The Foreclosure Mess

Was it a Cloward-Piven strategy?

Maybe, but I tend to go with Occam’s Razor — don’t attribute to conspiracy what can be easily explained by incompetence. Or its corollary, Clark’s Law (J. Porter Clark, that is) — any sufficiently advanced cluelessness is indistinguishable from malice. I think that the original instigator of the expression was spam, but this seems to fit as well.

35 thoughts on “The Foreclosure Mess”

  1. Vox Day and Ilana have a bust up over this issue. Ilana argues that government regulation (CRA and the like) was used to pressure the banking industry to offer “affordable” mortgage options for unqualified buyers and that the sub-prime industry was the banking industry’s effort to accommodate this government mandate. Vox Day, on the other hand, believes that the banking industry itself is the root of the evil and that the government regulation fostered this evil, but that the banking industry itself is the root of all the evil.

    I am awaiting my copy of Micheal Lewis’s “The Big Short” that will, hopefully, answer for me which two of these positions are correct.

    Right now, my gut instinct tells me that Ilana is correct and Vox Day is not. Both people are good thinkers. However, I find Ilana’s thinking to be more rigorously based on empiricism than Vox Day’s. If you assume that libertarianism is empirically derivable (both of these individuals are libertarians), which I do. Then it is reasonable, in the absence of additional information, to assume that the person whose thinking is purely empirical is more correct than the person whose thinking is not. Vox Day is good. However, he allows non-empirical world-views to influence his thinking. As far as I can tell, Ilana does not.

    The kind of non-empirical world-view that influences Vox Day easily lends itself to conspiracy theories and other delusions.

  2. Frankly, I have begun to suspect that it’s … both. These folks have been either radical outsiders or academics all of their purportedly “adult” lives. They think that screwing up things (Cloward-Piven) is the key to transforming things, and it turns out that they excel at … the incompetence required to really screw things up. Trouble is that, once they have screwed it up, they have absolutely no idea what to do next, and so their worker’s paradise remains a fantasy, and we end up spending a decade cursing them and fixing their mess. That’s the problem with Cloward-Piven: it looks exactly like incompetence (so they think it will work), and no one has EVER actually completed a Cloward-Piven maneuver successfully, so they don’t realize that it will NEVER work. People at large are starting to wise up to all of this, even if they don’t get their tutorials on Cloward-Piven from Glenn Beck, and they are deserting these folks at breathtakingly historical speed.

  3. no one has EVER actually completed a Cloward-Piven maneuver successfully

    I believe you are making the mistake of binary thinking. It either is or is not successful. That’s not the case. It’s incremental and they’ve already achieved that incremental success. Government spending is sacred. Chris Wallace today tried to get Fiorina to kill her campaign on the third rail of entitlements and was pretty obnoxious about it.

    We need to cut government employment so we quit starving the private sector, but anyone saying that is going to be a ‘wacko extremist’

  4. From what I hear when mortgages were bundled and securitized much of the original paperwork of the mortgages was left behind (some of the original banks which issued the mortgages no longer exist) such that many of these derivatives can no longer prove the original loans. If the bank can not verify it then there is no legal obligation to pay it.

    Apparently there was a recent legal case where a bank decided that a householder owed them a mortgage when in reality they did not, the bank lost the case – this has opened all such mortgages to legal challenge.

    There have been further issues with having to quickly ramp up the foreclosure industry, using the “Burger King” kids (cheap inexperienced labor that would otherwise be working at Burger King, so to speak). A lot of documents have been signed off without all the necessary documents being there, again exposing all these foreclosures to legal challenge. I am not quite sure why the financial industry has first right to talent though.

    It was in the government’s short term best interests to create the bubble, and it was in the short term best interests of the banks to run with the bubble. Both deserve to suffer the consequences of their actions – a plaque upon both their houses. A clean out of the banking industry still seems required – a functioning market requires that their failures have consequences. Many banks have failed their customers. Still, I am not sure how the government can be effectively held accountable for their failure.

