Wall Street

[wayfriend]

If everyone who ever borrowed money is "stupid", then our country has so many stupid people that nothing will ever fix our problems anyway.

[Cybrweez]

hashi, he slipped in saying we could end up like Greece. We cannot.

Borrowing money is usually a bad idea, but I wouldn't say stupid. You have to weigh the costs. You might want to buy your next car in cash, but if a current one breaks down and just doesn't work, and costs pile up in keeping it running, you save money in long run getting a car via a loan.

EDIT: however wayfriend, you may be on to something about too many stupid people to fix our problems...

[Hashi Lebwohl]

I didn't exempt myself from that category, you will note. I am not independently wealthy and I do live in the real world, so I, myself, have areas needing improvement. That being said, it is still a wise move to save up then buy things for cash whenever possible.

wayfriend...I suspect the jury is still out as to whether or not our problems are fixable at this point.

[Farsailer]

I grant that we are different from Greece in that we are in charge of our own currency. But that will not save us in an environment where the bankers and their allies in the government are transferring the burden to the savers in the form of teeny tiny interest rates when it has been clear to them for some time now that the taxpayers can't save them. Further, the federal government is fully determined to maintain its power by transferring the burden away from itself and the senior citizens are bearing and will continue to bear the brunt of that as their wealth will end up being stripped from them in order to keep the bankers and the government propped up.

Credit used to be dang hard to get. We need to return to those days. We need to understand that the excesses of the mindset of paying tomorrow for consumption today has led us to this point. That mindset allowed the bankers to insert themselves into our lives deeper and deeper. As available credit rose, so did the prices of things that credit could buy.

To look at it from the other direction: demand rose in direct response to the credit available. With increased demand came the rise in prices. Now demand has to fall back to what is supported by the real economic surplus available to consumers. In other words, that which a consumer has available to spend out of his pocket after he's taken care of shelter, food and clothing.

Nothing short of wiping the books on both sides will get us out of this and the longer we put it off, the worse it will get.

[wayfriend]

wayfriend...I suspect the jury is still out as to whether or not our problems are fixable at this point.

Nah. Blaming it all on stupid people is scapegoating, isn't it?

Let's say you have a company that made a billion dollars profit this year. Sounds good. Except you made a billion dollars last year. So actually what you are is a sinking ship and investors are the rats. Because on Wall Streat if your company doesn't grow it's not worth speculating in.

This is the pressure that led to mortgage companies pushing more and more credit at people. Growth. So they invented a subprime market. Then spent millions of dollars enticing people to take out more loans, convincing them it was a great idea. Then stuck the loans in an MBS, painted it with AAA-rated lipstick, and let someone else get stuck with the problems.

You say people are stupid. I say if you can make a profit making loans that you don't have to keep, you will make as many bad loans as you can. I say if you market something long enough and hard enough, the sheer scale of your net will eventually bring in some fish.

I say, if your business model is making bad loans, and your business model succeeds magnificently, you are not blameless.

[Hashi Lebwohl]

Scapegoating? No, I don't do that. All I do is speak the truth and the truth is that the average person really is dim-witted when it comes to money. I'm no genius at it, myself, or I would already be semi-retired in a paid-for house with a paid-for car and some savings in the bank...but at least I am making good effort towards those goals now.

I look at things a little differently than most people do. If I see a business that made a billion in profit then I see a company that made a billion dollars; their performance last year is meaningless to me. If the net result is greater than zero that is a success, even if the net result is smaller than the net result from last year.

[aliantha]

The hippies didn't end the war, the news media did.

How did the news media end the war, in your view? By the time the late '60s rolled around, they were covering both the bloody corpses in Vietnam *and* the protests. Kent State happened fairly late in the game -- the Democratic National Convention in Chicago was in '68. The film (it wasn't video then...) from the battlefields began to be broadcast earlier than that -- '65, maybe? I'd have to look it up.

No one cared about the smelly hippies. The general public (silent majority) lost the stomach for warfare when it was televised every night.

The "smelly hippies" were the kids and grandkids of the Silent Majority. Of *course* they cared. If the broadcasts of dead bodies in Vietnam were the real trigger, it wouldn't have taken almost a decade for them to bear fruit.

Anyway...

To look at it from the other direction: demand rose in direct response to the credit available. With increased demand came the rise in prices. Now demand has to fall back to what is supported by the real economic surplus available to consumers. In other words, that which a consumer has available to spend out of his pocket after he's taken care of shelter, food and clothing.

And it ain't much, after debt service. Good post.

