I’ll try to make this quick. There are two big problems with this idea.
First, the money that is owed by people who have mortgages (underwater or not) is owed to you and me. If you have money in a bank or anywhere other than a mattress, it’s very likely that some of your money was part of a loan to a person who bought a house. It’s not a direct relationship, but it’s there. We give banks our money, they lend it out, we get interest, they get interest, and a homebuyer gets access to capital. Jimmy Stewart as George Bailey describes the fractional reserve economy better than I can:
And here’s a version that looks more like today’s reality!
I love the idea of forgiving debt of all kinds. I don’t have very much debt, but the idea of cutting homeowners loose of their obligations means people would have more cash, less anxiety, and more confidence in the economy. But the deal is that the debt isn’t owned to “The Bank.” The bank’s money is our money. Essentially, if we cut people lose of their mortgages then we’re essentially writing down our own assets too.
That’s not such a terrible idea, but how much do you want to give up? How much are you willing to give up so that someone who’s underwater doesn’t lose their home? The Bank doesn’t have any money other than the money that we give it. That means when banks give up revenue from collecting mortgages we lose money too.
The second issue is about the greed not of banks, but people who thought they’d make a lot from the resale of their homes down the road. Most people don’t call this greed; they call it equity. I would leave it to you to decide what it is, but the basics are that most people buy homes for shelter and the idea they’ll be able to sell for more than they paid. I call that investing. Others would call that greed.
Single-family homes are the dream of the middle class. Lots of wealth was passed on from one generation to the next because of rising home values. If someone pops that bubble then lots of people lose. But is a busted housing value bubble the bank’s fault? Maybe partially, since banks lent out our money to riskier and riskier borrowers in order to get more profit for themselves and by extension us.
How do we hold the people who borrowed accountable. Fgruben’s comment on the Publicola article is blunt:
The real estate bubble was caused by greedy homeowners. Not banks. Not mortgage lenders. If there was any “fraud” done in a mortgage loan, it was on the behalf of the borrower. Yeah, banks made money on it. But it was greed that now has many people in foreclosure. Mr. Willis’s idea is certainly noble, but it is wrong. People losing their homes is certainly a bad thing. From a personal scale, I know some people that have lost their home, to a national scale, the housing industry contributes a large amount of jobs to America. While it is nice to target banks as the boogie man here ( and in my opinion, banks are not your friend!!!!), it is/was personal greed that has got us into this position. After all, the people went and borrowed the money. They got the money. They bought a house or refinanced. There was personal choice involved. Many people lived within their means, or rented. Why should they have to bail out someone that was greedy???
There are always other ways to look at this, but Fgruben articulates one side quite well.
Check out the latest edition of Think Tank on Publicola which takes on the question of whether we can or should be inspired by the Occupy movement. As winter wears on and the cold sets in, something tells me that the Occupy “movement” is going to peter out. As social catharsis I think it sort of served it’s purpose, allowing people to go out and shout at the banks before checking their balances.
Here’s a sample:
I will say that the Occupiers have started a good conversation about banks, financial institutions, and the role they play in American life and politics. But their simplistic narrative casting banks as the villain plays mainly to peoples’ fears about things they don’t understand rather than lighting the way toward something better. The movements I mentioned above had a vision of what life could look like once a big change came. There will always be a financial system and what’s missing from the Occupier’s rhetoric is any vision of what a reformed version of that system might look like.
I’m having another Mugatu moment as I see people using a quote from Illinois Senator Dick Durbin to justify the efforts of the Occupiers around the country.
“And the banks — hard to believe in a time when we’re facing a banking crisis that many of the banks created — are still the most powerful lobby on Capitol Hill. And they frankly own the place,” he said onWJJG 1530 AM‘s “Mornings with Ray Hanania.”Progress Illinois picked up the quote.
I feel like I’m taking crazy pills! Doesn’t anybody see that these politicians are completely abdicating basic human and professional responsibility for their own actions. Durbin might well have said.
I’m sorry that things are where they are. I’d have voted to abolish banks years ago but I can’t. You see they fund my campaign, and I really like being a United States Senator. It’s really cool. It makes up for the times when I was a little kid that my dad said I’d never amount to much. So I have to take their money. Maybe you can make them stop giving me money!
