Torture versus collateral damage; the bigger evil?

[carl]

Private investment allowed the housing bubble to expand beyond the simple, minimal losses of bad mortgages into the subprime crisis. Private investment is currently allowing housing prices to bubble again even as median wage nosedives. Private investment is a great engine, but a terrible steering wheel.

The first thing that popped into my head after reading this was an image of us private individuals as the sturdy draft horse pulling the plow under the wise direction of an experienced plowman, the career professional government bureaucrat. The next thing that popped into my head was the thought of the sturdy draft horse character in Animal Farm who was guided by the pigs. Old Boxer didn't do so hot.

When stripped to its essentials, the recent big economic crash was caused by a bunch of people who couldn't pay their mortgages. These were people who under normal circumstance would not have received mortgages because they were bad risks. Lenders established the criteria that marked them as bad risks because lenders don't like to lose money on loans and they had learned that people fitting those criteria were much less likely to pay back the loan. So why did the lenders lend money to people they knew were much less likely to pay it back? They lent it because is was government policy to strong arm them into making the loans. The gov did that in the pursuit of the political goal of expanding home ownership, and the wise gov figured the way to do that was to make sure more people were able to get home loans, and the way to do that was to force lenders to lower lending standards.

So that is it. Regardless of all the shenanigans that went on with lack of oversight, impunity, sharp practice etc., there would have been no crisis if all those uncreditworthy borrowers had repaid their loans as reliably as the credit worthy borrowers had been doing for years and years. But they didn't because home ownership doesn't confer financial responsibility upon a person, a person who is financially responsible is able to own a home. Those gov types couldn't figure that out.

George Orwell was a very bright guy.

[Fuchs]

When stripped to its essentials, the recent big economic crash was caused by a bunch of people who couldn't pay their mortgages.

No, that was a mere symptom.
That was (a) the grand scale resource misallocation away from (re)investment in production capacity and infrastructure into consumption.
The banks were (b) incompetent enough to fail entirely in their (systemic) risk management as a system. They believed to have managed their risks with diversion, but the diversion was nil at the aggregate level of the entire banking sector and on top of that they were connected to each other enough (with pointless reciprocal lending) that they turned into dominoes.

So the big story was the gross incompetence of the banking sector and the lack of effective government oversight.

To blame it on lenders is disingenuous.

[davidbfpo]

This thread started as 'Torture versus collateral damage; the bigger evil?', a valid exchange has followed, although now it appears to more of a debate on economics. I can discern links earlier on, not so much now.

Now please carry on.

One day I will try to separate out the diversion.

[carl]

This thread started as 'Torture versus collateral damage; the bigger evil?', a valid exchange has followed, although now it appears to more of a debate on economics. I can discern links earlier on, not so much now.

What more can you say about torture beyond it being a tool of the weak and the twisted?

[carl]

So the big story was the gross incompetence of the banking sector and the lack of effective government oversight.

The entities that made the bad loans did so because they were forced to by the gov. Gov oversight made sure that they made the gov imposed quotas of loans to people who were poor risks. So the big story was the gross incompetence of the gov.

To blame it on lenders is disingenuous.

Your right, and I didn't.

[Fuchs]

The entities that made the bad loans did so because they were forced to by the gov. Gov oversight made sure that they made the gov imposed quotas of loans to people who were poor risks. So the big story was the gross incompetence of the gov.

AFAIK you're writing about two agencies/entities/organisations here. This doesn't explain why the entire banking sector got involved. To them, it was incompetence on many levels.

There's much style, yet very little substance in banking.
I've come to the conclusion that banks are likely inherently incompetent. My professional experience with banks is that there's no correlation between quality of a credit application and it being approved. They could just as well employ monkeys for approving or disapproving applications: Nobody would notice if they don't tell anyone.
The personal highlight experience of mine was a 99.9% crap credit application being approved. The only good thing about the application was the passport photo of the young blonde asking for the credit!

[motorfirebox]

So that is it. Regardless of all the shenanigans that went on with lack of oversight, impunity, sharp practice etc., there would have been no crisis if all those uncreditworthy borrowers had repaid their loans as reliably as the credit worthy borrowers had been doing for years and years. But they didn't because home ownership doesn't confer financial responsibility upon a person, a person who is financially responsible is able to own a home. Those gov types couldn't figure that out.

