Tuesday, March 3, 2009

Free Market Hagiography

I speculated last year that many Free Market fundamentalists were having their world view shattered by the economic meltdown. The “invisible hand,” the idea of “pulling oneself up by ones bootstraps”, and the entire premise of our class system, which nobody with money wants to talk about, is predicated on a nearly religious observance of the Free Market. It’s strongly ingrained in conservative ideology and permeates our culture. So what happens when Free Market fundamentalists see their belief system collapse?

They certainly don’t blame the clergy. Money managers, traders, financiers and other elites of the world of finance are the high priests of the free market. They’ve received a free pass for the most part. What’s ironic, however, is if you really talk to the priesthood, they will tell you the market is not as free as we muggles believe. There are constant checks and balances, including government regulations that keep the markets running smoothly. Yes, high men of the faith admit this! The “invisible hand” is a complex web of laws and regulations that provides incentives and disincentives based on our collective will. It's subjective and it's not invisible.

The Free Market fundamentalists, much like with the Catholicism of my youth, are presented with just enough information to keep them behaving in the desired fashion, without causing them too much confusion. As an aside, I was shocked to learn in graduate school, that the Catholic Church has some amazing resources, such as contemplative traditions to rival Buddhism, yet these teachings, for the most part, are reserved for the clergy. No need to confuse the fuzzy wuzzies. The same holds true with economics.

So rather than blame the priesthood of finance, the free market fundamentalists act like superstitious people whose faith has been shattered in a crisis; they blame other parishioners for not doing their part. It was those who worshipped improperly at the altar of the free market, those poor people who bought homes they could not afford. They were lacking in understanding of the tenants of the faith. Forget that they were being guided by the financial priesthood, it is their own bootstraps that they failed to pull up. It's always about the bootstraps, whatever those are. They started all this! And while we’re at it, there were some heretic priests in the mix too that ministered to these poor bastards. We call them Democrats.

So on to hagiography. Hagiography is a kind of biographical re-write in which we take really good people we deem holy and make them even holier. Animals now flock to them. They have pithy quotes while being boiled in oil. They fly through the air or turn into a rainbow upon their deaths. You take a perfectly good historical record, a guide map for the simple folk on how to be a great person, and you turn it into a freakin’ comic book that meshes with your religious views. Perfection was never in your grasp anyway, common silly person; only God can have that, so just try to do the best you can. That's not your job, that's our job.

Now we see a kind of free market hagiography. An economic re-write that defies logic, the actual events, and all reporting on what actually happened. There’s a story the free market fundamentalists tell themselves now that’s a kind of hagiography. A bullshitification of the fact that the free market system was never free or fair, and was in fact broken by the high priests who ran the show. The religious studies term I like is "re-mythologizing." It accepts that the facts before were myths, but we're now pounding out new myths, re-cast in the light of a new interpretation.

Free market fundamentalists bristle as the new administration has a free hand in discussing issues of class and fairness as they sweep up the mess. Such blasphemy! Instead the fundamentalists work constantly to divert blame and most importantly, protect the faith. Rail against the poor, minority home owners. Blame Democrats for pouring billions into banks and subverting the whole system of pulleys and bootstraps. Balk at stimulus money. They’ll be damned if someone offers to pull them up by their bootstraps. The most important thing is to come up with some sort of story that keeps their conservative, free market faith intact. The government does nothing right and is to blame for this, after all.

Meanwhile, as a small business owner, I’ve got my own free market fundamentalism to deal with. I may be a Buddhist, but I was raised Catholic and I still don’t deny the existence of a God, you know, just in case. The same is true with economics. Which side is up? Is supply and demand still functioning? Are economic principles still at play? Listening to my Wall Street Journal small business podcasts, the rules seem to change each monthly. Do I discount now? Do I expand? Do I sit still? Warren Buffet has thrown up his hands in disgust. I don’t want to throw the baby out with the bathwater (or Buddha out with the bathwater, as we used to say), but how do you know what to believe anymore? And that is exactly why we’re in a crisis.


