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May 31, 2012

On the 8th Day, God Created Roommates!

Idiotic article of the day:

The above graphic exploded on Facebook this weekend. It shows how many minimum wage hours a worker needs to work in order to be able to afford a two-bedroom unit at “Fair Market Rent” in any given state. The FMR is a figure determined by the U.S. Department of Housing and Urban Development (HUD).

The numbers don’t show any discernible trend aside from perhaps 1) states with high cost of living/rent such as NY, NJ, DC, MD require the most man hours and 2) the minimum wage is too low. The latter, of course, is the point of this graphic.

In what universe is being able to afford a two bedroom apartment some sort of human right?

The Editorial Staff have read a lot of dumb things over the years, but this may well represent the absolute pinnacle of poorly reasoned appeals to emotion. When our two sons graduated from college, they moved out and rented apartments. Son #1 had a full time job and shared his first apartment with another FT worker: his wife.

Son #1 wanted to live in an expensive area. He had several roommates, all with full time jobs.

Our first apartment in the DC area was a one bedroom. It had three occupants: myself, my husband, and our 15 month old son. He slept in a walk in closet. Rents were lower for apartments located farther away from work, but with only one car we decided that the convenience factor outweighed the extra expense.

The idea that anyone is owed his or her own apartment (one they don't have to share with anyone else, which would seem to obviate the need for that 2nd bedroom by the way) is just stunning.

Get a roommate, move to a cheaper area, or get a better job. Sometimes it really is that simple.

Posted by Cassandra at May 31, 2012 08:58 AM

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Comments

Well, except for the part about getting "a better job." Good luck getting any job, these days.

Posted by: Grim at May 31, 2012 11:09 AM

Grim:

I am sure what I'm about to say will sound horribly insensitive for all sorts of reasons, but the comment was made in the context of thinking you are owed a 2 bedroom apartment on your minimum wage salary.

That's a stupid metric. My son and his wife moved down to Georgia because even though they both took a cut in pay, they could afford more house there even on a lower salary. In fact, they can afford more house on ONE salary that is lower than what my son made up here in the DC area.

I wish they still lived up here. I hate it that they are a day's drive away, but my son absolutely did the right thing for his family. They can't afford to buy a house in this area on one salary. Is that his employer's fault? Or just a fact of life to be dealt with like any other fact?

So that's point one and two: it's not just salary. Cost of living matters too, and metropolitan areas are expensive. Of course often they are also where the jobs are, so there's a tradeoff to be evaluated.

My husband and I couldn't afford to live together for much of the first few years we were married. Or to be more accurate, when we weighed all the pros and cons, we DECIDED it didn't make financial sense for our little family to live together.

I'm no stranger to having trouble finding a job. I didn't have a degree until I was almost 40, and in military towns that makes you even more uncompetitive than you already are just by virtue of being one transient in a sea of other transients that employers view as a risky hire. I couldn't get a job when my husband was in college b/c I was a mother competing with college kids the same age and with better skills.

This wasn't my fault, but it certainly wasn't theirs (or "unfair"), either. It just "was".

That's why I washed windows, took care of other people's kids in my home, did yard work and minor repairs, sewed things for other people, painted houses, etc. Anything to make money.

The three things I cited are options, and for someone who is in a minimum wage job (what used to be called an entry-level job), suggesting they get a better job is probably not unreasonable. Seriously expecting a minimum wage job to pay all the bills is not something I ever did, and I don't even know where such an expectation would come from.

Posted by: Cassandra at May 31, 2012 11:36 AM

In what universe is being able to afford a two bedroom apartment some sort of human right?

You need to think this through more carefully, Ma'am. If a certain gentleman had had that second bedroom to share with his gentleman/lady friend and his/her friend, then lacking the burden of travel, he might well have survived taking his stress test a day early.

Eric Hines

Posted by: E Hines at May 31, 2012 11:53 AM

If a certain gentleman had had that second bedroom to share with his gentleman/lady friend and his/her friend, then lacking the burden of travel, he might well have survived taking his stress test a day early.

OK, that was just wrong :p

Posted by: And then her head exploded.... at May 31, 2012 11:56 AM

My son has a B.S. in Mechanical Engineering. He has a job making north of $50K/year. He's living in downtown Chicago. He's moving to a different building and is going to have at least 2 other roommates. He's 26 and single. I see no problem with this whatsoever and neither does he. Neither he nor I nor his mother nor anyone else has any concept that he is owed the ability to live by himself in a 2-bedroom apartment. That's absurd!

Posted by: RonF at May 31, 2012 12:46 PM

I've been poor, there's no shame in it. It's not fun, but life is not ever increasing misery, unless you make it so. In fact I do have some funny memories out of it. The house I rented was more of an outbuilding, at the whopping rate of $75 a month. It was one room with a bathroom and a kitchen all kind of squashed together.

The shower was tiny with the shower head about 4 feet off of the floor. I had to squat down to get my hair wet which required that one's heiny might project a bit. In the winter it was a bear. Brrrr!

Entertainment? This place was behind a gas station at a busy intersection with an accident at least once a week. Traffic watching. That's pitiful when I think about it, but it still makes me laugh about myself.

Posted by: Allen at May 31, 2012 01:07 PM

I suppose that if you are going to establish a "minimum" standard for wages, then perhaps the most logical factor to be considered is the minimum cost to shelter the minimum wage earner, particularly insofar as the food stamp program provides the wage earner access to minimum sustenance. I mean, that's the whole point of a "minimum" wage, isn't it?

And there's no doubt that the federal minimum wage is pretty minimum at $7.25/hour or $290.00/40 hour week. Of course, as has been demonstrated repeatedly over the last 6,000 years, whenever a "minimum" anything is established by law, that "minimum requirement" instantly becomes the "maximum required." (The best known example of this phenomena being the HMS Titanic, whose lifeboat capacity met (or exceeded) the minimum requirements set by law.)

What seems to be missing here is a calculation as to what constitutes the "minimum" housing required for the minimum wage earner. As the young make up the lion's share of such workers, I must assume that some percentage of minimum wage earners reside with their parents, or at my house. I also will assume that many minimum age workers live in publicly-funded housing projects. As no federal agency has yet to determine the minimum living standards applicable to mom and dad's house, I referred to the "Housing Quality Standards" provided here by the Department of Housing and Urban Development:


Space and Security
Performance Requirement
• The dwelling unit must provide adequate space and security for the family.

Acceptability Criteria
• At a minimum, the dwelling unit must have a living room, a kitchen and a bathroom.
• The dwelling unit must have a least one bedroom or living/sleeping room for every two persons. Other than very young children, children of opposite sex, may not be required to occupy the same bedroom or living/sleeping room.
• Dwelling unit windows that are accessible from the outside must be lockable.
• Exterior doors to the unit must be lockable.
A living room may be used as sleeping (bedroom) space, but no more than two persons may
occupy the space.

Based upon these criteria, it seems hard to believe that no one earning minimum wage can afford minimum shelter in any state based upon the HUD's "Fair Market Rent" analysis, and indeed such skepticism is warranted. As the HUD report's "Fair Market Rents: Overview (*.doc, 112 KB)" plainly states:

FMRs are gross rent estimates. They include the shelter rent plus the cost of all tenant-paid utilities, except telephones, cable or satellite television service, and internet service. HUD sets FMRs to assure that a sufficient supply of rental housing is available to program participants. To accomplish this objective, FMRs must be both high enough to permit a selection of units and neighborhoods and low enough to serve as many low-income families as possible. The level at which FMRs are set is expressed as a percentile point within the rent distribution of standard-quality rental housing units . The current definition used is the 40th percentile rent, the dollar amount below which 40 percent of the standard-quality rental housing units are rented . The 40th percentile rent is drawn from the distribution of rents of all units occupied by recent movers (renter households who moved to their present residence within the past 15 months). HUD is required to ensure that FMRs exclude non-market rental housing in their computation. Therefore, HUD excludes all units falling below a specified rent level determined from public housing rents in HUD's program databases as likely to be either assisted housing or otherwise at a below-market rent, and units less than two years old.

Whoa. Well, tossing out all the newer apartments and "below-market" rentals (as determined by, um, what?) certainly narrows the field of study Even so, a brief review of the HUD report's data show that the reported Fair Market Rents vary between the 40th and 50th percentile, depending on locality.( See, e.g. The Crab Cake State ) It would appear, therefore, that at a minimum 40% of the properties studied are rented at rates below the "FMR" for the locality studied, which we already know includes only properties that are rented at "market" or "above market" rates.

Consequently, I call bullshit.

Posted by: spd rdr at May 31, 2012 02:25 PM

2 bedroom apt?
I consider the minimum civilian housing need to be 40?$/month so you can belong to a 24hr fitness center and therefore shower, shave and brush your teeth before going to work after sleeping anyplace that is dry.
Luxury isn't a cell-phone; its being able to rent a canoe.
But that's just me.

Posted by: tomg51 at May 31, 2012 03:10 PM

Consequently, I call bullshit.

Now isn't it just like a man to call BS on a poor, defenseless talking point!

Interesting to see how the FMR numbers are calculated. One more data point: our little 3 bedroom house on a lake rented out for a good deal less than the FMR for our area ($1900 for a 3 BR apartment? Really?).

My single friend in Seattle rented a room in someone's house for far less than an apartment would have cost (and utilities were included).

I just don't understand the expectation that we are somehow owed something just because other people have it. It doesn't seem like a value system calculated to make people happy, or to help them adjust to the ups and downs life hands out.

Posted by: Cass - Confirmation Bigot-in-Training at May 31, 2012 04:35 PM

I suppose that if you are going to establish a "minimum" standard for wages, then perhaps the most logical factor to be considered is the minimum cost to shelter the minimum wage earner, particularly insofar as the food stamp program provides the wage earner access to minimum sustenance. I mean, that's the whole point of a "minimum" wage, isn't it?

To me, this suggests that a uniform national min wage makes no sense, as cost of living varies greatly from place to place. So employers are overpaying in some areas and underpaying in others.

Posted by: Cass - Confirmation Bigot-in-Training at May 31, 2012 04:38 PM

To me, this suggests that a uniform national min wage makes no sense, as cost of living varies greatly from place to place. So employers are overpaying in some areas and underpaying in others.
That's correct, Cass, and there is no uniform national minimum wage. Oh, I mean there is a federal minimum wage, but that's just a sticker price that states are free to follow or ignore. I do think it unlikely, however, that any employer is actually "overpaying" any minimum wage earner, whether or not the state's MW is set above the Fed MW. I mean, let's be honest, the Chairman of Infra-Global Insecurities is overpaid. The president of Consolidated Crapola is overpaid. Bell Keller is overpaid. The guy who busses your table? Probably not.

Posted by: spd rdr at May 31, 2012 04:56 PM

"no federal agency has yet to determine the minimum living standards applicable to mom and dad's house, I referred to the "Housing Quality Standards" provided here by the Department of Housing and Urban Development:


Space and Security
Performance Requirement
• The dwelling unit must provide adequate space and security for the family."

Fear not! Local school boards, Universities, and minimum wage employers will be required by the ACF, BEA, BIA, BLS, BLM, CDC, CPSC, DHS, DOL, ED, HUD, HHS, DOE, etc., etc., etc. to require all minors, those under the age of 36, to complete Federal form ALURDATABLNG2US-0001, in order to determine if their parents are providing conforming habitat, food, health insurance, and beer/partay money, or if their parents need a reeducation vacation.

"I just don't understand the expectation that we are somehow owed something just because other people have it. "

I was afraid that I was the only one stuck in that conceptual ditch. The one that The Ø has been valiantly attempting to drive us out of lo these 3+ years*.

Speaking of other people have it, anyone interested in a road trip to Vegas? We've still got checks in my departments checkbook!

*Drats, The Ø is foiled by Bush yet again, in perpetuity. Unexpectedly?

Posted by: Chomi DaMoni at May 31, 2012 06:06 PM

there is a federal minimum wage, but that's just a sticker price that states are free to follow or ignore.

According to this map, only 4 states pay below the federal minimum wage. The vast majority of states w/min wages laws pay either the same or higher. I would think having a lower rate than the federal would be a tough sell to voters.

I do think it unlikely, however, that any employer is actually "overpaying" any minimum wage earner, whether or not the state's MW is set above the Fed MW.

I didn't mean "overpaying" in the sense that they weren't worth the wage (though having worked a series of min wage or barely above min wage jobs right up until I was in my late 30s, I can attest that many of my co-workers were indeed being overpaid, judging by the level of work they put in).

I meant to say that if the states are mostly conforming to a uniform federal wage floor, then in areas where the cost of living is very low (usually areas with few jobs, by the way) a min wage worker would be getting more than he or she needed to live. Workers in areas with a high cost of living, on the otter heiny, would be underpaid, relative to what the min wage would buy them.

Isn't income inequality (especially when perpetrated by the federal government) a social justice issue?

*running away*

Posted by: Cass - Confirmation Bigot-in-Training at May 31, 2012 06:28 PM

...that's the whole point of a "minimum" wage, isn't it?

Nope. The point of a minimum wage is the minimum value of the work done for it. But some, who Know Better, choose to dictate that minimum value.

...a calculation as to what constitutes the "minimum" housing required for the minimum wage earner.

This becomes quite straightforward, given the above clarification. The minimum housing required is what the purchaser/renter can afford on the value of the work he's done.

Eric Hines

Posted by: E Hines at May 31, 2012 07:01 PM

Here's what bothers me about this whole thing. I have worked as an adult for $1.00 an hour. I did that for 3 years.

I did it because that price was the point at which I considered myself better off taking the work than not, and also the point at which people who hired me to do work for them could afford (IOW, this is what my services were worth to them).

Now maybe in some alternate universe where everyone has all the money they need, we could say that objectively, my work was worth more.

But we don't live in that universe and so our choices reflect our circumstances.

I wouldn't work for $1.00 an hour now even if, as then, I could multitask: clean my house or cook dinner while taking breaks to supervise homework or talk to the kids I watched just as I would do with my own children. But I was willing to then and I was able to afford to buy things for my family that I wanted without making sacrifices (putting my sons in daycare, or giving up autonomy) that I was not willing to make.

So was I exploited? If so, it was by my own choice.

What wage a worker is willing to accept depends on all sorts of things: how much you need the money, the opportunity cost of not taking a different job or spending the time on private pursuits, living expenses, skills and education, how much time you have...

I could go on and on. And the same thing is true to an extent with employers - the wage they're willing to pay depends on a variety of factors.

The notion that there's some arbitrary dollar figure per hour, below which no person should have to work just plain offends me.

Posted by: Cass at May 31, 2012 08:20 PM

"Isn't income inequality (especially when perpetrated by the federal government) a social justice issue?"

*Checks prior posting, determines DOJ and EEOC was omitted. Decides to include The Office of Government Ethics too... slaps knee, wheezes and gasps for breath, The Office of Government Ethics! hahahahaha.*

"What wage a worker is willing to accept depends on all sorts of things:

<snip>

And the same thing is true to an extent with employers - the wage they're willing to pay depends on a variety of factors."

But, but... that's like, so not fair.

Posted by: Chomi DaMoni at May 31, 2012 08:57 PM

Simple solution. Raise the minimum wage to $75.00 per hour then all the libs can afford their own place. Or better yet, make it $120.00 pe hour. Wait, why not $500.00 per hour and everyone can live like a high priced attorney?

Posted by: Michael at June 1, 2012 07:28 AM

"Get a roommate, move to a cheaper area, or get a better job. Sometimes it really is that simple."

BINGO

The idea that you are 'OWED' a good place to live, or a great job, or a cool car, or OWED anything JUST because you are walking on this earth is a concept that I absolutely abhor. Minimum or no effort (or work effort for that matter) for maximum benefit . . . while someone else does all the work. Those who have the unrealistic expectation of 'getting my 2 bedroom apt because it is owed to me and because I deserve it' are also those who will never understand the satisfaction of working hard, doing their job well, and doing their job right . . the first time!

Posted by: Nina at June 1, 2012 08:22 AM

Spd, you said:

As the young make up the lion's share of such workers, I must assume that some percentage of minimum wage earners reside with their parents, or at my house.

Which made me laugh. Exactly how many young, minimum wage employees do you have at your house? That must be a pretty big house!

Posted by: MikeD at June 1, 2012 08:58 AM

The real effect of a minimum wage is to mandate unemployment for anyone whose work is not worth the minimum wage. The natural minimum wage is zero. The unemployment rate, especially for young and minority workers, inflates with every attempt to raise the minimum wage. That leaves them with the twin alternatives of the dole and the black market.

It works the same with apartment rent control, by the way. A ceiling on apartment rents ensures that a certain percentage of the population won't have an apartment. But then minimum-wage workers can double- and triple- and quadruple-occupy the apartments they can find, probably illegally.

Ain't central economic control compassionate?

Posted by: Texan99 at June 1, 2012 09:48 AM

The notion that there's some arbitrary dollar figure per hour, below which no person should have to work just plain offends me.

Spoken like a true client. :-)

Posted by: spd rdr at June 1, 2012 11:57 AM

The notion that there's some arbitrary dollar figure per hour, below which no person should have to work just plain offends me.

Posted by: Cass at May 31, 2012 08:20 PM

The notion that there is some amount of work below which no person should be able to survive intrigues me. (obviously with exemptions)

Posted by: tomg51 at June 1, 2012 01:32 PM

Really?

An amount of work equal to 0 and not surviving shouldn't involve a lot of intellectual intrigue. Nor, for that matter 15 minutes a year.

Finding where that line is, may be intriguing. But the fact of its existance seems rather mundane.

Posted by: Yu-Ain Gonnano at June 1, 2012 04:30 PM

The notion that there is some amount of work below which no person should be able to survive intrigues me.
Trust me, just stop breathing and the answer will become clear to you very quickly.

Seriously, though, while the lassie fairy side abhors the idea of a mandated minimum wage, the gruff, yet adorable cynic within reminds me that there are bad people about who prey on the dumb and the desperate. If we accept that every society's laws are created in the main to either thwart or protect those at the margins, then setting a minimum wage is a reasonably modest method of accomplishing that aim. (Remember, minimum wage earners represent only 5% of all hourly wage earners , and about 3% of all wage earners (excluding the self-employed, who are paid nothing.)

Now excuse me while my lassie bites my cynic in the tukus.

Posted by: spd rdr at June 1, 2012 06:49 PM

...setting a minimum wage is a reasonably modest method of accomplishing that aim.

The problem with setting such a floor, however well intentioned, is that it very quickly morphs, at the hands of cynical Progressives looking for personal gain, into an entitlement (vis., for a two-bedroom apartment) with that dependency serving to perpetuate the cynical Progressive in power. And no, I'm not being redundant: there are honest Progressives.

Better the laissez faire and our Judeo-Christian imperative to help those who cannot (as opposed to those who will not) earn their own way. After that filter, there still will be about 14 people who need government help. A minimum wage is not necessary to provide that help.

Eric Hines

Posted by: E Hines at June 1, 2012 07:22 PM

The notion that there's some arbitrary dollar figure per hour, below which no person should have to work just plain offends me.

Why is that? That's an interesting intuition.

We normally would say that no person should have to work even for a fairly high rate of return in kind, provided that such returns are provided in conditions of slavery or servitude. A slave on a plantation in the Old South may have enjoyed reasonably good conditions -- some of the slave narratives recorded by the Library of Congress attest to such things, although we may be suspicious of the glories of hindsight and the shining light of Long Ago. Still, it's possible to imagine a slave who is well treated, and maintained -- in return for hard work -- in very comfortable conditions.

So, a wage of "nothing" -- even if it is accompanied by significant in-kind benefits -- is something we have no problem rejecting. Would it be better if we paid our servant a wage of, say, a penny an hour?

