Why pillory people for failing to out-think the "great economic minds"?

[Kurt_and_Hunter]

Anyone who bought multiple house in 2006-2007 as an investment is like anyone else who buys assets in a bubble... a sucker who has earned their trading losses.

But the continual talk of irresponsible people who bought a house (as a place to live in) that they "obviously" couldn't afford is gibberish. If it wasn't obvious to all the Econ PHDs at Citicorp why was it so obvious to some average person?

There is only one reason those "irresponsible" purchases are seen as irresponsible. The market value of houses went down.

Had housing gone UP then none of these "irresponsible" loans would be underwater. If someone got laid off they could just sell their house (at a tidy profit) and move someplace cheaper. If you accept that housing "always goes up" then all those "irresponsible" purchases were intelligent, prudent money management.

I knew there was a housing bubble but what I think isn't the standard by which we judge the prudence of money management.

Alan Greenspan said there was no housing bubble. He said it all the time!

And it appears that every bank in the world sank billions and trillions into investment vehicles that were predicated on the proposition that housing always goes up.

The most sophisticated traders in the world endorsed the proposition that housing always goes up. Hedge fund managers, bank CEOs, bond traders, billion dollar pension funds... all of them invested billions on the theory that housing always goes up.

So what is the logic of casting ordinary people as irresponsible idiots for following the economic thinking of the best and brightest?

Joe six-pack is supposed to have a clearer view of the economy than the chairman of the Federal Reserve or the CEO of Citicorp or else he's an idiot???

It makes no sense.

(We heard this crap during the internet bubble also. The "retail" investor was blamed for running up tech stock prices to 100s times earnings. Those little people are so dumb! It was, of course, a myth. The craziest action on tech stocks in the 1990s was driven by BIG players like hedge funds. The little investor is naturally more conservative than competitive-gain driven hedge funds. Duh!)

[tridim]

1. Or the President, who touted an "ownership society"

and on multiple occasions told the citizenry directly to buy real estate.

[ljm2002]

2. That's a great point...

...and one I wish we would hear more often. Thanks for spelling it out.

We're still watching the financial geniuses try and convince the rest of us that we just can't understand how things work, and we need them to manage the levers of the economy, because they're so well trained and all.

Well look at where their BS management of money has gotten us all.

I guess we should be thankful, after all, since it is having the effect of ripping back the curtain and revealing the men behind the curtain as what they really are: small, petty, greedy little men who do nothing but game the system all day long.

[kenichol]

9. Absolutely.

I really liked & hope to repeat often :)
"...But the continual talk of irresponsible people who bought a house (as a place to live in) that they "obviously" couldn't afford is gibberish. If it wasn't obvious to all the Econ PHDs at Citicorp why was it so obvious to some average person?..."
Exquisitely eloquent.

[Peacetrain]

3. I am totally with you on this one.. it was the investing class

and the latest thing to run it up.. we did it with the S and L crisis, the do.coms etc, and then the run for real estate, that caught the average buyer in a vise

[Phoebe Loosinhouse]

4. People live in a house not a bubble.

The problem was when "shelter" transformed into "investment".

If you rent, don't you just answer a basic question - "Can I afford the rent"? And then bingo you sign a lease ( a legal binding contract with consequences if you default) and you move in.

If you move into a house for shelter instead of an apartment your question is "Can I afford the mortgage?" although it may be a little more complicated because of ARMs, etc, but still, the basic question is, can you afford the payment?

Now, some people answered that question with the answer,"Not for long, but I can sell for a profit in six months" so, they NEVER planned on it as long term shelter, they bought it for INVESTMENT. Investments, may go up, they may go down. If you bought your house for "shelter" you don't really care about the fluctuations in the market, because you have a roof over your head and you can afford it. If you bought for "investment" when you really couldn't afford it as "shelter" then you were always in a risky business.

And actually, the banks DIDN'T believe that it would always go up. In fact, that's why they were happy to get the foreseeably bad debt off their books and into the hands of the bond people.

The bond people didn't think it would always go up which is why they sliced and diced the mortgages so that the good would be mixed in with the bad.