[wayfriend]

Scapegoating? No, I don't do that.

Sorry. When you blame people falling for a scam, and not the scam artists, that is exactly scapegoating.

To look at it from the other direction: demand rose in direct response to the credit available. With increased demand came the rise in prices. Now demand has to fall back to what is supported by the real economic surplus available to consumers. In other words, that which a consumer has available to spend out of his pocket after he's taken care of shelter, food and clothing.

And it ain't much, after debt service. Good post.

Debt or no debt, if our economy was based on leveraged consumers, it's going to shrink when they de-leverage ---- and it ain't ever coming back.

This means that if we sit here and wait for demand to end the employment problem facing our country, we will be waiting a long time.

In fact, if we don't create a new source of demand to replace the one we've lost, we will not only stay at 10% unemployment, but as the population grows unemployment will as well, which will cause demand to fall, which will feed unemployment some more. It will eventually bottom out, but when it does, 20% or 30% unemployment will be the new normal.

So while everyone is saying debt is bad, mmkay, I am saying, maybe it would be more intelligent to find something to replace it in our economy before we dispose of it.

[Farsailer]

Debt or no debt, if our economy was based on leveraged consumers, it's going to shrink when they de-leverage ---- and it ain't ever coming back.

The phrase "no debt" doesn't belong in the same sentence with "leveraged". Leverage in this context means one took on debt to obtain something that was otherwise unaffordable. By using debt, a home buyer can leverage his $20k of cash down payment into a house worth $100k.

This means that if we sit here and wait for demand to end the employment problem facing our country, we will be waiting a long time.

This is unfortunately correct. Because every single time in the last 25 years that we did not take the pain pushed the debt mountain higher.

In fact, if we don't create a new source of demand to replace the one we've lost, we will not only stay at 10% unemployment, but as the population grows unemployment will as well, which will cause demand to fall, which will feed unemployment some more. It will eventually bottom out, but when it does, 20% or 30% unemployment will be the new normal.

Yes we are going to have 20% to 30% unemployment. That can't be avoided now. Only choice we have left is we either bite the bullet and try to control our way down (unlikely given the atmosphere in DC) or the politicians keep their heads in the sand, then it will control us (what I think will happen). But ... it doesn't have to be the new normal. We still have a few things going in this country. Agriculture, natural resources, biotech, computer and mobile tech, none of this is going away. A fair amount of manufacturing jobs will eventually find their way back here. Plus who knows what new whizbang technologies will come out of nowhere to play dominant parts? However we have to hit bottom first, we have to push the bankers back to their proper place, clear the decks and then you will see a recovery.

So while everyone is saying debt is bad, mmkay, I am saying, maybe it would be more intelligent to find something to replace it in our economy before we dispose of it.

This is the sort of thinking that got us in trouble in the first place. People need to understand that every time we had a recession, we did not deleverage, instead we dove deeper into debt as a means of pushing past the recessions. That charlatan Krugman wants us to keep doing that but we're tapped out now. Where the heck does it say we can solve the consumer debt problem by taking on more debt?

[SerScot]

wayfriend,

If everyone who ever borrowed money is "stupid", then our country has so many stupid people that nothing will ever fix our problems anyway.

Stupid is an overstatement but with discipline people can learn to live largely without credit. Right now the only debt my family and I have is the mortgage for the home we live in. We paid off our Student loans (at 8.25% interest) in Three and a half years. Any credit cards used are paid off monthly and the Mortgage should be paid of in 3 to 4 years. This is one salary.

It's doable, but not easy.

Regarding "Scapegoating". It's not. If I lie to a lender to get a mortgage for a $400,000 home when I'm making $30,000 per year who told the lie. Who committed fraud? Was the lender stupid for not confirming the information provided, without question. But the lender made no misrepresentations and told no lies. As such the only person who committed fraud in that scenario is the borrower. Why is saying someone lied to get a loan "scapegoating"?

[aliantha]

If I lie to a lender to get a mortgage for a $400,000 home when I'm making $30,000 per year who told the lie. Who committed fraud? Was the lender stupid for not confirming the information provided, without question. But the lender made no misrepresentations and told no lies. As such the only person who committed fraud in that scenario is the borrower. Why is saying someone lied to get a loan "scapegoating"?

You are assuming a fair amount there. In some cases, the loan officers were directed by their managers to fill in the income information themselves. Why would they do that? Because the managers' bonuses were based on the number and/or amount of money they loaned out. The institution was going to bundle the loans and sell them anyway, so there was no risk to the originators when the loans failed.

