January 18, 2008
Freezing Foreclosures and the False Flag of Moral Hazard (Brent Budowsky)
In my view the probabilities for the economy are these: 1 in 3 there is no recession, 1 in 3 there is a mild recession, and 1 in 3 there is a very severe recession that imposes long-term hardships in an economy cycling downward.
For many months I have been championing a freeze in foreclosures, in an attempt to halt the wave of foreclosures, the spread of the crisis to credit cards and the potentially severe recession that is now coming into view with some chance of occurring.
Most likely next Tuesday, in a column that will appear in The Hill newspaper, I will push even harder for the foreclosure freeze and for an economic stimulus significantly larger than the package currently under discussion.
My reason is, in the event of either a mild or severe recession, the current size of the stimulus package is far too modest compared to the size of the economy and does not materially lower the dangers of a very severe downward economic spiral.
In that proposal I will also suggest a specific means of raising the money to finance it. Stay tuned.
No doubt, any proposal of substance that would dramatically help middle-income and poor Americans will be met with the argument that is commonly called "moral hazard," from those mostly on the right who advocate what I now call "laissez-unfair."
Moral hazard means that those who made mistakes should pay for those mistakes and not be helped by government, and that if they are, it sends a signal that mistaken behavior would be encouraged if continued.
This is a false flag, for two reasons.
First, many of those who have been hurt in the current credit debacle were victims not of their mistakes, but predatory practices, or deceptive practices, which are now under criminal and civil investigations in multiple jurisdictions.
Also, many of those who are hurting suffered unexpected hardships such as outsourcing of their jobs, layoffs, or very hard medical emergencies, sometimes accompanied by inadequate insurance or attempts by their insurance companies to avoid making good on terms of their policies.
There is a second problem with moral hazard, from the "laissez-unfair" advocates, which is this:
Major mistakes were made by Alan Greenspan at the Federal Reserve Board. Where is the moral hazard for Mr. Greenspan reaping huge compensation from a company named Paulson and Co., which made billions of dollars of profits by betting on the side of more foreclosures and more defaults and the failure of the Greenspan policies?
Nothing illegal or wrong with Paulson's bets that foreclosures and defaults would rise. He was right. That makes a market a market. But for Mr. Greenspan to profit millions of dollars, paid by a new boss that made billions of dollars betting that the Greenspan policies would harm our economy – now if anything is a moral hazard, it is this.
The now-fired or -removed failed CEOs of Merrill Lynch, Citicorps, and Countrywide Financial (among others) made disastrous and catastrophically failed business decisions that caused and profited from these failures.
Yet these CEOs, at the heart of complicity for creating this mess, were compensated and rewarded hundreds of millions of dollars of personal wealth to create the mess and then for being fired for creating the mess.
If it is moral hazard to help middle- and lower middle-income Americans who made mistakes, is it not an exponentially greater moral hazard, by a factor of many millions, to reward those at the highest level of corporate leadership who caused and made money from this failure?
This is a double standard, hypocrisy on a grand scale, and laissez-unfair at its purist.
We could go on. The failures of the president and Treasury secretary who only months ago were publicly denying the crisis. The failures of regulators who failed disastrously in their mission to police the market and protect the public. The failures of congressional oversight, the failures of the major media to report what obviously was a dangerous and growing problem.
Why is it that when we want to help average Americans, it is a moral hazard to help them, but when titans of industry make trillion-dollar mistakes, they receive hundred million dollar rewards, and even the former chairman of the Federal Reserve is making presumably millions of dollars of wealth, from a fund that made billions of dollars of profit by betting that the new employee, of his new boss, was disastrously wrong, which he was?
Let's sum it up. "Houston, we have a problem." There is grave danger to our economy today and in my view, neither the president, nor the Treasury secretary, nor the current Federal Reserve Board, nor the stimulus now being discussed, is nearly enough to deal with the problem and avoid a potentially extreme problem in our national economy.
There must be a freeze on foreclosures for at least six months. There must be a stimulus package more significant than what is on the table today. There must be an end to the laissez-
unfair fallacy of moral hazard and a solution that is equal to the danger, which I will detail further in my column next Tuesday.
Be careful, and stay tuned.
42 Comments
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Great post.
Comment by Connor — January 18, 2008 @ 12:37 pm
Ah! Now I can be reckless with the mortgages I choose in the future because I know the Federal Government will bail me out.