  5. The problem with attributing it to cluelessness is they’ve specifically stated their intentions and are acting in accord with those intentions. They don’t just want to redistribute wealth, they want the loyal poor to keep them in power.

    It’s working great if not completely successful for them.

  6. The more we are learning about Obama the more we see that he has been a wolf in sheeps clothing. He became a community organizer purely on the basis of attending socialist conferences that were design to indoctrinate people into spreading the word of redistribution without, shhhhh, actually saying that’s what your doing. That’s the Alinsky way, that’s what the Cloward-Piven strategy is all about. If they are acting confused it’s purely for the purposes of sandbagging. Take it from me as someone who will sandbag you into tomorrow in a serious game of spades. You play from a position of weakness, “I know nutting'” is your preferred position when going for the ultimate take. We’ve all been sandbagged.

  7. I think the CRA and securitization helped, but these things were always going to happen, human nature being the way it is, as long as the underlying trend — which is that real estate climbs at 8% forever — continued. How could you not expect someone to try to creatively manage that wealth for the benefit of his political career and/or financial career?

    And, indeed, neither the CRA nor the securitization of mortgages would have hurt if the bubble kept going and going forever. So I think the real evil here has got to be the creation of the bubble in the first place. That dates back almost 25 years, and the most obvious culprit is the Federal Reserve system and the determination of monetarists to prop up the economy every time it looked like it was flagging with cheap money and low interest rates. Creating an asset bubble is almost inevitable.

    Maybe Andy Jackson was right, and central banks are simply evil.

  8. Back to the real world, about the only concrete action the new Congress could take to minimize the damage going forward is to immediately and as soon as possible stop all growth and then break up Fannie Mae, Freddie Mac, and Sally Mae. The longer this waits the more likely the results will be literally catastrophic.

    I like the idea of breaking each company up into 26 tranches to be sold based on the first letter of the note signers. Spread the Fannie-Freddie-Sally problem across 78 different companies and auction them off to the highest private bidders.

  9. Why do we all believe the lie that only central banks can provide liquidity. Loaning money is done for profit and lots of people want in the business. Deregulate completely. Survival of the fittest.

    In WA I used to take out a payday loan for $800, repay it in two days and they charged me zero interest (three days and it went up to about a gazillion pecent.) All I had to do was give them a post dated check which they returned to me two days later when I repaid them.

    All the government does by getting involved is two things. They get their cut or we don’t get an option of services. That’s it in total.

    Some moron in AZ wanted to regulate payday loan centers here (which I never use because they don’t offer what they did in WA) so they couldn’t be within a certain distance of each other. That’s crazy. I wanted them in the same building one window away from each other so they have to compete for customers. These lawmakers are idiots.

  10. Well, the theory, ken, is that government won’t rip you off, or in practical translation it means the government will bail your ass out with printed money if you’re (1) important enough (AIG, GM) or (2) there are enough of you (homeowners) and stick the taxpayers (preferably those yet unborn) with the bill.

    Or maybe it’s that only government can print an official-enough-looking currency? Although how useful currency is in these electronic days, I don’t know. If they stopped printing the stuff tomorrow, I’d not notice for months.

  11. So I think the real evil here has got to be the creation of the bubble in the first place. That dates back almost 25 years

    So does the CRA.

  12. Yeah, I know, Curt. But then how to explain the similar (some say worse) implosion in commercial real estate? It’s such an across the table thing, I don’t see any culprit more plausible than cheap money. How many times over the past three decades have you heard uh oh looks like the economy’s in trouble, so the Fed is going to ease interest rates so people can borrow more money to keep consumer demand up?

    What the Austrians say, and I’m more and more inclined to agree, is that ordinarily when people make bad investments — start the wrong business, buy the wrong piece of real estate, take the wrong job, get a useless degree — they get punished — they lose their savings, which of course means they cut back on their spending, are miserable, and (here’s the point) don’t do it again, and serve as a bleak example to their neighbors of what not to do. Periodically a lot of people in those straits cluster in one year, and you have an economic downturn, a sad but necessary fact o’ life.

