Michael Hudson on Freddie/Fanny

[moonshot]

Re: Michael Hudson on Freddie/Fanny

hudson is easily misunderstood. on the outside he sounds like an old lefty... a real turnoff for me. but the more i read the more i see how he arrived at his way of thinking.

+1

While free market and libertarian ideas are seductive, in the real world we have politicians in the pockets of the financial institutions. To be sure, this is partly the voter's fault. But the reality is that the vast majority of voters are easily manipulated and blinded to the truth. Is this paternalistic? Sure, but have you seen the morons running around (and running) this country?

[Munger]

Re: Michael Hudson on Freddie/Fanny

I have a real worry around here. Now the evil "creditors" include people who have saved, postponed consumption in order to secure their future and advance their families. We need more of these people and we are not going to get them by wiping them out to support the "masses". i don't care much what ideology people think they are, this need to confiscate the wealth of 'savers" seems to be a common denominator for them all.

I didn't gather that it was a need to confiscate the wealth of savers to which Hudson was referring. Rather, I gathered the need for letting those who put their money into risky ventures seeking favorable returns lose when the ventures tumble.

It is unfortunate that some non-rentier class people "saved" by buying bonds and equity from these companies, as I am sure few understood how the mechanism was operating. I don't see how socializing the losses solves the problem, however.

A larger problem, I think, is the difficulty of engineering a system whereby executives would have to focus on long-term results and could not compensate themselves on the basis of quarterly profits. Buffet and Munger do so, but voluntarily.

[ASH]

Re: Michael Hudson on Freddie/Fanny

free will, blah, blah, blah. never mind the 7/24 propaganda machine... it has convinced hundreds of thousands of broke young people to go fight wars for corrupt gov't officials after it convinced them to spend and not save. but you can call them all stupid, but the system is not designed for a world of jim nickersons.

Reminds me of John Kerry's faux pas.

Your remark comes off sounding rather condescending.

... But I admit it is in keeping with the august title of "Chief Cynic".

[BiscayneSunrise]

Re: Michael Hudson on Freddie/Fanny

Maybe someone else clarify this. I just recently heard through the grapevine about a state law in Florida that some Californians are taking advantage of. Something about purchasing a house in FL. before actually defaulting on their huge CA. mortgage.

You are referring to Florida Homestead Laws.

http://en.wikipedia.org/wiki/Homeste...ion_in_Florida

A favorite vehicle for scoundrels of various stripes who want to avoid court judgments against their assets. Florida law prohibits a forced sale of one's primary residence to satisfy creditors. Which is why so many on the lam CEO's build mansions in places like Boca Raton.

The scam goes like this: 1) build or buy a mansion in Florida that is worth 100% of your net worth, 2) default on your obligations. 3) sit there smugly while creditors are powerless to get to you.

[Munger]

Re: Michael Hudson on Freddie/Fanny

How can Hudson not be down on savers if he advocates the confiscation of the wealth createdby savers. Real interest rates to savers (after marginal tax) are grossly negative to the tune of say 10%, and have been for perhaps 40 years in Australia and maybe a bit less in the USA. This has resulted in the gross imbalances now apparent throughout all the Western economies and the prevalence of the notion we can all get lots for nothing. So, a couple of points, firstly, the consumer behaviour we see in spending more than we earn is rational. As a result, the problem has grown over such a long peSecondly, our present position is not some crisis recently brought on by the likes of Bush, Bernanke and Greenspan. It has been developing as a result of a policy of negative interest rates for 40 years. it is systemic and incurable without a catastrophic solution.
Frankly Metal, while I get a smile and mostly give a nod to your normally astute and pithy observations that whole Hudson thing to me looks like total verbal rubbish (being polite). The solutions proposed by Hudson ignore the whole fundamental problem, in fact exacerbates the distortions, and goes even further along the road of non responsibility for oneself and one's own decisions. Oh we poor little people being ripped off by the big baddies. The corruption exhibited by the elites and corporates is certainly on an horrific scale. However it is all part of the same disease.
I'm sure it makes Hudson feel good to play some role of a cross between Robin Hood and young Lochinvar, but as a contribution to a solution it rates less than zero.

Boiled down simply, my understanding of Hudson's message is this: you cannot make someone pay back more money than it is possible for them to.

