Michael Hudson on Freddie/Fanny

[Munger]

Re: Michael Hudson on Freddie/Fanny

Over 30 years lending evolved from relationship to transaction based, with the lenders relying more on automated risk management techniques, such as allowing the person writing the loan to use FICO scores and other metrics. Thirty years ago the loan officer used a set of decision criteria, experience, and personal 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.

This is the problem, not the technology available to evaluate risk and approve loans. Bayesian networks, for example, are as accurate (and often much moreso) at predicting a borrowers ability to pay back a loan as a human. It would not be productive to go back to a time when loans took much more human effort to evaluate and the results were less accurate.

The real problem is the incentive structure: it used to be that risky loans would sit on the books of the institution that made them and they eventually would be punished if there was a default. This was plenty of incentive for the lender to think long and hard about whether to make such a risky loan.

Now, the debt is often securitized and sold off to the next sucker. The people making the loans know from the software that these people are very high risk borrowers - that's why the rates are so high. But it's not their ass when it goes belly up. Plus, they have used scandelous loan structures so that the default is delayed for long periods, often years.

And even if the debt is not securitized, the institutions making these loans have gotten so big that the consequences have become divorced from the actions. When you are giving some crook $2M for creating as many loans as he can and he knows that when they default he will not be on the hook to pay it back, you know where his priorities lie. These guys want to get rich during the boom - the crash is someone else's problem.

When I said that it is only fair to let the people who made the bad loans suffer when they tumble, I did not mean that the borrower should be let off the hook; they should have to file for bankruptcy, have their credit ruined, etc etc. The point was that the money is gone and never coming back. The person who should suffer the financial loss should be the person who made the loans in the first place - not the taxpayer.

This is partly impossible because most of that money is long gone bonus money given out during the boom by the big banks. These institutions are near criminal: an absolutely disgusting amount of their profits over the years went straight to their own wallets and skipped the shareholders. The SEC needs to impose rules regulating the incentive structurse available to bankers to compensate themselves.

When these loans default, as everyone knew they would, the bonuses created from that "profit" should be helping to offset the loss. Unfortunately, I don't forsee the investment banking crowd ever having to declare bankruptcy en masse when loans default.

[The Outback Oracle]

Re: Michael Hudson on Freddie/Fanny

Look!! How are you going to sort out who the evil ones are who have invested money to confisacate their wealth versus the Super fund investing Mum and Dad's money? What are the criteria? Or maybe someone who works really hard for his bread one day thinks...gee...an extra half a percent would be nice (seeing as how i'm running negative with these savings anyway) and it sounds safe enough I'll go for it....he is in the mob of your evil doers ripping off the poor innocents. Hells bleedin bells! You just have some vague notion about a bunch of evil doers ripping off the poor sods...what a crock!

Now let's deal with this stupid bloody concept that there are the same bunch of evil doers ripping off the poor sods who borrow and spend all the money. Interest rates have been negative (allowing for tax) for the last 40 years that i can remember...so how does this constitute a rip-off by those lending against those spending. The person getting shafted here is the poor sod who is trying to save a bit for his and his family's future. He is being robbed of about 10% of his money every damned year. Why do i never hear anyone suggesting something be done for him/her?????

If the borrower is being ripped off, please explain how when his interest rates are negative??? The problem has been created by every moron that thinks the only solution to every damn crisis is to throw money out the window to make interest rates even more negative than they were before.
Why are we sacrificing every principle of self-responsibility in order to bail out a whole lot of people who have over-mortgaged, over-spent all their lives thinking that they can get something for nothing by doing so. Well for the last forty years bar a couple of mild recessions they have collected a lot of paper 'wealth' for nothing.
In any case it is all academic. There is no answer to this other than as a society to go back to square one and re-think the whole setup. Give people an incentive to save, generally pay our way as individuals and a society and stop the gross misallocation of resources that flows from negative interest rates. There is nothing in Hudson's treatise that goes in that direction in any way, in fact quite the opposite.
Now that's not to say i would not follow EJ's advice into the next bubble to try to pick up a few dollars but in the long run the society has to go back to basics to fix what is wrong.
The next bubble will be just another bubble based on negative interest rates ratcheting up the current problems we are experiencing.

[GRG55]

Re: Michael Hudson on Freddie/Fanny

...This is partly impossible because most of that money is long gone bonus money given out during the boom by the big banks. These institutions are near criminal: an absolutely disgusting amount of their profits over the years went straight to their own wallets and skipped the shareholders. The SEC needs to impose rules regulating the incentive structurse available to bankers to compensate themselves...

This is the one point with which I would disagree, and advise caution.

First, the SEC seems incapable of effectively discharging its current regulatory responsibilities; giving them more would seem ill advised and potentially counterproductive.

