The latest EconTalk is my colleague Todd Zywicki talking about debt and bankruptcy. One of his most interesting observations is how consumer debt has been pretty constant over time but credit card debt has increased while other forms of less pleasant and more expensive debt (layaway and payday loans) have decreased.
Zywicki on debt and bankruptcy
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On that particular point about the relatively consistent amount of consumer debt but the changing nature of it… It sure would be nice if economic training generally got people asking about a wider picture when confronted with data about changes in some narrow or not so narrow category. In physics, there's Newton's Law. Is there a similar concept that econ students learn?
I enjoyed the program until all the moralizing about foreclosure.
Somehow, the word "immoral" never entered the conversation when discussing the inflationary, loose lending practices of the mortgage banking and real estate brokering system. [The Federal Open Market Committee alone is not solely responsible for this inflationary process. The idea is absurd.] Somehow, when financiers paid themselves multi-million dollar bonuses to package incredibly inflationary, toxic mortgages into promissory notes of dubious value, bonuses they don't surrender when the value of these notes collapses a year after their sale, the word "immoral" is not apropos. These financiers are only responding to incentives.
But when regulators of the creditors, who are entitled to create money to lend it, require these creditors to share the risk of inflationary credit expansion by allowing them recourse only to the resale value of homes securing the credit they extend in foreclosure, suddenly "morality" is on everyone's lips. The other party sharing this risk, the mortgagor, if he refuses to accept 100% of the loss following the collapse of an inflationary bubble fueled by creditors entitled to create money to lend it, if he accepts only the lose of his down payment, is "immoral". He's not "responding to incentives". He's not behaving rationally as the law expects him to behave in order to discourage the inflationary credit expansion. He's just being "immoral".
What a lot of simple-minded, state worshiping nonsense.
In case anyone is turned off by the specter of simple-minded, state worshiping, nonsensical moralizing, I'll point out that, whatever one's opinion of it, the whole of the program's moralizing is about a third of the material Martin presents in his 9:38:51 post railing against the program's moralizing. Cover your ears for about 5 seconds in each of 2 segments and you'll be fine.
The point about the isolation of the credit function is one that I think doesn't get enough play, but I would have liked it Russ if you had pushed back with a question about why we see the GE Capitals and GMAC's of the world persist despite competitive pressure from credit specialists.
Like I said, I enjoyed the program otherwise. The use of the word "immoral" was limited to a few segments, but the discussion of bankruptcy and foreclosure was much longer, and more of this discussion had the sound of a morality play, while the discussion of central bankers, Treasury secretaries, mortgage lenders, mortgage securitizers, real estate brokers, real estate appraisers, bond rating agencies and other players in the financial game does not reach the same level. Why is that?
Russ presumed incorrectly that a mortgagor opting for foreclosure under a non-recourse mortgage must declare bankruptcy to escape the balance of the debt secured by the house after the house is sold. His guest didn't correct this misimpression. The mortgagor in this scenario need not declare bankruptcy. That's the whole point of the non-recourse mortgage.
A "mortgage", by definition, is the creditor's security in the house against loss of credit extended. The entire value of the house secures the credit, even if the mortgagor makes a substantial down payment. Saying that the mortgagor "promises" more than the value of the house in exchange for the credit is simply to assume the role of the creditor's lawyer, not the role of Moses on Mount Sinai.
A non-recourse mortgage is not remotely a "free ride" or a "fresh start" for the mortgagor. The mortgagor loses his down payment, which is the mortgagor's investment in the property and can be very considerable. The mortgagee loses only the difference between the selling price of the house before and after the mortgage, less the mortgagor's down payment and closing fees, and if the mortgagee has created the money (borrowed it from the central bank in our system) to extend the credit, this "loss" is hardly comparable to mortgagor's.
If the mortgagee lends far more than a house is ultimately worth, even without a meaningful down payment, that's his problem and should be his problem. If the interests listed above may inflate housing without limit, they effectively gain entitlement to all manner of property by writ of their entitlement to extend inflationary credit. A non-recourse mortgage is a public policy requiring creditors to share risk of the deflation of a housing bubble. It is part of a rational monetary policy, not a "fresh start" for "immoral" mortgagors. This fact bears repeating.
As Jefferson noted centuries ago, this game of inflationary credit followed by deflation is rent seeking, but despite Jefferson's misconstruction of the problem, it's not a problem of "private banks". We don't have a private banking system in the U.S., not remotely. We haven't had anything like a private banking system for the better part of a century. "Nationalizing" the banking system now would hardly change a thing.
There's a reason why people perceive many economists and some nominal "libertarians" as capitalist lackeys, because they are.
Martin – your ad hominem attacks don't serve to illuminate any points you might otherwise try to be making. It seems that the most common word usage on the blogs are "hack", "lackey", "scum" and so on. I don't know who you are intending to convince, but it isn't working.
I haven't attacked anyone's person. I say that particular lines of argument are nonsense. I nowhere ever call anyone "hack" or "scum".
In common vernacular, a "lackey" rationalizes particular political interests, like CEOs of financial institutions arranging themselves multi-million dollar bonuses while their shareholders lose billions. If I see arguments of this sort, calling the arguer a "lackey" describes his rhetorical style and is not an ad hominem. If I say, "you are scum for arguing this way," that would be an ad hominem, but I don't say so. You simply conflate my word with "scum" to create this misimpression.
I make substantive points about terms of foreclosure, and you completely ignore them. You can address the points, or you can defend the celebrated blogger and move on. That's up to you.
Martin – I shall engage in my brand of sock puppetry.
Crusader – I shall write nonsense and attribute it to Martin.