The bond investors didn't always think it would always go up, or they wouldn't have hedged their bonds with credit default swaps. (At this point, they were probably betting and hoping that real estate would go DOWN)

[Kurt_and_Hunter]

5. I take your point, but real (sophisticated) entities were left holding the bag

The fact remains that trillions of dollars of paper traded hands at more than they were going to be worth. Sophisticated institutions have taken trillions of dollars of losses on paper that would only have been valuable had housing continued going up.

Nobody would endorse the explicit simplistic statement "housing always goes up" but the balance sheets demonstrate that very intelligent, educated, experienced "masters of the universe" types did endorse that proposition, albeit dressed up in so much complication that one could pretend they were not endorsing the most simplistic expression of what they were doing.

When you lose a trillion dollars because home prices go down then you were betting on them going up... not much way around it.

And we know from the results that the play was monstrously one-sided.

(Were everything ideally hedged we wouldn't have the scale of losses we have.)

So no matter how one dresses it up, when you subtract all the obfuscating factors from both sides of the equation, there was a global one-sided bet by the best and the brightest that housing would go up March 2007-March 2008.

If there weren't we wouldn't even be having the conversation.

[Phoebe Loosinhouse]

7. I'm sorry, but I think you missed most of my point.

The banks did not lose any money for the most part - they off-loaded their debt to securitized CDO's and bond investors. They (the banks)are off the hook. They earned their money upfront with the enormous fees, points,etc. They don't really care if the price of the property goes up or down, just as long as they can continue to write the mortgages and pass them off.

The bond investors don't necessarily care if real estate goes up or down, they just want to be paid, but just in case it does go down, they have hedged their bets, with default swaps so they're really off the hook (for the moment). In fact, I have read of cases where investors have called loan servicing companies and threatened them with lawsuits if they negotiated mortgages. Now, why would they do that in a dropping market where they stand to lose more than the asset's value? Why would any sane person do that? But WHAT IF they would MAKE MORE if the bond defaulted? BINGO!!!!

You're right that it was all one-sided and that all the advantage went to the big players and the little guy was played for a sucker. He most definitely was. I am not blaming the little guy for being hoodwinked into a heads we win, tails you lose scenario with the big boys. They gave him the loan and then they are betting against him making the mortgage. How evil is that? Could we say that criminal activity has taken place? I think we can make that case. The mortgages were not made in good conscience but with evill intent. The loss of the home and real estate values in general mean NOTHING to the players at this level. If they are comfortably ensconced in Aspen and Switzerland do you think they give a rat's ass about values in Palookaville?

[Kurt_and_Hunter]

12. I was being agreeable

I understood what you were saying but decided not to get into a first-principles thing on the aspect of what you said that is clearly wrong.

This is not a zero-sum game. The fact that somebody lost doesn't mean somebody else won. About 14 trillion dollars have vanished in just two asset classes... gone to money heaven.

In terms of pain ordinary people bear the brunt of any dislocation but this has not been an event where any significant number of people have profited. Rich people are getting slaughtered right and left. I'm sure there is anecdotal evidence of individuals who have done well, which is why we tend to dismiss anecdotal evidence. In the big picture the art market and luxury goods and high-end real estate are all in the toilet.

You postulate a highly hedged arbitrage-type environment where certain people make out either way. Of course such trades exist but we can readily deduce their prevalence from the scale of the volatility and actual losses incurred in almost every sector.

There are enormous real losses to real traders and real rich people so the bets made were, taken all together, grossly one-sided. The investor class did, in aggregate, care a great deal whether housing went up or down because they have lost astonishing amounts of money from housing going down.

One might as well cite short-trading as evidence that the stock market is a zero-sum game. That would be true if there were not a long-side imbalance, which there is. And in a bubble that imbalance becomes overwhelming. In practice, when the stock market goes down it isn't a symmetrical flow from longs to shorts. A population of shorts profit, a much larger population of longs lose and the difference goes to money heaven.

The capitalist class made, in aggregate, very bad bets that were just as dumb as those made by ordinary people. And the capitalist class has suffered very real losses, of almost unimaginable scale, as a result.

Just because this is a kleptocracy doesn't mean it is always an effective kleptocracy.