False. The financial shenanigans played by the financial sector could begin with any widely-replicated form of debt. You could do it with school loans. You're blaming the matches for burning down the house, when in reality the landlord stripped out the sprinkler system and fireproofing to sell for a quick buck--and left the renters to burn.

I honestly don't know what any of this has to do with torture, but the factual misrepresentations here are too much to ignore.

[carl]

Fuchs:

Like I said, the whole thing boils down to bad home loans. Everybody piled in but if those loans had been repaid at the rates good home loans were, the problems would not have happened.

So your professional experience with banks is there is no correlation between the quality of a credit application and it being approved. Have you made home loan applications in the United States with some frequency in the past 20 or so years?

[Dayuhan]

Like I said, the whole thing boils down to bad home loans.

You have to add in the perception that if you pool enough dubious loans together they somehow cease to be dubious. Add that to a huge supply of free money (interest rate below inflation rate = free money), and the incentive to take risks on loans becomes overwhelming. If you set up a situation where people can borrow at 1.5% and lend at 7% with zero perceived risk, no amount of regulation or oversight is going to keep speculators from riding that out of control.

[carl]

You have to add in the perception that if you pool enough dubious loans together they somehow cease to be dubious. Add that to a huge supply of free money (interest rate below inflation rate = free money), and the incentive to take risks on loans becomes overwhelming. If you set up a situation where people can borrow at 1.5% and lend at 7% with zero perceived risk, no amount of regulation or oversight is going to keep speculators from riding that out of control.

Yep. I'll go with all of that as contributing factors. Fannie and Freddie were mixed up in all of this and they were widely believed to be no risk because no matter how bad they screwed up, the gov would step in.

[Fuchs]

Fuchs:

Like I said, the whole thing boils down to bad home loans. Everybody piled in but if those loans had been repaid at the rates good home loans were, the problems would not have happened.

No, that was just the weak spot where the construct broke.
The basic problem was resource misallocation.

The banking sector is supposed to serve the national economy as a mediator for efficient resource allocation. It failed grossly, and that's how the problems and vulnerabilities were set up in the first place. The exact point where the fracture began which lead to the break is of little interest.

Of much greater interest is whether and how the banking incompetence in credit allocation and risk management can be tackled and what exogenous factors amplified the problems (loose money by Fed, useless SEC and Fed oversight, mandated loans, ...).


You cannot prevent a repeat of the crisis by tackling the subprime mortgage issue only. The roots of the problem would simply manifest themselves elsewhere, maybe in towns going bankrupt or another dotcom bubble or a raw materials speculation bubble etc.).

[carl]

The banking sector is supposed to serve the national economy as a mediator for efficient resource allocation. It failed grossly, and that's how the problems and vulnerabilities were set up in the first place. The exact point where the fracture began which lead to the break is of little interest.

Next time an airplane breaks up in flight and people are investigating to find out where the exact point the fracture began was, I am going to write them and tell them the important thing is that the airplane broke up, not where the exact point of where fracture began was.

The banking sector can't do and efficient job of allocating resources if an important part of its business is mandated by gov fiat. That distorts the thing.

Of much greater interest is whether and how the banking incompetence in credit allocation and risk management can be tackled and what exogenous factors amplified the problems (loose money by Fed, useless SEC and Fed oversight, mandated loans, ...).


You cannot prevent a repeat of the crisis by tackling the subprime mortgage issue only. The roots of the problem would simply manifest themselves elsewhere, maybe in towns going bankrupt or another dotcom bubble or a raw materials speculation bubble etc.).

The problem wasn't banking incompetence. The problem was the gov forcing them to be incompetent to further a political goal.

Not towns going bankrupt, states going bankrupt. And again, that is caused by political decisions.

[carl]

False. The financial shenanigans played by the financial sector could begin with any widely-replicated form of debt. You could do it with school loans. You're blaming the matches for burning down the house, when in reality the landlord stripped out the sprinkler system and fireproofing to sell for a quick buck--and left the renters to burn.

I honestly don't know what any of this has to do with torture, but the factual misrepresentations here are too much to ignore.

Pushed beyond your limits you were, sort of like Cincinnatus leaving his plow. Well maybe not exactly but I had to work a Latin word in here somehow.

Nope not false, true. Regardless of the things that were done, those loans were bad and the would not have been made if the gov hadn't forced them to be made. So that is it. Bad loans made under duress that eventually went bad. Some surprise that that led to trouble.

Note: regarding all the games that were played with those bad loans that the gov forced to be made-see Dayuhan's last paragraph in post 53.