It seems like the purpose of wage labor is to provide some independence -- that is, it is to endow the worker with a better condition than slavery. To fill that purpose, though, it surely has to be possible to earn enough (off of the one wage, or several jobs filling no more hours than it is possible to work) to actually obtain liberty.

You can take roommates, of course; a two-bedroom house on one minimum wage job may be a ridiculous standard. I'm not sure, though, that it isn't reasonable to test our economy against the ideal of providing people with a measure of economic independence if they are willing to do hard work.

Posted by: Grim at June 2, 2012 01:02 AM

Which was, by the way, the intended force of the first comment I left. If there aren't any jobs -- as just now, for millions of Americans, there are not -- to some degree our economy is failing the poor.

Posted by: Grim at June 2, 2012 01:05 AM

Actually, as long as the decision to work is voluntary I would argue that there are cases in which a person might well decide to work for $0 an hour. In fact, I have done that as well (which is why I have had a job for 12 years with the same company).

Unpaid internships (or the "try before you buy" tactic people once used before the Obama administration tried to turn them into Social Injustice) are great examples examples of a person working for no money of their own free will and getting something of value - experience, and a chance to demonstrate the quality of their work to a prospective employer.

I couldn't get hired in the DC area until I did that. It was effective and I don't think the federal government should be trying to protect me against an effective way of breaking into a new job market.

It seems like the purpose of wage labor is to provide some independence -- that is, it is to endow the worker with a better condition than slavery. To fill that purpose, though, it surely has to be possible to earn enough (off of the one wage, or several jobs filling no more hours than it is possible to work) to actually obtain liberty.

I don't agree. At all.

There are all sorts of jobs. When I hired teens to watch my boys for an hour or two, there was no expectation that I should pay them a "living wage". Likewise, when I mowed neighbors' lawns or did odd jobs, they had ZERO moral obligation to pay me a wage that filled all my basic needs. The 90 year old woman who works at the coat check at a country club I visited recently doesn't need the money. She told me that. She works two jobs because it gets her out of the old folk's home she lives in, keeps her alert and interested in life. Her other job (what a woman!) involves taking care of other elderly people, many younger than she is :p

My sister in law's Dad retired from the FBI and worked in a mail room. He didn't need the money. He had a pension. He just liked feeling useful and getting out of the house in his 70s.

People work for all sorts of reasons. Sometimes, at its most basic, they work to pay the rent and put food on the table. But a significant number of wage earners work to pay for extra things - luxuries, or at the least non-necessities.

So again, I don't agree that the purpose of a wage is to ensure that the wage earner has enough money. Wages are an agreement between someone with money and someone with labor or skill who is willing to exchange work for money.

I think you are buying into the basic premise behind the minimum wage: some implied duty of employers to provide a given amount of money in exchange for services by the hour. That amount is not really tied to the value of that work, but rather conditioned on a calculation tied to the worker's perceived needs.

You can take roommates, of course; a two-bedroom house on one minimum wage job may be a ridiculous standard. I'm not sure, though, that it isn't reasonable to test our economy against the ideal of providing people with a measure of economic independence if they are willing to do hard work.

Are you seriously suggesting that most minimum wage jobs involve "hard work"? I've run a cash register more times than I care to recall, and that is in no way hard work (even when you're a week away from giving birth). I've flipped burgers and worked in fast food places - also not hard work.

I worked harder than most, and still found both these jobs quite easy.

It's one thing to say that no worker should be forced to work for a wage below the level at which it is subjectively worth it to him to work. Of course the alternative (if his worth calculation is skewed) may be unpleasant but that's part of the value formula.

Posted by: Cass at June 2, 2012 08:25 AM

If there aren't jobs, it's not necessarily the economy that's failing the poor. It could be the minimum wage that's performing that service. For higher-paying jobs, the problem often is the de facto minimum wage that takes the form of the normal expectation of non-cash benefits, which are growing into a larger and larger percentage of everyone's total comp package. Add to that an economy crushed under the weight of too much debt and too much public spending, and you get an extended recession with very little job creation.

Posted by: Texan99 at June 2, 2012 08:36 AM

I think some assumptions are out of place.

Minimum wage has a *real* definition, and it isn't one of entitlement(gimme an iPod). Part of that is to provide housing and food for a family of 4 on a single income. That's gov't dictate and not people believing they're owed anything.

In light of that what does the 2bdr apt on a minimum wage story mean? I think I have to reprise my Inigio Montoya impersonation, 'You keep using that word. I don't think it means what you think it means.'
--
Careful, Cass. There's a reason why The Molly Maguires came to exist. If'n you want the Wobbies and unions writ large again, be my guest, abiolish a minimum wage. Though even Adam Smith, free marketeer par excellance, knew the workers would have to form either unions/guilds or another entity would have to bargain for decent conditions to stave off poor conditions and $hit pay.

THAt said, minimum wage is a failure in many respects. Every time there's rise in MW there's a rise costs of everything to offset it. There's no attainment of the family of four standard.
---
But, yeah, if you want to return to turn of the 20th century economic rape and pilage that lead to some violent situations to redress real problems, go right on ahead. Just don't complain when I attempt do things to stop you from succeeding in that drive because I don't want to go back to that while finding MW laws a fair tradeoff in avoiding that most f'd up time, 'kay? Thnx.

Posted by: ry at June 2, 2012 08:41 AM

Perhaps I'm confused by your terms, Cass. You had said: "The notion that there's some arbitrary dollar figure per hour, below which no person should have to work just plain offends me."

Your counterexamples, though are mostly cases in which people don't have to work -- they're choosing to work.

I was thinking of the question of someone who really has to work: who is providing a living for themselves or their families.

We usually don't have a problem condemning some sorts of below-living-wage labor as unacceptable, even if it's voluntary. For example, the famous "company store" concept from the pre-union coal mines. In those cases we have a sense that the situation is unfair because the company store is manipulating the price of living so that it is just slightly above the amount of money you can make.

If the market is doing that, rather than the company, it isn't a moral wrong: market rates are often free of at least direct manipulation. But I think it might still constitute a failure of the system.

Which is to say, I might not have any problem endorsing the principle that it should be possible to make a living through hard work -- even for the poorest-paid positions.

As for whether minimum wage work is hard or not, here you lose me. The work itself may not be physically challenging, but the hours easily could be: for example, the (below minimum wage, because seasonal) stock job on offer at the local Toys-R-Us involves unloading crates from three in the morning until nine AM. That's physically not so hard (crates top out around fifty pounds), but if it's the only work available (as it may be) it's going to bear a heavy toll on your body over time. Given the market conditions of the moment, though, plenty of people will sign up for it. It's the only work there is.

Strange that in an economy with so little work available, that work should be unloading expensive toys at a toy store. It's a strange world we live in, just now.

Posted by: Grim at June 2, 2012 11:36 AM

Tex:

Those may all be problems. The issue concerns me, though, more and more as the recession grows longer. We're watching millions of Americans hurt, badly, by process they can't control and that we don't seem to be able to control either. I don't know what to do about it, but I do know that it's a morally important question. I wish I had better answers.

Posted by: Grim at June 2, 2012 11:44 AM

There are a number of problems with a government mandated minimum wage. One has been mentioned already: it sets a payment for labor not at all aligned with the value of that labor. Another also has been mentioned: it erroneously assumes--usually at government behest--an obligation on the part of employers: they're social welfare organizations and not for-profit entities.

One problem that gets elided in the NLMSM and is missed in this thread is the cost to the employer of that minimum wage. It's not just the dollar cost of the paycheck to the employee (if that employee is retained on the payroll at the now potentially above the labor value), it's also an increase of above 6% of that increase in the form of payroll tax that the employer must pay on that mandated government wage. Worse, that money isn't even sequestered for the benefit of the employee's future--it's paid right back out to someone else.

There's also another immediate effect: it reduces employment.

There's also the moral effect: the government, by mandating a wage floor, is both arrogating to itself the individual's responsibility for his own welfare--which begins the habit of surrendering personal responsibility in favor of government dependency--and attacks the ability--the liberty--of individuals to contract among themselves for their own agreements.

Moreover, employers are faced with either--or both--of two dilemmas when confronted with a minimum wage: either they must raise prices to cover the added cost, and so faced reduced demand for their product, or they must fire now (or hire less later), and so face reduced demand for their product.

That increased price has other consequences. FDR thought it would be peachy keen in his New Deal travesty to put a floor under farm produce prices to help out the farmers. Then he discovered that the poor folks--those unemployed and barely employed--who already were struggling to buy food at the original prices could afford even less at the artificially inflated prices. So instead of fixing the problem, FDR added to it with food stamps.

He had the same problem with his wage floors, but he couldn't come up with an epicyclic correction for that--the US just had prolonged very high unemployment.

Eric Hines

Posted by: E Hines at June 2, 2012 03:03 PM

"Minimum wage has a *real* definition, and it isn't one of entitlement (gimme an iPod). Part of that is to provide housing and food for a family of 4 on a single income. That's gov't dictate and not people believing they're owed anything."
A government dictate that a single worker with no noticeable skills should be able to support three non-working dependents in a separate household is (1) an entitlement mentality in the form of a government dictate and (2) insane.

Grim -- we can do something about it, but we're choosing, as a voting public, to do something that instead makes it worse, because of the common fantasy that we can support minimum wage levels for entirely unskilled laborers, and a very high level of public entitlement spending, without creating a permanent high level of unemployment.

Posted by: Texan99 at June 3, 2012 08:39 AM

I always thought minimum wage was for teenagers and it was not an intended wage for an adult.

Posted by: beefWellington at June 3, 2012 02:49 PM

"I always thought minimum wage was for teenagers and it was not an intended wage for an adult."
Nope.

That's become the cannard, but that's not the reality.

Way back when, about when Concrete Jungle was written, Someone came up with formula that covered housing, food, medical, utilities, and transportation for a husband, wife, and two kidlets. That was what became the minimum wage. Housing was to use about 30% of that allotment. That's no longer true as rents/mortgages are far in excess of 30% of that value.

It was enacted because of very REAL and pervasive wrongs by employers---hence the large size and aggressiveness of labor unions at the time. Which the need for has been ameliorated because of gov't intervention so we don't have another Pinkertons vs. Unions fiasco. There's a whole laundry list of norms we take for granted that aid in contracts and wage negotiations that go poof when you take this off the table.

But, fine, it's an article of faith that this is bad and only bad, and the alternative will be oh so much better because laizze fair is always better(except in Washington where liquor prices went up 20% when they went to a private seller economy, and now we'll watch the market tank there with lost jobs as well. Brilliant! This does not mean that central planning is best, but that the old axiom about tools having limitations seems to still be true.)).

Posted by: ry at June 3, 2012 03:34 PM

Cass, my biggest complaint is you're saying it's a single input to output arrangement(largely supported by annecdotals). That simply isn't true.

As if the value of the work was the only input that mattered. I wouldn't work on a dock for less than $7.25(actually far more than that). But employers will want to pay far less than that, it simply isn't worth it to them. If you get your way, I hope you like picking up your groceries from the farm because there will be nobody around to move it from distro center to your local mart. But then, we'll see an increase in wages, right, because the work will obviously be seen as worth more?

Look at the wages and practices the video game industry has dealt with(EA to be exact). That stamps BS all over the claim that wages increase because an employer sees a higher value in the work.

You're assuming a common cultural value of fairness(pay equal to the value of the work) which isn't true anymore, and wasn't true such that a minimum wage was established to combat the problem.

Posted by: ry at June 3, 2012 03:46 PM

Tex:

Maybe, but a high employment level that nevertheless doesn't allow workers to earn enough to cover their basic expenses is also a problem.

You mentioned how this plays out above minimum wage with benefits packages. ZeroHedge has a post up just now about the transition away from full time to part time jobs. Employers have sorted out a way around that problem: don't hire full-time employees, and you aren't responsible for providing those benefits. You can pay them less money -- even if you hire two people at 20 hours a week, you're saving a ton because neither of them has benefits from you.

In theory this could break that logjam, and get us to higher employment: certainly it lowers the bar for employers, if they aren't going to be roped in to paying for free health care (like free contraception) for their new part-timers.

Yet from the perspective of the employees, this means things are getting worse. They aren't going to be paid more per hour as a part-timer than a full-time employee was pulling in. They still need benefits, but now have to buy them off the market where they are much more expensive.

So now they need two jobs to have the same income (if they can obtain two jobs with compatible schedules; in this economy, they may be lucky to obtain one job at all). Their benefits are more expensive and probably not as good, and food and energy prices -- by the way -- are going through the roof.

It's the same problem as the problem at the bottom, but it looks like it goes most of the way up the food chain. Yet -- or perhaps therefore -- corporate profits have set new records in 2010 and 2011.

This isn't just a problem for unskilled workers. It's a problem for almost everyone. More jobs is a part of the solution, but the real standard to judge the economy is whether the person who is willing and able to work is able to earn enough to make a living. When we see this kind of systemic failure, I begin to think that there's a problem with the system.

Posted by: Grim at June 3, 2012 09:43 PM

Can I ask a stupid question here? All this talk of "what is the minimum wage for, and is it a good or bad thing," and I've yet to see anyone ask "excuse me... why does a single person need a two bedroom apartment?"

No, I mean it. Why does any single person (or even married couple without children) need a two bedroom apartment? That's stupid. What are you doing with a whole bedroom you don't need? "Well what if guests come over?" Have any of you been single twenty somethings? Do you remember it? I can. If I had guests who were spending the night (the perhaps one or two times it EVER happened), they either slept on the floor, on the couch, or in the tub (depending on if alcohol was involved with the staying). I cannot remember a single guest who complained that I didn't have a spare room for them. Because they too were twenty something guests who were getting out of buying a hotel room. So why, oh WHY does anyone who does not have children, need a second bedroom? And if they don't need one, why are we worried if a single earner can afford one on minimum wage? What am I missing here?

Posted by: MikeD at June 4, 2012 08:50 AM

I think the problem is the idea that there is a basic standard of living that people must have, and that wages must be forced to accommodate it. The way I understand it is, wages are a function of supply and demand, and whatever income you can get will control the standard of living you'll have. There's a reason people used to wait to get married until they were reasonably sure of a good income: most young people don't have skills in sufficient demand to command a generous wage that will support a household full of dependents. Until they do, they should be living (childlessly) with roommates in super-cheap housing eating tacos and ramen noodles. I know it's possible, because I did it and so did everyone I knew when I was young. When you're poor, you act poor.

No one is owed a living. Each of us is responsible for figuring out something he can do that other people place a high enough value on to pay the bills -- and for keeping the bills within the income, whatever it may be. For most young people without a trust fund, that means communal living in ramshackle apartments, and deferred procreation. For most young parents who haven't yet landed cushy recording contracts or landed that fabulous job on Wall Street, it means crowding themselves into little places they can afford, or even shacking up with the grandparents. It also means, or should mean, no new cars, TVs, iPods, etc.

I don't get how this became so complicated. Doesn't anyone grow up relatively poor anymore, and learn how to do this stuff? Where did we get the idea that it was the government's job to make sure we could satisfy all our requirements for comfort within our income?

Posted by: Texan99 at June 4, 2012 10:05 AM

All this talk of "what is the minimum wage for, and is it a good or bad thing," and I've yet to see anyone ask "excuse me... why does a single person need a two bedroom apartment?"

Well, actually I said it in my post :)

This is even funnier in the context of military quarters. We were one of only 2 couples in the Unit's Basic School class at Quantico with children. We had 1 3 year old and another on the way.

When he graduated and got his first duty assignment, we rented on the economy (though the Marine Corps, having told us we could NOT sign a lease - unlike his single classmates - until they officially told us we weren't going to get Base Housing in Quantico, subsequently denied us housing but didn't update the paperwork. So when we arrived at our first duty station, the "rectified" their clerical error by retroactively withholding BAH for the housing they had denied us and we had no pay due. Seriously.).

After a few months we moved again and applied for housing. Now again, we were still one of a VERY small number of junior officer couples with kids (2 now). So when our number comes up we get offered a 2 bedroom. The majority of quarters were 3 BR or 4 BR. I had to laugh - the majority of singles were living in 3/4 BR quarters they had no furniture for, but that was the way it was and we dealt with it :p

I think the problem is the idea that there is a basic standard of living that people must have, and that wages must be forced to accommodate it. The way I understand it is, wages are a function of supply and demand, and whatever income you can get will control the standard of living you'll have. There's a reason people used to wait to get married until they were reasonably sure of a good income: most young people don't have skills in sufficient demand to command a generous wage that will support a household full of dependents. Until they do, they should be living (childlessly) with roommates in super-cheap housing eating tacos and ramen noodles. I know it's possible, because I did it and so did everyone I knew when I was young. When you're poor, you act poor.

BINGO.

I see a lot of statements being made here that I'm not sure are accurate. I've done a fair amount of research on this and will write about it when I have time.

When the Unit was still active duty, I used to invite the retired wives to our coffees and socials. They would talk of what it was like back then - doubling up on apartments with other couples to save money, living in places that would be judged sub-standard now, etc.

A while back we toured the Battleship New Jersey. The staff required to run a battleship started out at something like 7000 sailors and officers. Over the years it was continually reduced until they were running the ship with a virtual skeleton crew.

The cost of a sailor during WWII was $11 a day - total. Now we have so many allowances and benefits in the military. Our standard of living and pay are SO much higher (and the cost of living in goods and services is lower than it was).

I keep seeing people calling for a return to the days when there were jobs for day laborers, etc. but I don't see much recognition that when you raise the cost of hiring workers, companies will find ways to replace them with machines.

Doesn't anyone grow up relatively poor anymore, and learn how to do this stuff? Where did we get the idea that it was the government's job to make sure we could satisfy all our requirements for comfort within our income?

"You keep using that word (poor). I do not think it means what you think it means anymore" :)

Posted by: Cass at June 4, 2012 10:54 AM

Until they do, they should be living (childlessly) with roommates in super-cheap housing eating tacos and ramen noodles. I know it's possible, because I did it and so did everyone I knew when I was young. When you're poor, you act poor.

BINGO.

We're clearly not going to agree here.

We're not talking about people who have behaved irresponsibly. We're talking about people who had kids and bought a house when they had a good job -- before the housing crash, which was only a few years ago, millions more Americans had work that paid reasonably well. Millions and millions more Americans had work that was full time and provided benefits.

The choices -- and commitments -- they made at that time weren't irrational or irresponsible. It was reasonable to buy a house, because all your life houses had been the American dream. You had a good job, you could easily afford the payments, why not?

It was reasonable to have children, because you had all the economic security our market-based economy knows how to provide. You had good work, good pay, a job with benefits.

Now maybe it's because we're from different parts of the country, and things are just worse out here. I see a lot of people, though, who are losing homes and losing everything a bit at a time through no fault of their own at all.

It's fine to say, "You shouldn't have kids until you can support them." It's no good at all to say, "You should get rid of those kids now that the economic crash has destroyed your industry." What's the standard for when people should have kids? When they not only can afford them, but are no longer in danger of losing their job and their ability to continue to afford them? If that's the case, nobody who's still young enough to actually have children can afford to have children.

This isn't their fault. They'd be happy to step up and work two jobs if that's what it took to fix things. But there aren't two jobs for them. There may not be one job. We could say, "Well, just accept losing your home and move to where work is," but there's nowhere else very much better, and losing your home isn't all that easy to accept. Easier than getting rid of the kids 'you shouldn't have had,' maybe, but not very easy.

Posted by: Grim at June 4, 2012 11:59 AM

I'm not trying to be difficult about this. I just think, on the evidence of the last few years, we ought to revise some of our assumptions about the way our system works.

It looks to me like there's a lot more to be said about the endemic corruption affecting our system than has been said, for example. We need some reforms if we're going to rebuild a system that can work the way we expect our system to work.

