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LQD: The Poor are Honest

by ChrisCook Thu Feb 12th, 2009 at 07:33:53 AM EST

The Recovery Plan From Hell : Information Clearing House - ICH

While the Obama administration's financial planners wring their hands in public and say "We feel your pain" to debtors at large, they also recognize that the past ten years have been a golden age for the banking system and Wall Street. The wealthiest 1 per cent of the population has raised its share of the returns to wealth - dividends, interest, rent and capital gains - from 37 per cent of the total ten years ago to 57 per cent five years ago, and an estimated 70 per cent today. Over two-thirds of the returns to wealth now go to the wealthiest 1 per cent of the population. This is the highest on record. We are approaching Russian kleptocratic levels.

Yet the financial Hard Right of the political spectrum - the lobbyists now in control of the Treasury, the Federal Reserve and the Justice Departments for starters - repeats the new Big Lie: that it is the poor who have brought the system down, "exploiting" the rich by trying to ape their betters and live beyond their means. Subprime families have taken out subprime loans, the lying poor have signed documents to obtain "liars' loans," as Alt-A, no-documentation loans are called in the financial junk-paper trade.

I learned the reality a few years ago in London, talking to a commercial bank strategist there. "We've had an intellectual breakthrough," he said. "It's changed our credit philosophy."

"What is it?" I asked, imagining that he was about to come out with yet a new junk mathematics formula?

"The poor are honest," he said, accompanying his words with his jaw dropping open as if to say, "Who could have guessed?"

The meaning was clear enough. The poor pay their debts as a matter of honor, even at great personal expense. Unlike Donald Trump, the poor are less likely to walk away from their homes when market prices sink below the mortgage level. In today's neoliberal Chicago School language, the poor behave "uneconomically." That is, they make choices that do not make economic sense, but rather reflect a group morality. This sociological gullibility is what made them rich pickings for predatory lenders such as Countrywide, Wachovia and Citibank.

An excellent article from Michael Hudson, postulating that the grand plan of Wall Street is to take an "Equity Share" in the future property gains of distressed borrowers.

It's not really that the Poor are more or less honest than the rich - it's just that for them, property is always a home, and not just an investment.

Yes, it's easy to walk away when you're Donald Trump.
by afew (afew(a in a circle)eurotrib_dot_com) on Thu Feb 12th, 2009 at 12:44:55 PM EST
A family with low income isn't a 'subprime family'. A family with high income isn't a 'prime family'. Isn't it enough that 'middle class', 'lower class' and 'upper class' are today already purely defined by finance? Can't he just say 'families with low income'? Or are people today exclusively defined by their credit worthiness?

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers
by Martin (weiser.mensch(at)googlemail.com) on Thu Feb 12th, 2009 at 01:33:28 PM EST
Or are people today exclusively defined by their credit worthiness?

Unfortunately, martin, that is exactly the situation we have reached.

Since Money is created as interest-bearing Debt, those without access to loans are viewed as being literally worthless.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Feb 12th, 2009 at 02:03:31 PM EST
[ Parent ]
and naturally those of good taste want to be in this category so as to avoid excessive participation in this insane orgy
by paving on Fri Feb 13th, 2009 at 07:57:16 PM EST
[ Parent ]
Well, when most political choices are determined by the market, in effect you get has many votes as you can spend...

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Thu Feb 12th, 2009 at 03:43:03 PM EST
[ Parent ]
It has long been by criticism of contemporary social mores that, were we to place return on investment in one pan of a moral balance and in the other pan place every other value we possess, we would not even move the pan containing return on investment off the table.  So much for all of the posturing about the USA being a Christan Nation, or of treasuring the values bequeathed to us by our founding fathers, etc. etc. etc.  BARFFF!