    But if instead of this sad outcome, millions of bad investment strategies are propped up by allowing people to borrow the money instead, so somebody else’s savings are sacrificed, you encourage continuing stupid investment, i.e. you get big bubbles and a suspicious lack of ordinary business downturns. Eventually you may reach a point — like now? — where half the country owes money it can’t repay to the other half, who don’t deserve it anyway because their investments were monumentally stupid. I mean, you have Homeowner Bob, whose income doesn’t nearly cover the actual nominal cost of his mortgage, but then you have Banker Jolene, who shouldn’t have lent her depositor’s money to Bob, and Investor Grace, who was an idiot to buy Jolene’s bonds with her 401k money, not to mention Former Homeowner Phil, who sold the property to Bob at a price far above the house’s actual value as a place to live, thus exploiting the eager idiocy of Bob, Jolene, and Grace.

    There’s not enough real wealth to make all of these people whole — but who should get the shaft? None of them are guiltless. How on Earth do you sort this out?

  13. I don’t believe commercial real estate is going to see anything like the collapse we’ve seen in residential. Certainly not to the degree that it triggers a global meltdown. I am of the firm opinion that the orgy-like endorsement of the CRA by Clinton, and especialy Bush, was the primary ingniter. What started out as an attempt to prevent banks from red-lining neighborhoods turned into ACORN-fed idiocy. Bob, Jolene and Grace would normally have worked out their issues without a greate deal of impact to Carl and Curt. But when you throw a hundred thousand Manuel’s and Angelo Mozilo into the mix…

  14. how to explain the similar (some say worse) implosion in commercial real estate?

    It’s a sympathetic vibration… of many methods for determining value, one is looking around to see what other values are.

    but who should get the shaft?

    You follow the law regardless of the outcome. If the banks lose because they didn’t follow correct procedures with notes, too bad for them. If I pay my mortgage for thirty years but fail to make the last payment, too bad for me.

    Bubbles are normal and if you don’t create a system wide failure with bailouts are hardly noticed. Using real estate to create derivatives probably seemed like a neat idea. They should have all lost neat piles of money rather than the taxpayers.

  15. Oh no, Curt. Google “commercial real estate crisis” for an eyeful. And it could very easily be worse, because it’s happening later in the depression.

    It’d be nice to blame it all on Shiftless Manuel, but honestly there just aren’t enough of him to do that plausibly. In my neck of the woods, for example, just about every third or fourth home sale is a foreclosure, and these are not fry cooks losing their houses — it’s bank assistant managers and construction company foremen. mostly fairly solid folks who, admittedly foolishly, in retrospect, stretched themselves to the utmost to buy the American dream — a home of their own — in an absurdly inflating local real estate market. Furthermore, many of them have been hanging on by their fingernails hoping “someone” would “do something,” encouraged in this folly by a cynical and opportunity-seeking Democratic Congress and President, and many of their better options (e.g. short sale, getting out while they still had some savings) are now gone and they’re reduced to even greater misery and a far longer road back.

    I understand looking beyond things like the CRA is uncomfortable — because it raises the real spectre that we’re all going to get screwed, beause it isn’t just Undocumented Jose who is going to take a serious hit. We’re all going to be slammed with brutal taxes, beggaring inflation, painful borrowing costs, years and years of losses on our retirement accounts, poor wage growth, or no jobs — some combination of those things. The only real question left is: what combination? I wish I knew, because then I could take appropriate steps to prepare.

    Part of the problem — what makes me most uneasy — is that we have reached a level of bread ‘n’ circuses in our governance — we have such a powerful central government, subject to capture by any majority, even a very foolish majority — that it becomes less likely that one can prosper by your individual choices, by being smart and careful. It becomes more likely that prosperity (or even survival in extreme cases) becomes more tied to your social allegiance: are you one of the party that successfully captures the central power, and uses it to protect yourself?