Nice precedent to set.
Comment by Jon Pemberton — January 18, 2008 @ 1:28 pm
Let's stop foreclosures. Then, let's stop auto repossessions. Then, provide free health care. Let's eliminate the hazards of living and teach each citizen there is no consequence to thought or planning. Or even working. Just sit home in your free house, if you get a headache give the feds a call. Maybe someone will still be working to assist you. Maybe.
Comment by Robert Rosencrans — January 18, 2008 @ 1:30 pm
What a great example for the youth of today! Get in over your head because of greed. But don't worry, if enough people do it some liberal commentator will advocate no consequences for your carelessness.
Comment by John Simmons — January 18, 2008 @ 2:06 pm
Hey Brent, would you advocate a freeze on my student loan payments? I have $100,000 in student loans, sure would be nice to blame my inability to pay on the economic state of the country.
Comment by John Simmons — January 18, 2008 @ 2:08 pm
it's quite simple, really; it's a Moral Hazard if we help the Working Class, because they're not consequential, they're just pawns in the Marketopoly. It's never a Moral Hazard to use every tool at your disposal to ensure that wealth begets wealth, that the Ruling Class stays where they are, and the plebs learn their place.
I'm sorry, but why don't people see this for what it is? I know most humans are utter morons, but there are a couple brighter ones here & there….
Comment by terry — January 18, 2008 @ 2:39 pm
(BTW, any idiot who tries to accuse another for "waging Class Warfare" needs a freakin' lobotomy. This has been on, nonstop, for millennia. Morons.)
Comment by terry — January 18, 2008 @ 2:41 pm
Jon and Robert, please answer this honestly:
how do you feel about failed and fired CEOs
making hundreds of millions of dollars of
wealth as compensation for their failure?
I dont see you upset about that. Why not?
Brent
Comment by Brent Budowsky — January 18, 2008 @ 2:52 pm
Great article, however, judging by posters 2 & 3, the American populace just don't seem to get it. He or she will still protect the rich con artists, while blaming the average Joe for not having a Harvard law degree to decipher ambiguous mortgage contracts. One of the most insidious practices during this mortgage boom was inflated property values, in which mortgages companies were in bed with the property assessors to inflate the value of or the refinancing of an existing mortgage. This is inexcusable, yet the mortgage holders are left holding the bag, while being labeled as "too stupid" or 'lazy' and deserves what is happening. Without relief, this situation can potentially ruin the economy, causing the already overburdened tax payer to once again foot the bill. (i.e, the Savings and Loan debacle)!
Comment by LGrayson — January 18, 2008 @ 3:10 pm
John
Funny that you would mention student loans. In the Spring of 2007, the Attorney General of New York decided to investigate student loans lenders who were giving so called "perks" to University officials to exclusively recommend their services to unsuspecting students. You may not have received the best interest rate on your student loan because of corporate greed and cronyism. Perhaps you were too stupid or lazy to know that you were being ripped off and maybe deserve what you get?
Comment by LGrayson — January 18, 2008 @ 3:29 pm
Brent, the story that needs to be told about all this, and it's NEVER mentioned, is that the deregulation that allowed the sub-prime disaster to happen is a result of the EXTREMIST Ideology of Alan Greenspan.
Brent…Tell the WHOLE story Please!
Greenspan and many others are followers of Ayn Rand and Milton Friedman. As such, Greenspan's economic ideology (probably his religion) is FREE MARKET/DERGULATION!
Americans need to know this whole mess is ideological based.
I'll provide a few stories/links below for you to research.
Comment by Larry from C — January 18, 2008 @ 3:51 pm
from Paul Krugman NY Times Dec. 3, 2007
re: the subprime mortgage and credit crisis:
Why was this allowed to happen? At a deep level, I believe that the problem was ideological: policy makers, committed to the view that the market is always right, simply ignored the warning signs. We know, in particular, that Alan Greenspan brushed aside warnings from Edward Gramlich, who was a member of the Federal Reserve Board, about a potential subprime crisis.