The CME group (check out their awesome, corporate website) describes itself this way:
CME Group is the world’s leading and most diverse derivatives marketplace. The company is comprised of four Designated Contract Markets (DCMs). Further information on each exchange’s rules and product listings can be found by clicking on the links to CME, CBOT, NYMEX andCOMEX.
Sounds awesome. Designated Contract Markets doesn’t sound like something that the occupiers would embrace as “community banking.” I’m not totally clear on what it is but it sure sounds exciting and a little risky. In any event, it’s groups like Citibank and CME that, in Durbin’s words, “own” him.
Please, Occupiers and allies, stop quoting Dick Durbin as a source for describing the problem you’re trying to solve. It’s people like Durbin–yes, people–that are the problem, not some nebulous thing called Banks. Durbin is a Senator for crying out loud, if he supports banning banks from giving any money then why doesn’t he do something about it? I know, I know that court decision makes that impossible. But Durbin’s certainly in a better position to do something about that, too, than a college student shivering in a tent.
Are you sick and tired yet of people whining about banks? Well I am. I am Pro-Bank and I vote. And I have this blog where I get to defend banks from the tiresome blah blah blah about fees and loans and bad customer service and all the other things we hate about banks. The Stranger, true to form, has allowed some of it’s writers to engage in a sustained screed about banks. They even use the “F Word” in the headline, and I don’t mean financing. But settle down for a second and let me explain why you should run right out and buy a cup a coffee for the nearest banker you can find.
Before I do that, let me say I hate banks! Their fees are terrible, I can’t get a decent loan from them, and they have terrible customer service. There, I said it. I’m one of the 99 percent–that hates banks. I’ve logged more hours than anyone out there yelling at banks over the phone over charges, mistakes, poorly communicated rules and agreements that cost me money. I’ve asked for more supervisors and been hung up on more than all of you. Maybe I need help, but still, I’ve battled banks with my bear hands clutched around a phone receiver. But without banks our world would simply end, and they perform a critical service for us all.
First, where else are you going to put your money? Yes, yes, I know a credit union. I have some money at BECU too. In fact, I’ll sign you up. They’ll give me fifty bucks for getting you to join. But credit unions are banks too, and you’ll find that BECU cuts a lot of corners to save you money and attract customers. My guess is that consumer banking is a huge loser for almost any banking system. Think about it, BECU has like three branches and they have really cool ways of doing things like depositing a check that require no people. People cost money, and BECU spends its cash on technology not lots of smiling tellers.
The average bank customer probably costs the average bank more money than we’re worth. We are constantly making deposits and withdrawals, we have low balances, and whenever we’re confused we burn up the operators time at $12 dollars an hour so that we can realize that, in fact, that pending transaction is there after all. Banks are like any other business, they make money from decreasing costs and increasing revenues.
Imagine if you were holding on to the allowances of 50 first graders. Lots of nickels and dimes from allowances and the tooth fairy. Those kids are going to want to count their money constantly, play with it, then give you more of it in small deposits of another nickel and dime and maybe even a penny. I’m not being mean. Just think about what that would be like. It would be a hassle and there isn’t much you could do with that money because it doesn’t add up to very much.
The reason why banks charge fees for silly things like a phone call is simple Folkenomics. If you have to pay for something you won’t do it. If you don’t do it, it saves the bank money. The reason why you get charged fees isn’t to generate more profits, it’s to get you to stop using the bank so much with your very small transactions. Let’s face it, most of us are not moving around hundreds of thousands of dollars. Are banks really going to make a trillion dollars charging me a fee here and there. I doubt it.
Why don’t banks make a bunch of money off of us? Because banks make money when then lend money out. Money sitting in a vault is a bad thing. The reason why banks give you such a high interest rate on a Certificate of Deposit (a CD) is because you promise to leave it alone for a long time. That means those funds can be made available to other people. Most of us can’t park all our money that way, we need liquidity, and all those little accounts with billions of tiny transactions suck up a lot of time and resources and money.
And that brings me to the second reason we need and should love banks. They loan out money. That cool bar that you like to hang out at; built with loans from a bank. That house you live in; mortgage from a bank. That car you make a payment on every month; a loan from a bank. Banks make money when they give money out. It’s true we’re in a liquidity trap, a situation that means banks are sitting on lots of money but they are afraid to lend it out. They’re afraid to lend it out because the economy is bad and they worry they won’t get paid back.