[Phoebe Loosinhouse]

13. Well, here is something you said that I think is clearly wrong

"So no matter how one dresses it up, when you subtract all the obfuscating factors from both sides of the equation, there was a global one-sided bet by the best and the brightest that housing would go up March 2007-March 2008."

Housing Market May Land Harder
Than Economists Expect by Mark Whitehouse
From The Wall Street Journal Online
August 08, 2006

Home prices in some parts of the country are falling. Builders are scaling back. Bubble or not, the biggest housing boom in recent U.S. history is coming to an end.

skip
The government's report on second-quarter real gross domestic product, the inflation-adjusted value of the nation's output, showed that fixed investment in housing by companies and individuals declined at an annual rate of 6.3% in the quarter. That was a sharp change from a year earlier, when it was increasing at an annual rate of 20%. As of Friday, futures markets were predicting about a 5% drop in house prices by May 2007.

I'm not sure why you picked the dates Mach 2007- March 2008, but the handwriting was clearly on the wall then.-

And when did I ever say it was a zero-sum game? You started off this thread by saying Hey! why blame the little guy when a lot of big guys got hurt too! You said that the investor class took huge hits and it's true they (we) did. We are ALL investor class now due to 401Ks. But I am making a distiction about the PROFESSIONAL FINANCE WHEELER DEALER guys as opposed to just rich folks in general, whereas you're lumping them all together.

"You postulate a highly hedged arbitrage-type environment where certain people make out either way. Of course such trades exist but we can readily deduce their prevalence from the scale of the volatility and actual losses incurred in almost every sector."

That's quite an obtuse sentence. I cannot make out whether you agree or disagree with the "highly hedged arbitrage-type environment" I postulated. I think others see it as being large enough to bring down most of the world's financials systems if someone doesn't figure out a way to deal with it.

I do agree that the best and the brightest are close to being burned by their own brilliance, it's just a shame that all the rest of us have to go down the tubes with them.

[Still Sensible]

6. While many fall into the category you define

and for those your observation is absolutely correct, there in fact have been some irresponsible buyers... but generally it wasn't their fault. With deregulation, predatory lenders carried out incredible marketing efforts to convince many people that they could really afford what they were looking at and often did so with ARM schemes.

This was all because the banks and Wall St. were running out of ways to show growth, which makes stock prices rise. The big banks, mortgage firms, credit card companies, were all trying to show the kind of phenomenal growth they enjoyed in the 90s. The greed was supported by the deregulation and they went wild with their newfound freedom. In addition to housing, the credit card companies went nuts with crazy offers of 0% balance transfers and pre-approved come-ons, often to people that shouldn't have been offered in the first place. They knew full well their new, predatory practices would result in more defaults, but they didn't care, they simply built it into their business models.

Then the coup de grace was passage of the bankruptcy reform, which protected the predators by making it much harder for their victims to get out from under their debt.

Their unregulated, out of control greed is what caused this whole mess--including the straw that broke the camel's back... derivatives, which allowed them to essentially create revenue growth out of thin air by swapping huge bundles of paper from entity to entity.

Obviously, what they didn't plan on was the massive bust in the housing market--caused largely by the predictable collapse of the housing market when the illusion of the derivatives became apparent. I promise the 'fat cats' did not engineer this collapse on purpose to screw the rest of us--they didn't want to lose trillions of dollars of their own wealth. Their greed, and politicians buying into their unregulated capitalism desires, blinded them to the potential for disaster. I'm sure some of them could have predicted the bust--but not on this scale.

[MadHound]

8. Because this isn't rocket science that we're talking about here

This is the biggest single investment most people will make in their life, and while it should be treated with the gravitas that statement implies, too many people simply saw "house" and "no money down" and "low initial rate" and went nuts.

The basics of buying a house haven't changed in the past fifty years. Your house payment shouldn't, ideally, take up more than 25% of your take home pay every month. Read all the paper work associated with the mortgage, and if you don't understand it, find somebody who does, even if you have to hire them. You should put at least ten percent down on a house. You should get a fixed rate loan, with the amount of time for that to be paid back to be determined by you and your lender, whatever both of you think is reasonable. You should get an escrow account to pay for insurance and property taxes so that you're not having to scramble at the last minute. You should have title insurance. You should have an expert go over the house, finding out what needs to be done and how much the house is worth. Finally, if you can't get a mortgage under these conditions, then don't force the matter. Don't fall for sucker loans that are nothing down, ARM's. You're only asking for trouble. Oh, and don't use your house like an ATM. Home equity loans should be limited to emergencies and to do work on the house, not to finance that European vacation or what have you.