And free-market orthodoxy dies hard. Just a few weeks ago Henry Paulson, the Treasury secretary, admitted to Fortune magazine that financial innovation got ahead of regulation — but added, “I don’t think we’d want it the other way around.” Is that your final answer, Mr. Secretary?
http://www.nytimes.com/2007/12/03/opinion/03krugman.html?_r=1&oref=slogin
Comment by Larry from C — January 18, 2008 @ 3:52 pm
Brent: Those executives golden parachutes are not paid for with tax dollars. Their board of directors can do what they want subject to the limitations of the law. The problem with government is it can do whatever it wants because it is the law. By the way this whole post resolves around the liberal belief that the public is stupid and some of them are. Doesn't that more call into question the failure of the public school system to teach members of the public about important things as opposed to filling their heads with mush about diversity?
Comment by Robert Rosencrans — January 18, 2008 @ 3:54 pm
Its a “collectivist” myth that businessmen, left to their own devices, “would attempt to sell unsafe food and drugs, fraudulent securities, and shoddy buildings….it is in the self-interest of every businessman to have a reputation for honest dealings and a quality product.”
- Alan Greenspan, in a 1963 essay for deregulation guru Ayn Rand's newsletter
Comment by Larry from C — January 18, 2008 @ 3:54 pm
A Catastrophe Foretold
Paul Krugman Oct 26, 2007
…So, once again, why was nothing done to head off this disaster? The answer is ideology.
In a paper presented just before his death, Mr. Gramlich wrote that “the subprime market was the Wild West. Over half the mortgage loans were made by independent lenders without any federal supervision.” What he didn’t mention was that this was the way the laissez-faire ideologues ruling Washington — a group that very much included Mr. Greenspan — wanted it. They were and are men who believe that government is always the problem, never the solution, that regulation is always a bad thing.
…Unfortunately, assertions that unregulated financial markets would take care of themselves have proved as wrong as claims that deregulation would reduce electricity prices.
http://www.nytimes.com/2007/10/26/opinion/26krugman.html?_r=1&oref=slogin
Comment by Larry from C — January 18, 2008 @ 4:00 pm
Brent, I know I've posted this story before. For anybody who doubts that these lenders are PREDATORS, see how they stalked this BLIND old lady who uses an oxygen tank.
http://www.nytimes.com/2007/11/20/opinion/20herbert.html?_r=2&oref=slogin&oref=slogin
Comment by Larry from C — January 18, 2008 @ 4:13 pm
LGrayson, the good news is that hopefully I can find a friend like Brent here to write a column or two lobbying the feds to forgive my loans!
Comment by John Simmons — January 18, 2008 @ 4:28 pm
Brent,
To answer your question honestly. I am upset and if I have investments in those companies I move them, if I plan to buy products or services I avoid those companies.
But in no shape, way, or fashion does that make me inclined to have the Federal Government save people from personal financial choices. Nor do I engage in "class-warfare".
btw LGrayson, you do not need a degree nevermind a Harvard one to read a mortgage or loan contract. What the heck do you think Adjustable Rate & Interest only means! It ain't rocket science.
Comment by Jon Pemberton — January 18, 2008 @ 5:13 pm
All,
If you are unsure or feel pressured about a mortgage or re-finance ask a friend or co-worker for advice or even for interpretation. Go to another financial institution until you find someone who will honestly explain the "details" to you.
Research online, go to the library. You are afterall engaging in the BIGGEST FINANCIAL DECISION ONE MAKES IN ONE'S LIFE!!!
Comment by Jon Pemberton — January 18, 2008 @ 5:19 pm
Mr. Robert Rosencrans, as politely as I know to respond your #2 post, you are sounding more like a robotic basher of anyone or anything that strays from your way of thinking. Your comments reveal your abandonment of reason and reasoned debate in favor of diatribe and arrogance. If you had read Mr. Budowsky's entire article(and/or comprehended a third of it), you'd surely realize that your rant was unwarranted and adds nothing to the discussion. You seem to be stuck on the concept that ONLY the middle class workers be held accountable for their actions and that in the event that you're wrong, you can spin the argument to "uh, well, the lefties want a socialized government" as if that gives credibility to your failed logic. Unless your wheel of intellect can somehow become unstuck from that proverbial rut, it will never free itself from that channel that it follows.
