The Mortgage Crisis Morality Play

The foreclosure crisis has created a kind of Rorschach test of moral judgment. Different observers look at the same events and make very different assessments of fault and responsibility. Furthermore, more than any recent issue, the cutting point is social class.

If you search the Issues menu on John McCain’s website you will not find the words housing, mortgage, or foreclosure. Instead the candidate has an issue category called “Taxes & Economics,” and the title at the top of this page is “McCain’s Tax Cut Plan.” This is a dramatic contrast with both Democratic candidates who have extensive sections devoted to on the real estate crisis. However, elsewhere on McCain’s site you can find the text of his March 25 speech to Orange County Hispanic Small Business Roundtable, which reveals his moral judgment. Here is the crucial section:

A sustained period of rising home prices made many home lenders complacent, giving them a false sense of security and causing them to lower their lending standards. They stopped asking basic questions of their borrowers like "can you afford this home? Can you put a reasonable amount of money down?" Lenders ended up violating the basic rule of banking: don't lend people money who can't pay it back.

This is a remarkably carefully worded section. It appears to blame lenders—at least in part—for being “complacent” and signing up people who “can’t pay it back.” But who is the bad person in this narrative? The text makes it sound like the lenders’ only mistake was being too nice, which opened them up to victimization by unscrupulous borrowers. Lenders are guilty of “lowering their lending standards” to allow the riff-raff to buy homes. Further blaming of homeowners is evident later in McCain’s speech in a section on solutions:

In our effort to help deserving homeowners, no assistance should be given to speculators. Any assistance for borrowers should be focused solely on homeowners, not people who bought houses for speculative purposes, to rent or as second homes. Any assistance must be temporary and must not reward people who were irresponsible at the expense of those who weren't.

The mention of speculators is, of course, a red herring. It serves to make the victims of the housing crisis seem less sympathetic, and it will tend to discourage any relief programs. It gives the false impression that much of the current problem has been created by reckless speculators.

This kind of rhetorical strategy is reminiscent of the approach used by the banking industry during its long campaign to strengthen bankruptcy laws. In his signing ceremony statement for the 2005 bankruptcy bill President Bush said: “In recent years, too many people have abused the bankruptcy laws. They've walked away from debts even when they had the ability to repay them.” Of course, the overwhelming majority of people who filed for bankruptcy were suffering from a variety of real financial problems and were genuinely unable to handle their expenses. The focus on those who “abuse” the system strengthened the banking industry’s case but also misrepresented the problem.

McCain is using a similar victim-blaming strategy in the housing crisis. In his March 25 speech, the words “irresponsible” and “responsible” appear once each and in both cases they are used to refer to borrowers, not lenders. Don’t the lenders and the “speculators” in the securities market bear some responsibility?

The Fake and the Real

The Bush Administration’s answer to the current housing and credit crisis is a fake solution. Although the new policies announced by Treasury Secretary Henry Poulson on Monday, March 31 have been widely reported in the media as “new regulation,” there is no new regulation. Poulson defended the current level of regulation of the banking industry and, instead, promoted the view that what we have here is a failure to communicate. A lack of interface among regulatory agencies. As a result, the administration has adopted what Paul Krugman calls “The Dilbert Strategy,” giving the appearance of responding by simply rearranging the organizational chart.

The Bush Administration has mastered the art of the fake response. Sometimes in the life of those in power, events demand an answer. There is trouble in the land, and the people look to their leaders for help. But President Bush and his group are advocates of small government and free markets, as a result, often they don’t really want to respond. In these cases they give the impression of caring by responding with BS. (See philosopher Harry Frankfurt’s On Bullshit)

Sometimes, if a response to a problem can serve his interests, the President responds with real, authentic policies. Examples include: tax cuts, the wars in Afghanistan and Iraq, bankruptcy reform, and the recent Wall Street woes. Fake policies include Katrina, the entire field of international diplomacy, the environment, and, most recently, the economic problems of the poor and middle class. Billions of dollars in loan guarantees—real money—is instantly moved into place when needed by the top end of the economy, but those who are losing their jobs and homes are still waiting.

Clear Differences on Foreclosures

The Republican and Democratic presidential candidates have always differed on a number of issues, but recent news has revealed a clear separation on how to treat foreclosures and the economy. According to statements reported in today’s NY Times, John McCain says he is not in favor of a vigorous government response to the mortgage crisis. In contrast, both democratic candidates favor programs varying between $30 billion (Clinton) and $10 billion (Obama).

In a statement that comes close to being a lie, McCain said yesterday “it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.” In truth, he seems only to believe half this statement. As documented later in the same article, McCain supports the Fed’s recent move to provide $29 billion in loan guarantees to support the Bear Stearn’s bailout. So, either the Bear Stearns episode was not a bailout in McCain’s view or rewarding those who act irresponsibly is fine, as long as they are wealthy investment firms and not mere citizens who are struggling to keep their homes.