Still inclined to blame the people who took out the loans?

[Cail]

If I lie to a lender to get a mortgage for a $400,000 home when I'm making $30,000 per year who told the lie. Who committed fraud? Was the lender stupid for not confirming the information provided, without question. But the lender made no misrepresentations and told no lies. As such the only person who committed fraud in that scenario is the borrower. Why is saying someone lied to get a loan "scapegoating"?

You are assuming a fair amount there. In some cases, the loan officers were directed by their managers to fill in the income information themselves. Why would they do that? Because the managers' bonuses were based on the number and/or amount of money they loaned out. The institution was going to bundle the loans and sell them anyway, so there was no risk to the originators when the loans failed.

Still inclined to blame the people who took out the loans?

Even if this is true, that doesn't change the fact that the borrowers were signing legally binding contracts with language clearly stating that what they were signing was the truth.

[SerScot]

Aliantha,

In the individual circumstances you describe I would say the loan officers are colluding with the borrowers to commit fraud.

[wayfriend]

Regarding "Scapegoating". It's not. If I lie to a lender to get a mortgage for a $400,000 home when I'm making $30,000 per year who told the lie. Who committed fraud?

I can't agree with you on this, Ser. The massive amount of consumer debt in this country can't all be blamed on consumer fraud. Not all, not mostly, not some. An insignificant portion at best. And the existence of things such as Subprime lending and mortgage-backed securities means that this was baked into the industry by the lenders. It was a business model. That means it was signed off on from the board and major stockholders on down.

Even if this is true, that doesn't change the fact that the borrowers were signing legally binding contracts with language clearly stating that what they were signing was the truth.

I can only refer to to the definition of "scam" here. And I have yet to see one loan document that said, "if you do this you will have too much debt".

[SoulBiter]

I agree that there were many many scams out there. I agree that banks and financial institutions were offering loans to people that were not loan worthy. I agree that some of these loans would make a loan shark blush.

But there is plenty of blame to go around.

Consumers - I'm not buying that this many consumers were too stupid to know that they were getting loans they couldn't afford. Most of it is simple math. Some were.. I agree there are some people that are dumb as a rock. But many just took the dice in their hands and rolled up. Too bad many came up snake eyes.

Financial institutions - Yeah the way they were buying and selling these as securities opened the door to exactly what happened.

The Fed - The Fed is probably the most complicit in this by putting pressure on the financial industry to make sure that 'every' person that wanted a house could get into one.

[Farsailer]

I agree that there were many many scams out there. I agree that banks and financial institutions were offering loans to people that were not loan worthy. I agree that some of these loans would make a loan shark blush.

But there is plenty of blame to go around.

Consumers - I'm not buying that this many consumers were too stupid to know that they were getting loans they couldn't afford. Most of it is simple math. Some were.. I agree there are some people that are dumb as a rock. But many just took the dice in their hands and rolled up. Too bad many came up snake eyes.

Financial institutions - Yeah the way they were buying and selling these as securities opened the door to exactly what happened.

The Fed - The Fed is probably the most complicit in this by putting pressure on the financial industry to make sure that 'every' person that wanted a house could get into one.

SoulBiter - You forgot about Congress and the CRA law. They were the ones putting the pressure to get 'every' person into a house. The Fed just aided and abetted them with those super low interest rates.

Wayfriend - consumers bear responsibility to the extent that they fell for the "consume more" and "cash out your home equity" pitches without fulling understanding that this was based on a house of cards, i.e., debt, or understanding that house values could fall as well as rise. SerScot's sensibilities regarding credit are sorely lacking in too many people who are being or will be shoved forcefully into reality.

[wayfriend]

Wayfriend - consumers bear responsibility to the extent that they fell for the "consume more" and "cash out your home equity" pitches without fulling understanding that this was based on a house of cards, i.e., debt, or understanding that house values could fall as well as rise.

That's precisely what I disagree with. That they "bear responsibility" because they "fell for" it. That is saying that the scamee is responsible for the scam. That's blaming the victim. That's social darwinism - god gave us chumps so that their betters could take advantage of them.

There's all kinds of stupidity and ignorance in this world. You've got people who will hold a big rock over their head and let it go - they are responsible for their own pain. It's a little blurrier when they ask someone who should know better to hold the rock over their head and let it go, and the other person complies.

It's even sketchier when the other person asks for fifty bucks and a signed waiver to do it. But when you have someone who figures out that they can talk stupid people into paying fifty bucks to have a rock dropped on their head, and then builds a business around doing it to as many people as possible ... it doesn't look like the stupid person is responsible to me any more.

