Thursday, September 13, 2007

The So-Called Sub Prime Mortgage Crisis

Sorry all for the blog lapse again. If you're a long time reader here you know I go through stages where I don't write much. If you're new then you're probably not reading this now because you figured I up and quit. I didn't respond to any of the comments on the last post and for that I apologize. Bad blog form I know. I will say this, Godwhacker: absolutely brilliant ad. You need to find someone with some basic video editing skills and get that thing up on YouTube. Sadddie, yes come back to the blogging thing. Good times will be had.

To the rest of you I will try to form my own thoughts on the mortgage issue since the last time all I really did was post an article which is something I don't really like to do all that much.

Everyone will point the finger at the banks here (and believe me when I say banks in general are not AT ALL something I am fan of) but we must realize the sub-prime mortgage companies are losing their butts on this as well. So the question, as is the question with all recessions, depressions, panics or what have you, is how is it that all of these brilliant entrepreneurs who make their living by speculating market circumstances all of a sudden CHOOSE WRONG in a giant comedy of errors. An entire corporate failure on the part of an entire industry. I mean sure, at any given time you'll have some companies growing and some going under, that's natural in a free market, but what's not natural is for an entire industry to suddenly get really really stupid.

I said the "so-called mortgage crisis" because while this current market bubble has manifest itself inside of the house lending business, it is not at all specific to the mortgage business anymore than the tech bubble that popped after the 90's boom was specific to the computer industry. The crisis is not in mortgages or microchips, it's in our monetary system.

Our inflationary system pumps money into banks who in turn, at the beckoning of the FED who ARTIFICIALLY lowers interest rates, give out loans to borrowers who wouldn't be qualified under a NATURAL market-defined interest rate. This goes on for a while (market boom) until enough bad loans are given out and people who shouldn't have lots of money to invest do. Then the whole thing collapses due to the large number of bad investors in a given sector(market bust). It's really pretty predictable if you think about it.

On top of that banking itself is a flawed anti-capitalist institution that uses fractional reserve banking which CAN exist in a free market but would be much more rare if banks were in danger of actually losing their butts if they made bad decisions and people wanted to collect their money. Instead we have the subsidized system of FDIC, which protects banks from the dangers of risk and keeps bad banks in business instead of letting them go under like they're suppose to.

Tie all that to inflation in general which is way up and will continue to go up while we pay for the war (not to mention the BILLIONS(?) we are borrowing from China to pay for this fiasco of a foreign policy) and it's really kinda scary where this whole thing is heading.

Now, on the topic of "predatory" lending, it's important to remember that A) value is subjective and B) people act rationally in their own self interest. Once we understand that we can throw away all this unreasoned approach stuff. We know that the only way a loan (or any trade for that matter) to occur is for it to be mutually beneficial to BOTH parties. Now that loan may not look beneficial to YOU based on your value determination or rationale, but it is to the two parties involved based on their value scale and their rationale.

Therefore, any lending regulation ultimately results in the limiting of economic freedom, usually on the side of the borrower, who has the State deciding for them what is and isn’t “predatory” or financially responsible. As if those are objective values. All of this infringes on one of our most basic natural rights, which is even enumerated in the constitution, the right to contract.

For instance in Illinois we now have new lending laws that “protect” consumers, which in actuality limits what lenders can offer and therefore makes loans that might otherwise actually benefit borrowers illegal. This also leads to MORE fine print and MORE difficult to understand loans which in the long-term hurt consumers.

Take another so-called “predatory” loan, the cash advance payday loan. Sure these will have ultra high interest rates but if a borrower can pay them off quickly they can actually be quite beneficial as opposed to, say having their checking account overdraw and having to pay the bank for their overdraft fees. I hear all the time how these banks will charge upwards of $35 PER ITEM that is overdraft and if you have 5 or 6 items that go under which are just 5 or 6 each can easily end up with loans that have astronomical interest rates. If a person can get one of these payday loans to deposit the cash as the bank to cover their overdraft for a few days and pay of the loan as soon as they are paid they can easily save themselves a few hundred dollars. Now according to the government, the payday loan is “predatory” and the overdraft loan is moral and legal. I’m not critical of either as long as both parties agree upon the terms, but I see hypocrisy in making someone else’s subjective value judgment OBJECTIVE by calling one legal and one predatory. It’s rubbish.

Now it’s important to go back to my first few paragraphs here and remember, the reason borrowers and lenders have a hard time evaluating long and short-term risk and reward is due to the inflation and artificial interest rates determined by the Federal Reserve. So when that borrower signed up with his 3-year ARM it checked out with his value determination and rationale that it would end up benefiting him in the long run. But because the FED is unpredictable and because it is run by fallible humans (who act rationally in THEIR OWN self interest) it is harder to determine whether or not that long term investment is going to pay off.