Posted by: Grim at June 4, 2012 12:31 PM

They'd be happy to step up and work two jobs if that's what it took to fix things. But there aren't two jobs for them. There may not be one job. We could say, "Well, just accept losing your home and move to where work is," but there's nowhere else very much better, and losing your home isn't all that easy to accept. Easier than getting rid of the kids 'you shouldn't have had,' maybe, but not very easy.

Grim, I'm not really sure what all this has to do with the minimum wage.

What you seem to be saying is that it is government's job to make sure good people don't lose their homes, but I don't agree. You own a home if - and only if - you can pay back the loan of other people's money that you bought it with. That's the condition under which you purchased your home, and there was NEVER any security against losing a job or decreasing market value. We were stuck with a home for 15 years because the local real estate market dropped and we would have lost money on our house. There was no guarantee: we gambled on what looked like a sure bet at the time (the market was great and had been for decades). It wasn't government's responsibility to "fix" the problem of market forces. We lost money when we sold after 15 years, but that's the way it goes sometimes.

On our last house, we also lost money but that was our choice. Had we sold at the top of the market we would have made about 300K. Not bad. Our neighbors who bought at the top of the market are mostly underwater on their mortgages.

We didn't trust either the job or mortgage market (having been burned once has that effect) so we stayed in the smaller house. We lost money, but on the other hand we're not under water.

I don't understand the idea that it's anyone else's job to "fix" the problem of bad personal investments, and I say that as someone who has experienced two up close and personal. When you buy a house you are gambling with money that isn't yours. Until your mortgage is paid off, neither is the house. That may be sad, but it's reality.

You're putting the cart before the horse here.

How does the minimum wage provide jobs for homeowners and parents? Answer: it doesn't, and there's evidence (though the vast majority of min wage workers aren't even married) that it actually hurts the people it was supposed to help by decreasing the number of jobs employers can afford to hire.

As for moving to find work, you don't have to move your entire family. My son moved to where the work was and only brought his wife along once he was fairly sure that was a good decision. We lived apart too for the first few years of our marriage.

I understand that you want government to "do something" here to solve the problem of market fluctuations and good people who are hurt by them. That's a natural feeling.

But I don't understand your whole framing of "the way we expect the system to work". The way you expect it to work seems to be that people have some implied guarantee that life won't happen to them, and if it does government will step in to fix the problem.

That was never my understanding of how the system was meant to work, and I'm having trouble understanding where this expectation comes from.

Posted by: Cass at June 4, 2012 12:47 PM

It wasn't reasonable to have kids and buy a bigger house than necessary on the assumption that there would never be a bobble in either the jobs or the housing market, and it certainly wasn't reasonable to do so unless the couple could exercise the discipline necessary to amass quite a lot of savings against a rainy day. I know lots of people were doing it, and lots of other people were telling them that it was the American way and the dream and so on, but so what? That didn't make it prudent, only fashionable.

My husband and I lived in a communal flophouse for several years after we married, even after I finished law school and started earning a decent salary. After we'd saved money, we bought an extremely modest house by the standards of my co-workers with comparable income, and by the lending standards of our bank. Over the next 17 years, as my colleagues and I all started making more money, they all traded up and up into more expensive houses, while my husband and I stayed with our dinky one, occasionally investing cash (not HI loans!) into upgrades. And saving like crazy the whole time. By the time we moved down here, most of the people I worked with thought nothing of carrying a mortgage that was 4-5 times the size of our original 15-year mortgage, which we had paid off early.

When the crash hit, they were strained a lot harder than we were, not because they were less lucky but because we were stingy and risk-avoidant, just as our parents always had been. We both grew up with the knowledge that the last three generations before us had encountered very lean times and sometimes had to uproot their entire families in order to find work to put food on the table. All three of those generations always found a job, somewhere, somehow, no matter how unpleasant or ill-paying, and that includes semi-rural Texas and Louisiana in the depths of the Depression -- not because they were unusually lucky or the beneficiaries of jobs created out of thin air by a benign government, but because they were extremely realistic and moderate in their expectations.

It's not about the circumstances. The circumstances are routinely tough in fairly predictable cycles. Boom times are for saving against lean times. Where people get into the most trouble is by letting boom times inflate their expectations, especially when "everyone's doing it."

Posted by: Texan99 at June 4, 2012 01:44 PM

This is even funnier in the context of military quarters. We were one of only 2 couples in the Unit's Basic School class at Quantico with children. We had 1 3 year old and another on the way.

As a young single enlisted man, my housing consisted of one of four types. There was the "one bedroom one bathroom" 60 man bay I shared. There was the two man room with the latrine we shared with 28 other guys. There was the three man room which shared a latrine with about 17 other guys). And there was the two man room that had it's own attached bathroom that I and my roommate shared. You'll note in every case, I never had a bedroom to myself, much less two.

"Yeah, but that's the Army!" I'm sorry, I wasn't under the impression that anyone was entitled to a better standard of living than the Army provides (assuming that they're even entitled to a standard of living at all).

Posted by: MikeD at June 4, 2012 01:46 PM

Cass:

All it has to do with the minimum wage is the general principle I asked about. Is it right to say that people shouldn't have to work for less than will let them live? The paradigm offered by me as an example of an immoral case is the coal mines that manipulate prices so that the cost of living is always just above wages. Even absent direct manipulation, though, I think we should want a system in which people who work hard can possibly make what they need to survive.

We seem to be in a phase in which that is increasingly not true for lots of people. It's not just minimum wage -- which, as I mentioned in passing, is something the corporations have figured out how to get around. Work is now classified as 'seasonal' or 'temporary' and thus does not have to pay the minimum wage: if you can find work around here right now, it's likely to be that kind. (The exceptions to this are accounting and nursing, which are both robust, but also both require significant investment in education as well as some native intellectual capability.)

An additional example is the movement even of formerly-middle-class jobs from full-time work to part-time work with no benefits. That allows the corporations to escape the trap that T99 described as a kind of defacto minimum wage for white collars; but it creates significant problems for the worker, who now has to find two jobs with compatible schedules (when they may not be able to find one), and even then loses out because benefits are more expensive.

When you say that this is just 'life happening' to people, in a sense I know what you mean; but in another sense, it's not just life. These markets are governed by rules, some of which we write and some of which we don't. The ones we don't write -- supply and demand, say -- may well be classified as 'life happening,' but there are other rules as well. The unenforced rules pertaining to corruption, for example, are a real problem for the system.

I think it's fair to say that they represent a large part of how we got here. We're not balancing the books on the backs of the ones who got us here, though. We're balancing them on the backs of the poorest and weakest. That bothers me.

James Jackson stood up to such an effort when Georgia was young. His idea then was that Georgia should be the kind of place where people owned their own land, and could make a living for themselves through honest work. Other people preferred a system where the Yazoo corporation owned the land (bought through the kind of government sweetheart deal we see so much of today), and people would get what the owners agreed to pay them.

Those are the kinds of rules we make up. They're not just life. They're corruption. He fought them then, and we ought to fight them now.

Posted by: Grim at June 4, 2012 01:54 PM

It was reasonable to buy a house...I see a lot of people, though, who are losing homes and losing everything a bit at a time through no fault of their own at all. ... This isn't their fault.

Apologies if I've over-edited in the name of brevity.

How is it not? My family--wife, grade-school daughter, and daughter's maternal grandparents--lived for two years with no income whatsoever after I got out of the USAF. Where we'd chosen to go live didn't have jobs. Yet we never took a penny of the government's dole--of your taxpayer money. And it wasn't until the last six months of that period that the grandparents started picking up the mortgage (yes, we owned our home).

We achieved that because when we had an income, we took care of our money; we didn't make any effort to get the latest gee-gaw that was on the market. Before we spent anything we set money aside for savings, investment, emergency fund, and so on. We took care of our future before we started living high on the hog in our present.

Who stuck a gun in these folks' ears and stopped them from doing the same? Sure, they've had events happen to them that were a) beyond their control and/or b) unforeseeable. But taking care of the future before that future becomes Now (to channel George Allen) is what planning and saving and investing are for. When I walked away from the USAF, I had no idea that I'd be out of work for two years. Nor did my wife have any idea of her unemployability. But we'd already been taking care.

I sympathize with those folks who've lost their jobs and more. But their current straits are as much a result of their prior, conscious choices as it is of their present poor luck. I'd be far more inclined to help these, and to support a government-provided last resort program to help these, could I be confident that they've recognized the error of their ways and they'll start seriously saving for their futures. And if simply existing eats up all of their income, even after I've been through their budgets--well this is irrelevant in this context. They're not owed a comfortable retirement just because they exist.

All of that drift, though, starts with the idea that everyone is owed a minimum wage commensurate with their desires. Everyone is owed a wage commensurate with the value of their labor to the buyer of that service. And nothing else. (Cass already has addressed that this has little to do with any alleged morality of a mandated minimum wage, beyond the fact, I add, that folks finding themselves newly in this strait rather than starting out at this point have a higher cost (not higher standard of entitlement) of living.)

But there's a non sequitur here, too. What's fault got to do with it? How does that obligate our government to mandate for us what our duty toward these is and, worse, how we must satisfy that obligation? Our Judeo-Christian duties to our fellows are individual duties, not collective ones. If we choose to band together in the name of...whatever... to satisfy those obligations, that's our choice, not government's. Government must be the last resort not the first.

Eric Hines

Posted by: E Hines at June 4, 2012 02:01 PM

Is it right to say that people shouldn't have to work for less than will let them live?

Absolutely, because first of all no one "has to" work, but also because people work for a variety of reasons. If you're suggesting that we should set a wage floor based on the demonstrably false idea that every wage must be a "living" wage (which presupposes only 1 worker per household), I don't think that's a good idea. The job market contains people who don't want or need a living wage and that prices them out of the market. It contains two earner households and small businesses with tight profit margins.

Now maybe you think some people "don't need" to work and government would be right to discriminate against them (essentially reserving min wage type jobs for those who, in the opinion of the government, "really need them"). I don't agree.

What happens if it turns out that employers can't afford to hire as many people when you impose an artificial restraint of trade designed to favor your protected class of workers? Do we force them to offer the same number of jobs at higher pay?

Where does government get off telling business owners they must run their businesses to benefit employees (as opposed to making a profit to offset the real risk of losing money)?

The paradigm offered by me as an example of an immoral case is the coal mines that manipulate prices so that the cost of living is always just above wages.

Yes, and I agree that's rotten but on the other hand, as you observe that's not the case for most workers that their employers control the cost of living. So it's an extreme (and extremely poor) case to base a general rule upon.

Even absent direct manipulation, though, I think we should want a system in which people who work hard can possibly make what they need to survive.

They can but they may have to move, retrain, change fields, work two jobs, etc. Or they may have to move in with family, or sell their home and rent if that's all they can afford.

What you're really arguing for, Grim, is the "right" of people to a predefined wage that has nothing to do with the value they offer to an employer (or with the employer's ability to pay that wage and still stay in business). Next you'll be arguing that when enough employers don't generously step forward and hire "enough" people, we should force them to. That's the logical consequence of a general rule based on the idea that employers "owe" workers a predefined wage that allows them to afford a predefined set of things.

That way, madness lies.

Work is now classified as 'seasonal' or 'temporary' and thus does not have to pay the minimum wage: if you can find work around here right now, it's likely to be that kind. (The exceptions to this are accounting and nursing, which are both robust, but also both require significant investment in education as well as some native intellectual capability.)

Why do you think that is, Grim? You act as though employers don't have to worry about the bottom line but they do. A lot of work *is* seasonal or temporary. Retail's a great example - I worked in retail for years and got paid min wage and none of my jobs were permanent. No job is, in fact, permanent and employers need to be able to hire and shed workers as needed. Again, you are putting the perceived needs of workers ahead of the needs of employers to be able to run their businesses.

An additional example is the movement even of formerly-middle-class jobs from full-time work to part-time work with no benefits. That allows the corporations to escape the trap that T99 described as a kind of defacto minimum wage for white collars; but it creates significant problems for the worker, who now has to find two jobs with compatible schedules (when they may not be able to find one), and even then loses out because benefits are more expensive.

This is a direct result of forcing businesses to provide defined benefits.

I can tell you that my company, which is still hiring and growing in this economy, absolutely does consider benefits and we hire fewer people because we are forced to provide certain benefits and choose to provide generous benefits.

You keep mentioning "corruption" but you have not really explained how this corruption caused the lack of jobs. Employers are feeling the same recession workers are.

It is not and was never reasonable to expect good times to last forever. Anyone who buys a house expecting that he will never experience a severe recession over the 30 year repayment period typical of most mortgages isn't being reasonable either.

Buying a house is a gamble. The idea that the housing bubble wouldn't have burst "but for" the financial meltdown is mistaken. Everyone knew it couldn't continue, except those people who (for whatever reason) convinced themselves otherwise.

I can't make that into a reasonable expectation though, no matter how hard I try. We expected to sell our first house with a modest profit within 4 years based on recent real estate trends, but we never thought that was a guarantee. We knew we were taking a risk. We thought it was a reasonable one, and when it didn't pan out we didn't blame corporations because they had nothing to do with it, really.

I don't even know where you get the idea that there has ever been such a guarantee in place in our history.

Posted by: Cass at June 4, 2012 03:46 PM

The paradigm offered by me.... and ...Work is now classified as 'seasonal' or 'temporary'.... and ...movement...to part-time work with no benefits....

usw.

All of these are failures of government intervention into a free market. Yet you want further government intervention in the form of a minimum wage. Frankly, that makes no sense.

The mother of all failed government interventions in the US is Social Security. Even FDR intended that to be only supplemental income. It's since morphed into an entitlement to a comfortable retirement.

Government can't do these things even when it tries hard and with good intentions.

Eric Hines

Posted by: E Hines at June 4, 2012 04:24 PM

As I said, I can see we are not going to agree.

All I'm really arguing for is an understanding about what right looks like. Right looks like people who, though they start off poor and may not be well educated, getting ahead over time if they work hard.

If we have a society -- including an economy -- that supports that, I'm satisfied. If we have an economy and a society that doesn't, it strikes me that something somewhere must be wrong.

I'm clearly on my own here, though, except for ry. This is why I changed my mind about labor unions, though. When I was a boy I believed what I was taught, which was that labor unions were destroying the country and that was why we couldn't compete with the Japanese. But when I got out of college, and couldn't find work, I eventually got an informal job with some of the local Savannah unions just going out and checking up on some of their members who were on medical leave, or retired, or whatever.

When I'd go out to see one of the young ones, I'd often be shocked by the poverty they lived in. We're talking about guys who lived in rotting single-wide trailers in the swamps around Savannah, with particle board over holes in the floor that had turned to much from the humidity. But the men themselves were clean and eager to get back to work as soon as they got over whatever injury; and the union made sure they had a job to come back to, and the medical care they needed to get over the injury.

The middle-aged people I'd visit had reasonably nice homes. Nothing fancy. Just nice, clean homes closer in to the port.

The retired families I visited usually had simple but nice brick houses, with lots of pictures of their children and grandkids on the walls. The kids had often gone to college, although the grandparents hadn't had that chance.

That's what a good economy looks like to me. It's about hard work getting rewarded, and people who put in the work having their boat lifted a little bit over a lifetime of effort. When I start seeing people like that losing the homes they've worked for and the hopes they had for their children, I get mad.

I'm pretty mad about the way the government AND the corporations have behaved the last few years. There's been a lot of profit and corruption, and as far as I can see the truth is that the class of financiers who wrecked it is the same group of people who are getting themselves elected to office -- and that's true for both parties.

Posted by: Grim at June 4, 2012 04:31 PM

Grim, I'm really confused here.

You seem to be conflating a whole lot of things without any evidence as to whether these are systemic problems or merely whatever part of the elephant (the economy) you are seeing or paying attention to at present. Bad outcomes always stand out. In fact, they tend to eclipse good outcomes - we notice them more b/c they are painful.

I understand what you are feeling, but I don't see any real argument except, "Somewhere, some people are suffering." And that's true, but then it has always been true. It should be more true during a recession, but the jury's out on whether that unsurprising fact is an indictment of the entire system (conveniently ignoring the boom years to focus on the bust years).

I have yet to get any real response to the repeated points I've made about mortgages being inherently risky, except for a generalized statement to the effect of "this shouldn't happen" to people who "work hard".

Well it does and it has throughout our history. My great great grandparents were wealthy. They worked hard to earn their wealth, but they lost it during a market crash. Oh well.

Their children (my grandparents) struggled financially. My parents were solidly middle class, as were my own family... until our children were grown and I added my income. Now I would say we're upper middle class.

Where you do place the cutoff when deciding whether the system works? If you intentionally choose an economic downturn as your reference point....

Even during a recession, if I only look at my circle of acquaintances the economy looks great. If you only see people who aren't doing well, the economy looks terrible. Either way, I can't get you to articulate on what equitable principle other people should subsidize the choice to buy a home predicated on the assumption - and it's a whopper of an assumption - that there will be no economic downturns.

I can't get you to address that point.

People got credit far too easily for about two decades. Did the system work better then? Judging by the contemporaneous results, yes. Looked at in hindsight, not so much. The time window matters. I think T99 is making a really great point here: it's perfectly acceptable to decide to base your personal risk analysis on the frankly unrealistic assumption that you won't hit an economic speedbump for 30 years. You can do that.

What you can't - and shouldn't - be able to do is ask me to subsidize an unrealistic - and extremely risky - calculation. We're seeing the result of that thought process writ large in Europe right now.

You're substituting a snapshot - during a recession! - for a timeline stretching over decades and saying that because things don't look so good during a recession (is this surprising?) we should re-examine our assumptions. That's not really a valid thing to do.

My assumptions have ALWAYS been that economic downturns are predictable and normal and MUST be taken into account. Your assumption seems to be that people shouldn't have to worry about downturns so long as they work hard. But things are - by definition - generally rough during a recession.

You seem to be arguing that people shouldn't have to take that undeniable reality into account. They shouldn't have to make adjustments (sometimes, painful ones) when they borrow other people's money to buy an expensive consumer good. If I believed that, I would own a Mercedes coupe. I would say, "Hey, I can afford it now. I don't need to worry about whether I can depend on making the payments if I lose my job and can't find another one."

You also seem to be assuming that times won't get better. But you can't look at a snapshot at a single point in time as a valid test of this proposition:

Right looks like people who, though they start off poor and may not be well educated, getting ahead over time if they work hard. You can't see the whole timeline, and picking a low point as your measure of success/failure fails from a whole slew of logical perspectives.

Posted by: Cass at June 4, 2012 05:55 PM

OK, Cass, let's go through these details.

Either way, I can't get you to articulate on what equitable principle other people should subsidize the choice to buy a home predicated on the assumption - and it's a whopper of an assumption - that there will be no economic downturns.

What we've actually done is a little worse than that. People who worked through the 2000s have substantial equity in their homes. However, many of them have also lost their jobs due to the crash caused by the speculators (who managed to turn risk-absorbing mechanisms like credit default swaps into a new means of gambling, vastly increasing everyone's risk without anyone's consent). Thus, they can no longer make the payments -- through no fault of their own.

"Well, that's your risk! Say goodbye to your house. Your fault, cupcake."

Wait a second, though. They have equity -- quite a bit of it. So why don't they just refinance -- rates are extremely low right now -- so they can ride out the storm on the wealth they built up in good times? After all, they did just what you and T99 say they should do: they saved in good times by investing in their homes.

Well, no! We can't let them do that. They have no job. It would be improper for a bank to extend them credit now. They can't make the payments.

People got credit far too easily for about two decades. Did the system work better then? Judging by the contemporaneous results, yes. Looked at in hindsight, not so much.