Comment by andy42302 — January 19, 2008 @ 9:40 am
Jon
Obviously you never owned a home, if you did, you would know that the actual "closing" can take upward to 2 hours, with tons of paperwork. The real problem is NOT the borrowers, but the inflated value of property. Because of the inflated value of the borrowers home, mortgage brokers were telling them that when the rates indeed "adjusted", the property would have "appreciated" to make a profit if the borrower decided to sell or refinance. Your elitist attitude that it is acceptable for a few at the top to prey on the average working person has led to some of the largest financial meltdown in the history of America: The Gilded Age, the Great Depression, the Savings and Loan Crisis, Enron, and now the Mortgage debacle.
Comment by LGrayson — January 19, 2008 @ 11:18 am
John
If your loans were underwritten by greedy unscrupulous lenders, I would hope that YOU would have enough sense to lobby Congress to enact laws to protect against this. It is amazing how you types defend those who do not have your economic interest at heart.
Comment by LGrayson — January 19, 2008 @ 11:24 am
Robert:
The only problem with your reasoning is that when these CEO's wreek havoc with his or her "get rich at the expense of the public schemes", the very public are the ones who are left to clean up the financial mess left behind. Pure Capitalism only works if "Socialism" is in place to bail it out! So sorry that the "public school" system has failed the truly stupid average guy. Perhaps the churches and synagogues have failed the truly greedy where they have no moral compass other than the laws of the wall street doctrine!
Comment by LGrayson — January 19, 2008 @ 11:33 am
Robert: The only problem with your reasoning is that when these CEO's wreek havoc with his or her "get rich at the expense of the public schemes", the very public are the ones who are left to clean up the financial mess left behind. Pure Capitalism only works if "Socialism" is in place to bail it out! So sorry that the "public school" system has failed the truly stupid average guy. Perhaps the churches and synagogues have failed the truly greedy where they have no moral compass other than the laws of the wall street doctrine!
Comment by LGrayson — January 19, 2008 @ 11:37 am
LGrayson: There have been two massive government bailouts that I am aware of. One was Chrysler. As far as I am aware they paid back the loan they received. The other was the massive savings and loan industry. Part of the problem there was that the government regulators and even some members of Congress (Keating Five including John McCain) were there to be bought. I am not protesting regulations. But obviously the mortgage industry, which is one of the most heavily regulated, failed anyway for a small group of people. We shouldn't bail them out anymore than we should bail out people whose cars are being repossessed, because, that in essence, is all a foreclosure is, the taking back of collateral.
Comment by Robert Rosencrans — January 19, 2008 @ 12:28 pm
Robert
Your memory seems to only serve you to make your misguided point. The Savings and Loan crisis cost the American tax payer almost 125 billion during the 1990's, primarily due to the DEREGULATION of that industry during the 1970, particularly the secularization of credit. Sounds eerily similar to the mortgage crisis that we are now experiencing
Comment by LGrayson — January 20, 2008 @ 11:12 am
LGrayson. I'm sure you're not as dumb as to miss my point that regulators and members of Congress were swayed to make it happen.
Comment by Robert Rosencrans — January 20, 2008 @ 2:43 pm
Robert
It is YOU who are dumb and woefully misinformed. Banks are regulated by the FDIC, which in part requires secularization of credit, meaning you must have adequate cash reserves on your balance sheet to secure the amount of liabilities incurred (loans). During the Bush administration, Fly by night lending companies were established who were immune to these rules. (unregulated markets). They in turn made these unsecured loans, sold them to banks, which in turn "bundled" these loans and sold them to wall street investor as AAA stock. I suggest you stop getting your information from ex-con, drug addicted right-wing radio personalities and start reading articles from leading non-partisan economist.
Comment by LGrayson — January 21, 2008 @ 12:37 pm
Brent: You're an economic illiterate. Feel good economics ends up hurting everyone…
Comment by Rich — January 21, 2008 @ 1:24 pm
LGrayson: I was wrong. You're too dumb to understand what I was stating.
Comment by Robert Rosencrans — January 21, 2008 @ 2:05 pm
Robert
Ah, when your "facts" are disputed, that indeed deregulation has caused some of worst economic blunders in US history, you resort to calling others "dumb". Take my advice and don't enter any debate contest any time soon pal!
Comment by LGrayson — January 21, 2008 @ 2:20 pm
LGrayson: It's hard to have a debate when someone ignores your points. That is dumb and it is ingnorant, on your part. As far as a debate, you can't have a debate with rock. So there.
