Tuesday, March 17, 2009

"Political Correctness" Caused Financial Crisis and My iPhone Caused This Brain Tumour

American blacks and Hispanics (not the Jews, not the Arabs?) once again have brought the mega-rich doyens of the financial world to their innocent, tropically sun-tanned knees, apparently...

"My own understanding, however, is that the cause can be traced to pressures of "political correctness" in America: Financial institutions, habitually reluctant to take the risks involved in lending to minorities - particular black and Hispanics - were charged with racial discrimination. They came under pressure to prove their enlightened credentials by lending to minorities on equal terms. Gradually succumbing to such pressure, they upgraded the creditworthiness of minorities, Soon hundreds of thousands of houses were being built as mortgage lenders became emboldened to lend 90 per cent or more of the purc hase price of houses sold to minorities, whose employment prospects were uncertain and whose incomes were relatively low." E.J Mishan For The Straits Times - Tuesday 17 March, 2009.

Mr Mishan forgot, on this of all days, to mention the poor Irish farmers whose potatoes went bad, threatening the income of many rich, landed English lords in Ireland. It was their fault too.

He also forgot to mention where this talk of being "charged with discrimination" came from. Where are the documentation and facts to back this up? Where are the minutes of meetings, the statements of board members?

So according to this tired line of reasoning, Mr Mishan's "understanding", the reason bank made stupid loans is they had high-moral, socialist, "enlightened", humanist principles...

Actually, and more usually, the blame for this pressure is placed on a misguided bipartisan push to lower interest rates for housing in the USA in 2003. (As the Atlantic Business Week pointed out in 2004, merely owning a house, as opposed to renting one, doesn't make you wealthier. That's for sure - trust me on that, mine was a total money pit.)

Well maybe that's what *started* a time of cheap money. But it wasn't the poor, the people who took out SOME of those loans, who used that cheap money to make themselves billionaires, it was... wait for it... the banker-wankers themselves. The ones the governments of the world are bailing out right now, so they can get their well-earned (NOT!!!) bonuses.

It was THEM, not the poor, who were greedy lunatics, who thought that they could make money hand over velvet-gloved fist by trading CDOs and CDSs FOREVER, or at least until they were stopped.

Tha lending institutions continued to make easy loans because their competitors were rapidly stacking up millions, billions, trillions of dollars on the trades of CDOs etc... and they wanted in on the cheap money glut. Then they turned cheap money into dumb money. They set up their trend charts and forward looking packages optimistically based on persistent growth in the property market, not even allowing for any negative market growth in the formulae that these econometric tools used. And who isn't optimistic when your rivals are raking it in, buying yachts and condo's and flash cars? You want some of that...

Essentially these tools were charting the statistics of the continued appearances of 'white swans'.

The Boards fell for the flashy Powerpoints and the promises of previously unrealistic riches, because, whey! it's much too complicated to go into in depth, and hey, everyone is getting rich as Croesus, so blowed if we're going to miss out! Not to mention the needs of those altruistic shareholders!

These banks are run by individuals, men and women with human frailties, with human emotions and limited human intelligence. They were people in a feeding frenzy, the nictatating membranes of group-think rolled over their eyes, and that's that.

In MY understanding, (trying to recall the arguments I listened to in my "Dumb Money audiobook last night) these products were initially offered not by real banks but by "shadow banks", lending institutions that didn't have the (minimal) regulatory control of normal banks and certainly didn't have the required monetary asetts to sustain such lending in harder times. The shadow banks used brokers to make the actual sales; door-knocking, cold-calling salesmen who took a commission on the sale and then had no more responsibility. If the loan defaulted, not their problem!

Then those real banks latched on, also thinking it would be silly not to boost their stock prices by making fast money themselves, expanding, buying up smaller banks, buying up non-banks with dodgy portfolios... This made the CEOs into apparent geniuses of market management.

But, no-one seemed to notice that instead of growth in the housing industry, there was continual shrinkage of house prices - prices fell every month from August '06 to July '07. Yet the insanity continued. As the margins calls came in, people like Jim Cramer of CNBC went tootle-brained on TV trying to get people to buy, buy, buy - his back-room buddies needed continual injections of cash in order to keep the wheels of their Aston-Martin's turning.

Yes, poor people were offered ridiculous loans to help them buy their rented properties, but people who were NOT poor were also offered ridiculous loans. EVERYONE was offered ridiculous, NO FAULT loans. Most of the housing default problems first occured in speculative real-estate, in places like Florida and Las Vegas. "All this funny business wasn't being stage-managed by people in $75,000 homes in Milwaukee or Detroit or St. Louis", says political blogger James Rowan No, it was a predominantly speculative bubble that was sucking in and catching out relatively well-to-do investors, not a poverty bubble. Those poor people had no money to loose anyway.

Buy the house, it's cheaper than renting. We'll even give you money for furniture. Buy a second, a third house and flip it next month when the price goes up. As it will! You might be black, white, a shyster, a crook, a Presidential candidate with 7 house already, a BLACK Presidential candidate even...

We Never Say No.

Lend you a buck for coffee? No way. Lend you $350,000 for a three bedroom bungalow? No problem.

