don’t” (much of SOX) and the kind of code that would lead to true transparency. I am guilty of not being precise. And it’s a crucial distinction because I expect what will emerge from the hoo-haw to “do something” will be more of the former and very little of the latter.

Again, something to watch. (Read an article last week that Charles “Tax This” Rangel is too powerful to fail.)

Sounds like you were a tempting target for mortgage hucksters. You must have great credit.

Interesting. I’ve heard the Florida (esp. South Florida) was Ground Zero of mortgage meltdown. Your stories certainly support that.

You know, one way to think about the mortgage mess is that a long-lived product (up to 30 years) was sold by people who had a very short time horizon (get rich quick). This is not necessarily a problem; the insurance industry has done this for centuries. But there were three important differences between mortgages and insurance:

1. Insurance is regulated at the state level. This prevents a single insurer from co-opting a single regulator. Insurance regulators must compete to attract insurers, and insurers must compete within different states. It also means a failure in a single state is very unlikely to spread to other states. Mortgages evolved into a national system, dominated by Wall Street, and regulated nationally.

2. Regulations strictly enforced capital requirements. You have to keep sufficient reserves, or you can’t write policies. Them’s the rules of the game, and if you don’t like them, you just don’t play. There may be lots of arguments about the right amount of reserves, but there are rarely arguments about the right amount of equity. This is a good example of intelligent regulation.

3. Insurance is a liability to the insurer, but mortgages are assets to the lender. This is important because when you stop paying premiums, you stop getting coverage. When the cash flow goes away, so does the liability. This means that underwriters to not have to predict the future with precision. Lenders, on the other hand, need to know that, over the life of the loan, the cash flow will be there. This is much harder to do, and moral hazard is a much greater risk.

This last one is probably the most important. Because the industry was rewarded on short-term results, and because the mortgages had a “long tail” so to speak, everyone kept looking for a way to financially engineer away the tail, so they could “lock in” profits and pay everyone handsome bonuses. And it worked for a while.

Problem was, the tail didn’t go away. It turned into a bullwhip.

Ouch.

L3

I think your fundamental point is right – “markets” are neither moral nor immoral. In fact, only human action is moral or immoral.

That being said, there are certainly ways to design markets that reward moral behavior, and punish immoral behavior. Maybe that’s really what we’re talking about when we refer to moral markets.

Well-functioning markets tend to “moral” in this sense. The key requirements of a well-functioning (and therefore “moral”) market are:

Transparency. One of the bugaboos of markets is asymmetric information: sellers and buyers don’t share the same information. Makes markets easy to manipulate. This is why insider trading is so heavily regulated. The moral dimension of transparency is that it punishes lying, since I can find out that you’re lying to me. This is why audits are really important.

Low transaction costs. If it costs too much to buy or sell, markets can become very inefficient, lower returns, and keep people out of the market. The moral dimension of low transaction costs is it makes it cheaper to punish lying, since there’s not a lot of “leakage” if I buy now and sell later (or vice versa). This is why low brokerage commissions are important.

Low pricing power. If I have to purchase from a monopoly, they can set the price at whatever they want. I have no influence. (Or, if there’s a single buyer, there’s a similar problem.) The moral dimension of pricing power is that it prevents exploitation of consumers by corrupt political entities (since monopolies cannot long survive without government support). This is why trust busting and subsidiarity are important.

Freedom of decision. Consumers should be free to make purchase decisions (including the decision not to purchase), and producers should be free to make production decisions (including the decision to enter a market). The moral dimension here has to do with essential goodness of liberty, man’s right to self-determination. This is why fundamental human rights are important.

In short, markets require rules that distinguish between good and bad actions; in other words, morality. Our unwillingness to “impose our views on others,” why laudable in certain contexts, will undermine free enterprise in the long run, and make us all poorer.

The question, then, is not whether to impose morality. It is which morality to impose, because impose them we must. Moral relativism and political correctness destroy markets, and with them prosperity.

Cheers.

L3

“Transparency”

The government reshaped this common sense morality by forcing banks to make loans. And by setting up a government-company or a company-government called FannieMaeFreddyMac that didn’t face the moral hazard of you make to many bad loans you go bankrupt.

The banks responded by making those loans-under-duress into hot potato instruments. Who would end up holding it? And now the government further reshapes morality by preventing big elite companies from going out of business. In the end government has almost destroyed credit.

And liberals call this de-regulation.

Relative to the 5 “C’s” I am convinced that part of the mortgage problem derived from the fact that the mortgage broker industry became in many ways an industry in its own right. Even today after, the crash, you hear “Get Your Credit Report” commercials at least every 15 min on TV and radio and the edges of our internet pages are crowded with mortgage offers and credit report ads.

Here in Florida it was said that during the height of the mortgage craze a few years ago that poor service in bars and restaurants was due to the waitresses and bartenders having gone off to become mortgage brokers.

I not only got numerous telemarketing phone calls offering refinancing, but Well Fargo sent me two express mail packages with all of the paperwork filled out and ready to sign.

A large and presumably profitable industry developed that was eager to reap the fees associated with loans. Way back when, I never got the impression that the banks gave a rat’s rump about the loan fees; they were focused on the long term viability of the deal. That clearly is not true with the credit/mortgage/loan application industry.

P.S., I grew up hearing “Turn on the blue light the man wants a blue suit” as a warning on certain people’s business practices.