  1. Thanks, that was interesting and amusing. Any time you talk to a priest of any discipline, you'll find the masses are getting a dumbed-down version... heck, just ask a GM about his players' rules knowledge!

  2. We no more have a "free market" than we are a "democracy" - in other but the most general terms.
    Historically, we have a market based economy with government oversight and guidance (the SEC, consumer protection laws, contract law, etc.), as well as being a republic that operates on democratic principles (each adult citizen gets a vote, but we elect representatives who then make decisions on our behalf, leaving very few laws and policies to a direct vote of the people).
    The problem is that most Americans - most people in fact - like to reduce things to simple definitions, whether or not those definitions are strictly accurate. In comparison to a Soviet style economy, we do have a "free market" - although "free-er market" would be a better description.

    Oddly, the actual debate over the current economic problems has to do with how much government regulation/interference with the economy (or, more specifically the banking system, mortgage and investment markets) is best.
    Historically, there have been changes as we have tried to achieve the best balance between market forces and public good - what might be described as a "fair market" set of regulations. Sometimes the changes lean too far in one direction, sometimes in another - it has been a constant balancing act.

    Those on the "free market" side will bring up the fact that government regulations encouraged/forced banks to give loans to people that really couldn't afford the mortgages they were signing up for. Those on the "government regulation/control" side will bring up the fact that the lending industry then divided up and repackaged these bad loans and ended up selling packages to investors that they knew (or should have known) were poor risks, and that there was not enough oversight of this process (either by management in the financial institutions, or in the government).
    What seems to have happened is that both the existing government regulators AND the managers failed to keep track of what was going on, as the market adapted to try to accommodate the loans forced on them by government interference.

    This leaves us in the position where those who want more government control of industry - socialists like Obama - argue and fight to gain more government control of the economy through increased regulation, forced consolidation, and government takeovers of businesses. At the same time, there are some who argue that the markets need to have much less government oversight and control than before.


    "Not me!" seems the by-word of today's world. Everyone is interested in saying "Them! They did wrong! Not me!"

    It seems to me that a lack of a sense of personal responisibility and pride in self-sufficiency are the root of the current state of the economy.

    Everyone, from the persons getting loans they could not afford, to the people offering them and re-selling them, to the government agencies responisible for oversight of these sales, are all uninterested in accepting even a portion of responsibility for the mess the world is in.

    Instead, they point the finger at others. Usually someone close by in the food chain, but those that appear to tower over them do quite well: The people blame the banks, the banks blame government, and the government claims it wasn't their department, it was the banks and so on.

    This resolves itself into a situation similar to The Salem Witch Trials, with the loudest, the first to complain or the one whose bias most closely relates to the listener's own thoughts on the current crises recieving the lion's share of our understanding or belief.

    People need to own their shit. Accept responsibility for errors made as well as fine performance.

    In short, they need to stop kneeling and polishing the knobs of the gods (both secular and ecclessiastic) and start fucking thinking for themselves. Turn off the TV's talking heads, make a plan for their own self-sufficiency and stick to it. And I am not talking boot-strapping for the poor, I am talking about and to everyone: government, banks, and the people. Get your head out of your ass and set your house in order, then see what you can do to assist others trying to do the same. Show some pride in ownership.