Any solution must revolve around that simple fact: that money is never getting paid back. It only seems fair to let the loss fall upon the person who was irresponsible enough to make the bad loan.

I agree that society should encourage saving to pay for desires again - there was a piece in the NYTimes about this a month or two ago.

[Guest]

Re: Michael Hudson on Freddie/Fanny

Real interest rates to savers ... are grossly negative ... resulted in the gross imbalances now apparent throughout all the Western economies ... consumer behaviour we see in spending more than we earn is rational. ... Secondly, our present position is not some crisis recently brought on by the likes of Bush, Bernanke and Greenspan. It has been developing as a result of a policy of negative interest rates for 40 years ... The corruption exhibited by the elites and corporates is ... all part of the same disease.

I agree with Outback's take on this.

The above is a very apt and succinct description that peels away lots of preconceptions regarding "fiendishly manipulative cabals" all working together with supreme cohesion and effectiveness to "shape consumer spending" on a daily basis. I instinctively shy away from this Hudson-like world-view - with it's descriptions of how this exalted mechanism - a cabal of rentier corporate interests working silently in the background - is able to exercise such infallible precision to accomplish the jerking around of the consumer like a puppet. There is an unspoken assumption of their essential brainlessness within this macro-explanation of structural debt levels which is inherently patronizing.

Whenever I see a trace of the patronizing in a macro-explanation, it's a flag to be on my guard regarding plausibility. Conversely, Outback's description of the overriding mechanism is highly plausible, because it's core "glue" or motive force is the consumer's own self interest, in response to decades of negative real interest rates. Further, it is not necessarily a "misguided" self interest - it is a rational response evolved over time to an extreme. Altogether a very probing and robust explanation at it's core therefore, deriving it's motive principle from typical human response, which is the most reliable constant down through the generations. You can bank on human responses guided by plain old self interest every damn time, and that's where the relationship between chronically negative real rates, chronic inflation, and chronic dis-savings all converge.

This explanation actually rates as highly plausible. Now compare that to Hudson's macro explanation, which relies on certain rentier groups being highly effective with uncanny consistency down through the decades, while conversely the debt serfs remain mired in a highly consistent state of permanent befuddlement all that time as well.

[jk]

Re: Michael Hudson on Freddie/Fanny

my read of hudson is that each of two power structures are going to get a piece of you - the government[s] via taxes, the financiers via interest payments on loans. think about a home under two conditions: high property taxes and low property taxes. in the latter case, the same home will tend to have a higher market value since the carrying cost of taxes is lower. this higher market value will result in a higher price paid, a bigger mortgage and higher interest payments. thus the homeowner's cash flow is directed into more interest paid when less tax is paid. if your money went to taxes it would [one can hope] go to infrastructure and services; if it goes to interest it just ratchets up the financial system. california is a great example because of proposition whatever-it-was, which limited property tax increases. i think hudson would argue that this increased the likelihood that california would be a leading participant in the housing bubble.

one underlying assumption in this argument is that most people are going to spend every dime they've got, so the choices are zero-sum. hudson would argue, i think, that he'd rather pay the government and get at least some services, than pay the bank and have the fire chiefs garner ever increasing political power and wealth.

[GRG55]

Re: Michael Hudson on Freddie/Fanny

Boiled down simply, my understanding of Hudson's message is this: you cannot make someone pay back more money than it is possible for them to.

Any solution must revolve around that simple fact: that money is never getting paid back. It only seems fair to let the loss fall upon the person who was irresponsible enough to make the bad loan...

Certainly that should be the case.

But in the minds of many of our dear leaders, in the interests of "fairness", those who have saved and not lent it out foolishly on bad loans are acceptable targets to confiscate the funds needed to bail out the rest. Whether that confiscation is by virtue of permanently raiding the Social Security accounts, imposing restrictions on pension fund investments, or simply inflating away the purchasing power of Joe and Jane's meager savings matters not a whit in the end...

[jtabeb]

Re: Michael Hudson on Freddie/Fanny

that whole Hudson thing to me looks like total verbal rubbish (being polite). The solutions proposed by Hudson ignore the whole fundamental problem,

You want people to save? Give them a vehicle that let's them do that and make actual progress (minus 10% return yr after tax, is not very encouraging). The root cause error that you are referring to is INFLATION, plain and simple. That's why I like Gold and Silver (the only opt-out choice I could find). My vote is don't support a BullSh!t monentary system.