These aren't hard rules to follow, and in fact up until about ten years ago were considered standard procedure. But then people got greedy and stupid, with poor impulse control, and voila, here we are with this housing crash. Yes, there are people out there who got screwed over through no fault of their own. But there are plenty more people who got greedy, who were stupid, who put no more thought into buying a home than they would into buying a candy bar. These are the people I have no sympathy for, people who shouldn't be rewarded for their greed and stupidity with our tax dollars.

If that sounds harsh, oh well, the truth hurts sometimes.

[xiamiam]

10. you are generalizing...in that respect you mimic the meme the subprimes did it

which we all know now is utter nonsense...first the immigrants were blamed for buying houses in stockton..then its irresponsible homeowners who were taking equity out and fixing up houses...long sweat equity hours..or lost a job or got sick..takes a few years of being sick before the bills catch up...millions of different stories...all suffering the same fate...makes you wonder..i think its ludicrous to blame people who are filing bankruptcy, cant pay their bills, live in stress constantly...blame it on greed..but dont blame it on the average individual family..or small investor..listen to the stories..they are all varied...money totally dried up in october...we have been feeling the tremors ever since and there is more to come...
I'm glad you did everything perfectly...but since you did..please dont sit in judgement..you have absolutely no right to broad sweeping generalizations which lump millions...millions into not playing by the rules...which rules?..whose rules?...

[MadHound]

11. Wow, speaking of generalizing

Where did I say anything about "immigrants were blamed for buying houses in stockton"? Oh, I didn't. However I did say the following two things which negate even more of your criticism: "Home equity loans should be limited to emergencies and to do work on the house, not to finance that European vacation or what have you." and "Yes, there are people out there who got screwed over through no fault of their own. But there are plenty more people who got greedy, who were stupid, who put no more thought into buying a home than they would into buying a candy bar. These are the people I have no sympathy for, people who shouldn't be rewarded for their greed and stupidity with our tax dollars." Get it, I'm not blaming or criticizing those who've lost a job, suffered from health problems, etc. I am only criticizing those who showed a lack of personal responsibility.

But sadly, personal responsibility seems to be a dying concept. Owning a house isn't a right in this country, or anywhere else for that matter. It only comes about through hard work, making the right moves, doing your homework, etc. If you try and take shortcuts, you get burned, and that's the fact of the matter. For years and decades people in this country didn't seem to have a problem with that concept, yet now, in the past ten years, the concept of playing by the rules, doing the right thing, taking responsibility for one's actions, for a lot of people that seems to have become a quaint relic of the past. Yet now that these self same people are paying the price for their greed and stupidity, we're supposed to not judge them? We're supposed to feel sorry for them and use our hard earned tax dollars to not just bail their happy ass out, but worse, give them a better deal than what those of us who did do the right thing can get. Gee, perhaps I should go out, take out a liar's loan on a McMansion in the middle of a hundred acres. Then I can get money knocked off my principle and a sweet, below market fixed interest rate. Yeah, that's the ticket.

If this doesn't apply to you, if you did the right thing, if you did your homework and did the right moves and are still going under due to job loss, health problems, etc., then this isn't directed at you, I'll state that clearly and succinctly for you since you seemed not to have picked that up in my first post. However, if you went out and got a house that you couldn't afford, a nothing down ARM, if you didn't do your homework and bought your house on impulse, then no, I really have no sympathy for you. You failed to do your homework, and you failed to control your impulse buying, and now you want my hard earned tax dollars to bail your ass out. Sorry, but I want my money to go to those who have been harmed through no fault of their own, not to those whose own actions doomed them. If this sounds harsh, oh well, sorry but life is harsh, which is why you do your homework and do the right thing in these sort of matters. Personal repsonsiblity, it's not just some sort of quaint antique notion.