Thursday, November 03, 2011

The Mandate of Hell, Pachyderm 2, The Housing Disaster Nobody Was Responsible For

If you’ve been following (see previous two posts, easily identified by the "Mandate…" header), we’ve been trying to look at what our virtuous elites seem unable to examine, contemplate, discuss, or even acknowledge, what the writer has described as the elephants in the national living room. We’ve talked about about one of them, US, you and me, at least the ignorant version of US that won’t see beyond its own nose (until now of course ;-)). Here’s another elephant approaching, breaking the floorboards and knocking the Impressionist prints off the walls.

An observation: in courtship, one learns, as much as you might hope for an easy catch, if you haven’t got anything to deliver to he or she, the object of your affection will look elsewhere. It’s not cultural. It’s basic biology, basic family, basic community. A useless mate is a lot more difficult to manage than having no mate at all. The preference for one with something to offer is natural. Find someone else, or go it alone. Sadly, this does not obtain in the vast movement we call politics, as much as sexual attraction may play a part. Political leadership, we have noted, like the pioneer wagon master, depends largely upon the hopes and fears of a large, loosely connected, and often ill-informed, population. The wagon master couldn’t turn to his train of Conestogas and shout “we’re going my way or nowhere,” not unless, under the panicky faces he surveyed, there lay enough sober minds to realize that the fellow might have a point, that crossing a very long stretch of barren rock might be safer than trying to force the wagon train over the Grand Canyon without the benefit of angels’ wings, or at least a 747. Sadly, this common sense protection more often disappears in crowds than not.

Back in the 70s, as part of the White House and Congress's efforts to overcome a decade of stagnation, the Community Development Act brought the idea of subsidizing housing for those who couldn't afford standard term mortgages. Very American, everybody owning a house, part of the Dream...However, Congress and the White House, besieged by an electorate sick of a failing administration, didn't go the extra mile. They decided not to fund the CDA. Instead, through successive administrations, especially the Clinton and second Bush administrations, they used the law to force the financial services business to violate the primary principals of a loan market, to wit: 1) the borrower has to be able to pay; 2) for weak borrowers, an underwriter is the only way for the lending institution to protect its capital for loaning out to future borrowers. Both standards protect the borrower, the lender, and the market's future.

Promoted by community organizers, middle class (call them liberal or compassionate) friends of the less-well-off, usually without knowing how the mortgage market (or any market) works, they prodded Congress over the years into a new, take-it-or-leave-it, requirement that would, WE claimed, save the poor, liberate us from bad consciences, and help build the American dream. As such, CDA started out by violating both tenets of the mortgage trade. When came the industry complaints that all that weak or bad mortgage debt would be lost, loan officers and their bosses were told to game the system to beat the odds. It was like requiring a compulsive gambler to win at blackjack to assure funding for her child's college education. Hey, education is good, right? In essence, the law said “if you expect to do any mortgage business, you have to cheat. If you lose money cheating, find the money somewhere else, however you can. The ends justify the means.” WE agreed, like it or not. Acorn may have conned lots of people, acted with malfeasance, and what not, but I know folks in Acorn. Most of them are well-scrubbed, attractive Americans with big hearts, and a willingness to blithely lie about the consequences of what they want done, just like most of the rest of us.

If Congress and the White House had said, No! we have to have a reserve fund for risky loans, provided by general revenue, the disaster we are still enduring might not have happened. They didn't do that, however. They felt, justifiably, that if they tried pay for an open-ended program with tax revenues they might lose four classes of constituents, not only those dependent upon the program to buy houses, but builders, taxpayers, and most of all, you guys who thought it was righteous to subsidize housing for people who couldn't afford it, that is to say, most of us. So, in the best cowards' tradition of politicians across the planet, they legislated that banks and other lending institutions were to bury bad assets with the good - or else! Sweep it under the rug, eh? No problemo.

The writer spent a lot of time working at banks in the 80s and 90s, and learned an important lesson. If you inspire a numbers & finance guy to develop a way to make money out of nothing, there's never a shortage of volunteers. And some of these kids, male and female, were prodigiously gifted, working with mathematics that would do a high energy physicist proud, and standing on the shoulders of the banking giants from the 70s and 80s. (See previous post)

And were they ever good! They created mortgage products that made the most advanced betting systems look like a high school kid's effort to outdo Murray Gel-Mann. The derivatives market they created was probably the most extravagant con game ever developed in high finance, and there have been some big ones. And it was politically mandated, popular with the customers who mattered, investors and depositors, and let's not forget politicians and regulators! Market realities be damned! Progress ahead! And, what made the politicians and their constituents so happy, and for a long time, was that this horseplaying system actually worked! OMG, truly did it ever! Profits flowed, hand over fist, exchanges larger than the economy of the known universe, with fabulous parties, bonuses the size of a small country's national budget, a commonality, almost a communion, of private and political interests, and then....

Well, you know. Blooey. As with the wisest bettor’s system, the derivatives market in mortgages blew up, nearly taking down the world's financial system. Hey, listen, OWS, it's easy to stand on a streetcorner, subsidized by the SEIU or George Soros, and bitch about the evil one percent. It's easy to shriek about your loss of an entitlement. But to be honest, look at it differently. If the loser was a trust fund baby, would you give a damn if he or she suddenly had to work for a living? What's the difference between that person's “entitlement” and a secretary in a government shop who's “earning” three times what a secretary gets in a private company? In the real world, if the economy shrinks, everybody has to adjust, the sooner the better. As a chess-playing, Ph.D. holding survivor of the Holocaust once told me, “I'd rather drive a cab in NY than take a check from a government official.” He knew where that could lead, and Zwi was a very good hack. Point?