  16. ken, the problem is that “the law” is not a static instrument, something carved on stone by Moses umpty years ago. Whether you like it or not, it’s a constantly adjusting and living thing, being morphed and refocussed all the time, in real time, by 535 elected representatives and about 100,000 busy bee bureaucrats and staffers in DC.

    “The law” is not just what might be traditional, it’s what Congress says it is today (but not what it says it is tomorrow, which may be wildly different) — plus how senior bureaucrat Foo drafts the regulation implementing the law, plus how junior bureaucrat Bar interprets the law when you telephone, plus again how (if things get that far) a prosecutor decdies to prosecute, and how a judge chooses to rule.

    It would be nice to have a fixed, unchanging framework, so that we all knew from a wee age what The Rules were. There are some who would say this is a sine qua non for a successful society: Rules that fit in a small book, for example, clear enough that any clown can understand them, and so rarely mucked with by lawmakers that you can count on them for decades at a time.

    But this is not the society we modern Amercans have (so far) chosen. We may still have time to go back to the intentions of our ancestors — who knew all about complex, all-pervading, infinitely flexible law that served those who made it, interpreted it, or paid for it. I hope we shall. I think the next two elections will be instructive.

  17. Carl, IMO your bank managers and construction foreman paid too much for their homes because the market had risen too high.


    1) What the hell is “too high”???

    I’ve no answer (guilty as charged).

    2) Granted THAT, why?

    Because too many Jose’s were given no-doc loans by too many Angelo’s. Jose didn’t get hurt because he didn’t put anything down to begin with. And Angelo didn’t get hurt (much) because he (wisely) spread the dough around to the right people in the process.

    Looking beyond things like the CRA is uncomfortable because it indicates possible real flaws in the system. An imperfect system granted, but get rid of government meddling and it’s my opinion that the bubble wouldn’t have been large enough to entangle bank managers and construction foreman.

  18. Many cities have passed tourism taxes on things like rental cars and hotel accommodations. These are a popular source of revenue because local people rarely stay in hotels or rent cars in their own towns so only tourists (who can’t vote in local elections) get soaked. What we’ve been seeing for some time – but never to the extent we’re seeing now – is government doing the same thing except instead of soaking the touriss, they’re soaking our children and grandchildren. Don’t have enough revenue to keep buying all of the votes you want with entitlement programs? Simple, borrow the money and stiff the kids for the bill. They can’t vote until they’re 18 (and relatively few of them vote even then) and many aren’t even born yet so they have no say in the matter.

    Back in the 1990s, people bought into the lure of get rich quick schemes by investing in Internet companies. Many of these companies were – if not outright frauds – based on the foolish idea of a “New Economy” where there was no need to show how your company was ever going to be profitable. When that bubble inevitably burst, people began looking for other ways to make money fast. Enter real estate. My youngest son lives with his family in San Diego. For several years, the price of homes in San Diego was rising by 25% per year, taking less than 3 years to double. I warned him then that it was unsustainable. Fortunately, when he and his wife decided to buy their townhome, they didn’t overextend themselves and instead bought something they could afford. When they qualified for a much more expensive mortgage then they were comfortable with, their real estate agent immediately tried to push them into buying the most expensive home they could get. I’m sure this was out of the goodness of her heart and that she never even considered the higher commission she’d get with the more expensive sale. [/sarc] Fortunately, my son married a wise woman and they resisted the temptation to overextend themselves or to use their home as an ATM. They’ve weathered the recession fairly well.

    Judging by the local market, commercial real estate followed a similar pattern. Even after the recession began, they kept putting up new buildings despite the number of empty buildings in the area. Now, most of those buildings are less than 20% full and several are still empty. Someone is paying a lot of money for the mortgages on those empty buildings and the question becomes, how long can they continue before they go bankrupt? I fully expect a lot of the people who invested in those buildings are in big financial trouble. If they have political connections, it won’t surprise me in the least to see the next round taxpayer (and children) bailouts to protect them from their folly.