Now to the third reason we need and should appreciate our banks. Banks can lead innovation and have. When properly motivated and incentivized banks will risk money on lots of crazy ideas like the ones Bill Gates and Steve Jobs each had about starting Microsoft and Apple. Banks make a difference where we need it the most. Sure, they have to be persuaded to take risks, and risk has upsides and downsides as we’re learning. The idea is to get banks to take risks on more sustainable projects, not blow up big banks or any banks.
Life without banks would be a post apocalyptic nightmare world full of bartering for things, hoarding cash and valuables, and having to defend our wages with our lives. Life without banks would mean no loans for things we need, want, or that we think we could use to make more money for ourselves. And finally, life without banks would jeopardize progress and innovation, denying entrepreneurs and people with great ideas the cash to try out their concepts.
So please, stop bashing the banks. Sure, move your money to a local credit union, that’s a supportable idea. But don’t forget we are the little guys. And while I know this sounds insane in today’s world (or really at any time) we ought to be grateful for the idea of banks, even if our own bank sucks. Let’s focus on making the banking system better, more sustainable, and demand that it puts its money into projects that will produce long term benefits. And for crying out loud, let’s do something about all these damn fees!
In my long winded post about how are outsized expectations filled a borrowing bubble that eventually sprung a leak, I mentioned “upward mobility.” I hinted that the idea that each of us should exceed the economic expectations of our most recent ancestors was something that led to the economic break down and that it was something that would have to change.
Enter the term “downward mobility,” explained by Robert Samuelson in a recent column with a nice nod to Karl Marx:
A specter haunts America: downward mobility. Every generation, we believe, should live better than its predecessor. By and large, Americans still embrace that promise. A Pew survey earlier this year found that 48 percent of respondents felt that their children’s living standards would exceed their own. Although that’s down from 61 percent in 2002, it’s on a par with the mid-1990s. But these expectations could be dashed. For young Americans, the future could be dimmer.
Samuelson is one of several conservative writers that I enjoy reading along with Charles Krauthammer and George Will. I like them because they annoy the hell out of smug liberals, they unashamedly use “big words,” and, and this is the scary part, I often agree whole heartedly with what they’re saying. But not necessarily because I am a conservative. Will’s stuff, for example, is really good at defining what a Progressive should be, although most progressives are too timid to turn Will’s derision on it’s head and embrace his definition.
Recent headlines have been blaring about July’s huge drop in home sales across the country. Along with a drop in the stock market, the plunge in sales has also lead to a spate of discussion about how the housing market got to this place, and its role in the overall economic downturn the country is experiencing. While the news is bleak, there is a silver lining, I think, for sustainability. There could be a serious shift in attitudes about what housing means. Does the American Dream look like a single family house with a car parked out front? Or is it possible that we might revise that vision to include living in the city and relying on transit? We may be closer than you think.
In that post I was responding to what Samuelson called a “housing fetish,” and I think what he said in that article resonates with the idea of downward mobility. Samuelson, in the article on Downward Mobility, points out that while our wages have grown, inflation and health care costs have eaten most of that wage growth.
It’s already happening. “A decade of health care cost growth has wiped out real income gains for an average U.S. family,” report two Rand Corp. researchers in the journal Health Affairs. From 1999 to 2009, total compensation of a typical four-member family with employer-paid health insurance rose by $23,000. About 95 percent of this (almost $22,000) went to inflation and health care, including employer costs, family premiums, out-of-pocket payments and taxes. For most families, higher costs didn’t deliver parallel benefits. The reason: Health spending is concentrated; the sickest 5 percent account for half the total.
And Samuelson points out in his article on our “housing fetish” it the bubble was filled by
The cheap credit subsidy [for housing] . . . mainly through Fannie Mae and Freddie Mac. These government-sponsored enterprises (GSEs) were economic mongrels: profit-making companies that were given goals of expanding homeownership among poorer buyers. The GSEs could borrow at interest rates barely above the U.S. Treasury’s, because investors regarded Fannie and Freddie bonds as backed by the government.
As I mention in the last post, the American dream includes a house, furniture to go it, a car, and “free roads” and sewers. All those expectations were shared by more and more people, including those at the lower end of the economic ladder. While extending the benefits of a government backed mortgage seems like a sweet thing to do, it lead to trouble.