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Feb 12th, 2009 at 07:44:06 PM EST
[ Parent ]
"We've had an intellectual breakthrough," he said. "It's changed our credit philosophy."
"The poor are honest,"

by Bernard (bernard) on Thu Feb 12th, 2009 at 03:28:01 PM EST
DemocracyNow! WPFW 89.3 FM!!!!! | 13 Feb 2009

And then they're trying to blame the poor for all this, as if the poor are somehow exploiting the rich by taking out more loans than they can pay. Yesterday, Senator McCain said--he warned that all of this debt was going to be paid by the future generation, and we're exploiting them. But that's not how to think of it at all. When you have a debt that goes to a future generation, you have taxpayers paying to bondholders, just like in the nineteenth century you had the western states paying to the eastern states. So what you've done is given $12 trillion to the richest one percent--or ten percent of the population, and you've indebted the economy and the government to them for the next hundred years. You've created a new class of ruling families.

And Obama has--by doing this, he's broken with every president in history. Whenever the debts have exceeded the ability to pay, they've been written down to the ability to pay, either through bankruptcy or through conscious government write-down. But instead of writing down the debts, he says the creditors are not going to lose money, despite what Mr. Roubini said. They may have lost money, but they will be made whole by the government. And that's crazy. That's why every economic chart you see, there will be a gradual rise and then a sudden collapse. Everything is turned into a vertical fall. Prices, international shipping, employment, profits, they've all hit a wall. And there's no way that the economy can recover when people have to pay interest and amortization instead of buying goods and services, or companies will have to pay their junk bond holders instead of investing in new equipment.

Incidentally, suckers, executive pay caps are cut.

| APF | 12 Feb 2009

Lawmakers removed the provision without explanation in closed-door talks this week. Hoelzer said several senators had questioned whether the provision was legal, since Congress had not limited the bonuses in approving the original legislation last October.

Diversity is the key to economic and political evolution.
by Cat on Fri Feb 13th, 2009 at 02:28:41 PM EST
It's not really that the Poor are more or less honest than the rich . . .

A number of years ago, there was one of those human interest stories that caught my eye. Some kid somewhere who delivers bagels (it was probably in the Washington Post, because I lived in Northern Virginia at the time) noted that people are generally honest and generous with tips, with the exception of executives. Not only were executive types stingy, but the only real problem with pilfering and short-changing the kid said he had was when he was dealing with executives.

Makes sense to me, looking at the personality traits of executive types according to the Myers-Briggs typology. And the poor being more charitable and honest is also a theme Steinbeck repeats a number of times in Grapes of Wrath.

by NBBooks on Fri Feb 13th, 2009 at 07:13:29 PM EST
Brand Autopsy: An Experiment in Coffee Honesty

Feldman kept copious notes on bagel sales data and some of his conclusions are fascinating. For example...

* When the weather is pleasant ... people pay at a higher rate.
* When the weather is cold, rainy, windy ... payment declines sharply.
* During the holiday weeks of Christmas and Thanksgiving ... payment is lousy.
* But, during the holiday weeks of Labor Day and 4th of July ... payment is strong.

Because Feldman's bagel customers were office workers he was able to draw interesting conclusions about how workplace morale affects payment. The more sweeping conclusion was: The better workplace morale at a business, the greater the payment rates. And more interestingly, Feldman came to believe higher-paid executives cheated the bagel honesty system more than did workers lower on the corporate ladder.

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Fri Feb 13th, 2009 at 07:24:26 PM EST
[ Parent ]
Great, you found it. Was it something you had bookmarked? Now I have to disavow much of what I wrote above. And, I wonder how people testify at a trial years later ans supposedly remember crucial details.
by NBBooks on Fri Feb 13th, 2009 at 08:31:53 PM EST
[ Parent ]
The power of Google.

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Fri Feb 13th, 2009 at 08:50:01 PM EST
[ Parent ]
(searched on Bagels and Honesty)

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Fri Feb 13th, 2009 at 08:51:02 PM EST
[ Parent ]
Now I have to disavow much of what I wrote above.

Not really; it's a fair hypothesis seeking data.

I'll attest to the general honesty of newspaper subscribers; I delivered the Detroit News in my youth.

re: "executives"

The label is to vague for the personality-type implied by dishonest, or abnormal, heuristics. You may want to look into research produced in organizational behavior. I waddled over to the closet (you fiend!) to dust of the ol' three-ring binder.