Comment by Robert Rosencrans — January 21, 2008 @ 4:28 pm
Robert
Your "point" has been debunked "Part of the problem there was that the government regulators and even some members of Congress (Keating Five including John McCain) were there to be bought. I am not protesting regulations. But obviously the mortgage industry, which is one of the most heavily regulated, failed anyway for a small group of people". Only the banks were heavily regulated, not the Sub prime lending markets which created this debacle.( this was done with a Republican congress)! Before you show YOUR ignorance, please be able to argue your points with factual information.
Comment by LGrayson — January 21, 2008 @ 7:13 pm
LGrayson: You state that deregulation was the problem. Well, let's look at the most tightly regulated entities in the country and see how they are doing. Social Security, couldn't be more regulated. It's a disaster. Public schools. Couldn't be more regulated. Total disaster. It isn't regulation or deregulation. It's the insiders inside the beltway. That was my point. As far as ignorance, you're steeped in it and it's obvious.
Comment by Robert Rosencrans — January 21, 2008 @ 7:53 pm
Lgrayson,
I am currently living in my house that I bought in San Diego in 1992. I have refinanced twice on this property.
I also have a second home in Arizone that I lease out.
And you know what? Each time I re-financed (and include the original loan) I took about 20 hours of my time to do some research and learn about what I was doing. Yes I had to give up "Lost" and "Survivor" on tv, but a man has got to have some priorities. Never thought of having the government do this for me or "cover me" through the process.
btw, I did this without a Harvard degree, without any degree. Thats right I have no 4 year degree, no inheritance, just 4 years in USMC and a lot of hard work.
Try it, its better than groveling at the belly of the Federal Government and you will feel liberated!
Comment by Jon Pemberton — January 21, 2008 @ 10:22 pm
Jon
What you also had in 1992 was a DEMOCRATIC CONGRESS and PRESIDENT, who respected the middle class and kept in place the very regulations and policies that led to the largest economic growth since WWII. You MINIONS took over our government and increased the deficit, gave welfare tax cuts to the rich, drove up oil prices, raised unemployment, decreased exports, gave us poisoned food from china, and lied us into war. It is so funny when you talk of the GOOD OLE DAYS, when home ownership was truly affordable from reputable banks. And you call the rest of us stupid?
Comment by LGrayson — January 21, 2008 @ 11:34 pm
Robert
Social Security is only a disaster if you listen to the likes of Rush Limbaugh, who would love for Wall Street to get .0765% of your income to invest in volatile overseas markets. Judging by past performances, these thieves will steal your money, lose it, and the Feds will have to bail us out once again. The problem is that Medicare, Medicaid and Social Security works "too well" and does not fit into your failed ideology. With minor adjustments, (as raising the cap to adjust for inflation) Social Security will be viable for the next 70 years! As for voucher charter schools, not working and the experiment is less than 10 years old!
Comment by LGrayson — January 22, 2008 @ 12:02 am
Brent, as always an excellent post. I do not understand why folks think it is just fine for the rich to get richer, but even though they may be middle working class, think it is just as great to continue sticking it to the poor.
Keep telling the truth Brent, we need your voice
Comment by radpaddi — January 22, 2008 @ 7:36 am
LGrayson,
Actually in 1992 we had a Republican President and the demorats running on the slogan "Its the economy stupid" saying we had the worst economy since Hoover. Clinton vetoed the Welfare reform act twice before signing it just to increase his re-election chances.
I understand you would rather have the gov't provide everything for you, but many of us do not want that.
Question: Provide me with 3 economic policies Clinton HIMSELF implemented in the 1990's to provide us that 'bubble' that burst in the year 2000.
DA
Comment by Jon Pemberton — January 22, 2008 @ 11:14 am
LGrayson: There is no Social Security money. It was taken by the politicians in Washington so they could blow it on other stupid government programs.
Comment by Robert Rosencrans — January 22, 2008 @ 12:37 pm
Robert
There is plenty of Social Security Money, However, it is in the form of T-Bills, a direct result of the Republican hit machine, which took a Social Security surplus and spent it on stupid government programs, like the war in Iraq and tax breaks for the rich!
Comment by LGrayson — January 22, 2008 @ 3:12 pm
DA–I can name you one huge Clinton policy, raising taxes on the wealthy, and not burdening the middle class with huge deficits. Ever heard of PAYGO? Oh I forgot, a dirty word to fiscally conservative Republicans.
Comment by LGrayson — January 25, 2008 @ 10:59 pm