We need to get real. We need to stop pretending that the elites have anything of value to offer in the way they analyze these things. Half the time they’re fantasizing based on political allegiances; the other half they’re just lying out of fear, ignorance, a need for approval, and spite. And the real issue in this disaster is how it happened, who the actors were, and why they fell for, or fought for, the CDA trick on the mortgage market. Politicians, regulators, business people, and individuals are not discussing this, or are openly lying about it.

Let’s look. The housing disaster began with irresponsibility among constituents and politicians who wanted a quick fix (give Louise a home so she’ll vote for me and we’ll all vote for you), regulators and mortgage brokers who wanted more power and more money for booked loans, builders who wanted more orders, shortsighted investors who thought that markets were no different from casinos -- an irresponsibility based on the all-too-human willingness to suspend disbelief when the prospect of sudden, unearned wealth and power appears. And it wasn't as if it was something new in human nature. The Dutch nearly bankrupted themselves buying tulips in a similar market five hundred years ago. And you don't have to back up that far. Think of the lunatic irresponsibility of investment bankers pouring billions of dollars onto kids who'd done nothing but develop a storefront on the Web in 1998-1999, before the crash. There was nothing behind their pretty pictures, nothing but the chance of money and power, all based on hope and dreams, as long as you weren't the owner when someone realized the product was worthless. And they thought, as did Barney Frank, or Bill Clinton, or George W. Bush on housing, that they had found nirvana, a heavenly state where millions of dollars or votes would be automatically given, an entitlement of their own! And it was a long chain. The irresponsibility of one actor depended on the irresponsibility of another, from the constituent looking to get an unearned benefit, to the politician looking for a contribution, to the homebuilder looking for more orders, to the lending institution trying to book more mortgages.

The essential feature in the housing disaster was an irrational demand to violate basic understandings about how the economy, or a given part of it, functions. Frosted with lots of sweet talk, wishful thinking, jealousy, distress that things take time – an attitude more akin to a badly parented child in a toy store than to an adult, the political support from us was powerful enough to encourage politicians, bankers and builders to take insane risks. Politicians and bankers, buoyed by the hope and belief that we expressed, became so confident that they legislated a mandate on a vital core of economic activity, requiring a market to behave as they wished it to, forcing lending institutions to violate hard won business and regulatory standards for prudent and profitable business practice. By pretending that the old standards were nothing but the imposition of arrogant elites on the rest of us, WE imagined that one day, houses, and perhaps even skateboards, would be free. We passed that on to politicians. They took the measure of their other contributors, the billionaire construction magnates, the building trades, the suppliers, the tract development crowd, and said, hey, great idea! It wasn’t. With risk thrown out the window, people of quite ordinary means began to bet their net worth in this market, using houses bought on spec as chips. Boom! Bust!

The distortions this disaster caused in our economy are bad enough, but there's another effect. The political action that declared entitlement more important than following well thought-out procedures and practices has put a lot of us in the position of Greek public employees, demanding what can no longer be afforded, unwilling to play our part by considering what’s actually happened. Driven by our own irresponsibility, fear, and greed, amplified by political and regulatory action in pursuit of power and influence, the notion of entitlement has replaced our sense of whether or not we have earned something. This is no different in character or quality from the attitude expressed by indigent welfare clients.

That's what political mandates do. Their progenitors, authors, and legislators are not required to consider the consequences in the world we live in. But, friends, WE are the progenitors. Want it to stop? Stop it yourself.

To help in that great work, let's summarize:

The CDA mandate, and its pretense of providing social justice, created a casino out of the largest fixed asset market in the world. In a regular casino, the house always wins. In this casino, we ended up with a lot of empty houses and more bad debt that we can afford to repay. Who’s talking about this out there?

It has nothing to do with Governor Perry's affinity for the dull phrase, nothing to do with Governor Romney's plainfaced sobriety and happiness to work with real people, nothing to do with the President's friendship with Bill Ayres, nothing at all to do with silver or gold-backed currencies. Who's talking then?

We are.

This writer supposes that there won’t be much talk from the political and economic elites, however, because the Community Development Act has proven so enormously self-serving and profitable for them. We know all too well from reports, even in MSM, about the fabulous salaries and bonuses for these people about who’s getting the good stuff. Far from providing housing for the less favored, which we all wanted, CDA and its associated institutional authorities, have provided vast piles of cash rewards for the principals in Fannie Mae, Citibank, a dozen other institutions, political fundraising, votes, and, in the process, so badly damaged the credit markets that, despite historically low rates, it is harder to get a mortgage now than it has been since the 1970s. But, not to forget, WE participated in this, through our hopes, deluded wishes, ignorant advocacy, and foolish denial. As such WE need to talk about the responsibility of political constituencies and citizens, to make sure the likelihood of another foolhardy gambit like this doesn’t happen. A citizen's job is not only to vote, but to check an overly ambitious fool from making a mess. That’s what the Tea Party movement has been at for years.

In politics as in courtship, false hope is the poison that leads to alienation, rage, and divorce. We can stop this by refusing to play the blushing bride. We can start paying attention to whom we court or who is courting us.

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