    -The Griffin

  4. We had a "perfect storm" of events that caused the collapse of the housing/lending markets - poorly thought out government programs that forced some high risk lending, underhanded lending and bundling of loans that increased the risk, underhanded borrowing that further increased the risk, a lack of oversight by banking regulators and bank managers that allowed the risky mortgages/investments to grow to immense proportions, and a widespread conscious decision to ignore the lessons of history and basic economic facts because it seemed to be working (like any pyramid scheme).
    As long as housing prices continued to skyrocket, it really didn't matter if the home buyer couldn't pay their mortgage, because the paper value of the home would grow much faster than the debt, leaving them ahead of the game.
    As long as housing prices continued to skyrocket, and people continued to buy in at the higher prices, the system worked. This meant that there needed to be more buyers, which required larger and riskier loans.
    Many people (myself included) could see that this system was doomed to come crashing down at some point. Of course, I was told that I was a fool when I didn't buy a house that I couldn't afford in 2001, 2002, 2003, etc. I was still being told that I was foolish not to buy a house (that I couldn't afford) in 2008!
    Unfortunately, the crash didn't happen in 2002 or 2003, when it would have done far less damage to the overall economy. With each passing year, the impact of the impending crash grew - much like flying higher and higher without a way to ever land, it works only until the flight comes to an abrupt end.
    One reason that a small crash didn't happen sooner, was that government and the banking industry worked together to put off the market correction - even though they had to know that it would only be bigger and more dangerous the longer it was put off. Banks somehow got the idea that the government would bail them out to save the economy, because they were "too big to fail". This might be because of their confidence in their investment of millions of dollars into the pockets of politicians through campaign contributions.

  5. The first casualty in this crisis was personal accountability. What sickens me is that everyone who is asking for money seems to deny accountability. There is no REPENTANCE. That goes doubly for homeowners. "Some bad people made the market go bad, give me money." The victim mentality is sickening, as is the sense of entitlement. What makes these people feel entitled to a home they couldn't afford, while I rent? Why should I pay their mortgage? Why should the fools enjoy a better quality of life than me, at my expense?

    There is this mentality that owning a home is a an entitlement and a necessity. Honestly, I would feel a whole lot better about the bailouts if people expressed a little remorse. At least it would give me hope that people changed their attitudes and learned their lessons.

    The real tragedy of the current financial crisis is joblessness, not forclosures themselves. If people want to work diligently, and can't find work, it is a shame.

  6. My favorite argument is when a homeowner (or mortgage-owner, to be more precise) whines that since the value of their home has gone down, the bank should write off a few hundred grand from what they borrowed.
    Does this mean that the bank can take that money back from the person who sold the home at the outrageously inflated price? Or, does that mean that the bank's other customers are supposed to make up the extra money?

    Since a bank is a faceless entity, it's easy to blame the bank, and demand that the bank pay for people's mistakes. Sorry, you gambled with an overinflated housing market, and lost.

    It's kind of like this Bernie Madoff thing. He set up an investment scam along the same lines as Social Security - the early joiners got a nice return at the expense of those who came later (a classic pyramid/ponzi scheme). Now that the pyramid has collapsed, everyone wants Madoff to give back all the cash... What about the money given to those who got in early? They made some nice returns on their investments, shouldn't they have to repay that profit to the people who lost everything?

    I've heard people complain that their house isn't worth as much now as they borrowed to buy it. As someone who pays almost $20k a year in rent, I don't see how you have lost ANYTHING if your house has gone down $100k in value since you bought it 5 years ago. All investments are gambles, some are less risky than others, but all investments come with risks.

    On that same subject of decreasing value, should I demand that the government give me a fat chunk of cash because I purchased a car for $15k, and it's now only worth $2k or $3k? Was I ripped off somewhere?

    How about that game I bought for $50... should the retailer have to buy it back from me for that amount, even though I've opened it and played a few times?

  7. A much better way to deal with the housing crisis would have been for the government to set up a program where certain groups of people could have had access to low/no interest loans to buy a foreclosed house as a primary residence (not as an investment property).
    I would think that Disabled Veterans, firefighters, cops, nurses, and teachers might be the groups that would be included in the program.
    This would have kept housing prices from falling as much, and propped up the mortgage/banking industry while reforms were put into place to fix the excesses that have caused us to be in this situation.
    This would have been a simple method that could have stabilized the economy, and prevented the secondary effects - things like employers not being able to borrow money for supplies or payroll, and thus going under.

  8. Unfortunately a house has been seen as an investment and the banks very aggressively encouraged consumers to tap that equity at every opportunity. Now, overnight, it's not an investment. It's a place to keep your stuff. Everything you knew about real estate over the past 30-40 years is wrong.

    If you happen to be underwater, at what point do you look at this "investment" and throw up your hands? Are you willing to spend 20 years making house payments just to break even? How about 10?