Yeah, it's a pretty big deal in hindsight. The people who did it right and paid their mortgages and worked hard... they're now looking at losing all that equity, with no options. They can't sell their homes because the market is glutted. They can't pay the mortgage they have because they lost their job. They can't refinance because "under the new rules" they don't qualify even for credit secured by their equity. After all, the banks don't want to own another house. Houses are a drag on the market.

The banks and financiers put these people in this position. They offered credit "too easily," maybe; but now they won't offer it at all, not to the people who took their advice about their investments for ten long years and saved by investing in a house.

Ultimately it strikes me that if you want advice on the law you ask your lawyer, and if you want advice on your money you ask your banker. If a lawyer took a client and gave them legal advice that led them to destruction, you'd have a case against them. When the banks do the same thing -- and then change their policies so that they're "not allowed" to help during the downturn -- we say it's just the poor fool's fault for having taken the risk of buying a house and paying his mortgage.

People can't be expected to be experts in everything. If you hire an accountant and he screws you, apparently the state of Georgia (who certified the accountant) seizes your business and steals the cash out of the drawers. If you trusted your banker to give you good advice and they screwed you, you can kiss all that equity in your home goodbye -- it's "your risk," somehow, not the bank's risk. And if your politicians respond by bailing out the banks, with your tax money, that's your risk too.

That strikes me as fundamentally wrong. It's putting all the weight on the poor guy or the poor gal who's just out there trying to earn a living. When things are good, the politicians and the bankers are happy to take their money; when it goes bad, they're on their own. The only thing the government or the banks want to talk to them about is the new taxes they need to pay to fund the bailout.

Again, maybe it's just because I'm from a part of the country that's been ravaged by all this. But I don't like what I'm seeing.

Posted by: Grim at June 4, 2012 06:19 PM

...a generalized statement to the effect of "this shouldn't happen" to people who "work hard".

At the risk of putting words into Grim's mouth, I think that's his point. The fact that bad things, as you've put it, Cassandra, have always happened, is no reason to accept that in the future. To this point, I agree with Grim; although I disagree with the idea (not necessarily Grim's) that the existence of bad things is evidence of the system's failure.

Where I disagree with Grim is in the idea that government is the first resort answer.

Government is incapable of answering this sort of problem. All it can do is protect a free market environment, which is the environment that is the most efficient at producing a society where everyone has the opportunity to work hard and make their lives a little better. And then, at last resort, help those who couldn't make it in one of the inevitable downturns get back on their feet.

Eric Hines

Posted by: E Hines at June 4, 2012 06:22 PM

The banks and financiers put these people in this position.

Yeah. CRA had nothing to do with it. Nor did ACORN. Or government forcing banks who neither needed nor wanted TARP bailout money to take some anyway, so as to not embarrass the others. Nor did borrowers casually borrowing more than they could afford--knowing they were doing that, or having "constructive knowledge" of that fact. Certainly there were some bad apples in the banks. But they're not alone in the charade. Far from it.

When the banks do the same thing -- and then change their policies so that they're "not allowed" to help during the downturn....

Or not. Most of them weren't changing their policies. They were changing away from government policies thrust on them and going back to their original lending standards. They aren't a welfare program, never mind that government wants them to be. They have a legitimate expectation of being repaid. And if the current economy means fewer people fit that bill, then fewer legitimate loans are going to be made.

Equity: if you have a $300k mortgage on a $300k house, and you've paid half that mortgage principle back, you have $150k of equity in your house. If the market sours and your house now is worth $150k, you don't still have $150k equity: you have $75k. And it matters not a whit what caused the market price to shrink. That market price variability is the risk that the borrower knew--or should have known--they were incurring when they borrowed in the first place. And if their mortgage payment maxed out their income in some fashion (pick your own definition of max), that was just dumb on the borrower's part. On what real basis was that borrower assuming he'd have a job in perpetuity? On what real basis was that borrower assuming he'd get pay raises in whatever job, or series of jobs, sufficient to ease the loan burden, in perpetuity? On what real basis did the borrower assume his house would never fall in value?

If you hire an accountant and he screws you, apparently the state of Georgia (who certified the accountant) seizes your business and steals the cash out of the drawers.

Another government failure that looks to government to fix....

If you trusted your banker to give you good advice and they screwed you, you can kiss all that equity in your home goodbye -- it's "your risk," somehow, not the bank's risk.

Well, yeah (ignoring the jape about who screwed whom). It's my house. The banker's risk is that I'm not screwing him by borrowing beyond my means, or by cavalierly walking away from my mortgage just because it's inconvenient to honor my promise to repay.

Nobody expects people to be expert at everything. But it is reasonable to expect people to think about what they are doing before they do it. There was a discussion here or in the Hall about the value of handyman-ness. It's not rocket science. Third grade budgeting and actually setting aside for the future are part of that handyman-ness.

Eric Hines

Posted by: E Hines at June 4, 2012 06:46 PM

What makes you think I'm looking to the government, Mr. Hines? All I've advocated is a general principle for how to understand whether things are right or not.

I might be willing to let the government have a chance to put things right. I might be willing for the banks to think about what they've done, and take steps to put things right. If they don't, though, I assure you that my upbringing provided me with other ideas for how things can be put right.

As for your example, it just goes to prove how imbalanced the system is.

...if you have a $300k mortgage on a $300k house, and you've paid half that mortgage principle back, you have $150k of equity in your house. If the market sours and your house now is worth $150k, you don't still have $150k equity: you have $75k.

And if the bank loaned me $300,000, and has now received $150,000, it's going to sell the house and keep the rest. I'll have spent $150,000 for the privilege of losing my house to the bank. All the risk is on one side.

Speaking of which, I just got my tax assessment the other day. My home is assessed as having lost $40,000 in value in one year. Fortunately we bought it at well below the asking price, so we didn't take a forty-thousand dollar hit; but I can imagine a fair number of my neighbors did. That's more than a year's work that just evaporated. Not a year's saving's -- a year's work. It's probably four or five year's savings. Fairy gold.

If they'd just gone on 99 weeks of unemployment followed by Social Security disability like the smart people, they'd be no worse off and would have had all that time free to spend with their families. Stupid fools. They shouldn't have taken the risk.

Posted by: Grim at June 4, 2012 07:14 PM

Speaking of which, I just got my tax assessment the other day. My home is assessed as having lost $40,000 in value in one year. Fortunately we bought it at well below the asking price, so we didn't take a forty-thousand dollar hit; but I can imagine a fair number of my neighbors did. That's more than a year's work that just evaporated. Not a year's saving's -- a year's work. It's probably four or five year's savings. Fairy gold.

Let me get this straight: you haven't finished paying for your house yet.

Your house has (as assets often do in markets - I know ours has, and our last house did too) dropped in value.

This, by the way, was not an unknown risk. We bought our first house in 1983 and even back then they were talking about when the bubble would burst. We had a good long ride, but some of us got caught.

Again, you're assuming the market will never come back up (and it may not, but likely it will). What about the appreciation people got on their homes during the boom?

Apparently that was OK, but a decline in market value is not? Really?

That's the risk you take when you buy a home, Grim. We've taken that risk 3 times now. We lost - BIG TIME - twice, but then we factored that risk into our calculations. Some people did not do that: they counted on something they should not have counted on.

What's your solution?

Posted by: Cass at June 4, 2012 07:38 PM

But let me offer your next riposte, because I know it: 'they signed the papers!' As indeed they did.

So, legally, it can be made all their risk; we can look past all the manipulation that crashed the economy and cost them their jobs. As a matter of law, that can be done.

The problem is that it can't be done morally. We've let the financiers and bakers capture the entire American system and turn it into a system of speculation. 'You bought your house! That's a risk! You must be punished for the failure of your risk! The system depends on you taking the consequences of a bad speculation!'

None of these people ever meant to make a speculation. They aren't speculators. Most people aren't. All they wanted was to buy something solid and build on it, through honest hard work.

If we can't do that -- if we're going to insist that everyone is a speculator, everyone is a gambler, everyone is always putting their family home on the line -- then we've lost something powerful and important. Most ordinary, decent people aren't gamblers. They just want what everyone has always wanted: to build something solid, with hard work and the sweat of their brow.

Risk belongs to the gamblers. There are a whole lot of them in American banks and equity firms. The risk is rightfully theirs, because they are the ones who turned the ordinary and solid investments of Americans into a casino. They are the ones who ought to be paying up for the gambling debts, because it was their decision to turn this into gambling at all.

Posted by: Grim at June 4, 2012 07:38 PM

No it wasn't.

It has always been a gamble. There have always been recessions, some of them quite severe.

Posted by: Cass at June 4, 2012 07:39 PM

Cross posted with you, Cass.

What's my solution? Putting risk on the people who insist on treating life like a gambling casino. Not letting them play both ends: they profit by bundling mortgages and selling credit default swaps, and if they win, they profit wildly. If they lose, they pass their losses entirely to the mortgage holder; and if anything is left when they've bankrupted the mortgage holder for everything they are still worth, they get the rest through a government bailout paid for by us.

Hanging a few of the worst of them isn't a bad idea either. Bankers and politicians who are helping the bankers craft the rules this way, both.

Posted by: Grim at June 4, 2012 07:44 PM

It has always been a gamble. There have always been recessions, some of them quite severe.

Sure. But we've been through that. These folks paid into their homes. Now they have equity; but now that the recession is here, if they've lost their jobs, they can't borrow against it.

It's all about protecting the banks, and making sure that all the risk is put on the working men and women. It's not about doing what's right for people who worked hard and saved, and now need to fall back on those investments in hard times.

This shouldn't have been a speculation in which they win or lose everything. They invested in something solid and real -- real estate -- and now they ought to be able to tap those investments. Instead we changed the rules.

Posted by: Grim at June 4, 2012 07:52 PM

What makes you think I'm looking to the government, Mr. Hines?

Your whole argument that a minimum wage of some sort is necessary. A minimum wage is a government mandate, and nothing else. Have I misunderstood? You're not looking to government to implement your principle?

I'll have spent $150,000 for the privilege of losing my house to the bank. All the risk is on one side.

As to the first, not if you honor your commitment, unlike the gentleman in the article I cited. As to the second, of course the borrower is inflicting no risk at all on the lender.

That's more than a year's work that just evaporated. Not a year's saving's -- a year's work. It's probably four or five year's savings. Fairy gold.

You bet. Just like it was fairy gold when the house had its phantom value of $40k more the prior year. In fact, nothing at all was lost. Gold is fairy gold. $1,000/oz today, $1200 tomorrow, $800 the next. Gold--and houses, and labor--have the value the two people looking at an exchange say they have. Nothing more, nothing less. And tomorrow the two, or two others, will arrive at a different set of values.

They shouldn't have taken the risk.

Apparently they should have thought about their risk more carefully before they did.

'You bought your house! That's a risk! You must be punished for the failure of your risk! The system depends on you taking the consequences of a bad speculation!'

Where's the morality of letting people renege on their commitments as soon as it becomes inconvenient to them to keep those commitments? Again, what's your solution? Your constant decrial of folks accepting the negative consequences of their risk-taking (while allowing them to keep the positive consequences?) implies that you want to inure folks from the negative consequences of their behavior. Is that really your position?

...if we're going to insist that everyone...always putting their family home on the line -- then we've lost something powerful and important.

No. We never had that. All of life in a free society is a risk. Or would you put those two gentlemen exchanging their gold, their houses, their labor in a straight jacket and dictate the exchange rate to them for all time?

What is acceptable risk to you, Grim? What separates risk from speculation? On what basis is speculation wrong?

Eric Hines

Posted by: E Hines at June 4, 2012 08:30 PM

My solution, Mr. Hines, is just what I've said.

There's nothing wrong with gambling within proper limits. I enjoy a good game of poker myself. I don't, however, bet the family farm on it -- no matter how much I'm enjoying the game. The whole metaphor of "betting the family farm" shows that the American people understand that to be a rash and radical thing for someone to do.

What you're proposing is that every ordinary mortgage is a radical game of speculation of that type. That's not how it should be. Ordinary people need to be able to make ordinary investments. These may make or lose money, certainly; and you should pay your mortgage and build equity in good times, so that you can borrow against it to ride out the bad times.

What we're seeing here is different. We're seeing an industry, the finance industry, that has figured out how to turn every ordinary investment into a kind of radical gambling. The proliferation of bundling and credit default swaps is what made these ordinary investments (which could gain or lose a little) into radical gambles with the family farm. Now you are talking about not the possibility that your investment might lose a bit, but that you'd find yourself out of work, in an economy with no work to offer, with rules that prevent you from borrowing against your investment -- but that don't prevent the bank from foreclosing to recoup 100% of its investment.

We're in the situation where these banks turned these ordinary investments into radical gambles, but then changed the rules so that ordinary people were the ones who paid the cost. It's not even wrong to be a speculator, as long as you are ready to pay up for your speculations: but it is certainly wrong to convert people's family farms into speculations, and then change the rules after the game is over to force the people to pay for your gamble. That's been the problem here, not only in terms of changing the rules to prevent borrowing against equity, but in terms of having the taxpayer bail the banks out.

I don't care about the minimum wage. I never said a word about it: what I was asking about was the general principle Cassandra said she objected to. The minimum wage -- and indeed, the government entire if this is how it intends to behave -- is disposable. The principle, I think, remains a useful guiding principle regardless of mechanism.

Posted by: Grim at June 4, 2012 09:21 PM

The proliferation of bundling and credit default swaps is what made these ordinary investments (which could gain or lose a little) into radical gambles with the family farm.

I'd be curious to hear your chain of events that connects the failure of CDS and MBO holders (the CDS and MBOs themselves, by the way were, and are, quite safe; the problem was a failure to remain diversified and instead loading up on these CDS and MBOs) with a decision of a borrower who still is fiscally capable of honoring his commitment, if with more difficulty, simply to walk away from his promise because keeping it isn't convenient to him.

Bearing on that, I'd be curious to hear your chain of events that ties the failure of the CDS and MBO holder to another man's loss of a job.

I'll leave aside your focus on the evil financiers; you don't seem willing to accept that any other players had any role in the failed mortgage payments themselves.

Eric Hines

Posted by: E Hines at June 4, 2012 09:33 PM

Your first question is a non sequitur, my friend, as I have not argued that anyone should be free to abandon anything for reasons of convenience. What I have argued is that they should be allowed to borrow against the equity they saved up in good times, to help them against the bad times.

Your second question I am sure could be adequately answered given the power of the subpoena. The tragedy is that no one with such power is interested in the question.

People can be responsible for making good investments or bad ones. The problem is when you change gears, so that a long-solid investment suddenly becomes a kind of secret speculation; and then change the rules, after the gamble goes bad, so the people who took their bank's advice end up losing everything to protect the bank. The bank, meanwhile, gets saved by the taxpayer.

Or read James Pethokoukis. He's far kinder to the banks than I'm inclined to be -- my sense of history is that the New York banks have almost always been on the side of breaking the poor for their profit. But leave that question aside: he still wants the banks broken up, and for much the same reasons. They're powerful enough to push the risks they've assumed off on others, like the taxpayers, when the risks go bad. That's a problem. It's a problem for all of us, not just the poor.

Posted by: Grim at June 4, 2012 11:04 PM

These folks paid into their homes. Now they have equity; but now that the recession is here, if they've lost their jobs, they can't borrow against it.

No, they most certainly do NOT have equity. Equity is a positive sum equal to the present value of a property minus mortgages, claims, or liens.

If you buy a home for 120K and put down 20K, you must borrow 100K of other people's money.

If, over the years, you repay 20K in principal, your mortgage balance (the amount you haven't yet repaid to the bank and its' depositors) is now 80K. If the market value of your home then falls to 80K, you have ZERO equity. There is nothing to borrow against.

Let's see if I understand what you're suggesting.

If people have not saved enough of their own money to buy a house, they should be allowed to use other people's money. Funds lent out by banks belong to other people who have deposited money in the bank.

Banks have no obligation to protect their depositors' funds. They should be required to lend out money to people who want it, and if borrowers lose their jobs then the bank (and their depositors) are SOL.

If you stop paying your loan, banks should not be allowed to repossess the house and sell it to protect its depositors and investors (pension funds and the like), because the borrower "worked hard" and "played by the rules" (except for that troublesome matter of paying back what they borrowed). Of course the bank's depositors worked hard and played by the rules too - that's why they have savings. But who cares about them?

Faced with a situation where a bank has lent out money belonging to its depositors and the borrower can't pay back that money, the bank should now have to lend even more of its depositors' money to a person who now has no job!

If the house appreciates in value, the owner keeps the windfall.

If the house loses value, the bank must make up the difference.

If the borrower loses his job and stops paying, the borrower should be able to:

- stay in the house without repaying the bank's depositors - after all, it's "his", even though he used other people's money to get it.
- use non-existent equity as "security" to borrow even more of other people's money (in effect, forcing them to pay his mortgage for him with a vanishingly small prospect of seeing their money again)! Again, who cares about their rights?

Or maybe we just let the bank can sell the house for market price (which is now below what the borrower owes the bank's depositors), give the borrower back everything he paid in principal, and leave the bank and its' depositors holding the bag.

Remind me never to put my money in any bank you control, Grim. Also, remind me (and others) never to let their pension fund buy shares in any such bank :p

Posted by: Cass at June 5, 2012 08:08 AM

"Is it right to say that people shouldn't have to work for less than will let them live? The paradigm offered by me as an example of an immoral case is the coal mines that manipulate prices so that the cost of living is always just above wages.

It is indeed a terrible state of affairs when the same person or company both sets the wages and owns all the local food and housing. That's not a natural state of affairs in a free economic system, and we have antitrust laws to break up monopolies. In every other circumstance but that extremely unusual aberration, it's not a question of making people work for less than they need to live on. It's a question of their living at a level that can be paid for by whatever they happen to earn, even if that means a lot of rice and beans and shared housing. I've seen too many people do it successfully to doubt that it can be done.

As for my suggestion that prudent people should tie up their savings in their homes, I decry any such reading of my advice! If you have some extra cash, it's often a much better idea to upgrade your home than to go buy a bigger, nicer one with a new mortgage, and it's certainly better to use cash than to take out a home-improvement loan. But we'd have been nuts to put money into upgrading our home if we hadn't at the same time been saving far, far more in liquid investments. Savings aren't much of a hedge against disaster if they're in something as illiquid as a house. A lot of people got into trouble that way, and then seemed shocked that, just because it was possible for a long while to flip houses, suddenly it wasn't that easy any more. That just comes from too much focus on the "free money casino" mentality, where we drink in the beautiful results of the upside but refuse to think about the downside that always goes with it. TANSTAAFL.

I doubt whether most people ought to own their homes at all. If they can't master the basic economics and risk management, they'd be much better of renting, which would make it easy to uproot themselves and move to where the work is. I think we screwed up the housing market precisely by rigging the system to enable more people to get home loans than could possibly be expected to deal with them like responsible citizens. That's what you get when you make the taxpayers the ultimate guarantors of mortgage risk. We got the same result by making the taxpayers the ultimate guarantors of student loan risk. It's really a predictable cycle, whenever we think we can successfully interfere in the law of supply and demand.

Posted by: Texan99 at June 5, 2012 10:24 AM

Is it right to say that people shouldn't have to work for less than will let them live?

No, it is not right. To say otherwise is to say that it's better to do nothing to improve your situation than to do little.

The paradigm offered by me as an example of an immoral case is the coal mines that manipulate prices so that the cost of living is always just above wages.

The problem, in your example, is that you have one entity which controls both supply and demand. A command economy, not a free market. You do not solve the problem of a command economy by "commanding" it a different direction. Command economies do not fail because they have the wrong commands/commanders.

All the risk is on one side.