Surprising no one I hope, HBS publishes cases on the topic of "leadership characteristics" by the bushel (these are sold online, too). A classic on psychometric applications: "Kronos (A)" 9-393-05.

Mark Ain sat at his desk and wondered about what his role at his own company should be. Mark had founded Kronos, Inc., 13 years earlier. Now, in April 1990, it was a $35 million firm that manufactured and sold time accounting systems --essentially computerized time clocks. The month before, Mark had asked his chief operating officer (COO), Garret Lewis, to resign. During the past month, Mark had been wondering: should he try to find another COO to fill this spot, or should he manage Kronos's team of vice presidents himself? The week before, Mark had attended a training session given by Praendex, Inc. Praendex had developed a personality-assessment technique that it used to help business people understand their own behavior and management approach, as well as the behaviors and motivations of the people around them. This tool --the Praendex Indes-- had been used by other functions within Kronos for about a year, with excellent results.

Mark felt he'd learned a lot about himself --and about his management team-- from the Praendex Index training session. The question was, what insight did this provide to his current dilemma, and what solution, if any did it suggest?

LBS cases "Collapse of Barings (A), (B)" are pretty freaky, too.

Now, imagine how this pedagogy scales when some widget, oh say, Arne Duncan, obtains the authority to select and train the next generation of American "leaders."

Diversity is the key to economic and political evolution.

by Cat on Fri Feb 13th, 2009 at 09:29:39 PM EST
[ Parent ]
Hudson goes on to describe his best estimate of the shape of the "Homeowner Rescue Plan":
Here's the patter talk you can expect, with the usual Orwellian euphemisms. The "rescue the homeowners" PPP, a veritable Savior Bank, will go to a family strapped by its home mortgage debt and feeling more and more desperate as the price of its major asset plummets deep into Negative Equity territory. An offer will be made: "We've got a deal to save you. We'll renegotiate your mortgage down to $250,000, the current market price, and we'll also lower your interest rate to just 5.50 per cent. This will cut your monthly debt charges by nearly two thirds. You will escape from negative equity, and you can afford to stay in your home."

The family probably will say, "Great."

But they will have to make a concession. That's where the new public/private partnership makes its killing. Its Savior Bank, funded with private money that is to take the "risk" (and also the rewards) will say to the family that agrees to renegotiate its mortgage: "Now that the government has taken a loss while we've let you stay in your home, we need to recover the money that's been lost. So when the time comes for you to sell, or to renegotiate your mortgage, our Savior Bank will receive the capital gain up to the original amount written off. If we've made you whole, we want to be made whole too."

In other words, if the homeowner sells the property for $400,000, the Savior Bank will get $150,000 of the capital gain. If the property sells for $500,000, the bank will get $250,000. And if it sells for more, thanks to some new clone of Alan Greenspan acting as bubblemeister, the capital gain will be split in some way. If the split is 50/50, then if the home sells for $600,000, the owner at that time will split the $100,000 further capital gain with the Savior Bank. The Savior Bank will thus make much more through its share of capital gains than it extracts in interest!

This plan will be even better for Wall Street than the Greenspan bubble was! Last time around, it was the middle class that got the gains. To be sure, it really was the bank that got the gains, because mortgage interest charges absorbed the entire rental value. But at least homeowners had a chance at the free ride, if they didn't squander their money in refinancing their mortgages. And many did use their homes "like a piggy bank" to support their living standards.

But this time around, Wall Street is not obliged to make its money by making middle class homeowners rich. Debt-strapped homeowners are willing to settle merely for a plan that leaves them in their homes! It can get for itself the capital gains that have been the driving force of U.S. "wealth creation," Alan Greenspan bubble-style.

About the only way this plan could be described as fair is if home values continued to decline and stayed down for 30 years.  The truly sad thing is that most underwater home owners would think they were getting a deal.