  19. (1) There are a number of reasonable definitions of too high, Curt. For one thing, I didn’t buy a house during this mess. After I was forced to sell my last house in 2002, I just stashed the cash away and rented. Real estate agents would show me houses at $750,000 and it was crystal clear to me that they weren’t really worth that, that is, the value of the house as shelter and access to local amenities (schools, freeways) was just not worth that many years of a man’s average annual income. They’d agree, actually — but then give what to them seemed an ironclad argument: but it will be worth $1 million next year! Their argument boiled down to yes, this is foolish, but so long as there will be a greater fool next year, you can profit enormously!

    Well, leaving aside the ethical quandary of profiting by the folly of others, I just couldn’t see betting on an endless supply of fools, so I didn’t. Anyone could have made the same calculation. You just need to step outside of the dangerous notion that the price of things always reflects their value. Once you do that — there are many tools to assess the true value of things, the easiest of them being to look inside yourself at the tradeoff of the hours and years of your life for ownership of the thing. If the buy isn’t a good deal on that basis alone, if you find yourself horrified at the notion of being stuck with your purchase indefinitely — then the price is too high.

    You can certainly go on to find lots of objective numbers, historical trends in home prices, fluctations in rates of return, blah blah, to justify your decision. But this is just window-dressing, stuff you do to back yourself up when you’ve already recovered from the delusional state. When it comes right down to it, the key decision is not to buy a thing just because everyone else is. Applies to fortysomethings buying houses and stocks just as much as it does to teenagers buying designer jeans and iPhones.

    (2) I understand the argument, but I just don’t think the numbers bear it out. I don’t think such wildly risky (at the retail level) loans were enough to push prices so high — I think it took a systematic national level policy of keeping the price of debt in general too low, of fostering the attitude that borrowing to fuel consumption is exactly the same as saving for it — which it most definitely is not. That’s what points to national-level central banking policy, the policy of shoveling out cheap money whenever the economy dips.

    In essence, at the national level we committed the folly against which Thomas Sowell argues all the time: forgetting that price is a signal, a symptom, not an illness to be cured in itself by propping it up or trying to push it down. Falling consumption in the national economy is a signal of significant levels of bad investment, of savings that have been badly spent, and if you foolishly try to prop it up by encouraging borrowing to throw after the misspent savings, you are as much of an idiot as if you tried to prop the price of buggy whips up when Henry Ford starts selling Model Ts.

    I also don’t think you can isolate the problem to those who shouldn’t have owned property at all. Quite a lot of people are owe more money than they can pay but the actual value of the asset they bought, the house, isn’t actually more than they can afford. That’s the evil nature of the problem: these people owe too much money but they owe it for an asset that isn’t really worth what they paid for it. Even if you burn them by depriving them of the asset, it’s not going to help the person who lent the money, because the asset is still not worth what was borrowed against it’s value. And keep in mind that “the people who lent them money” isn’t, alas, just one particular bank. It’s all of us, through Fanny and Freddy, through the mutual and pension funds that invested in real estate bonds, and so forth.

  20. One other way of making home loans too cheap was making the interest deductible, particularly relative to other loans. Now I think that all interest should be deductible (or else stop making earned interest taxable, so at least they aren’t doing heads they win tails you lose), but making only mortgage interest deductible no doubt exacerbated the problem.

  21. QFE this Phamtastic nugget for the tl;dr crowd:

    Part of the problem — what makes me most uneasy — is that we have reached a level of bread ‘n’ circuses in our governance — we have such a powerful central government, subject to capture by any majority, even a very foolish majority — that it becomes less likely that one can prosper by your individual choices, by being smart and careful. It becomes more likely that prosperity (or even survival in extreme cases) becomes more tied to your social allegiance: are you one of the party that successfully captures the central power, and uses it to protect yourself?

    Why work for a living? Work is punished – vote for a living, instead.

  22. There are a number of reasonable definitions of too high

    Sure there are. The question is why so many bank managers and construction foreman didn’t use them. “Greed” just doesn’t do it for me. A small percentage of them maybe, but not enough to perpetuate the bubble.