I rarely speak about my job, and with good reason, but I have worked pretty much my entire career in credit risk and I can tell you that statement is flat out false.

All they wanted was to buy something solid and build on it, through honest hard work.

Firstly, mortgages (which is what you are actually *buying* when you borrow money) are not, and have never been "solid", nor something "to build on".

Secondly, housing is not now, nor has it ever been "solid" as an investment except in the long term. Values rise and fall constantly and always have. To say that the borrower reaps all the gains when values go up, but the banks should reap all the losses when values go down puts "all the risk on one side".

Housing, as shelter, is only solid in as much as you actually own it.

But using a short-term volital income to purchase an investment that is only solid in the long term is, and has always been a gamble. Our grandparents understood that. Which is why they bought small homes with very short mortgages and not large homes with very long mortgages as is common today.

The banks did not *make* us do that. There isn't a bank around that would turn down a loan for 1.5X your annual income on a 10 year fixed rate note with 20% down. *We* asked for a 30 year, 3% down ARM for 3.5X our income. And yes, the bank, its depositors, and shareholders expect to get paid for that increased risk.

And now you want the banks to lend money based largely non-existant equity to someone with a non-existant job and the basis that they will be repaid in, what? Good Intentions? Or are the depositors and shareholders just supposed to make it a gift?

Let me say it again (and, again, I say this as someone who works in credit risk), mortgages are not and have never been "solid investments". They are, and have always been, gambles. Which is why our grandparents avoided them as much as possible.

Posted by: Yu-Ain Gonnano at June 5, 2012 11:31 AM

[Banks are] powerful enough to push the risks they've assumed off on others, like the taxpayers, when the risks go bad.

But that's a political decision, borne of a bailout mentality in a too-big-to-fail fantasy. There's no economic need for such. Indeed, with a much less centrally-planned (I mean heavily regulated) economy, where minor tweaks like the Sherman Antitrust Act are enforced, an economy quickly recovers from the failure of Gigantic Consolidated.

I have not argued that anyone should be free to abandon anything for reasons of convenience.

and

The problem is when you change gears, so that a long-solid investment suddenly becomes a kind of secret speculation; and then change the rules, after the gamble goes bad

But any sound investment is pure speculation when held in perpetuity. Price dislocations, for instance, are going to occur, frequently and minorly in the near term, and hugely and infrequently in the long term. It doesn't matter whether those huge fluctuations are cause by your evil bankers or my scofflaw borrowers or a meteor strike. They're going to occur, the rules will get changed and a sound investment tossed into a cocked hat. If we're going to allow such exceptional occurrences to void a commitment, what's to stop the next step of allowing any inconvenience, large or small, from similarly voiding the same commitment?

And since catastrophe is both unpredictable in its particulars and wholly predictable in its simple occurrence, anyone entering into a long-term investment--or who simply lives--has an obligation to plan for that catastrophe and to set aside assets which he can readily convert into food, rent, transportation. Let housing prices be stable, and a man's entire "wealth" be wrapped up in his home. Let him lose his job. How will he turn his house into food? Why is an honest lender obligated to lend to what is now a demonstrably poor credit risk?

There's nothing magic about me or my example of 2 years (104 weeks, not 99) without income--and without dole. I'm only of middling intelligence, but my wife and I did some planning and setting aside. Everyone can. And so there's never a "need" for crying King's X, let's start over. Except via bankruptcy court.

Eric Hines

Posted by: E Hines at June 5, 2012 11:52 AM

Remind me never to put my money in any bank you control, Grim. Also, remind me (and others) never to let their pension fund buy shares in any such bank :p

Indeed you ought not to. To behave as you describe runs afoul of my most deeply held principles for how people ought to treat each other.

To honor is to sacrifice of yourself for others you hold important. Thus, there are certain professions that are inherently honorable, because they are built on sacrifice of yourself and your own interests for those you love.

Banking, as you describe it, is based on precisely the opposite principle. That such bankers serve an important purpose in our economy I do not doubt. Nevertheless, precisely because it is founded on such a principle, we ought to take care not to allow this industry's interests to become the defining interests for us as a civilization. This principle is not, I maintain, what we as a people should want to define us, or our laws, or our basic institutions.

But I appreciate the unanimous and full-throated nature of your opposition, ladies and gentlemen. I account myself defeated here.

Posted by: Grim at June 5, 2012 01:57 PM

To behave as you describe runs afoul of my most deeply held principles for how people ought to treat each other.

Which behaviors that Cass describes would that be that run afoul of your most deeply held principles?

That banks have a responsibility to protect their depositors funds?

In what way is being a good steward of their depositor's money an "opposite principle" of acting honorably?

Banks are not charities, nor should they be. If one is looking for charitable housing, Habitat for Humanity is a better place to seek it.

Posted by: Yu-Ain Gonnano at June 5, 2012 02:14 PM

Grim:

...we ought to take care not to allow this industry's interests to become the defining interests for us as a civilization.

I don't agree that anyone has done this.

I consider the notion that one person would think that they have the right to use another person's money to buy something they want conditioned on a promise to repay what never belonged to them, and then violate that promise to be profoundly dishonorable.

A society that protects such behavior isn't following any code of honor that I would recognize, but I realize that the sanctity of contract (the idea that agreement on a deal suppported by mutual consideration is binding) is an outdated ideal in an age where people feel entitled to profits earned with other people's money but think others should absorb their losses.

So I guess we have a very different notion of honor. When you honor a bargain, you can be depended upon to keep it even when that becomes difficult or it turns out you didn't get the benefits you hoped for. Witness Abe Lincoln working off his business partner's debt even though he didn't incur that debt, because it was incurred in the name of the business). Sacrifice is one quality that is worthy of honor, but it's hardly the only one and a particularly inexplicable one when we're talking about sacrificing your depositors' money to protect a favored class.

Posted by: Cass at June 5, 2012 02:30 PM

Grim, to expect strangers in financial transactions to treat you with the kind of open-ended generosity you're willing to extend to the dependents in your household reflects what I think is an essential confusion. At the very least, the strangers at the bank should not treat you that way unless it is entirely their own money they're putting at risk by making you a loan but privately thinking of it as a king of contingent gift. They have no excuse whatever to act that way with money of which they are only the custodians.

It would be far better for people never to loan or borrow if the paradigm they're looking for is really closer to that of informal gift-giving inspired by affection and need, without expecting a quid pro quo. To tell the truth, the same is true of formal employment. If what we really want is to be allowed to do something interesting and fulfilling while coincidentally receiving a regular deposit of money into our banking accounts, we would do better to cultivate intimate relations with rich, generous uncles who only want us to be happy. I prefer the Golden Rule, under which I no more expect my employer to treat me like an indulged dependent than I expect my employees to treat me like Santa Claus.

Posted by: Texan99 at June 5, 2012 02:36 PM

I account myself defeated here.

Not defeated, Sir. There is/was no contest. Just two sides of a discussion, neither of which has convinced the other.

And so I just have a couple more comments/questions, and then I'll withdraw from the matter.

Banking, as you describe it, is based on precisely the opposite principle.

But banking as it's been described here is an entity whose leadership and employees are aimed at the goal of protecting their own investors/owners/creditors' investments in others. Since all business entities are but agencies of the men who form them, with similar moral, as well as legal, obligations, are they not all in the same boat--banks are not unique?

And what Cassandra and T99 said just above. We do need more folks like James Cagney--who could make whole movies on a handshake--today.

Eric Hines

Posted by: E Hines at June 5, 2012 03:02 PM

Ladies and gentlemen,

What I have argued is that people ought to have a right to their own money; and that it's wrong to change the rules, after the fact, so that they can't tap money they have invested. That seems so obvious to me that I don't understand how anyone can oppose the idea.

This doesn't strike me as a gift, or 'giving people a right to other people's money,' or anything of the sort. The banks are arguing that they shouldn't be forced to loan money to people who can't repay it. OK -- but the loans are fully secured by the equity in the homes. Nobody's asking the banks to give away money, just to let people tap their investments. People made investments in good times, and want to tap them in bad times.

I get the sense that we are all talking about very different scenarios, though, because the counterpoints you raise are wildly removed from what I think I'm describing. T99 is talking about people flipping homes and outreaching their capacity; I'm talking about people in rural Georgia who haven't done any such thing.

Nobody here has an expensive home, but they have homes and farms, and these new rules prevent them from borrowing against the equity they have built into those homes and farms if they are out of work.

Meanwhile, it was the financial sector that created the bubble and inflated it, and rode it out until it burst. All these people are out of work because of the instability created by people who make bubbles in order to profit off them. Now those same people are extracting whatever wealth they can from these ordinary people -- people who used to work jobs as construction workers or truckers, as well as running farms on the side. Now their industries have been broken and their farms are being lost.

The big banks made this mess, and they took bailout to cover their losses that you and I paid for as taxpayers. Now they also want to prevent themselves from "losing" money by letting people tap their investments. That is to say, they want to capture all that equity for themselves. It's thievery, and the law is totally on their side for the same reason that these big banks all got bailouts: because they've bribed the people who make the laws, and have thus captured the state.

That's how it looks to me, in any case, from where I sit in rural Georgia. Maybe it looks different if you're sitting in some place with McMansions where people were getting rich by flipping things; yeah, those people are part of the problem, sure. That's not how it was out here, though, and I just can't see why the people who never wanted to be part of the problem and did their best to keep clear of it should be the ones losing everything over it. I especially can't see it while the banks are getting made good at taxpayer expense.

Posted by: Grim at June 5, 2012 03:13 PM

Grim:

The same principles apply whether we're talking about someone who buys and flips McMansions or someone who owns a modest home.

1. Either way, if you use someone else's money to buy something and promise to pay it back, the lender has a right to expect that you keep your word. The fact that it may be tough for you to do so by reason of circumstances beyond your control does not change that obligation. Your promise to repay is conditioned on the amount of money you borrowed from other people, NOT some imaginary guarantee of escalating (or even constant) market value.

Asking you to honor your word is not "being mean" or "being dishonorable". Banks make arrangements with people all the time, but their first obligation is NOT to someone who broke their word but to their depositors and investors.

2. If you are already behind on paying back old debts, there is zero reason to expect a bank to lend you even more money. Whether you have equity or not is 100% irrelevant. If you have equity, you can sell your house and use your money however you please. The rest of the mortgage balance is not yours and never was. And neither is the house - it isn't yours until you have paid off the loan, so you have no "right" to stay in a house paid for with other people's money. It ain't "yours" unless and until you've paid for it.

3. Equity is not - and never has been - "what you have already paid back". It is the excess of the current selling price over what you still owe. You can't redefine equity on the fly. There are several corollaries here:

a. If you owe more than the current selling price, you don't have equity. Period. So there is no collateral.

b. Just because your house will sell for X today is no guarantee that it will sell for X tomorrow. You may have 10K in equity today, but if the value of your house drops another 10K (hardly unforseeable in today's market) during the term of the loan, the bank has now made a loan to a guy with no job and no equity. That is an unforgivable breach of the bank's fiduciary duty to its depositors. There is NO security for the loan. People have no right to expect the bank (and its depositors) to assume more risk.

c. That is to say, they want to capture all that equity for themselves. It's thievery, and the law is totally on their side for the same reason that these big banks all got bailouts: because they've bribed the people who make the laws, and have thus captured the state.

How does a bank "capture" equity? If the house is sold, equity is returned to the seller and the bank has nothing to say about it. If the bank forecloses, equity is returned to the person who paid it. So there is no theft.

If the house is not sold (and there is actual equity), the homeowner can liquidate the home to regain the equity. Until the moment a home is sold, equity is a moving target. Apparently you want to force banks to extend additional amounts of their depositors' money to someone who can't demonstrate they have the means to pay it back (and is already behind on a previous loan of other people's money).

The law is on the side of the banks because the people who provided the money for the mortgage have rights too.

I just can't see why the people who never wanted to be part of the problem and did their best to keep clear of it should be the ones losing everything over it.

Because they bought something with other people's money, they can't pay even their old loan back, they aren't willing to sell to honor their debt, and they expect MORE of other people's money on top of everything else! Doing what you seem to want (allowing banks to let them cash in their equity at today's prices) puts all the risk on lenders and their depositors. If the house price falls further, they won't get their money back on the old loan. And probably not on the new loan either, because that money will be spent.

I especially can't see it while the banks are getting made good at taxpayer expense.

That's a separate issue. Maybe you want bailouts for people who fall behind on their mortgages? This transfers the risk of buying a home to innocent taxpayers.

What could *possibly* go wrong with such a scheme? Banks weren't bailed out to benefit the banks. They were bailed out to protect people who had money deposited in them, and secondarily to protect taxpayers from having to make good on loaned out funds that never got paid back.

When you buy a house, you get the benefit of living in it. You get tax deductions every year. If your house appreciates in value (and you sell), you get to keep the profit.

The loss, by your rule, is always transferred to someone else. Eliding past the fact that banks usually lose money on foreclosures, banks are on the hook to honor deposited funds that some people don't pay back, or that it's downright stupid and irresponsible to lend out more money to someone who can't even pay back what they already owe with no security doesn't change the basic fact that you want homeowners to get all the benefits of home ownership but pass the risks onto banks, their depositors, or taxpayers.

Posted by: Cass at June 5, 2012 04:35 PM

Cass:

You keep treating these people as if they were breaking their word. They aren't breaking their word: refinancing a debt is not a violation of the old terms of the debt.

Consider that the problem exists whether there is an existing mortgage or not. Let's take the case of someone who has paid off the full price of their home, but has now lost their job.

You can't possibly charge this person with being in violation of his word to pay, because he doesn't owe anything. He is the real owner, but will lose the land anyway if he can't pay the taxes on it. Times are hard, and he knows he may need to tap a couple of years' living expenses before the economy recovers to the point that his truck-driving business is earning reliably again.

This should be an easy transaction. They own something that is worth a lot more than the money they are going to need for a couple of years' expenses (and taxes). It should be easy to get a loan when there is full security for the amount of the loan; and with interest rates being rather low, it should be even more affordable.

Yet the mortgage rules we have now won't let them take a mortgage.

You tell me that the taxpayer bailouts of the banks are a separate issue, but it's not a separate issue at all. The banks ceased to have the right to claim that their only duty was to their shareholders or profits when they took taxpayer money.

They got paid off, by us, when times were hard for them. Now they want rules that prevent them from having to do business with people who are in the same position.

Many of those people, who are in bad shape now, were still taxpayers in 2008. The banks were happy to take their money when the banks were the ones who needed money (and at gunpoint, using the IRS as enforcers). Now that those people need help, the banks are insisting that their hands are tied by convenient new rules that prevent them helping those same people out.

This strikes me as an indictment of the whole system: the government, the finance industry, all of it. At a minimum we should recognize that banking isn't an inherently honorable exercise, and that the collection of vast wealth and power in an industry that is not inherently honorable is a matter of some concern. There should be close oversight, and the banks should be broken up so as to make them less powerful and the government less susceptible to their manipulations.

Also, we need to take some thought for helping out the little guy. Maybe it's not good business, but the relationship between Americans is bigger than just a business relationship.

Posted by: Grim at June 5, 2012 04:52 PM

refinancing a debt is not a violation of the old terms of the debt.

But when the refinancer has no means of repaying his original loan, the lender--and any other lender--has no obligation to agree to the refinance. To force the lender to do so is to change the rules in the middle of the game by allowing one party to a contract to unilaterally alter the terms of the contract without the consent of the other party.

[T]ake the case of someone who has paid off the full price of their home, but has now lost their job.

By construction, your man has no capability to repay the loan. How is anyone obligated to lend him anything? Forcing someone to "lend" is changing the rules in the middle of the game.

The banks ceased to have the right to claim that their only duty was to their shareholders or profits when they took taxpayer money.

Even the banks who didn't want the money but were forced to take it anyway? The banks didn't cause the present fiasco, your protestations to the contrary not withstanding. The government and private interest groups and NGOs did. Certainly your evil bankers and my scofflaw borrowers were complicit, but the government changed the rules on the banks, and the interest groups changed them further with their charges, among other things, of racism if the banks didn't lend to poor risks.

we need to take some thought for helping out the little guy.

Indeed. Where are his neighbors? Where is his local community? Where are the surrounding communities and farther removed neighbors? Our obligation to help the less fortunate is an individual obligation, not a collective one. Transferring that obligation off onto government, or onto the banks, is unsustainable from an economic and political standpoint, and it's an immoral rejection of our Creator's endowment in us of our obligations and liberties.

Certainly we can band together to form private enterprises whose purpose is charity so as to more efficiently apply our individual resources to our obligation, but the formation of one such entity in no way obligates any other entity to do the same. Moreover, if the banks (and other private businesses) are not allowed to make and retain for their creditors/owners/investors profit, but must--here's a rule change in the middle of things again--give up their profit whenever someone falls on hard times, then in short order all of us will be on hard times and unable to satisfy our duty to help the less well off. We'll all be those less well off.

Eric Hines

Posted by: E Hines at June 5, 2012 06:00 PM

OK, so let's work with your scenario of a homeowner with no mortgage on a house that is today worth 100k. That is he has 100k in equity.

But he has no job.

He wants to live off this equity until such time as he gets a job.

OK, fine. So tell me, if you are lending your own personal money to this person, on what do you base your expectation of the borrower actually paying you back? That 2 years from now when the borrower still has no job you can foreclose on the home for $80k toss the borrower out on the street and take a $20k bath yourself?

Posted by: Yu-Ain Gonnano at June 5, 2012 06:07 PM

We've already established that I am not fit for the banking business, YAG. If I had money to loan him, I would base my expectation as to whether he would pay it back on the quality of his handshake, how he looked me in the eye, and whether in fact he was a man known to work hard and honestly at whatever he undertook.

Mr. Hines:

The churches down here do a lot for people. However, I think the man -- he is after all a fictional case, but if he is a typical Southerner -- would not want to ask anyone for charity, no more than he would want to apply for welfare. What he would want to do is rely on the wealth he had built up through hard work, and ask no one for anything. He would feel that the money he had saved and invested in paying off his mortgage in good times gave him an asset that he ought to be able to trade on, in bad times.

I think he would be right to feel that way.

As for the banks who were forced to take bailouts against their will, that's a reasonable point. We will exclude them. But note also that the mortgage rules don't force someone to loan money: rather, they force them NOT to loan money. The bank -- even a small bank, run by local people who know the man and his family -- can't let him stand on his own feet, and borrow against the asset he bought when times were better. They have to turn him into a beggar.

Posted by: Grim at June 5, 2012 07:26 PM

...the man...would not want to ask anyone for charity....

Indeed. But his neighbors need not wait for him to ask in order to act. I've written elsewhere that one of my bugaboos about charity is that it ought to be anonymous wherever possible--if the beneficiary knows who his benefactor is, it's no longer charity, but obligation.

The neighbors could, for instance, chip in, and the property tax bill of your illustrative man turns up paid. Other bills similarly. The man's obligation in return, then, is to chip in likewise when he's in a position to do so.

Eric Hines

Posted by: E Hines at June 5, 2012 07:36 PM

One point I missed: the mortgage rules were written by government. They may well have been so at the banks' behest, but it still was government that did the deed.

Eric Hines

Posted by: E Hines at June 5, 2012 07:38 PM

OK Grim, let's abandon the scenario we were discussing and address this new one:

You keep treating these people as if they were breaking their word. They aren't breaking their word: refinancing a debt is not a violation of the old terms of the debt. Consider that the problem exists whether there is an existing mortgage or not. Let's take the case of someone who has paid off the full price of their home, but has now lost their job. You can't possibly charge this person with being in violation of his word to pay, because he doesn't owe anything. He is the real owner, but will lose the land anyway if he can't pay the taxes on it. Times are hard, and he knows he may need to tap a couple of years' living expenses before the economy recovers to the point that his truck-driving business is earning reliably again. This should be an easy transaction. They own something that is worth a lot more than the money they are going to need for a couple of years' expenses (and taxes). It should be easy to get a loan when there is full security for the amount of the loan; and with interest rates being rather low, it should be even more affordable. Yet the mortgage rules we have now won't let them take a mortgage.

