Friday, March 28, 2008

A Few Thoughts

I will hopefully write more about this tomorrow or this weekend, but I want to quickly address a few points:
  • Individuals should be held responsible for their decisions, but many homebuyers and homeowners did not have a decision beyond bad mortgage or no home. That is not a decision, but a reflection of the inability of the market to address the needs and concerns of all segments of society. The one who did have a choice, those who invested in real estate in order to profit, should be differentiated from those who did not. Self-help fails when individuals are unable to help themselves.
  • Lang gets at a fundamental issue when he discusses the power differential between borrowers and lenders. The Lochner era of the Supreme Court, named for the 1904 decision Lochner v. New York, was characterized by the adherence to the idea of right to contract. Individual workers were assumed to have the same leverage and power as their employers, thus any legislation to regulate the hours, wages, conditions, etc. of labor was seen to interfere with a worker's right to dictate the contents and terms of his (but not her) contract. The result of this mistaken application of the Due Process Clause of the Fourteenth Amendment was damaging not only to individual workers, but to unions and the long-term health of the economy. When this changed in 1937 under West Coast Hotel v. Parrish, the government gained the ability to bridge the gap between workers and employers. This ensured that the 1935 Wagner Act (among other legislation) would remain constitutional and it paved the way for the Fair Labor Standards Act in 1938. What was true of workers and employers is also true of borrowers and lenders. To paraphrase Lang, borrowers lack the knowledge, expertise, and experience to gauge the market with anywhere near the accuracy with which lenders should be able. Even borrowers who may possess such specialized knowledge simply do not have anywhere near the same resources as the average bank, to say nothing of a Citigroup or a Goldman Sachs. As such, government should step in to help bridge that gap. It is not a double standard to hold those capable of a certain behavior accountable while not doing so for those incapable of such otherwise regulated behavior.
  • Government non-intervention works both ways. In the 1890's, unions were among the most critical of government intervention in the economy because government would invariably intervene on behalf of management in any labor dispute. Today's situation parallels this grievance. Bear Stearns was bailed out (for all intents and purposes), but individual homeowners are not. This reinforces the structural inequality between massive institutions and individuals as well as the need for government to actively stand for those individuals.


ebl2009 said...

As an side, this article apropos of our discussion, was in the Times this morning

ebl2009 said...

Also, to your first bullet point, that's a mischaracterization of the individual mortgage holders and their choices. The choice many of these people were making was not between no home and a bad mortgage, it was between a bad mortgage on a house that was well beyond there means and one that was safer. My family, in commercial and real estate, repletes me with the average story - it isn't an underprivileged person choosing between a home and not, it's a person purchasing a $700,000 home and one that might be $300,000.

In addition, it's not accurate to portray the choice as manichean in nature. There's no reason that an individual could not downgrade their house and secure a mortgage they could actually pay. They have no 'right' to the nicer house; they should only procure what is within their means. In addition, yes, it's nice to own your own home instead of renting and I'm not necessarily against government sponsored low-interest rates for mortgage lending, but once again that's not the situation we're discussing - we're discussing situations where individuals went far beyond their means.

Lang said...

I'm entirely with EBL regarding your first point.

In addition to finding a cheaper house, people could also choose to rent. Your post presents a false dicohotomy - either buy house X at price $X, or "no home," as you put it, but that isn't the case. Cheaper housing, and renting are both alternatives you fail to consider.

Garbo said...

It was late and I was more focused on getting out my second point. I did oversimplify, but I think there are other factors that the two of you do not consider:

First, the housing bubble increased home values and prices, forcing families to pay more for the home that fit their needs. Rental would be an option, but if rents skyrocket (as they did) and the mortgage turns out to be cheaper, it is hard to blame anyone who went for the mortgage in order to save money. Ironically, such attempts at thrift resulted in financial ruin.

Second, and I am kicking myself for not saying so earlier, punish the borrowers by lowering their credit rating. Make it harder for them to buy a new tv or a car or a boat, but let them keep their house. There needs to be an effort to assist these individuals with keeping their home. Tent Cities are not the answer. They didn't work for Hoover and they won't work now.

Lang said...

Garbo -

I like the second reaction, but still disagree with the first.

If housing is overpriced, buy or rent (preferably rent, since you're predicting the price will drop, and why make an investment you think will depreciate...) a cheaper/smaller/worse house, until prices lower.

Living in an inferior house that doesn't 'fit a family's needs' is really a response to EBL's point that "They have no 'right' to the nicer house; they should only procure what is within their means," and ultimately I side with EBL on this one.

Families don't have an inherent right to live beyond their means. The solution to poor families that can't afford necessities isn't to justify them borrowing sums of money that they can't reasonably expect to pay back, anymore than than it is to justify flat-out theft. The solution should be for the government to help them meet their needs, not to encourage them to rip off others through whatever options they have open to them.

Garbo said...

Of course they do not have such a right and an enormous problem that we have as a nation is our inability to save and live within our means generally, not only when it comes to housing. Your solution is correct; Government should enable families to live within their means, not exploit the generosity of others or to live a life they cannot afford.

In the future, stringent lending regulations can help prevent lenders from granting loans to those who should not receive them. In theory, the market should have done this, but clearly it failed to do so. But future regulation will not solve today's problems. We still must address what has already happened and a hand's off approach, punishing people for the circumstances in which they find themselves, is no more a solution than bailing them out regardless of circumstances.

hot zone said...

I've got to second everything Ebl and Lang said. There is no inherent right to a big house.

Everyone is so sad about the homeowners who are losing their homes, but no one remembers the smiling family who just bought their dream house from the foreclosure sale. You have to look at both sides.

Truth be told, the market did not fail. The market was correcting the mistake, but it is painful. Lenders would have gone out of business and borrowers would have had to declare bankruptcy. People don't like the pain and turn to the government. The government never lets a bubble burst without interference which sometimes leads to other bubbles forming to prop up the economy.

Garbo said...

I hadn't actually looked at it that way, Hot Zone. You do make an interesting point regarding the foreclosure sale.

The right to a big house does not exist and I never said it did. I may have oversimplified the options available to potential homebuyers, but I never meant to imply that buyers have a right to live beyond their means. Of course they do not.

The role of government is to mitigate the bursting bubble. It cannot make them disappear, but it can soften the blow, which it has failed to do this time around.