I was unimpressed with Geithner from what I have seen of him in interview.  His body language denoted uncertainty and dishonesty.  He seems to me better suited to be the brilliant young point man for some leader with gravitas than to be the person who is supposed to inspire confidence.  If he can sell this plan I will have to reclassify him as The Pied Piper of Wall Street, charming all of the homeowner rats into following him to their doom.  Instead of having some equity from their homes when it comes time to retire, that will belong to the bank.  Hope they are prepared to live on Social Security.  Sure glad I sold when I did.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Feb 14th, 2009 at 12:54:33 AM EST
Which part of "jingle mail" does this plan suppose that underwater home "owners" will fail to understand?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Feb 14th, 2009 at 11:19:47 AM EST
[ Parent ]
See above: "The poor are honest."  Many of the ones who should walk away won't.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Feb 14th, 2009 at 12:32:12 PM EST
[ Parent ]
Many say that, in real terms, housing will never ever again reach the prices it reached in that bubble. If there is inflation, they might.

But remember that the people who  need such rescheduling should never have bought such expensive houses in the first place. Thye are to blame too.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sat Feb 14th, 2009 at 11:31:03 AM EST
[ Parent ]
That is why I chose 30 years.  The real scandal is that the very banks that created the mess may well be cast as "Savior banks" and be further enriched.  I don't have objections to savior banks getting some of the equity as an incentive, nor  for the homeowners losing some of their equity.  But I feel that the government should get more than the banks or the homeowners.  Use it as security for future Social Security and Medicare obligations.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Feb 14th, 2009 at 12:37:28 PM EST
[ Parent ]
I wish I could remember the footnote, but a few years back a colleague of mine was all excited about a "save the third world poor" book (written by a N Am neolib of course);  the thesis of the book was that 3rd world people were so poor because too many of them owned their homes outright!  they should, so said the author, take out mortgages and go into debt to liberate capital for investment and thereby achieve lots of prosperity.

When my colleague told me this remarkable theory, after politely replacing my jaw (Marley style), I said that the author must be either a loan shark or the consigliere for loan sharks.

What we have right now is the messy end state of an economy run by and for loan sharks.  Usury was rightly, imho, regarded as criminal in previous centuries.

The difference between theory and practise in practise ...

by DeAnander (de_at_daclarke_dot_org) on Sat Feb 14th, 2009 at 01:04:56 PM EST
Missed you!!!  Welcome back and wish you'd write about your new life.

Our knowledge has surpassed our wisdom. -Charu Saxena.
by metavision on Sat Feb 14th, 2009 at 01:58:06 PM EST
[ Parent ]
personal blog here for those who want to hear sailing stories, etc.

The difference between theory and practise in practise ...
by DeAnander (de_at_daclarke_dot_org) on Sun Feb 15th, 2009 at 01:50:42 AM EST
[ Parent ]
You must be referring to Hernando de Soto Polar's The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else.  (That link is to a World Bank roundtable). The following (friendly) review would serve as a summary of the book's thesis
CONSIDER THE TERM "the Third World." Most people probably would conjure up in their minds the image of tens of millions of poverty-stricken people living in Asia, Africa, and South America possessing no means for survival other than their unskilled and primitive labor. Property ownership, in this image, is limited to a select few extremely wealthy individuals and families, who exploit others in societies so they may live lives of comfort and luxury.

Hernando de Soto, Peru's leading free-market economist, says this image is both false and misleading. The ordinary peoples in the "undeveloped countries" of the world, in fact, have a vast amount of wealth. And this wealth enables a flourishing world of trade, commerce, industry, and employment.

Indeed, if one adds up the estimated value of real estate held by "the poor" in these countries, the total value comes to something in the neighborhood of $9.3 billion. The only problem is that most of this wealth is not in the form of legal titles to property; instead, these are "informal" ownerships not recognized or enforced by the political authorities in these parts of the world.


The heart of de Soto's argument is that under this informal system, a vast amount of private wealth exists as "dead capital." Without legal title to real property -- residential homes, retail businesses, factories, apartment buildings -- the informal owners are unable to tap into either the national or global financial markets. Normal loans or lines of credit with real property as the collateral are difficult to acquire.


So his recipe for economic development is to formally recognize all this "informal wealth" so that people in poor countries can then mortgage their homes and land to "access the national or global financial markets".

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Carrie (migeru at eurotrib dot com) on Sun Mar 15th, 2009 at 07:47:31 AM EST
[ Parent ]

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