What mortgage rules are you talking about here? The ones that banks have used for centuries to assess the risk associated with loaning out other people's money safely?

What would such a "refinance" (question: how to you refinance a loan that has been paid off?) agreement look like?

BORROWER: Though I have no income coming in to pay any of my bills, I own a house free and clear.

I don't want to sell my house to access my equity because... well, I just don't feel like it. I would rather ask other people to voluntarily assume some of my risk. That way, if the recession continues and I don't find a job it won't be just me that's hurting.

In return for lending me a sum equivalent to some percentage of the current value of my house (not all, because if I default the future value may well be lower than it is now and there will also be expenses associated with foreclosure), I agree to....

What? In a normal loan, the borrower must demonstrate that he has money to pay the loan back at agreed upon amounts on agreed upon dates for an term agreed upon in advance.

Here, the buyer has no income and can't guarantee - because housing prices are still falling - that his house will be worth the same amount in the future.

So what does he promise here in return for being able to use other people's money? I honestly can't see it, but am willing to entertain the specifics of your proposal.

Posted by: Cass at June 6, 2012 08:33 AM

It appears that the borrower promises nothing but his character, and that that should be good enough. If the borrower doesn't repay the loan the lender is then justified in having a low opinion of the borrower's character.

That no enterprise could survive under such a scenario is irrelevent, it is still morally wrong and evidence of a broken system that must be "fixed".

Posted by: Yu-Ain Gonnano at June 6, 2012 09:43 AM

I reject your reality and substitute my own.

Posted by: Adam Savage, Mythbuster at June 6, 2012 09:52 AM

YAG:

I do reject your reality -- at least, your assumptions about reality. My sense is that handshake deals between men of honor is how a substantial part of this country got built.

We used to be able to do that. Now it's all math and formulae, and a man's word doesn't fit those things. You can have that reality, if you're happy in it.

Cass:

I don't care whether we talk about the one scenario or the other. I only want to point out that it's the same problem set in both cases: it seemed like you wanted to treat the trucker/farmer as being in the wrong, and thus justify him losing everything, because he'd lost his job and couldn't make the original payment schedule forever. My point in introducing the alternative model is just that he'll still lose everything even if he'd made every single payment, and now owns his house free and clear. Taxes alone will do that.

Now in both scenarios, the guy has a substantial equity (either all of it, or a substantial investment) and needs to borrow against it. Your point is that the house and land can continue to decline in value, and thus don't represent a proper security.

There are two counterpoints.

1) That they can decline in value is true, but it's also true of anything else that you might offer as security for a loan. If I offer my job as security -- that is, as evidence that I could repay -- I can lose my job tomorrow too. There's no reason to prefer the one security over the other.

2) The desire was to borrow a couple of years' living expenses, including enough money to make the mortgage payments. That means that:

(a) the risk is fairly low, since the value of the home is much larger than the amount to be borrowed. Thus, even if home prices decline substantially, your loan should be fully secured.

(b) your odds of getting repaid at least for the two years he thinks he need are quite high, since he's borrowing enough money to do that.

This still represents a risk, but it's a fairly well mitigated risk. If the man is known to be of good reputation, and has a history of working hard when times are better, it doesn't seem to me like an unreasonable risk to take for the limited return of the interest on the mortgage.

Of course, a bank might not agree: but under the current rules, they don't have the option of taking this risk. The man will lose his farm, because he can't borrow against it; and then he'll not only be unemployed, he'll be homeless; he won't only be unemployed and homeless, he'll have lost everything that he had invested in for a decade of work; and there will be one more unoccupied home dragging down the market (owned either by the bank, in the one scenario, or by the taxman, in the other).

Posted by: Grim at June 6, 2012 10:35 AM

Whether I am happy in it is irrelevent. An apple falls if it is dropped regardless of my happiness about such.

To act as if that is not the case and to set up a system that depends upon it not dropping is a recipe for failure.

If we set up "the rules" such that lenders behaved as you desired there would simply be no lenders period.

Of course, a bank might not agree: but under the current rules, they don't have the option of taking this risk.

False. A lender can lend under any rules they want so long as they do it on their own balance sheet. The GSEs may not buy it, no one may be willing to securitize it. But a lender can put anything they want onto their own balance sheet.

What you are really talking about is what is called a Reverse Mortgage. HUD backs the loan if the borrower is over 62, but again, if a lender is willing to put it on their own balance sheet there is nothing stopping them from doing so at any age.

Posted by: Yu-Ain Gonnano at June 6, 2012 11:10 AM

No, I think I see what Grim's on about. At first I didn't, but now I think I do.

Let's say to take out a $200,000 loan to buy a house. The deed is the collateral. If you don't make a single payment, the bank evicts you and holds the deed free and clear. They then sell the house for $200,000 to someone else. On the other hand, if for half the loan, you're servicing debt and paying down the principle. So lets say you're far enough along to have paid down half the principle. The interest is profit to the bank for having provided the loan. That's their earned income. But you've paid half the loan back. If you stopped making the payments (regardless of reason), you owe $100,000, but the bank gets to keep the $200,000 house. So not only have they earned the interest (which I believe all of us agree they are entitled to), but they get repaid $300,000 ($100k they've been paid + $200k when they sell the house, because they're clearly not going to sell it for the remaining $100,000 they're owed)? Now, I suppose in a perfectly just system, the bank would sell the house for what they could and pay the loanee the difference (minus a reasonable handling fee). So if they sell the home for $120k the loanee at least gets $20k minus fees back (since the bank lost $80k on the home).

Mind you, I understand the reluctance to loan money back to the loanee based on the principle he's paid off (since he no longer has the ability to pay the original loan off... much less the new loan), and it feels unnatural to loan money that isn't even the loanee's (since it's money he owed in the first place. But I will agree it feels wierd to say that if you managed to pay 29 years and 11 months worth of a 30 year loan off, but failed to make that last payment that the bank gets an (effectively) free house out of it. Regardless of the reason that last payment wasn't made.

Posted by: MikeD at June 6, 2012 11:52 AM

I'm not quite sure that is what I'm talking about, since the idea wouldn't be to burn up the equity but to provide short term capital that could be paid off when the job picture improves. That instrument looks like it would accept the equity in return for something like an annuity; but you'd still end up losing the house (although you'd at least get something out of your investment; the most likely scenario here is that you lose the entire investment and end up homeless).

Posted by: Grim at June 6, 2012 11:55 AM

burn up the equity but to provide short term capital that could be paid off

Providing short term capital secured by equity is by definition burning up said equity.

Nothing prevents the borrower, when he has a job, from refinancing the reverse mortgage for the amount of the "burned up equity" as a standard mortgage.

That is the borrower has a $100k house and uses that as collateral for a Reverse Mortgage (from Lender A) where the borrower receives $2000 per month of "burned equity" for a max of 50 months. The borrower returns to work after 2 years having bled $24k of equity.

The borrower then refinances the $24k (say with Lender B) as a standard mortgage and uses that to pay off the $24k owed to Lender A.

There is no "rule" that I know of which makes this transaction illegal.

Posted by: Yu-Ain Gonnano at June 6, 2012 12:28 PM

I had taken it to be Mr. Hines' point that it was the government preventing these things (which meant that I should have less ire for the banks). I think he is at least partially correct about that, but I don't really care. If we're back to blaming the banks for protecting themselves at the expense of the society they were happy to tap for bailouts, then I'm happy to go back to blaming the banks. The banks that asked for taxpayer money to save their butts from their bad investments are ill-placed to be so "scrupulous" about not taking even mild risks to avoid putting people out of their homes. They now have a duty to the American people, not just their bottom line.

Posted by: Grim at June 6, 2012 12:40 PM

What would such a "refinance" (question: how to you refinance a loan that has been paid off?) agreement look like?

BORROWER: Though I have no income coming in to pay any of my bills, I own a house free and clear....

Leaving aside the editorial snark following, this is a perfectly reasonable loan request. The man wants to borrow a sum, and he's offering a tangible, valuable item as security against his failure to repay. This has been the stuff of loan arrangements between free men ever since we fell out of the trees and bumped our fannies on the savannah.

Of course, the potential lender has no obligation to make the loan, but he's not being hit up with an empty demand for money.

Yes, I am modifying a detail of your scenario--without my modification, the potential borrower has no reason to mention that he owns his house free and clear.

It appears that the borrower promises nothing but his character, and that that should be good enough.

And indeed, it very well can be, when the loan is between two men who know each other. But an entity that is acting as an agent for the men who created it, and funded it (in a modern economy) with OPM, has a prior duty to those other people whose money they commit to this or that loan. Those other people do not know the potential borrower, and a background check cannot reveal the sort of valuable information that Grim summarizes as the look in his eye or the nature of his handshake. Banks may be people, my friends, but they are not close enough to the ground to know this person.

The interest is profit to the bank for having provided the loan.

A minor quibble: the interest is income to the bank. It doesn't become profit until the sum of principle repaid and interest paid begins to exceed the original principle loaned (and if we want to get really anal about it, not until that sum exceeds the net present value of the principle loaned at that time in the past).

...because they're clearly not going to sell it for the remaining $100,000 they're owed)....

This is hardly a foregone conclusion. Aside from the running thread that the house today may not be worth the $200k it was when the money was borrowed, the bank has no need to sell it for that original $200k. Keeping it simple and leaving aside my quibble above, the bank recoups its investment, plus a taste for its own profit, if it sells the (still worth $200k, let's say) house for the $100k remaining of the unpaid principle. In an ordinary market--i.e., not the present housing meltdown and its residue--this gives the bank enormous leverage in the market. It does not want to hold that house on its books; real estate isn't its line, lending is. So it'll sell the house at the reduced price available to it in order to move it. This also gives the buyer an enormous opportunity, whether that person be a house flipper, or a serious home owner who intends to live in the windfallenly priced house.

Today, though, the foreclosure overhang lowers the banks' leverage in moving what should be cut-rate houses off their books. This argues for the banks being more willing to cut deals with stressed borrowers, but it in no way obligates them to. And it leaves them, either way, with the conundrum of separating the legitimately stressed borrower from the scofflaw borrower.

...sell the house for what they could and pay the loanee the difference....

What difference, exactly?

if you managed to pay 29 years and 11 months worth of a 30 year loan off, but failed to make that last payment that the bank gets an (effectively) free house out of it.

In this extreme case, the banks probably would not be allowed by the courts to foreclose. My wife's parents had sold a house to a buyer, and well into the repayment period, the buyer chose to stop making payments. The first thing the lawyer we consulted about the matter worried about was whether we are trying exactly that: her empirical experience was that the courts (Iowa, not Texas or Georgia, but I suspect the principle is rather widespread) would block a foreclosure in such a circumstance.

Eric Hines

Posted by: E Hines at June 6, 2012 12:41 PM

I had taken it to be Mr. Hines' point that it was the government preventing these things....

I had taken, without checking, your statements about "rules" preventing the banks from acting. I defer to YAG's superior knowledge.

Eric Hines

Posted by: E Hines at June 6, 2012 12:46 PM

MikeD,

Any remaining equity after the foreclosure sale does belong to the borrower. The bank cannot keep it.

That said, foreclosure proceedings are EXPENSIVE. The lender has to pay attorney's fees, court fees, appraisal fees, auction fees/commissions, and if they take in their possession, they have to fix up the property (if you haven't been making payments you likely haven't been doing maintenance) and then pay the Realtor's commissions. It burns through that equity fast.

It is almost universally true that if you have any equity worth talking about, you are much better off selling your home at the scratch-and-dent price yourself before you ever get to foreclosure.

Posted by: Yu-Ain Gonnano at June 6, 2012 12:53 PM

Yu-Ain's comment brings up what was in my lengthy deleted comment from last night - this sounds like a reverse mortgage, which the borrower can get if he's a senior.

If the borrower defaults, moves out of the home, fails to keep it up or doesn't pay the taxes, or the last owner dies, the bank gets to sell off the house.

Here's the problem I'm having with your scenario, Grim.

You want to use a best case scenario (a homeowner who has made all his payments on time or even paid off his mortgage entirely, but unfortunately did NOT save up the recommended 6 - 12 months of income during the fat years as a hedge against lean years). Ok, I'll totally buy off on this... as a best case scenario not at all typical of people who end up in default on their mortgages.

You want to use the best possible, unrepresentative scenario as the basis for a broad policy that would apply to a group of people who aren't the best case.

Ignore years of actual data on how people really behave in such situations. That's not relevant to your best case. Instead, look the guy straight in the eyeball and hope he really is the exemplar of The Most Trustworthy One Percent.

If the bank were loaning out it's own money, I'd agree: sure, if the bank wants to take that risk, good on them. I have no problem with that.

But the vast majority of banks are loaning out money that belongs to other people (and they're on the hook to pay it back on demand, something they can't predict). Which, by the way, is why these banks were bailed out in the first place - to prevent a run on banks that would hurt not only homeowners but anyone with deposits in the bank and the taxpayers on the hook for FDIC insurance.

You really seem to want to cast this as some kind of existential Manichean conflict between Good (homeowners) and Evil (heartless bastard bankers who are being mean because they enjoy oppressing the proletariat).

On the one side we have Purehearted Homeowners Who Can Be Trusted To Do What Most People Clearly Can't Be Trusted To Do (not based on my opinion, but on centuries of documented experience that resulted in the loan guidelines Congress jettisoned so ill-advisedly over loud protests from banks who knew this was a crock of sh*te, for which principled objections, you think they should be hung).... the bankers, not Congress.

On the other side we have Heartless, Venal, Moneygrubbing Banks Who Risk Nothing When They Lend Out Our Money, which (whilst entertaining and comforting on some level, is clearly a gross oversimplification of a complex political debate over social justice). Saying that banks risk nothing is false on its face, and eliding past that inconvenient fact doesn't do justice to the question we're discussing.

You are also eliding past the question of fiduciary duty (IOW, you have to be more careful with other people's money entrusted to you than you would with your own, for good reason).

I don't get such stark Good vs. Evil hypotheticals. Sure, it's possible to skew the hypothetical so far to one side or the other that your proposed solution looks like a slam dunk. But let's not lose sight of the fact that most of us are neither Extremely Good or Purely Evil.

And let's not pretend that extremes are a good model for most everyday decisions.

Posted by: Cass at June 6, 2012 01:04 PM

That said, foreclosure proceedings are EXPENSIVE. The lender has to pay attorney's fees, court fees, appraisal fees, auction fees/commissions, and if they take in their possession, they have to fix up the property (if you haven't been making payments you likely haven't been doing maintenance) and then pay the Realtor's commissions. It burns through that equity fast. It is almost universally true that if you have any equity worth talking about, you are much better off selling your home at the scratch-and-dent price yourself before you ever get to foreclosure.

BINGO. Another case where we were talking best case (current sales value of a sale of an occupied residence vs. of an abandoned foreclosure that may take months or even years to sell, and will not sell for near the asking price it would if occupied and maintained).

Add up all those best case assumptions and after a while you're talking real (other people's) money :p

Posted by: Cass at June 6, 2012 01:08 PM

I had taken it to be Mr. Hines' point that it was the government preventing these things

The .gov prevents quite a bit, but not on-balance-sheet Reverse Mortgages.

They don't have to. They're just stupid risks.

Posted by: Yu-Ain Gonnano at June 6, 2012 01:08 PM

I'll freely admit, I know next to nothing pertaining to home loans. I married into a house my wife had already "purchased". I use scare quotes there, because she did buy the house so much as take over payments for the previous owner. As such, he lost any and all equity he had and she benefited. The house is in her name, we pay mortgage and homeowners insurance every month, and should hold the deed, debt free, at some point this decade.

Posted by: MikeD at June 6, 2012 01:11 PM

I really should leave this, because we've gone all the way around and you're just as convinced now as at the beginning. It's a stupid risk that no responsible banker should ever take to loan money against this kind of security; no one can ask the banks to take that kind of risk with other people's money.

But the same banks thought it was a wise use of other people's money to bail out the banks when their far riskier forms of loans blow up the markets and the economy.

My concern is partially for the good people hurt by all this, while the banks got made good. But I also have a concern about the kind of society we are, when we bail out the rich and powerful but put the poor out of their homes even when they have substantial (or even complete) equity.

I don't like all this. This isn't how I think a just society should run. And now I've said my piece, and I'll finish.

Posted by: Grim at June 6, 2012 02:26 PM

My concern is partially for the good people hurt by all this, while the banks got made good. But I also have a concern about the kind of society we are, when we bail out the rich and powerful but put the poor out of their homes even when they have substantial (or even complete) equity.

But the problem here is not the bank bailouts, but the bailouts themselves (but that's a different argument). Those never should have happened at all, contra Cassandra's suggestion.

Look at the moral hazard those bailouts have caused. Look now at everyone and his great aunt with their hands out looking for their bailouts (and I'm not at all singling out your down on his luck farmer; I'm thinking more of OWS and unions and scofflaw borrowers).

Absent those bailouts the Current Unpleasantness would already have run its course, and we'd be booming, again.

As to the kind of society we are, I'm not worried at all. Keep in mind that most Americans don't like the bailouts----and loudly didn't like them even when they only were being discussed, to the point that the Democratic Party-controlled House voted down the bailout on the first try. It wasn't until the second try, after McCain had gone back to DC to sit meekly in a discussion to show his Presidential fiber that the House--including all the RINOs then in office--lost their nerve and voted up the bailout.

The bailout is the product of self-serving politicians, not of American society.

Eric Hines

Posted by: E Hines at June 6, 2012 03:00 PM

Eric, under normal circumstances I would agree with you.

I have come to believe that the difference between people who think the bank bailout was necessary and those who don't is whether you believe the financial system would have melted down, absent that step.

I am on the side of those convinced we were far closer to a complete, cascading vortex of crap that would have sucked down good banks along with the bad ones. If you believe that, considerations like moral hazard (which I have written about countless times and don't dispute) fade somewhat. They are still important, but not of primary importance when weighed against a disaster none of us have ever experienced: a global, computer network mediated meltdown.

I accept that you have good reasons for believing what you believe. And I don't accept Grim's repeated formulations that the banks were bailed out to benefit the banks. Several of those banks didn't want bailout money

Some of those banks are not actually guilty of the things they were accused of. Not that that matters, given the current populist "get a rope" mentality.

I don't lack sympathy for Grim's fictional homeowner. As I pointed out, we have lost money twice in similar circumstances.

I also don't accept Grim's suggestion that absent the financial crisis, we would never have had a recession or a downturn in the housing market (THIS is what he says caused the job losses for his fictional homeowner).

That's not right - there have been multiple recessions with multiple waves of housing fits and defaults and attendent job losses during the 21st century. They're extremely common. So to pretend that this one is somehow the exception to a general rule of unending prosperity we can depend upon is just plain delusional. History doesn't support it.

We all learned about the Great Depression in school. Speculation played a part in it, but it was also only a part of a larger boom and bust cycle that pervades every civilized society on earth for centuries and centuries.

We can put our heads in the sand and pretend that isn't the case, but that doesn't change the reality. There's nothing like that giant clue bat to bring home the lesson that real people suffered in those previous recessions we learned about in history class ("Zzzzzzzzzzzzzzzz...."). Except when it happens to us, suddenly it becomes all too real.

Posted by: Cass at June 6, 2012 03:25 PM

I really should leave this, because we've gone all the way around and you're just as convinced now as at the beginning.