Second, in the same fashion as you believe foolish lenders should bear the consequences of their actions, it seems entirely consistent that foolish bank shareholders should also bear the consequences of their decisions [to hold the stock] and should not expect a regulator to redirect bank profits from the pockets of executives to their own. If they do not agree with the way the bank is managed, stockholders should sell their holding, and that is exactly what they seem to now [belatedly] be doing. That various analysts and financial commentators are presently expending endless amounts of energy attempting to forecast a "bottom" in financials, or explain their merits as a "deep value" play, is nothing short of hilarious.

[mikedev10]

Re: Michael Hudson on Freddie/Fanny

Forget the “madness of crowds” free-market propaganda. Insiders and enabling politicians always try to blame the victim.

The very thought of debtors not living up to written contracts they had signed – contracts which turned out to be bait-and-switch deals signed under duress ...

why does he seem to absolve the willing participants on the borrowing side? they were certainly involved in fraudulently representing themselves and their income as well as being part of the "housing can only go up!" mania. there are plenty of people out there who are victims of their own greed, not of the bank's.

i enjoy reading all articles by hudson. and as usual i find myself liking the itulip position.

[c1ue]

Re: Michael Hudson on Freddie/Fanny

Good discussion about Hudson, but I do want to clarify a couple of things:

1) Hudson speaks on property taxes vs. mortgage interest. While he has ideas on general taxes, for what I see in this discussion the primary issue is property taxes - and this is important because property taxes are at least partially voluntary. No one forces you to buy a McMansion or live in a small condo.

The voters for Proposition 13 in California - quickly followed by a number of other states - by passing this law created a beautiful test case.

What Hudson stated is that by not having a reasonable property tax - that banks would take the resulting free cash by enabling an asset price bubble through lending practices.

My informal survey of the 50 United States shows this to be true: in general wherever taxes are assessed yearly, properties are higher value. Even Illinois, which is a yearly assessment - has a few counties with exceptions, and unsurprisingly these areas are significantly over average.

There are exceptions: New York - Manhattan in particular, but I think as the epicenter for the financial machinations, a case can be made for why this is so.

2) Taxes vs. savings.

I still see some misapprehension on how taxes and savings relate.

Sure, higher taxes reduce free cash, thus theoretically reduce savings.

However, the point of a progressive tax is that

a) Every person requires some minimum amount to live
b) Each increment over this minimum represents increasing percentage of disposable income
c) Therefore taxing more of this increased disposable income doesn't necessarily remove the benefit to the person, and should generate revenue to benefit all

Thus having a 50% tax rate for income over $200,000 doesn't strike me as specifically confiscatory. Sure, you give up one dollar for each 2 you make, but on the other hand you have roads and bridges to drive on, police to keep crime down, utility services, etc.

Yes, maybe you can't have quite the nicest McMansion in your area, and you can only go abroad twice or three times a year instead of 6, but big deal.

The problem in the United States is that those who can less afford it, pay more tax. As Sir Warren himself said:

http://www.guardian.co.uk/business/2007/oct/31/usnews

Warren Buffett, the famous investor known as the "Sage of Omaha", has complained that he pays a lower rate of tax than any of his staff - including his receptionist. Mr Buffett, who is worth an estimated $52bn (£25bn), said: "The taxation system has tilted towards the rich and away from the middle class in the last 10 years. It's dramatic; I don't think it's appreciated and I think it should be addressed."
During an interview with NBC television, Mr Buffett brandished an informal survey of 15 of his 18 office staff at his Berkshire Hathaway empire. The billionaire said he was paying 17.7% payroll and income tax, compared with an average in the office of 32.9%.
"There wasn't anyone in the office, from the receptionist up, who paid as low a tax rate and I have no tax planning; I don't have an accountant or use tax shelters. I just follow what the US Congress tells me to do," he said.

I will say that in general I don't like taxes because there is too much incentive in government to waste, but in principle I do agree taxes are necessary and useful. Its just that they're not oriented well.

[Munger]

Re: Michael Hudson on Freddie/Fanny

This is the one point with which I would disagree, and advise caution.

First, the SEC seems incapable of effectively discharging its current regulatory responsibilities; giving them more would seem ill advised and potentially counterproductive.

Second, in the same fashion as you believe foolish lenders should bear the consequences of their actions, it seems entirely consistent that foolish bank shareholders should also bear the consequences of their decisions [to hold the stock] and should not expect a regulator to redirect bank profits from the pockets of executives to their own. If they do not agree with the way the bank is managed, stockholders should sell their holding, and that is exactly what they seem to now [belatedly] be doing. That various analysts and financial commentators are presently expending endless amounts of energy attempting to forecast a "bottom" in financials, or explain their merits as a "deep value" play, is nothing short of hilarious.