    What's the purpose of bankruptcy law? Wouldn't common sense tell you that 7 years of a bankruptcy black mark is better than 12-15 years of paying off a horrendous debt? Reasonable self interest says to walk away.

    What if I said you couldn't MOVE for 12 years? You can't sell a house if you owe more than it's worth. Your economic mobility is destroyed. Your educational mobility for your children is gone. Don't the banks bear *any* responsibility here? They did collapse the market, after all.

    If the car companies sold you a car for $15,000 and then suddenly you couldn't buy gas for it anymore, and it was because the auto industry colluded with oil companies to screw up the supply, I think yes, you should tell them to take their car and screw off. Everyone knows a car is a depreciating asset. Few predicted the housing crash we're seeing now.

    Anyway, bottom line is that the consumer looks at their house values, measures it against the sting and expense of bankruptcy and then wonders what the bank thinks about all this. Do you think the *bank* would make 12 years of payments on an asset that could be depreciated in 7? They would be criminally negligible and their shareholders should hang them in public squares.

    Anyway, it's not about you (renters), it's about the contract between the lender and the consumer.

  9. Gary has just given us an example of exactly where the problem begins when he says "it's not about you (renters)". This is an attitude that is common, based on the fallacy that renters aren't impacted by the housing collapse.

    It damn well is about us renters. We are the ones that will be paying for the bailouts, handouts, refinances, and everything else that's part fo the housing bubble collapse and the fallout from the housing bubble collapse - while still paying the mortgage for our landlords.
    If I were to have been part of the irresponsible borrowing/lending, then I would man up and be willing to pay my share of the costs (either through taxes, higher interest rates, less available credit, higher bank rates as the FDIC raises the rates it charges banks). However, since I did the right thing, the smart thing, the prudent thing, the responsible thing, and didn't overextend myself, I get to pay for everyone else's party.
    As to needing to stay in a house for 12 years... Sure. Why not. If you don't want to face the possibility of staying in the same house for 30 years, don't take a 30 year mortgage. If you want to move in 15 years, take out a 15 year mortgage. If you want to be able to move every few years, then make the right choice for that lifestyle and a house.
    The other thing that Gary isn't mentioning is the fact that we don't know how much the value of a house will go up in the future.
    It could be that housing prices bottom out this summer, plateau for a year or two, and then begin to rise again as they did for the past decade.
    In that case, a house that was valued at $400k in 2007, but that is now valued at $200k, might be a $400k house again in less than seven years. On the other hand, it might not be worth $400k until most of his mortgage is paid. Either way, the guy who pays $400k for a house that is worth $400k or more when he pays it off is not financially hurt. The only financial pain is based on the illusion that he should have been able to sell his house in a couple of years and made a profit on it.

    When people start thinking of their house as an investment they frequently forget the factor that makes it such a great investment - the fact that it IS a place to live in and keep your stuff in.
    This is an important factor because you are going to be paying for a place to live, whether or not you buy a house. Your options: Rent, Buy, live in your car/on the street, or find a job that comes with room and board.
    If you rent, you get a place to live, freedom to move frequently, and no return on your monthly payment.
    If you own, you get a place to live, plus some great tax breaks (until Obama removes them), but less freedom to move, and every month your mortgage payment gains you more ownership of the house - which will generally increase in value over time.
    Even houses that have had their ridiculously overinflated prices corrected in the past year will eventually be worth more than their 2007 price - if lived in and taken care of.

    In other words, it is the renters who did the least to create this problem, and who have the least to gain from the expensive solutions - that renters will be paying as much (or more, depending on what happens with the various proposed taxpayer subsidies for homeowners) for as their neighbors who bought houses.

  10. Nobody in the last forty years or so of home ownership has bought their home thinking they would pay it off. You buy the home you can afford, it rises in value and your income goes up over time, and you trade up to better digs. That's the deal. That's what anyone under 50 or so believes the deal to be. If you want to re-define what it means now, that's fine.