One point, if I may, Grim? Your "going all the way around" if you will convinced me that my initial reaction was wrong. I followed the logic of it through and came out the other side agreeing that theoretically, there should be no harm in the bank issuing another loan against the equity in the home. Mind you, I still see where the bank would be reluctant to do so, and think (as a member of a credit union) that I'd rather see my bank sell the property and make up the difference with the loanee, but I can now (thanks to your line of argument) see both sides of it where I could only see one before.

So I thank you for that.

Posted by: MikeD at June 6, 2012 04:06 PM

Some random thoughts, and then I'll join Grim on the sidelines.

...far closer to a complete, cascading vortex of crap that would have sucked down good banks along with the bad ones.

The primary espousers of this are guys like Paulson, who wet his pants all over the House floor in his panic, and Geithner, who's so ignorant he couldn't even pay his own taxes--or figure out how to hire someone to do that for him. There is no objective evidence to suggest that the credit lockup--which is what these guys claim would have happened--would have been widespread or long-lasting.

I don't accept, on the other hand, that these guys--or the other politicians involved--are as droolingly stupid as that would make them seem. Look what happened, other than the manufactured moral hazard: the bailouts were quickly morphed into handouts and payoffs to political cronies. As a Progressive adviser once suggested, these worthies didn't let a good crisis go to waste. What does that suggest about the purpose of the "bailout?"

We all learned about the Great Depression in school.

What, exactly, is it that you think you learned about the GD in school? In my school (which somewhat predates yours, I think), we learned that FDR did his best, that the New Deal was instrumental in getting us out, and peripherally, that WWII was what it took finally to lift us up.

What actually happened was that FDR's bailouts (which he called "New Deal," rather than "TARP") prolonged the Depression, including killing a nascent recovery that had begun to begin in 1937. But the schools don't teach that. I learned it years later, researching for my books.

Eric Hines

Posted by: E Hines at June 6, 2012 04:07 PM

What Mike said :)

I never had a problem with a bank voluntarily offering such a loan. Merely with the idea that it was dishonorable for them to safeguard funds entrusted to them, and with the rather intemperate broad brush condemnations of an entire industry based on... Who knows?

My son is a good and honorable man. So is Yu-Ain. He's also an old and valued friend. I didn't care for it when some commenters felt it necessary to bad mouth the entire legal profession and I hope I can be counted upon to object to the same for the banking industry, in which I have worked and in which I have friends and family.

Posted by: Cass at June 6, 2012 04:53 PM

You're welcome, Mike.

For the record, I didn't say banking was dishonorable. I didn't even say it couldn't be done honorably. I said it was based on a principle -- as you described it -- that was "not inherently honorable." That's not a blanket condemnation of people involved in the industy; it's just a fact about the industry, insofar as you are correct in describing its basic principle.

You believe as I do that institutions guide human nature. Remember the old post I wrote called "Honor defined"? It articulates a principle for honor as self-sacrifice, which is the same principle applied here.

I am less worried when a profession that is inherently honorable accrues power or influence. I don't worry about the influence of the Marine Corps on our government, for example. The guiding principle of the organization is itself a kind of check on human nature, because it the organization is structured around self-sacrifice and service. That is still not a perfect guarantee. Still there must be watching and oversight. But given proper watching and oversight, that founding principle endows the institution with the capacity to guide human nature in the right directions.

There are many organizations and institutions founded on other kinds of principles. That doesn't make them bad. They may even perform some social good, in which case they are -- to that degree -- good.

Posted by: Grim at June 6, 2012 06:05 PM

But the same banks thought it was a wise use of other people's money to bail out the banks when their far riskier forms of loans blow up the markets and the economy.

What the "bankers" thought isn't really relevant to the discussion. You are talking to *us*. *I* don't think that type of lending is prudent and *I* argue against it. *I* was not a fan of the bailout and did not think it wise, because as Cass aluded to, *I* didn't think the whole facade was going to come crashing down around our ears. People of good faith can (and do) disagree about that, it is not a moral issue.

But regardless of whether you think it was a good idea or not, the purpose of the bailout was not "to protect the banks" from their own stupidity, it was to protect the depositors from the banker's stupidity. I would have preferred that a "bailout" had taken the form of the .gov buying the loan paper at 60-70 cents on the dollar. I think that would have been enough to protect the depositors funds while the banks still took a massive hit in the wallet themselves. It also would have had the upside of turning a profit for the .gov over the next 10-15 years. But nobody asked me.


no one can ask the banks to take that kind of risk with other people's money.

You can ask.

Just don't compell me to do it with my money through "changing the rules". Don't go risking my deposits and my taxes on your quest for social justice. It was bad enough that I had to do it with the bailout. Don't screw me twice because only screwing me once wasn't fair. Two wrongs don't make a right.

Posted by: Yu-Ain Gonnano at June 6, 2012 06:11 PM

Nobody asked me either. And I paid the same taxes -- in fact, in 2008 I paid some pretty massive taxes -- so insofar as you got screwed, we're even. I just wish that our shared sacrifice had helped the poor families I know, instead of only buying out the rich.

Now let's leave it there and not come to fighting words, for two reasons: there's no point to it on the internet, and it would be unkind to our hostess.

Posted by: Grim at June 6, 2012 06:27 PM

so insofar as you got screwed, we're even

No, we aren't. Wronging you doesn't right me. That's my entire point: Two wrongs do not make a right.

Wronging all of us, all over again, but this time for the *right* people still doesn't make it right.

Posted by: Yu-Ain Gonnano at June 6, 2012 06:52 PM

"Grim, I'm not really sure what all this has to do with the minimum wage."

Agreed.

neither does this: "When you're poor, you act poor. BINGO."

Which has everything to do with an attitude and buying styles(no champaign tastes on a beer budget) and nothing to do with rightness/morality of a minimum wage.
--
"How does the minimum wage provide jobs for homeowners and parents? Answer: it doesn't, and there's evidence (though the vast majority of min wage workers aren't even married) that it actually hurts the people it was supposed to help by decreasing the number of jobs employers can afford to hire." I don't dispute this initial order suppression. The alternative's downsides are what though? We have evidence of the laizze fair model(circa 1920). It wasn't too good either.

It makes one ask the question: Why is it considered better to have more people who cannot afford anything than only 2? This is a situation I believe the Nash 'Co-operative Competition' model is better suited for than laizze fair. You get some working, and their economic activity generates more jobs(same principle that working for $1.00/hr allowes one to generate activity which creates more work---rather Keyesian actually).
--
"Right looks like people who, though they start off poor and may not be well educated, getting ahead over time if they work hard. You can't see the whole timeline, and picking a low point as your measure of success/failure fails from a whole slew of logical perspectives"
Not true. A whole slue of economists have done work showing that starting out on your career/prime earning years during a recession(i.e. low wages) socks it to you your whole life(compounding interest works against you, because your principle is low). I agree in part with the sentiment, but not the principle.
""You keep using that word (poor). I do not think it means what you think it means anymore" :)"
--
You're stealing my comedy routine. It's not funny when everyone does it(even if you're use of it is far more effective than mine...jerk ;)
--
To me, this begins and ends with what the most likely results of alternative styles are. When Labour ran things---Carter years, let's say--- you wind up with things like the bail out of the auto industry in the 1980s. If you leave it to the industrialists to set wages you get company store and abuse.

Hence, I opt out. I look for the most like a neutral third party to pick a middle road so we avoid both extremes(workers screwing the economy, and owners screwing the labour force). The system is set up to the advantage of those in the 'prime working years', between the ages of 18 and 45, and I think a system set to the advantage of the retired, looking for something to do(can't freeze them out! lawsie me, can't freeze them out!) is retarded because of the proportion of who is getting screwed and the long term damage. This is triage since perfection is impossible. Choose who you're going to screw over and why. Mine seems to be the one that has helped the most as the US has been the most successful in wealth creation during the period of minimum wage(1920ish through now)--China doesn't count because they cook their numbers. How does one defend, morally, a system that has a known result of screwing the largest number of people(18-45 low-skill or unskilled in a service economy) of the alternatives? I don't think Judeau-Christian values say that's proper, nor free market theory. But, hey, I sound like KErmit the Frog when I speak, so, what do I know.


Posted by: ry at June 6, 2012 07:47 PM

Mine seems to be the one that has helped the most as the US has been the most successful in wealth creation during the period of minimum wage(1920ish through now)

You're not seriously contending that the minimum wage is responsible for the wealth creation of the Twentieth Century, are you? That's not just confusing correlation with causality, that's laughable. You may as well say (and I would say you'd have a better case for) the car was responsible for the acceleration of wealth creation. Or the plane. Or the widespread use of electricity. Or refrigeration.

I'd honestly say it's all of the above and more. But to lay the laurels at the feet of "minimum wage"? Well, I think we'll need to agree to disagree there.

Posted by: MikeD at June 7, 2012 08:22 AM

Oh, and I'm not sure where the "fighter words" comment is comming from.

If I have offended, I apologize.

I haven't said anything here that I wouldn't, and in fact, haven't said to my own father. Like you, he's an old-fashioned southern democrat who is all about some righteous indignation over "Greedy bankers" being saved on the backs of the noble little guy. You'd like him a lot.

Posted by: Yu-Ain Gonnano at June 7, 2012 09:59 AM

MikeD, I'm not sure I agree with your description of how a mortgage works. If you had cash and bought a house for $200K, and its value dropped to $100K, you'd have invested a lot of money and gotten a disappointing return. If the house rose in value to $300K, you'd feel great. If you didn't have the cash and instead used the bank's money to buy a house for $200K, the bank would expect to be paid its $200K plus interest, and it would leave to you the depression or elation resulting from a decrease or an increase in the house's value later on. If the house dropped to $100K, the bank would expect you to pony up the full $200K anyway, just as, if the house rose to $300K, you'd get to keep the excess. The bank isn't speculating on the value of your house, you are.

It's not a question of the bank taking unfair advantage. The bank's deal was that it would be paid $200K -- it's just that the borrower thought there was a really good chance he could count on the value of the house to compensate him for all the mortgage payments he was planning to make. But that's his business. The bank is out real-live cash in the amount of $200K, which it took out of its vaults and really and truly paid to the previous owner of the house. That wasn't speculative cash. It was real money, and a real hit to the bank's balance sheet back there on the day the borrower closed on the house. The bank can't stay in business if it makes a habit of doing that and not getting all of its principal back with interest. It's not like our mortgage payments to the bank every money are just gravy.

Also, if the house is worth $300K and the bank forecloses when there's only $100K left on the note, the bank doesn't get to keep the excess, only the principal and interest balance. The problem usually is that "value" is not a hard-and-fast concept. A foreclosure sale doesn't bring as much value as a nice, leisurely brokered private sale -- which is a really good reason to sell the house for as much as possible, even at some loss, before you get to the extreme point of having to let the bank take it and sell it at foreclosure. But we all hate to face the prospect of a deficiency judgment so much that people put it off and put it off and refuse to sell at a loss until it's too late, and then they're forced to sell at an even greater loss.

Posted by: Texan99 at June 7, 2012 12:34 PM

... regardless of whether you think it was a good idea or not, the purpose of the bailout was not "to protect the banks" from their own stupidity, it was to protect the depositors from the banker's stupidity.

I'm not sure I even agree with this :p

I thought the danger of the meltdown was due to the risk of a digital run on the entire banking system. In the olden days the government could (and did) shut down banks. They weren't online 24/7 and they weren't as intertwined as they are now thanks to computers. Things took longer, which gave banks a way to delay until people regained their good sense.

In a globally networked system, that is no longer possible. And in a globally networked banking system, there is absolutely no way to stop the kind of depositor panics that once sank perfectly healthy banks and wiped out people's life savings.

IMO, it wouldn't have been just mortgage banks. Panics are by definition irrational, and the Internet is an accelerator of irrationality like no other we have ever known. It makes spreading panic an easy thing to do. Which brings me to a related topic.

On the subject of fighting words, I have now typed and erased 4 long comments because no matter how carefully I try to word what I think I need to say, I don't want to hurt or offend my friends.

Yu-Ain, I will never fault a man for defending his own profession.

I don't think Grim meant to imply what he absolutely did say - that banking is founded on principles that are the opposite of honorable. I'd like to think it was one of those cases where we don't have time to wordsmith or think through the implications of a comment.

"Opposite" is an ordinary word with a plain meaning we all understand. The opposite of honorable is dishonorable. The opposite of sacrifice is selfishness. And what kind of man or woman chooses to work in a profession founded on dishonor and selfishness? Well, I did. My son still does.

Without abandoning common sense, we need to be careful about saying such harsh and unforgiving things. I will be honest here and say that it has taken every ounce of self control and faith I have in Grim not to take deep, personal offense at the idea that banking is founded on selfish and dishonorable principles. It's not.

But then I didn't take well to having several commenters smearing the entire legal profession a while back. That was probably the angriest I've been at anything that has happened here at VC.

So I will ask everyone to stop for a moment, as I have done many times over the last few days, and remember that we are all good people. I know of no one who comments regularly here that I don't respect and like immensely.

You all are very dear to me, and the idea that VC would become a place where people are called upon to defend their choice of career bothers me more than I can express.

I guess that's all I have to say.

Posted by: Cass at June 7, 2012 01:56 PM

I thought the danger of the meltdown was due to the risk of a digital run on the entire banking system.

It never was that. The risk that was seen was a credit freeze. In large part, it was driven by the housing bust, which blew up a potful of MBOs, which blew up a potful of CDS that had been sold and bought on those MBOs (and on a whole lot of other debt instruments). (And yes, there were a number of banks and other financial institutions that worked both sides of those deals--a legitimate beef--and by being on both sides, they'd cancelled the beneficial effects of both. But those were a small minority in a very large financial industry.).

Withal, all financial institutions became very leery of lending at all, to anyone or anything, no matter how good a credit risk that borrower might have been. This, in particular, included a drastic slowdown in lending by big banks to the small, regional, and local banks that are at the heart of the financial industry and the primary source of funding for medium and small businesses and to individuals. To the extent there was a risk of a run on the banks--and on money funds (one did break the buck, the second time that's happened, only this time there wasn't perceived to be enough strength within the money fund industry for the other money funds to make this one whole) and other institutions with deposit facilities--it was to get the cash folks and businesses had there, since they no longer could borrow. The bailout was a badly misguided attempt to inject more liquid cash into a system that already had plenty of liquid cash (the MBO and CDS blowup notwithstanding) in an attempt to spur lending and break the credit freeze.

At least that's where my reading has taken me; folks like YAG likely have better understandings.

None of the above is to blow off the rest of Cassandra's post. I appreciate it. For what it's worth, I never saw offense in any of the remarks, but I certainly can see where the possibility exists. Maybe that's because I'm not in any of those professions remarked upon.

But like our hostess, I believe that all of us here are fundamentally honorable people, all of whom have--and are--serving our country and our neighbors in the ways we know how to do.

Eric Hines

Posted by: E Hines at June 7, 2012 04:18 PM

and remember that we are all good people.

Speak for yourself, lady! Some of us have reputations to think of! :P

Posted by: MikeD at June 7, 2012 04:19 PM

"But like our hostess, I believe that all of us here are fundamentally honorable people, all of whom have--and are--serving our country and our neighbors in the ways we know how to do."

I'll second that notion while I'll continue to refrain from offering my 2¢ on this matter*

Much has been said by folks who know more about the fundamentals of the crash of '08 than I. I suspect most of the Villains have read most of the substantive critiques.

As with most things in life, there are both good and bad people on most sides of any particular matter. So I'll say if I, in one of my frustrated curmudgeonly rants in any other thread at VC have offended our hostess or any of the Villains, regardless of their profession or philosophy, I offer my sincere apology.

//Raises glass of brew in virtual direction and says//, To friends!

BTW, Keep off the grass! =;^}


The road home musters on station in 151 days and a wake up. Be there and vote. The future of the Republic depends on it...

* Don't get me started, I'm not convinced that any of us has enough time...

Posted by: bthun at June 7, 2012 07:24 PM

As with most things in life, there are both good and bad people on most sides of any particular matter. So I'll say if I, in one of my frustrated curmudgeonly rants in any other thread at VC have offended our hostess or any of the Villains, regardless of their profession or philosophy, I offer my sincere apology.

Me too, bthun. The point I meant to emphasize wasn't that I was offended (because I generally get over that sort of thing very quickly) but rather that we've heard an awful lot of demonization and finger pointing from our president. He has repeatedly demonized businessmen and bankers. There's always a convenient villain lurking around the bend to take the rap.

When painful things happen, we are hard wired to look for simple explanations and a bad guy we can blame. Simple narratives give us a feeling of control that is, I think, illusory: find and fix that single cause and life will right itself. It's us vs. them, and "they" are always the problem. Never us or anything we've done.

But I haven't seen too many human problems in life where all the fault was on one side.

It never ceases to amaze me that even the "experts" don't agree on what exactly caused the crash, or what the proper response was, or what would have happened "if".... So if we don't agree on causes or solutions, that doesn't bother me too much. The point is to try to understand each other's positions a bit better.

I think I understand Grim's points better than I did. That's not the same as agreeing with him, but I can see where he is coming from and I think there's value in that. I don't think we could have the kinds of discussions we have here if you all were not the kind of people I know you to be, and if I have failed through being busier than a one armed paper hanger lately to express my admiration and appreciation for the quality of your thoughts, please forgive the omission.

Things have gotten very overheated in America of late. There are big questions at issue and none of us (or few us of, I would guess) have all the answers. I understand Grim's point about people being hurt by the crash and it's a sobering one that should bother us all.

There were also good people working to fix problems they didn't create and having to deal with calumny and death threats and their leaders inciting the public against them with melodramatic references to standing between them and the pitchforks.

That's not my vision of how a great nation responds to a crisis none of us completely understands and historians will argue over for decades.

Posted by: Cass at June 7, 2012 08:47 PM

I didn't know that you, Cass, were involved in banking; or that your son was; or that YAG was, until he said so; or that he had such an excellent and sensible father, until just now.

It may be that "opposite" conveys a plain language meaning that I did not intend. I meant opposite in the logical sense only. I had thought I had taken some pains to be clear about my meaning by avoiding the term dishonorable, and using the rather technical locution "not inherently honorable," which is not a term from plain language but one I thought might convey that I meant something more technical. I apologize for the confusion, which I had thought I was being careful to avoid; but the term 'opposite' didn't strike me the same way, for the same reason that the opposite of "moral" can be either "immoral" or "amoral." A thing that is amoral is neither moral nor immoral; it's just not a thing of the moral type. I was trying to talk about a-honorable things.

There is an issue of some antiquity behind the distinction I wanted to draw, which I think is a good, useful, and important one. I'm going to discuss it philosophically now, in a way that is intended to lay out the issue dispassionately.

For a very long time anything like modern banking was considered actually dishonorable, and in fact sinful: the sin of usury, which was universally taught and accepted by all Christian theologians and the laws of Western societies until the 1500s. There were some good reasons for this, arising chiefly but not only from the Christian view that it is part of the duty of society to protect the poor. The poor and relatively undereducated are always worst treated by such organizations (witness for example the 'paycheck lenders' that cluster around military bases, aiming at E-1s and E-2s).

We've left that behind us, and for a good reason: because we can see the manifest physical goods that banking provides. We can see the improvements. Something that provides goods and improvements is, by nature, a virtue: it is a strength.

So for a while -- from the mid 1500s until the late 1700s, perhaps -- we had a conflict between our sense of what was sinful, and our sense of what was virtuous. It is strange to describe something as being at once a sin and a virtue.