I agree the shareholders should take the hit, and should know better than to hold such stock. If the bonuses were directed to the shareholders' pockets instead of the executives' the problem would be the same, however: money given out in bonuses or dividends is unrecoverable.

The problem is that the incentive is to make as many loans as possible and collect fees for each, not to make as many loans as is possible where each loan is paid back. Masking the risk by using impossible to understand debt instruments and selling them to a 3rd party sucker is where the real skill lies. I suppose, given enough time, the system could work itself out where the 3rd parties wise up and only buy paper that they understand. Experience tells me this scenario has gone on forever and that while the name of the game may change, the underlying situation will not - especially as the 3rd parties typically use their clients' money to buy these worthless loans and get compensated on the basis of a few quarters' performance.

[Thailandnotes]

Re: Michael Hudson on Freddie/Fanny

Why are we sacrificing every principle of self-responsibility in order to bail out a whole lot of people who have over-mortgaged, over-spent all their lives thinking that they can get something for nothing by doing so.

Credit card companies went to a 28-day billing cycle. A bill due on the 10th one month, is then due on the 7th, then on the 5th. When I first got stuck with a 40-dollar fee for a payment (one day late), I was pissed. For 20 years I had paid my balance in full. I'm sure the change was in some small print somewhere.

Soon after, I contacted my bank. I said, "I want make an arrangement to pay my credit card bill off automatically." They said, "We can't do that is this state. We use to, but now we can't."

I live overseas, but have a house which I close up for much of the year. The phone company use to allow me to shut off the phone and pay 6 or 7 dollars a month to maintain the same phone number. Not any more. I have to keep the phone on all year long. Last week I was joking to my brother-in-law. "It costs us about 15 dollars to send or receive a call."

The local stories of people being ripped off, snookered and boogered, flim-flammed and boozled would make Woodie Guthrie jump out of his grave singing.

A woman sat on my porch last weekend. She had just bought a house. The final papers she signed had 192 items. She had gotten a friend to do the required-by-law house inspection. That had pissed off the realtors and they had ended up secretly charging her 900 $ for it. She's a doctor.

[metalman]

Re: Michael Hudson on Freddie/Fanny

Look!! How are you going to sort out who the evil ones are who have invested money to confisacate their wealth versus the Super fund investing Mum and Dad's money? What are the criteria? Or maybe someone who works really hard for his bread one day thinks...gee...an extra half a percent would be nice (seeing as how i'm running negative with these savings anyway) and it sounds safe enough I'll go for it....he is in the mob of your evil doers ripping off the poor innocents. Hells bleedin bells! You just have some vague notion about a bunch of evil doers ripping off the poor sods...what a crock!

Now let's deal with this stupid bloody concept that there are the same bunch of evil doers ripping off the poor sods who borrow and spend all the money. Interest rates have been negative (allowing for tax) for the last 40 years that i can remember...so how does this constitute a rip-off by those lending against those spending. The person getting shafted here is the poor sod who is trying to save a bit for his and his family's future. He is being robbed of about 10% of his money every damned year. Why do i never hear anyone suggesting something be done for him/her?????

If the borrower is being ripped off, please explain how when his interest rates are negative??? The problem has been created by every moron that thinks the only solution to every damn crisis is to throw money out the window to make interest rates even more negative than they were before.
Why are we sacrificing every principle of self-responsibility in order to bail out a whole lot of people who have over-mortgaged, over-spent all their lives thinking that they can get something for nothing by doing so. Well for the last forty years bar a couple of mild recessions they have collected a lot of paper 'wealth' for nothing.
In any case it is all academic. There is no answer to this other than as a society to go back to square one and re-think the whole setup. Give people an incentive to save, generally pay our way as individuals and a society and stop the gross misallocation of resources that flows from negative interest rates. There is nothing in Hudson's treatise that goes in that direction in any way, in fact quite the opposite.
Now that's not to say i would not follow EJ's advice into the next bubble to try to pick up a few dollars but in the long run the society has to go back to basics to fix what is wrong.
The next bubble will be just another bubble based on negative interest rates ratcheting up the current problems we are experiencing.

good rant, dude, but you don't get it. once usa households moved from needing only one to needing two wage earners to live, THERE WAS NO ONE LEFT WITH TIME TO CHECK THE FINE PRINT! here in the state every credit card, cable company, phone company, insurance company, etc. agreement is filled with gotchas and loopholes and ripoffs. all of them. you have to watch every bill that comes in for add-on fees and "errors" there was a story in the press recently about a software developer who was paid to write an application that generated billing errors! no shit.