By and large, the stupid people can't trick the banks into making those loans, and they can't force them either. (Although, as we can see, people want to make the case that this is what happened.) The banks cover their asses as thoroughly as Wall Street lawyers can cover it. So we clearly have a rock-dropping business here.

[Hashi Lebwohl]

But when you have someone who figures out that they can talk stupid people into paying fifty bucks to have a rock dropped on their head, and then builds a business around doing it to as many people as possible ... it doesn't look like the stupid person is responsible to me any more.

Wrong, wrong, wrong. People must always be held accountable for their own actions.

I'm not saying that the banks weren't making it easy for people to sign things they didn't understand, but the prospective signee should never sign anything if they don't fully understand what it means and what the ramifications will be.

No one held a gun to their heads--people who bought mortgages that they couldn't afford did it of their own free will. The primary fault lies with the customer; the lender suffers only partial, secondary blame for making such situations too easy.

[wayfriend]

Wrong, wrong, wrong. People must always be held accountable for their own actions.

So people are responsible for being fooled. But banks aren't responsible for having fooled them. Got it.

Banks weren't just "making it easy". Banks took direct actions to convert as many people as possible from would-not to would.

No one held a gun to their heads--people who bought mortgages that they couldn't afford did it of their own free will.

Again, I refer you to the definition of "scam", or "fraud": convincing people to do something against their own best interests for your own profit. If "no one held a gun to their heads" was a valid defense, there would be so such crime as fraud. Abramov would still be running his Ponzi.

[Hashi Lebwohl]

So people are responsible for being fooled.

In this instance, yes. If they didn't understand the full impact of what they were signing it is their own fault.

But banks aren't responsible for having fooled them. Got it.

No, they are. Banks should never have been allowing all those creative mortgage products, especially when they knew that they would be dumping the debt onto someone else within 6 months.

Again, I refer you to the definition of "scam", or "fraud": convincing people to do something against their own best interests for your own profit. If "no one held a gun to their heads" was a valid defense, there would be so such crime as fraud. Abramov would still be running his Ponzi.

From USLegal.com:

Fraud is generally defined in the law as an intentional misrepresentation of material existing fact made by one person to another with knowledge of its falsity and for the purpose of inducing the other person to act, and upon which the other person relies with resulting injury or damage. Fraud may also be made by an omission or purposeful failure to state material facts, which nondisclosure makes other statements misleading.

To constitute fraud, a misrepresentation or omission must also relate to an 'existing fact', not a promise to do something in the future, unless the person who made the promise did so without any present intent to perform it or with a positive intent not to perform it. Promises to do something in the future or a mere expression of opinion cannot be the basis of a claim of fraud unless the person stating the opinion has exclusive or superior knowledge of existing facts which are inconsistent with such opinion. The false statement or omission must be material, meaning that it was significant to the decision to be made.

Sometimes, it must be shown that the plaintiff's reliance was justifiable, and that upon reasonable inquiry would not have discovered the truth of the matter. For injury or damage to be the result of fraud, it must be shown that, except for the fraud, the injury or damage would not have occurred.

To constitute fraud the misrepresentation or omission must be made knowingly and intentionally, not as a result of mistake or accident, or in negligent disregard of its truth or falsity. Also, the plaintiff must prove that the defendant intended for the plaintiff to rely upon the misrepresentation and/or omission; that the plaintiff did in fact rely upon the misrepresentation and/or omission; and that the plaintiff suffered injury or damage as a result of the fraud. Damages may include punitive damages as a punishment or public example due to the malicious nature of the fraud.

There are many state and federal laws to regulate fraud in numerous areas. Some of the areas most heavily litigated include consumer fraud, corporate fraud, and insurance fraud.

The banks didn't commit fraud with shady mortgage deals because all the terms and conditions are clearly spelled out in black and white.

Here is the page when I entered the search criterion "scam".

There are wider varieties of scams like the moving company ones: they will give you a non-binding estimate, load your stuff on their truck, then when they ask for more money than their estimate and you don't pay they can drive off with your belongings--when the goods enter the truck they ostensibly became the property of the moving company.

Many scams are subsets of the basic "advance fee"--pay a little money now on the promise to receive a large payout in the future...which never occurs. Scams like this sucker people out of greed--they think they will get $1 million if they only pay $1,000 now to facilitate some bank transfer or other such nonsense.

True, some scams are similar to general fraud, but in this instance shady mortgages are not scams, by definition.


I stand by my claims as accurate.