It seemed a perfect marriage: The GSEs would do well by doing good. They’d earn profits and pass along the benefits of cheaper credit by financing or guaranteeing mortgage loans. Congress could promote homeownership outside budget constraints. By 2009, Fannie and Freddie had lent or guaranteed almost $5.5 trillion in home mortgages, roughly half of the U.S. total. But the marriage between private profit and public purpose failed. In September 2008, the Bush administration took over Fannie and Freddie, which faced huge losses from bad mortgages.
Sorry to zig and zag back and forth between two Samuelson articles. But this leaky dream bubble inflated with the hopes and dreams of so many people wanting to get into a home, and those who aimed to profit by supplying that demand, has lead to the current decline. And the decline may not be just part of a cycle, but an actual fundamental shrinking of money and economic opportunity. From Samuelson on “downward mobility.”
Our children’s futures have been heavily mortgaged. That’s true even if the economy returns in a few years to “full employment” (say, 5 percent unemployment) and past productivity gains (about 1.7 percent annually since 1966) continue. If today’s weak recovery persists, the outlook darkens. Unemployment will remain high, say 7 percent to 9 percent. Wage increases will remain depressed. Young workers will have trouble finding jobs to develop the skills and contacts that lead to better jobs. Productivity growth might falter.
So the bad news for the Occupiers, and all of us, is that the idea that we would live a life better than our parents is, essentially, over. It hurts. And again, it isn’t fair. But what was that dream? As I pointed out in my post, so much of what we were after was a house in the burbs. Not all of us of course, but it’s hard to find people in the middle class who did not see a house as part of what upward mobility meant.
But we can quantitatively and qualitatively change the American dream. After all, it’s our dream, right? The dream doesn’t have to feature resource intensive visions of houses and mortgages for all. Instead, it can be about renting or owning in a high rise. I pointed out in a post on the land use blog awhile back that we ought to be thinking about the Jefferson’s rather than the Cleavers when we think about “mobility.” We ought to be thinking about movin’ on up, not sprawling on out. It’s sustainable, and, well, it’s what’s going to have to happen.
Edmund Burke anchored rights, or their realization, in good government rather than something God given, Alexander Hamilton constructed a system of public finance to pay for good government, and John Maynard Keynes gives us a theory about how to use both tools to create growth and prosperity. When we put these ideas together, we can find our way out of the economic mess we’re in.
There are all kinds of reasons to be mad about the state of the economy now, but there are few leaders who are motivated to do what is needed to pull the country and the world out of its economic nosedive. Unfortunately the lessons learned from people like Burke, Hamilton, and Keynes are lost not only on our leaders but on us.
There is nobody to blame but us in this mess. We, together, have placed demands on our economy that, while feasible for a while, are no longer realistic. Do you expect to be better off financially in four years than you are now? Did you grow up expecting to make more money than your parents? Did you feel that you should “have something to show” for your work and your education?
The answer for most of us is “yes.” It’s called “upward mobility,” and that expectation seems entirely fair and reasonable, especially for those of us who climbed up the economic ladder from a place of modest means. There simply isn’t anything wrong with the idea that individuals should make upward progress economically relative to their families or even their peers demographically. But how do we pay for it all? This sense of economic escalation and entitlement, however, melds itself with our national mythology of individual will power to create an unreasonable demand of exceptional and consistent positive economic outcomes.
The idea is a simple but powerfully American: A young man leaves home, goes to college, gets a degree, meets a wife, buys a house, has some kids, and gets them educated. He pays for all these things with money he earns at a job. The job is provided by some kind of corporate entity or government that, in exchange for his time, pays him cash but also benefits like health care and a retirement plan. He pays taxes that the government uses to pay for roads and sewers that connect his house to larger infrastructure. If things go well, he feels ok paying some of his cash income in taxes for others to spend on his behalf.
From time to time, the economy falters and the little family might worry about their income not keeping up with their lifestyle. Things can start getting expensive, situations change, prices go up, wages go down. The idea of private school for the children becomes economically unfeasible and maybe even a public college is too expensive. Then taxes go up, eating to an already fragile household budget.
These downturns or times of receding economic growth have, until now, tended to be bumps in the road leading to superficial political changes in the system but not the dissolution of the system itself. The hypothetical family might suffer some distress, but when the economy “comes back,” the incremental growth continues.