Why? Not because we like you, or trust you, or because of our big-hearted "political correctness" but simply because, in the short term, the broker makes money, the shadow banks makes millions selling the loan on, trading the CDO of your hot-potato bad credit between banks, who then repackage it - AAA, thanks to the rating agencies - and sell it on to nickel-and-dime investors on the street (like yourselves again, so that eventually you, the poor sucker, looses out twice) to carry the burden as CDS, for as long as this bubble floats.

We can get rich, the money market people were saying. We can get richer. We can get richest, because we are the Masters Of The Universe... And, of course, as the money we make on these trades are classified as capital gains, not income, we only pay 15% tax.

And if-slash-when that bubble bursts, we can rely on the banks to bail us out, and for the government to bail THEM out, so we can still have our commission on the trades, our bonuses and our cash, tucked away in islands in the Caribbean called the Caymans.

Thank you suckers. Now let's get the neo-con libertarian pundits and the media to twist this around to make it out like it's the POOR PEOPLE'S fault.

Now THAT would be politically correct, Mr Mishan, if your politics of choice was Fascism.



Momentary Madness said...

Yes, not sub-prime but sub-crime.
The financial ”titanic crisis” began some time ago. We’ve been listening to various reports about rescue, and now - at this stage - we know exactly just who is being rescued: the wealthy.

Banks should be scrutinized thoroughly about their business investments. Every CEO should have to submit to a - proper - regulator a clear sound investment plan, a plan that in worst case scenario will not jeopardize (pension/savings accounts) liquidity.

Businesses too should have to submit a detailed progress report, and future plan to give some semblance of proof of profit since its inception.
Some companies are complete zombies, having borrowed 100% to set the business up, and borrow ever after to continue. Hiring only those seeking (because of their dole conditions) work experience, or short term contract to avoid having to pay the full working rate. ….. You know the story.
Thee small businesses are (worse than the stereotypical “dole bludger“) making a small fortune (again) out of debt on the backs of the poor.
Bastards!!!! How mad is it to privatize profit, and nationalize debt.

expat@large said...

Bloody well sub-prime, SUPER-crime!

Like I said, heads on the ramparts...

Stephen Folan said...

Maybe a flowchart toshow how the money flows from the guy paying his mortgage to support the fee infrastructure, the bonuses and the complete incraptitude of the banks. Might want to show sums paid to politicians and political parties to enable 'light touch' regulation.

The strange thing is that apart from the few banks who have disappeared the survivors are not unilaterally changing their ways. Only when pressure is applied and they are being held up to public scrutiny are they withdrawing products and stopping sharp practice.

expat@large said...

H-G: well I only had the audiobook, maybe the real book would have those things.

For further opinions of E@L on this issues, you are reminded of the chocolate metaphor.

dibabear said...

Hear! Hear! Well said by the back bencher from down under!

And yes the banks are still the arrogant prigs they were before they went on the dole. I say the U.S. should nationalize the insolvent banks, and re-regulate the industry to instill some confidence from the retail investor. If the banks don't want that then they aren't hurting bad enough and need to go under.

Don't even get me started on AIG and their bloody bonuses.

As Jack Nicholson said so well, "this town needs an enema."

expat@large said...

The real world needs to shift its wealth-making paradigm from gambling on the stock-market to hard freaking work!

Says he, relaxing back in his chair as cruise ship after cruise ship comes into dock...

expat@large said...

IMHO, the entire stock-market is a freaking Ponzi (pyramid) scheme...

marke said...

say it all:

"....simply because, in the short term, the broker makes money, the shadow banks makes millions selling the loan on, trading the CDO of your hot-potato bad credit between banks, who then repackage it - AAA, thanks to the rating agencies - and sell it on to nickel-and-dime investors on the street (like yourselves again, so that eventually you, the poor sucker, looses out twice)...

marke said...

.... um , meant "says it all"...

Tom said...

Mr. Mishan's "understanding" sounds suspiciously like the canard spread about by Ron Paul and other right-wingers that the 1977 Community Reinvestment Act (or, rather, changes to strengthen it in the 1990s, which did indeed aim to stop mortgage lenders discriminating against people living in low-income areas - often predominantly black or Hispanic) somehow contributed to the 2008 financial crisis by encouraging banks to make unsafe loans.

Somehow, this seems to allow Mr. Mishan to gently imply that racial discrimination is somehow a Good Thing, and if only banks hadn't been forced into "lending to minorities on equal terms" this whole crisis wouldn't have happened.

Ignoring the distasteful racism underlying the whole argument, this is nonsense on the surface: the CRA doesn't force banks to lend to anybody unless they would extend the same terms to people with equally good or bad credit ratings who happened to live in different (i.e. predominantly white) areas. If minorities' "employment prospects were uncertain and... incomes were relatively low" then all the CRA did was force banks to treat them the same way as poor white applicants with dodgy jobs.

There's also the fact that over half of subprime lending wasn't done by institutions fully subject to the CRA, the long time between the changes in the 1990s and the crisis in 2008, and a whole bundle of detailed points here

expat@large said...

Tom: racism is good. This really IS his point!

Think poor white trailer-trash hobo 'Good', but think equally poor black or hispanic, 'Bad' - and deliver loans accordingly. To act otherwise is that damn political correctness again! And 'Big Government' made the banks do it! Twice compounded wrong, in Mishan's 'understanding'.

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