    The *bank* owns the houses. I'm contractually obligated to pay them back for it over a period of time. In exchange, I get the use of the home, tax benefits, etc. If I decide the contract no longer benefits me in the long run, I have recourse. The recourse is very painful and not without years of hardship, but the contract may be more onerous.

    About a third of Californians are in this boat, considering their recourse. This is the year that banks decide how they'll handle it, possibly with government threats, such as loan modifications during bankruptcy. Again, home owners are hoping the banks will see some reason. If not, I think the store in 2010 will be more about walk-aways.

    I see 3 stages of this crisis:

    1. Subprime collapse. Where people who shouldn't have had homes, bought them. 2008.

    2. Mainstream crisis. Where people who expected to refi under normal circumstances need loan modifications. 2009.

    3. Value walk-aways. In which the 20% of home owners who are under-water (30% in California), realize they have no recourse but to start over with their financial lives. 2010.

    We are in stage two.

    If you dig and do the research, it's generally understood by economists that there will be no rebound of the housing market. There will be a bottom, hopefully this year, followed by increases in value commensurate with inflation. Most homeowners have not done the math. If you're a hundred grand in the hole on a $300,000 house, that's ten years until you break even, WHEN the market stops falling.

    Oh yeah, and the Obama attempt to remove the mortgage tax break was aimed at the rich, and is rumored to be DOA in this mornings USA Today.

  11. All three of your stages were entered into during the panic of late 2008.
    They may not have developed fully yet, but people were giving up/losing their houses for all of those reasons last year.

    Maybe my parents are odd ducks - they purchased their home in 1977 or 1978. This was the first home that my stepfather purchased, and they still live there.
    They were lucky that they were able to refinance as interest rates dropped (remember, mortgage interest rates in the Carter 70s were like credit card interest rates today), and the value of their home increased. While it is not going to sell for the $800k that it was supposedly valued at during the peak of the bubble, neighboring houses of similar size and amenities are selling at $400k. That's a 500% increase in value over 30 years, which isn't too shabby - especially when you consider that the value probably won't fall lower (they are in a very stable neighborhood).

    They have thought about buying a smaller home now that they are retired, but the difference in property taxes has locked them in to their current home.
    Like many people, they rented until they were ready to buy, and bought the home that they planned to live in for the next 10-20 years.

    The first of my close friends to buy a house bought a "starter home" in Oakland in 1995. Despite having a pretty high income, he decided not to buy up to a larger house after his son was born - the amount he would have to borrow was outrageous, and he was confident that the housing bubble would burst at some point.

    Other people I know (the ones who kept telling me that I was "stupid" for not buying a condo in 2001/2) are upside down in the homes (yes, multiple homes in some cases) that they purchased by selling their previous homes that they couldn't afford, but that they were able to pay off by selling for a lot more than they bought the house for. These people are speculators who made a bad gamble. The tenants who rent their second house should be given the option to buy it out from under them (at current market price) if they can't or don't want to make the mortgage payments that they contracted to make.

    It should remain between the lender and the buyer - they have a contract. If the buyer wants to reneg, and the lender can't (or won't), then the buyer needs to suffer the consequences (bankruptcy and loss of the house) of their decision, and the lender needs to suffer the consequences of their poor lending decision (foreclose on the house and sell it at a loss).
    Buyers who strip the house before leaving, or otherwise vandalize the house on their way out are criminals, and should be prosecuted (but not jailed, just have fines levied against them - with a long term payment plan if needed).
    If this were what was happening, then lenders would be scrambling to attract the responsible people who want to buy a house, but couldn't afford to pay an artificially overinflated price for a house to buy their foreclosed homes.

    Meanwhile, those who choose to walk away can spend seven years renting a house, and paying someone else's mortgage (yes, that will be over $100k over seven years for a two or three bedroom house, at Bay Area rents). If they add that cost into the equation, the walkaway may not make as much financial sense.

    Just about every time someone who "lost" their house in the market correction is interviewed, they talk about their rent being higher than their mortgage. This indicates that they are paying someone else's mortgage for them.