For a while there was an attempt to balance the load, in the manner I tried to describe above. A thing that is based on a principle that is not inherently honorable can still be a good, insofar as it provides goods; but we should take special care with it to make sure that it is only licensed insofar as it provides goods, and does no harm. It is not inherently honorable to drink alcohol, for example; but it can still be a great good, and should be licensed and enjoyed to that degree. It should not be licensed beyond that point, to the point that it causes the harms of alcoholism.

In the case of banking, though, the sense of it being virtuous won out over the sense of usury being a sin. Now it is common (especially among conservatives) to view this kind of thing as an unalloyed good. Especially as we've moved toward a secular society, there's been a sense that values that relate to concepts of sin should be disposed of; but also, the progress that banking and finance have enabled has been so vast and obvious that it's a convincing argument.

The problem is that there really was something important captured by the old idea. There really is a sense in which a society that gives itself up to the virtue of pursuing increased wealth via banking and finance loses the capacity to recognize the sin of bailing out the rich who cannot pay their bills with money seized in part from the poor; and then seizing the houses of the poor when they can no longer pay their own bills.

It may be that, in a secular society, we can't talk about these things in a meaningful way. If we banish sin to Sunday morning we end up licensing a whole lot that our ancestors had good reasons to reject. The fact that there is significant religious history involved shouldn't be a bar, because some of these reasons were religious and some not. The effects on the poor are not necessarily religious, unless it is only religion that makes us take stock of the damage inflicted upon the poor.

Nevertheless I fear that we have, manifestly by our behavior as a society, lost all the reasons.

Posted by: Grim at June 8, 2012 12:07 AM

"The point I meant to emphasize wasn't that I was offended (because I generally get over that sort of thing very quickly) but rather that we've heard an awful lot of demonization and finger pointing from our president. He has repeatedly demonized businessmen and bankers. There's always a convenient villain lurking around the bend to take the rap."
The point came through and was as clear as the ringing of a bell.

Unfortunately our nation's current POTUS has such a thin file of positive accomplishment, or even honorable, stately behavior in these trying times, he's left with with little to say/do other than to manufacture defects in his opponents to curry favor from the marginally aware/informed. Heck of a way to, as is said, bend the curve.

This tactic is used only by those who can not measure up. Good parents, teachers, managers, in general, fully formed adults recognize the dodge. Of late, even some Democrats are making oblique public statements regarding the leadership failure [rarely] in the White House. Grudgingly, but the defensive wall of excuses is cracking.

Odds are, Bush did it. Unexpectedly.

Posted by: bthun at June 8, 2012 08:25 AM

In the case of banking, though, the sense of it being virtuous won out over the sense of usury being a sin. Now it is common (especially among conservatives) to view this kind of thing as an unalloyed good. Especially as we've moved toward a secular society, there's been a sense that values that relate to concepts of sin should be disposed of; but also, the progress that banking and finance have enabled has been so vast and obvious that it's a convincing argument.

Well, I agree with this 100%. I have been on the verge of bringing up the fact that lending ("neither a borrower nor a lender be!") was once viewed as somewhat shameful, and in many parts of Europe was left to the Jews as "good Christians" were not supposed to involve themselves in such matters :)

I think there's a good reason for the moral sanction, but I'm not sure it has so much to do with the power of the rich over the poor (they have that power anyway) as it does with the concept of moral hazard.

There are a great number of activities that change our perceptions of risk and of our proper relationship to society and the people around us. I have tried to convey my disapproval of prostitution, which commoditizes sex and in fact often involves auctioning off access to women and even small children against their will as though they were slaves or products on a shelf in a store.

That is degrading and wrong. It's quite dangerous to think anyone has the right to buy people (or license to use their bodies) in any way they please if they can pony up enough money.

I think lending has a huge moral hazard aspect. When we buy things with other people's money, we begin to think of them as "ours" (when in fact they really are not ours in the real sense until we've paid for them with our *own* money). Until that time, those we borrowed from have a proportional interest in what we like to think of as being solely "ours". They paid for it.

This was the point I was trying to get across: buying anything on credit is an inherently risky activity. If you buy a car on credit, you may get in an accident or suffer some mishap that diminishes the value of your car or it may be stolen. If you buy a house on credit, it may diminish in value and if the selling price falls below what you paid for it, you may not be able to sell it and get all the money you paid back. But people only see the upside - they fall prey to optimism bias.

As T99 pointed out though, they still borrowed the purchase price from someone else and they're still on the hook to pay it back. The problem with lending is that it is a form of kicking the can down the road - deferring difficult or painful decisions like cutting spending until you can afford something you want or even facing the fact that maybe you can't afford that thing at all.

The problem is that there really was something important captured by the old idea. There really is a sense in which a society that gives itself up to the virtue of pursuing increased wealth via banking and finance loses the capacity to recognize the sin of bailing out the rich who cannot pay their bills with money seized in part from the poor; and then seizing the houses of the poor when they can no longer pay their own bills.

First of all, the poor in America pay little/no taxes. They are always entitled to their equity. No bank will seize it. What they are NOT entitled to is the expectation that if their house appreciates, they get all the gain but if the value falls, the people who made it possible for them to buy the house should be stuck with the loss.

You keep mentioning bailing out the rich, but it has been pointed out many times that the purpose of the bank bailouts was NOT to save the rich. It was because we allowed certain banks to grow so large and amass so much of the credit market that if they went under, there would be no credit, people would lose their retirement savings and nest eggs, and many many more people would be hurt than just the ones who owned homes.

What makes me uncomfortable about that formulation is that you're basing your criticism on something that sounds perilously close to class warfare (Bailouts are bad! Don't bail out the evil rich! Bail out the deserving and virtuous poor!). I don't buy the linkage of virtue and poverty. Having worked in banking and retail, I've seen that many of the credit problems suffered by the poor are related to the reasons many people stay poor: lack of self control/discipline, inability to delay gratification, etc. When you've heard people demand that the bank discharge their $5000 credit card bill b/c they took cash advances to gamble and lost the whole amount in Vegas (and now they have nothing to show for it! And they're POOR! And the bank has plenty of money and will never miss it!) it tends to color your perceptions of the origin of credit problems.

The harmful aspect of credit as far as I'm concerned is that it erodes our self control and ability to delay instant gratification. It makes us feel like we're better off than we are, and we take risks we wouldn't take if we lived within our means. Americans (and conservatives in particular) have some issues with freedom and free will.

I agree with your point about moral danger from lending and thank you for the clarification. I didn't get that from your arguments earlier, but that may be b/c I was so jammed at work that I was not able to spend a lot of time thinking or reading carefully.

If I misunderstood or mischaracterized your position, I didn't mean to and I'm very grateful for the opportunity to understand it better.

Posted by: Cass at June 8, 2012 08:46 AM

Cass:

I'm also glad we've talked this through. I can see we have a significant disagreement, but that's OK: I like people who disagree with me. It provides the intellectual challenge I enjoy.

Now, I must say that I've never quite understood the complaint about class warfare. It's something I hear people say from time to time, but I'm not sure I understand what is meant by it. It seems like the objection is stronger than "That argument does not accurately describe the situation," and more like "You shouldn't make arguments of that kind."

We do have a category for "arguments that no good person should make; these include for example racist arguments (although that taboo has been weakened substantially the last few years by trying to shoehorn a lot of other kind of arguments into it).

In the case of class-based arguments, though, there's nothing obviously immoral about them. For example, when you say this:

...t has been pointed out many times that the purpose of the bank bailouts was NOT to save the rich. It was because we allowed certain banks to grow so large and amass so much of the credit market that if they went under, there would be no credit, people would lose their retirement savings and nest eggs, and many many more people would be hurt than just the ones who owned homes.

...that sounds to me like a class-based argument. If it had been done to save the rich, then it would have been wrong; but it wasn't done to save the rich, it was done to save that part of the middle class that has retirement savings and nest eggs (i.e., financial instruments of one kind or another). Since it saved the middle class and not the rich (or rather, it did save the rich, but only accidentally to the purpose of saving the middle class), it was a worthier action.

I think a class-based critique of this argument would be fair, rather than unfair. If we say that society chose to bail out the two richest classes while letting the two poorest classes get tossed out of their homes, isn't that the same misplaced priority? Isn't the problem that the rich(est) have been designated as the objects of charity, while the poor(est) have been held strictly to account for their debts in spite of the collapsed economy?

Isn't the problem that we're placing a higher value on preserving the stability and value of the investments made by the wealthiest (two or three) classes, instead of the kinds of investments made by the (two or three) poorest? Almost everyone has made the point to me that buying a house was always a risky investment; but everyone who invested in a 401k was buying stocks, which are supposedly far riskier investments -- and bundled mortgage investments were so wildly profitable precisely because they were so wildly risky. If it's fair that the poor man who lost his job should also lose his house, surely it's fair that the retired teacher who invested in stocks should lose her retirement. And if that is in fact not at all fair to her, as it well may not be, then surely it is also not fair for the poor man.

I don't think this kind of argument is unfair, or the kind of thing that only a demagogue would do. I think it's a fair critique of what seems to me to be misplaced values. We're in love with the virtue of wealth creation, and surely it is a virtue; but I wonder if we haven't forgotten the lesson that lay at the heart of the old thought.

Posted by: Grim at June 8, 2012 09:10 PM

It seems to me that there are two kinds of class warfare argument that are wrong. One kind of class warfare argument is no different from any other bigotry: the rich are evil simply because they're rich. This is of a piece with the argument that blacks need special treatment simply because they're black--which was Woodrow Wilson's argument 90 years ago and the affirmative action argument today.

The other class warfare argument that's wrong is harder to detect because it hinges so much more on motive. The rich are rich, and that's unfair because there are poor folks in the world. The motive that distinguishes this argument from your society chose to bail out the two richest classes while letting the two poorest classes get tossed out of their homes as a misplaced priority argument is that it's (that is, the type of argument that's wrong) is aimed solely at generating jealousy so that the jealousy can be exploited for personal gain. An example of this is the argument that the rich should pay more taxes because they're not currently paying their fair share. What makes this a bad (I hesitate to say evil, but that's the direction in which I use "bad"--not as a logically failing argument) in my view are a number of things: the 20% who pay 70% of the income taxes presently compared to the 50% who pay 3-4% of the income taxes nationally, yet the 20% are held to not be paying their fair share; and when one who openly espouses that fair share view is asked to say specifically what the fair share of the rich should be, that one refuses to supply an answer. Another class warfare argument of this type, it seems to me, is the argument that the rich can afford it, so they should give it up. I see no difference, though, between this argument and the argument of yesteryear that the Indians aren't using the land they're on, so we can take it with no sweat--we have a better use for it.

An alternative way of phrasing your bail out the two richest classes while letting the two poorest classes get tossed out of their homes argument might be to decry--with more obvious justification, at least to me--bailing out some while not bailing out others. Now we can confine the argument to its fundamental issues: should there be a bailout at all (in this example), and if so, how do we do it for all who are in similar straits (which would carry a necessary discussion of what constitutes "similar."

Separately, but related, because it's in the same comment: If it's fair that the poor man who lost his job should also lose his house, surely it's fair that the retired teacher who invested in stocks should lose her retirement. Indeed, it is. I don't know of anyone other than unions and Progressives (and this time I'm not using those terms pejoratively) who make an argument that it's not. This is part of what underlies their demand for the fixed benefit of a pension--which is, in fact, far riskier than long-term stock investing but which has the appearance of safety because the "beneficiary" has no responsibility for the investment of a pension.

Stock investing, by the way, isn't all that risky, even compared to house buying. Stock trading is quite risky, and what I call "dabbling in stocks" is just foolish. The distinction is in the time frame, the planning, and the discipline. An investor has a plan that is set for long-term involvement, and he has the discipline to stick with his plan, even when the short run moves against him. A trader likely also has a plan, but he's running in a much shorter time frame, where stock (or other investment) movements more closely approach a random walk. The dabbler just chases every hot tip, current fad, and/or get rich quick scheme. 401(k)s, if the investor takes them seriously, are vastly safer than pensions. They're at least as safe as a house and much more liquid.

Eric Hines

Posted by: E Hines at June 8, 2012 10:40 PM

...bailing out some while not bailing out others. Now we can confine the argument to its fundamental issues: should there be a bailout at all (in this example), and if so, how do we do it for all who are in similar straits (which would carry a necessary discussion of what constitutes "similar."

Well, no, my friend. That's "justice" according to Aristotle -- treating relevantly similar cases similarly.

The problem is that there is a relevant difference here: it's just that we're upside down on it, as a society.

Bailouts are acts of charity. We, the taxpayers, made some people good at our expense.

In determining who is a proper object of charity, it's relevant whether they are rich (or richer) or poor. The rich(er) are better fit for the exercise of charity than for being the object of it.

The question isn't whether we shouldn't bail out everyone if we bail out anyone. The issue of wealth and poverty is a relevant difference here. It matters that we decided to bail out the rich(er), and leave the poor to take their lumps.

As for whether 401ks are safer than mortgages, doesn't your reading depend on the fact that they got bailed out? They look real safe compared to mortgages, under the circumstances: but this is one of those 'life happening' rules that we chose, rather than a basic law of economics.

Posted by: Grim at June 8, 2012 11:26 PM

...treating relevantly similar cases similarly.
The problem is that there is a relevant difference here....

But if there's a difference, they aren't similar.

Bailouts are acts of charity.

No, bailouts are acts of dependency creation, albeit with less physical (but not less emotional) effect when it's the rich who are bailed out. Hands up are acts of charity. There is an exception to the bailout: the truly helpless will need constant care.

...it's relevant whether they are rich (or richer) or poor.

Especially the richer--and the poorer, which you omitted. Where do you draw the line between richer and poorer? We're all supposed to help those less fortunate, and there's only one man in the universe--or in the local community, or in the wider community--who has no one less fortunate--poorer--than he. Wealthier vs poorer matters, when we're not simply engaging in class warfare and really trying to help others, but wealthier vs poorer is a very movable and moving standard.

As for the bailout of the "rich" in the present economy (the TARP, et al.), whether Cassandra's interpretation of the underlying problem or mine is right, the espoused purpose--which I take at face value for this discussion--was not to bailout the "rich" or the "banks," but to unclog some critical nodes in our economy so that it could get going again, and make everyone better off. We could have "bailed out" everyone, or only the "poor," but given the reason for that bailout, those alternatives would have been far less efficient and so more wasteful uses of the taxpayers' money.

As for whether 401ks are safer than mortgages, doesn't your reading depend on the fact that they got bailed out?

Not a bit. Most 401(k)s are in mutual funds, and most 401(k)s' funds took hits. But they're also nominally inaccessible prior to retirement except in dire need. The Panic of 2008, though, simply represented a buying opportunity, as Baron Rothschild recognized all those years ago. And, no, neither my 401(k) nor my stock investments were bailed out; their buying opportunities were short circuited by the bailouts.

It's certainly true that some folks felt a dire need and borrowed against their 401(k)s, but unless you're starving in the streets, that's foolish: most of those folks won't repay their 401(k) loans, with all of the negative consequences appertaining, and so their retirements will, at best, be severely curtailed compared to what they could have been, and more likely, these folks will be further burdens on the public's weal.

It's also true that folks dependent on their 401(k)s because they were actually retired took hits. These few may warrant hands up (but not bailouts) until their 401(k)s have recovered. They are, after all, responsibly adjusting their standard of living to match their circumstance and resources, yes, rather than continuing to spend as though nothing has happened, or as though Uncle Sugar will take care of them?

[401(k)s] look real safe compared to mortgages, under the circumstances: but this is one of those 'life happening' rules that we chose, rather than a basic law of economics.

No, again. The "basic law of economics" in this context is that all assets vary in value over time and in accordance with the values men put on them when the assets are exchanged. What we choose is the risks we're willing to run and the assets we select for running those risks.

Eric Hines

Posted by: E Hines at June 9, 2012 08:11 AM

As uneasy as I was about TARP, the only argument that brought me to grudging approval was the danger that a liquidity crisis would not just inconvenience this or that voting bloc or class but would simply shatter our whole economy, leading to massive simultaneous bank failures and widespread failure of employers to make payroll. It's horrible enough to contemplate the loss of jobs or investments by significant but still small percentages of the population, but this was portrayed as a much more catastrophic level of damage. A society can absorb only so much damage to all sectors at once. I didn't see the problem as avoiding danger to either the rich or the poor, but to the nation's prosperity as a whole. If the argument had been pitched as saving the rich at the expense of the poor, or vice versa, I would have ignored it entirely. I don't believe either the rich or the poor exist for the benefit of the other.

There's huge difference between see a lot of people disappointed in the value of either their houses or their IRAs, on the one hand, and virtually the entire economy finding itself almost overnight unable to deliver goods and services or make payroll. Everyone who invests in an assets, whether a home or a retirement fund, is naturally exposed to losses, and I can live with that. It's the nature of investments that they go up and down and involve risk of loss as well as chance of reward. We do more harm than good trying to insulate investors from that reality.

Honestly, the way it's worked out, I continue to wonder whether TARP was a massive mistake. It was billed as a temporary liquidity fix that would pay for itself quickly while benefiting virtually every American at once, and it may even have done so, but it seems to have convinced a huge swathe of the voting public that "they got theirs, now I want mine." In other words, it has entered the public consciousness as a valid precedent for every Keynesian spending monstrosity that a pandering politician can use to buy votes from whatever citizen-baby-birds have their beaks most vocally open in any particular election cycle. It's horrible, destructive economics as well as being a corrupting influence on governance. The idea that economic wellbeing comes from the government is the worst possible idea we could have engendered. It's like convincing people that illnesses can be cured by bleeding the patients.

Posted by: Texan99 at June 9, 2012 10:52 AM

It's the nature of investments that they go up and down and involve risk of loss as well as chance of reward.

It's more than that, though. Sitting on cash is just as risky, as the value of our dollars waxes and wanes as inflation wanes and waxes. So it is with gold: as we get more gold, the gold price of goods and services goes up. As we get more labor, the labor price of goods and services goes up. The reveres is, of necessity, true, also: the price of gold, and of labor, in terms of those goods and services goes down.

We face risk as a part of our existence.

Eric Hines

Posted by: E Hines at June 9, 2012 11:26 AM

I was opposed to TARP. With the stakes that high, the corporations would have sorted out a way to make deliveries and payroll. It might have been very ad hoc, but private ingenuity has ridden out worse failures before.

We keep pouring money into the banking system to try to keep from admitting that it's fundamentally broken. Spain is now looking at begging for a bailout from Europe that, if we did it on the same scale, would be over a trillion and a half dollars. But that just saves the Spanish banks: for a while. Ireland is now demanding a similar bailout, pointing out that they 'didn't get theirs' back a while ago.

I read today that Bank of America and others are even more fragile now than in 2008, before Lehman Bros. died. Before TARP.

However ugly it may be, sooner or later we're going to have to let this go.

Posted by: Grim at June 9, 2012 10:35 PM

I was opposed to TARP.

You and me both. I was opposed to any bailout of any sort. I was opposed to bailing out GM and Chrysler, particularly since the American auto industry was not at all at risk, just two dinosaur car companies were. That particular portion of the bailout worked so well that both of those American car companies still are into us taxpayers for several billions of dollars, and one of those American car companies is now an Italian car company.

Eric Hines

Posted by: E Hines at June 10, 2012 01:10 AM

Lately I've been reading/hearing that the taxpayer still has a share in GM somewhere between a paltry $15,000,000,000.00 to a slightly less paltry $25,000,000,000.00 depending on whose doing the cyphering and from which set of ledgers.

With a stock priced at around $22.05, I can't imagine* why investors are not climbing over each other to buy shares of GM...

*Sarcasm mixed with pity for the OLD GM bondholders who took it in the BVD's before the Gub'ment and the UAW had its 21st century version of rape & pillage with the taxpayer.

Posted by: bthun at June 10, 2012 10:41 AM

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