This incremental growth was built almost entirely using a fractional reserve system of banking and money. The best explanation of the fractional reserve economy I’ve seen is by Sal Kahn, a genius teacher. It is worth the 12 minutes to watch this.
Debt is a great thing, because what it allows a person to do is spend tomorrow’s money today. As Kahn explains so well, an economy using debt and banks can actually create more money just like turning a crank. The family in my example benefits from this is all kinds of ways, from having a place to put their earnings to being able to borrow for a house and for college.
But debt is dangerous because if tomorrow’s money doesn’t show up, a person is still on the hook to pay the loan. And if you haven’t already figured it out, money is an illusion; it’s a confidence game. That money in your wallet and the balance in your bank account are representational of what we believe is there. But the truth is that if we all took our money out of the banking system the world, as we know it would, literally, come to an end.
What has happened since 2008 is that we’ve sprung a major conceptual leak in the dream bubble that is our economy. Somewhere along the line the system started to generate lots and lots of loans for houses with a very low threshold for the borrowers. One can blame the Republicans or the Democrats for this. It’s easy to make a quantitative argument to support an indictment against either one.
But both parties were simply feeding the beast. Each side of the aisle would love to hand you keys to a new home and claim their policies opened the door for that opportunity. The policies each side espoused may have favored different players in the game, but in the end, the full faith and credit of the United States backed all those loans. I doubt there were many politicians that held office since the end of World War II that would have said this was a terrible idea.
This policy of backing mortgage debt fueled the economy, turned the crank if you will, generating jobs and rising incomes for decades. It was, as Martha Stewart would say, a Good Thing. But the bubbles burst was not a conspiracy, but rather than slow accretion of bad practice and diffuse greed in the system.
Say that hypothetical family went on the market to buy a house in 2007 when the housing market was hot. Prices were shooting up then. They would have wanted to buy soon to avoid paying more later on. Lenders would want to make the loans because, as Kahn points out, their profit comes from interest. When those mortgages or loans could be sold off for more money as securities with low and high risks loaned together, it was a bonanza for everyone. The family could get in to that house at a low rate, the banker made a commission, the bank made profits for depositors and shareholders and Uncle Sam backed all of it. What could go wrong?
Well, we know what happened. The loan was high risk that meant that its terms favored the lender, not the borrower. But the borrower was figuring on increases in value from the asset, the house. When the value of housing started to drop, their position becomes rapidly untenable. High interest rates, a depreciating asset, and unemployment or decreased income spell foreclosure.
This formula also means changes in the system. When confidence in the system begins to slip loans get more expensive, banks hold on to the money they have, credit dries up, and the fuel that turns the crank dries up too. All of this combines to lead to more unemployment, more lost wages, and more skepticism about the system. Now the crank is turning the opposite direction, and our family is standing in the economic game of musical chairs when the music stopped playing.
All of this is complicated and infuriating. It’s not fair. It feels wrong that the banks that made those loans and were holding on to all sorts of bad bets ended up being made whole with government dollars. It’s even more frustrating that those same banks are now sitting on their money, afraid to lend. It’s enough to make people, well, Occupy Wall Street.
What passes for innovation at one time can be seen as greed in another, and what, for one generation of Americans, is a time of booming opportunity can seem like blindness by the next. What fueled the boom and the bust was 60 years of an ever-expanding economy intended to meet our needs to be more and more affluent. We felt entitled to that. The bad news is that the music has stopped. The good news is that we can reboot the system, and with good government, and better rules we can improve it. The question is can we resist blaming and look for solutions.
If we look to Burke we know that government is best when it is focused on solving problems. And government needs to intervene in the banking system, but not by shutting it down. Hamilton and subsequent generations of leaders built an amazing system that lead to massive increases in wealth using the fractional reserve economy. We should be following Keynes advice and turn the crank again, but at a more sustainable pace with more sustainable outcomes.
And this is where it comes back to land use. We can and should reboot the system so that it favors massive growth and opportunity in our cities, growing dense, walkable, and livable neighborhoods. This means that our young family won’t have a single-family house, but, instead, a courtyard home or an apartment. Making this shift is a huge undertaking mainly because it changes the concept of what home and a bright future looks like. The policy and economics are easy. Changing the way the American dream looks, well, that’s going to be hard.