    Guess I’m naive.

  23. As usual much wisdom from you Carl. Centralization is the critical problem; as you said, an election can swing things wildly. Laws may change, but principles should be carved in stone; hey, someone did that didn’t they?

    Education should be the moderator, but that’s been under attack for generations now.

    We are truly screwed if we don’t realize the depth of the problem and work on it with the effort and time it requires.

    When congress tries to retroactively solve their friends problems by changing laws that have stood the test of time, they need to be hung out.

  24. Titus, you are a sick puppy; but you’re also right, we may have already past the tipping point where voting is more important than working for far too many.

  25. Ken, you are too kind, but that’s just the bottom-line of my neighbors’ demonstrable philosophy – they are unlikely to post here, so I feel compelled to Represent!

    For my part, I avoid all politics, including voting, to the extent which I can. At some critical mass, however, it cannot be ignored, and the injustices and agents will manifest physically into your home or business and drag you through the street. A generation ago, there was enough morality in this nation that such a spectacle would elicit shock and horror, thus bringing-about real change we could believe in, but I fear that we’re past that point, and any passive resistance will be met with cheers and indifferent silence.

    The morality of the nation will have evaporated and we simply won’t be a nation worth saving. We all know what happens after that, and it’s never pretty.

  26. The question is why so many bank managers and construction foreman didn’t use them.

    Well…it’s understandable why a minority didn’t use them in the short run. People just aren’t that bright, full stop. This is why we’re stuck in purgatory, and heaven on Earth has proved impossible to construct these past forty thousand years.

    But if left fully exposed to the natural consequences of their actions,this folly doesn’t go on too long, and doesn’t spread to far, since others slightly less foolish are instructed by the terrible example of the most foolish being eaten alive. Evolution in action, natural selection, the bad example pour encourage les autres.

    What I’m suggesting is at the national level we have systematically frozen out the natural consequences for folly as long as we could, a good two decades, and now, perhaps, the chickens have come home to roost, to the woe of all of us. Even now, it continues. I see ads all the time from banks: Time to buy a house! Mortgage rates have never been lower! And maybe that works, which would prove people still haven’t really learned the lesson. If something isn’t a good deal for its price, it doesn’t become a good deal just because you can borrow the money to finance it at low interest rates.

    I mean, would you like a poke in the eye with a sharp stick? No? How about if I poke you now, but I have a magic pill that will let you only feel the pain tomorrow, or after Christmas? Does it become a better offer?

    Here’s a clue: the interest rate on your mortgage should have nothing at all to do with whether you buy the house, or how much house you buy (unless you are a speculator or investor comparing investment vehicles). You should look only at the price and at your resources. If you find yourself considering the interest rate, you are in the Danger Zone and should go lie down until the impulse passes. When that becomes conventional wisdom we’ll know sanity has returned to this market, and not before.

  27. I think that all interest should be deductible

    Fair tax means never having to be interested in deductibles.

    And a single tax rate that both parties would be fighting to lower.

    A bit worried about unintended, but what we have ain’t workin’.

  28. Or maybe it’s that only government can print an official-enough-looking currency

    I didn’t comment on this back when you said it, but I meant to. It’s not how official looking it is, it’s how much trust people have in the printer to secure the debt since all money is debt. In theory, anybody can produce money (whether paper or electronic makes no difference.) In practice, they do. Linden bucks are real money. Air travel points are real money.

    A debit card is real money. In theory, you don’t need a bank to issue them.

    You might say there is money that isn’t debt. Anybody could print the current market value of a piece of metal on it and people could use that as money until they decided it was worth something different from face value.

    You could also create money that isn’t secured by anything (pretty sea shells) as long as people were willing to use it as a means of exchange.

    This is further evidence that capital and money are two different things. Capital is anything (labor, tools, seed, etc.) that is used to produce anything. Money is just a convenient way of conveying capital.

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