Problem as Hudson points out is that all the numbers the gov throws out are bullsh1t and people investing/saving based on that information are getting raped and killed. The propensity to go into debt and NOT save is a rational response to the situation. (why save when it will buy less than it does today, also, why be self sufficient and act responsible, you won't get any assistance that way). When the PIG MEN do their thing (they are very good and making sure that THEY WILL GET BAILED OUT, can't have systemic risks you know), they get to keep the profits when times are good and the taxpayer gets footed the bill for the bailout when times are bad. People see this and they try to emulate this behavior, but they don't have the power and connections to do it effectively.

I am sure Hudson doesn't mean "F*CK savers", I read him as saying "F*CK the PIG MEN" the "RENTIER CLASS" as he calls it. If welfare is BAD for the poor, (they don't learn to take personal responsibility) then it is also bad for the very rich. The real joke here is that welfare for corperations and wealthy campaign contributers DWARFS the piddly spending for every other group. I think that is Hudson's real take away.

His points about the shifting of the tax burden are SPOT on. We have gotten to a point were the EFFECTIVE TAX burden is squarely placed on the shoulders of those who have "earned income" and "RENTIER income" is for all intents and purposes, untouchable for tax purposes.

Now I know some one will make the false argument that "blah, blah ,blah the marginal tax rates on the top income earners are soo much higher blah blah blah"

First off, it's "earned income" (think celebs and sports players and rock stars) not "investment income" and second marginal tax and effective tax rates are two very different animals.

I'll use myself as a case in point. The higher I've moved up in marginal tax brackets, the less effective tax rate I pay, and that's doing things 100% legally. Sure, I would have to pay more tax if I structured my investments differently, but why would I do that when I can shelter myself from the majority of the tax just by investing in certain ways.


Hudson's point (which I FIRMLY agree with) is that the system as it stands now PUNISHES actual work and rewards non-work. That is the meat of the issue he is trying to raise. You can argue about that last point all you want but the truth is our systems rewards social and economic vampirism (leeching is my term) and punishes productive capital and labor (actual work, making actual things, providing actual services)

Hudson says this fetid systems got to change OR we go back to feudalistic serfdom as means of social organization. It's our only chance, unless your are a rentier of course, or don't mind being a serf. That's what the whole debate is about, the future structure of our society no less.

Cast your vote, but remember, you might only get one chance to do so.


Hope this helps put things into perspective.

V/R

JT

[jtabeb]

Re: Michael Hudson on Freddie/Fanny

i think, that he'd rather pay the government and get at least some services, than pay the bank and have the fire chiefs garner ever increasing political power and wealth.

Yeah, DITTO

[grapejelly]

Re: Michael Hudson on Freddie/Fanny

hudson is easily misunderstood. on the outside he sounds like an old lefty... a real turnoff for me. but the more i read the more i see how he arrived at his way of thinking.

the reason so few can save in the usa is that lenders as an industry and as a wealth class with political influence have influenced government policies in their favor so that the maximum income stream is siphoned off of households and productive businesses as interest on debt... leaving less to pay taxes for infrastructure and other needs. most wage earners can't do anything in this country anymore without borrowing to do it... college is a prime example. they can't save because they have mortgage, college tuition, auto loans, etc. interest payments to make.

hudson isn't down on savers, he's down on the fact that in terms of gross $$$ the savings is not in IRAs and bank accounts of households but has been sucked out of those and into the accounts of creditors.

that's his point.

spot on, exactly my take-away. Exactly. And I really can see his points clearly as being quite valid.

[marvenger]

Re: Michael Hudson on Freddie/Fanny

they were some some great posts by JK & jtabeb. Thanks.

[Slimprofits]

Re: Michael Hudson on Freddie/Fanny

You are referring to Florida Homestead Laws.

Thank you Biscayne!

[ASH]

Re: Michael Hudson on Freddie/Fanny

Any solution must revolve around that simple fact: that money is never getting paid back. It only seems fair to let the loss fall upon the person who was irresponsible enough to make the bad loan.

