March 26, 2008

Moral hazard

I think Bitebark will enjoy this column by Robert Reich. He suggests that conservatives claim "moral hazard" to avoid helping individual home owners who made bad decisions (how else will they learn?) yet are more than willing to bail out the large Wall Street firms who clearly knew better.
"It's true that people tend to be less cautious when they know they'll be bailed out. Economists call this 'moral hazard.' But even when they're being reasonably careful, people cannot always assess risks accurately. Many of the mostly poor home buyers who got into trouble did NOT in fact know they couldn't afford the mortgage payments they were signing on to. The banks and mortgage lenders that pulled out all the stops to persuade them to the contrary were in a far better position to know; after all, they had lots of experience at this game. So did the credit-rating agencies that gave these loans solid credit ratings, as did the financiers who bundled them with less-risky loans and sold them to other financial institutions, and the hedge fund managers who quietly tucked them into their portfolios."
Regular people are held to a different standard by conservatives. As Reich points out, Donald Trump can declare bankruptcy casually and protect his own personal fortune. Regular people now have a much harder time declaring bankruptcy. The people who clearly knew they were making bad loans get bailed out, while the sometimes ignorant or unlucky who took the loans are told to learn from their mistakes. I am so tired of conservatives.


Bootleg Blogger said...

Streak- Recently my father in law (75years old) went in to retire a home equity line of credit he had with the bank. He'd banked there for decades but the officer with whom he was dealing was new. My father in law is a very intelligent guy but does have a history of trusting people. The loan officer talked him into renewing the loan which ended up costing him some fees, etc... In the end it wasn't too devastating but it was very irritating to all of us that felt he was taken advantage of. If anyone has applied for a loan lately I'd challenge them to read through the inch thick stack of papers and walk away really feeling like you know every detail of what you just signed. I agree that those of us who sign loan contracts are responsible for what we do. There is a trend now, however, for those within a system, e.g. banking, tax law, even a cell phone contract, to develop terminology and sheer length of agreements to the point that no one outside their system can really understand it. I recently saw a piece on credit card contracts. The credit and legal experts to whom they showed the contracts were hard pressed to make heads or tails of the details.

There needs to be a term for lenders who really take advantage of people. Predatory doesn't really capture the full idea- Morally Bankrupt might fit. Needless to say, that goes for the ones that are willing to bail out the big boys while leaving the little people for their "life lessons".
Later- BB

steves said...

How about vampires?

I have mixed feelings about the whole bailout. On one hand, people should be helped out if they were victims of some of the more unsavory practices, but there needs to be a way of distinguishing those from people (rich and poor) that borrow more than they should with knowledge of what they are getting into.

The terminology used in contracts is out of hand. I have trouble understanding some of it and I have read thousands of pages of contracts. I have no doubt that most of it is for obfuscation and does not need to be so complex.

Bootleg Blogger said...

Steve- I agree- It would be iffy as to who to help out i.e. who was a victim. I can't say I have much sympathy for the third and fourth home buyers who were taking out interest only lones in order to speculate purely on the home value increasing. Hey, when a stock value crashes we aren't looking for bailouts, either. However, in our area few of the foreclosures would be from that demographic. Most are working poor or middle class.
Later- BB

Tony said...

I think this all fits the textbook definition of double standard, no? Big businesses are essentially told that economic risk-taking is the key to the success of their businesses but when they take those risks and fail, there is the cushion of the potential bail-out. So in actuality, no risk has been taken at all.

But if Regular Joe takes out a loan and is unable to pay--he should just learn from his mistakes. And this has happened to millions of people, yet under the variable interest rates for mortgages, correct?

So little guys get tough love, big businesses get forgiveness and a slap on the wrist.

I remember reading a few days ago that one of Obama's campaign managers resigned because he was involved somehow with Countrywide Home Loans. This also would seem to apply to John and Cindy McCain's quarter of a million dollar credit card debt--which is at 0% interest. The ridiculously rich aren't held to the same repayment standards as the ridiculously average.