Drive-Through Windows, the Large Muscle Hierarchy, & Spending

The picture above was taken on March 17, 2008 at a local Dunkin’ Donuts during the lunch hour. Six cars in the drive-through line are visible from this angle, and none of them has yet to reach the speaker box where the driver can place an order. Also note the many parking spaces available for patrons ambitious enough to leave the car and walk into the store. The red car to the left is mine.

In Going Broke I suggest that physical effort is a major deterrent to many acts of spending and that the contemporary retail world has been designed to reduce the effort involved in spending. In particular, I propose the following Large Muscle Hierarchy:

1. Sitting is better than walking.


2. Walking is better than climbing stairs.

Cars put us at the top of this hierarchy. We are in the extremely desirable seated position, expending very little effort. Furthermore, we can move great distances in comfort and—when retail stores provide drive-through facilities—exchange money for goods and services. All without walking. The effects of all this convenience can be seen in our bank balances and waistlines.

Quick Help for the Powerful

The economic news over the last few days has been dizzying. On Sunday (!) the Federal Reserve Board announced a plan to lend money to Wall Street investment firms and approved a deal that allowed J P Morgan Chase to buy the failing Bear Stearns Company for pennies on the dollar. Today, the Fed announced yet another decrease in interests rates. Once again, Heaven and Earth move quickly—at great taxpayer expense—to help the wealthy and powerful who gamble in the stock market, but the wheels of government move much more slowly—if at all—for the less powerful who are losing their homes and jobs, are without adequate health care, or are burdened by enormous debt.

The Fed’s actions may have been important and completely justified, but there is something very wrong with this picture. The suffering at the bottom of our economy seems to get very little attention, while the ups and downs of Wall Street grab the headlines.

Ben Bernanke, Kingmaker

Yesterday the stock market shot up over 400 points, the largest one-day gain in over five years. Why? Because Ben Bernanke, the Federal Reserve Chairman, offered up $200 billion in loans to the top 20 investment banking firms in the country. Banks have been caught in a credit crunch caused by the subprime mortgage mess and need liquidity—cash that can be used to make investments. The stock market got all excited yesterday and went on a big run, and as I write this the Dow is up again this morning.

I am struck by two aspects of this story. First, there is the dizzying power of being able to move such enormous sums of money with the flick of a wrist. In contrast, the $170 billion economic stimulus package was hotly debated before Congress and the President would sign off. Of course, the rebates of the stimulus package are permanent disbursements, and the Fed is offering loans. But the imbalance in oversight and accountability is daunting. Those who serve the banking industry can move government funds quickly and with impunity. Those who serve the individual consumer must summon a great effort to do so.

The second and most important observation is that the Fed’s action is another short-term fix. There is still great worry about underlying value of mortgages in the US, and Bernanke’s action is another demonstration of the government’s responsiveness when it comes to the quick fix. But there is far greater reluctance to take on the true causes of economic instability. Why? Because some of these problems are difficult to solve (e.g., health care) and the solutions to others will be attacked by the powerful banking and business interests (e.g., mortgage lending and credit card industry reforms, wage and job security increases). Unfortunately, I have little faith that free markets will correct the kinds of problems we face today. We need a serious change of direction, away from the highly leveraged consumer-driven economy of the recent past, and it is unlikely that change will come without strong leadership.

Upside Down and Unemployed

The bad economic news just keeps coming...

An Epidemic of Negative Equity
The real estate bust has engendered a new catch phrase: upside down. To be upside down is to owe more on your mortgage than your house is worth—to have negative equity. The value of your home is always supposed to be higher than the amount of your mortgage, but as real estate prices have dropped, many people—particularly those who had little equity to begin with—have found themselves upside down.

This week we learned that 10 percent of homeowners now have zero equity or are upside down. Long before the foreclosure crisis began and before the label upside down had been introduced, this particular form of financial checkmate was anticipated in “The New Road To Serfdom: An Illustrated Guide to the Coming Housing Collapse,” a May 2006 Harper’s piece by Michael Hudson. [The article is here, but only Harper’s subscribers will be able get at it.] Of course, the worry is that any economic bump—and there appears to be no shortage of them—will bring disaster to the upside downers, and without any equity to lose, many homeowners will be tempted to cut their losses by walking away from their mortgages.

More People Out of Work
Speaking of economic bumps, Friday we heard that the nation lost 63,000 jobs in February, the second drop in jobs in as many months and a much larger drop than had been expected. The unemployment rate actually fell, from 4.9 to 4.8 percent, but that was a statistical anomaly. The unemployment figures only include those who are actively looking for work. They do not include people who would like to work but have lost hope and given up looking. This last group also increased in February, so joblessness overall is on the rise. If you put these two news items together—more homeowners without equity and increased joblessness—it seems likely that, at least for the near future, foreclosures and bankruptcy will continue to rise.