How about splitting the responsibility between the lender and the borrower? I like seeing people who make bad choices take their lumps, because that's the natural mechanism by which prudence is taught. In the case of a bad loan, the responsibility would seem to include both the lender and the borrower. Take housing: the holder of the mortgage-backed security takes a write-down and Joe Sixpack who didn't trouble himself to do the math is out on his ear with a foreclosure on his credit record. The banking industry makes more conservative loans for awhile, and perhaps Joe Sixpack (or his kids) learns something about budgetting and personal finance.

[FRED]

Re: Michael Hudson on Freddie/Fanny

How about splitting the responsibility between the lender and the borrower? I like seeing people who make bad choices take their lumps, because that's the natural mechanism by which prudence is taught. In the case of a bad loan, the responsibility would seem to include both the lender and the borrower. Take housing: the holder of the mortgage-backed security takes a write-down and Joe Sixpack who didn't trouble himself to do the math is out on his ear with a foreclosure on his credit record. The banking industry makes more conservative loans for awhile, and perhaps Joe Sixpack (or his kids) learns something about budgetting and personal finance.

The official iTulip position is that both lender and borrower used to be accountable, and this balance needs to be restored.

Thirty years ago average North American, call him Joe, walks into a bank to get a loan to fix up his falling apart house, rather than add another thousand square feet to make room for the Made in China, Bose branded Home Entertainment center. A dour looking loan officer, call him Ed Noway, sits behind a laminate faux walnut desk facing the nervous applicant. Prominently displayed on the edge of Ed’s desk, a brass nameplate on a wood block that reads “Ed Noway, Loan Officer.” While Joe fidgets, Ed pours over a pile of paperwork that Joe dutifully spent until midnight filling out with his wife the night before. They did not cuddle afterwards. She’s not sure Joe can close the loan with Ed. Joe's not sure he wants the extra hours he’ll have to work to make the additional payments.

Ed finally looks up to grill Joe about his employment and credit history, his assets, his attitude about saving. Ed wants to know if Joe is likely to pay the loan back or not. He, Ed, the loan officer, is responsible for the decision. He doesn’t want the bank, nor he as its representative, left holding the bag if Joe punts on the loan. Ed will look bad. He might even lose his job. Ed’s ass is on the line. So is Joe’s.

Here we have the basis for a sound business transaction. But those days are over. The Frankenstein Economy is here.

- Frankenstein Economy, iTulip, March 2006

The borrower has always been on the hook for the consequences of bad borrowing decisions, the only options: bankruptcy that make credit almost impossible to access for seven years, or new loans at usury rates. What changed to cause the surge in bad loans that is now creating the latest epidemic in defaults?

Over 30 years lending evolved from relationship to transaction based, with lenders relying more on automated risk management techniques. Loan writers use FICO scores and other metrics whereas thirty years ago a loan officer used a decision criteria established by the bank, training, and personal experience and judgment. Most importantly, if his or her judgment of the borrower's ability to pay was bad, then he or she made a lot bad loans, and when these were not repaid he or she was fired. Often the person writing a loan for a lender under the transaction-based system no longer has a personal stake in the outcome, and is interfacing with the applicant via an application on a screen in a bank branch office, and may not even work for the lender at all. The motivation for the person writing a loan to lower standards and cut corners is very high.

Further, as millions of loans are made this way, the assets on each bank's balance sheet represents its competitive edge over other lenders. Soon banks are in a race to see who can write the highest volume of the most risky loans; in the competitive environment the new transaction based system created, corner cutting and standards reduction fed a positive feedback loop, leading to a classic market failure scenario wherein the cumulative actions of rational market participants working independently in their own interest causes a systemic collapse of the market.

At the height of the mortgage lending frenzy, not long after we published the Frankenstein Economy piece, a banker for a mid-tier bank in the mid-West called us to say, "It's out of control. We need to be regulated. It's going to end in disaster."

The source of the problem was the lenders. The lenders changed, not the borrowers. However, now that the inevitable crisis is here, the lenders are getting preferential treatment, not the borrowers. On July 15, the most recent TAF auction, desperate lenders borrowed at the Fed's discount window at the stop-out rate of 2.3%. Desperate borrowers, on the other hand, are paying as much as 99.25%.

Hardship always has and will always reduce bad borrowing behavior. But what will reduce bad lending behavior? How will transaction-based lending work without producing future market failures if lenders are not confronted with the same hardship?