Real Estate, Corporate Welfare, and Business Cycles
A really good Real Estate blogger named Robert Dean has done an outstanding job of explaining all of the confusing news reports concerning Real Estate over the last few days. I highly suggest you click over and read his most excellent post.
I have to go ahead and disclose something. I am a member of the National Association of Realtors. The NAR is a trade union that lobbies the Federal and State government to pass laws that benefit people like me. Being one who believes markets should be left alone, I am opposed to that kind of thing. But you see, I really don’t have a whole lot of choice when it comes to being a part of the trade union. Things are set up, thanks to the NAR/TAR, in a way that if you don’t join, you don’t have a business. So I pay my dues and accept things as they are.
But I have to admit. The whole thing really bothers me. All big business, and corporate lobbying bothers me. I believe in the free market, but this market isn’t free. The government’s hands are all over it, favoring organizations with big bucks. This post about corn ethanol is a prime example. Corn ethanol, which has done nothing for the environment, nothing for the price of gasoline, and has driven up the cost of food, would not survive without government subsidies and the tariff on Brazilian sugar ethanol.
The whole thing makes me sick. We have the NAR up there lobbying for government to intervene in a mess caused by a bursted bubble that Realtors benefited from. Politicians are throwing up their hands in panic and the Fed is still doing the exact same thing that caused the crisis.
Folks, we have to allow business cycles to run their course. We can not keep intervening every time the economy turns downward. Let these companies that loaned money to people that weren’t credit worth go belly up. It’s not the end of the world. It’s just a business cycle. By intervening, government ends up showing favoritism to certain businesses and not others. And who do they show favoritism too? Well let me give you a hint, my trade union, the NAR, has a lot of money. So guess what?
Oh man, I’ll probably get a letter from the Association telling me that I have been fined for something now. With all of the stupid rules I have to abide by, I am bound to be breaking one without even knowing it. Whatever. It won’t be the first time other Realtors have been mad at me this week. In fact, a few of my colleagues are quite upset that I had the nerve to offer full service listings at 4%. Sorry I had to throw that in there. Shameless advertising, yes I am guilty.
All big business, and corporate lobbying bothers me. I believe in the free market, but this market isn’t free. The government’s hands are all over it, favoring organizations with big bucks.
Do you honestly believe that in the absence of government involvement, the market would be less influenced by big money interests? The robber-baron era stands as a stark counterexample.
Folks, we have to allow business cycles to run their course. We can not keep intervening every time the economy turns downward.
This is true to a certain extent, but not unconditionally so. If outright economic collapse is a likely example, and intervention — even a somewhat unfair intervention — can prevent this, then intervention is not only a defensible course of action, but a rational one.
Of course, with respect to the housing bubble, the elephant in the room you’re missing is that the problem wasn’t too much government involvement, but too little government involvement. Sane regulation, including requiring lenders to do due diligence (such as verifying income), and requiring them to approve borrowers based on what the post-teaser payment would be, rather than the low teaser payment, would have gone a long way toward preventing this mess in the first place. But at the behest of “free market” types, the inmates were allowed to run the asylum.
Complicating matters even further was the fact that there was a great deal of unspoken collusion among banks, appraisers, and (no offense) realtors, in which a lot of homes were greatly over-appraised; much of this thanks to the fact that many of the appraisers worked for the banks, creating a conflict of interest.
What would have kept this from happening in the first place would have been for the lenders to know if they loaned money to someone who couldn’t pay, it would be their ass. But that wasn’t the case–they knew from history they’d be bailed out by the taxpayer. They were in a win/can’t lose situation.
Think of it this way–I’m not going to walk up to a blackjack table and play $1,000 a hand with my own money…no way. But if I have a guy with a fat stack of cash standing behind me saying, “Keep whatever you win, and if you lose I’ll cover your losses” I’m going all-in every hand, especially when I just saw him honor the deal for my buddy at the craps table.
My brother-in-law got into real estate just a few years ago, in Montgomery County. Now, bidness isn’t good. He hasn’t made a sale in weeks. He’s wondering if the school and license costs were worth it.
I blamed him for the collapse, for entering that profession. But we kid around a lot like that.
As much as I appreciated the investment value, I knew that this was a burstable bubble. Like the dot.com boom/bust, we had to have a correction. The dot.com’s made a lot of filthy young millionaires but did little to improve business and industry; likewise, the skyrocketing home prices made some quick wealth for a few but didn’t have a long-term benefit for business. And really, most successful business ventures are measured by long-term successes.
Track back the cause of our monetary problems to the ’80’s, when the new interstate banking laws allowed in-state banks to be absorbed by larger out-of-state bank holding companies. Yes, Reagan signed that into law, one of the first “One-World Economy” moves designed to allow U.S. banks to have enough capital to compete world wide, opening up markets we weren’t able to penetrate.
So, we had Nashville’s Big Three banks (Third National, First American, and Commerce Union) disappear within a decade, and Nashville removed from prominence as a regional banking powerhouse broker to a small-time small-town operator. Bigger fish eating the smaller.
Now, many of these large banks are borrowing from China and Middle-Eastern oil-rich countries, and Bank ownership is transferring overseas. Gradually and surely.
One. World. One. Government. One. Bank. Follow the (money) trail.
I’ll be when it’s all over, they won’t be using our Constitution, either.
But that wasn’t the case–they knew from history they’d be bailed out by the taxpayer.
Actually, it’s a little more complicated than that. You see, most of the people responsible for making these bad loans in large numbers sold out before the bubble burst, so they laughed all the way to the bank. They’re at no risk of loss, because they’re already out of the game, and therefore they have no need to be bailed out of anything. That’s the hell of it. Those most responsible won’t suffer at all.
And responsible people never put themselves in a position to suffer.
Only the truly stupid are paying the price.
Do I give a damn about them? Not really.
Well, we will all pay a price when they print off more money to bail out the 5% of stupid or snookered American’s who are foreclosing or late on house payments. The value of our dollar goes down….again…..Which in turn, hurts our economy. We need to let those people learn from their mistake, and move on. This isn’t something the the rest of us 95% should have to pay for. I’m sure most of you have bought a used car before and were scammed. I bet you didn’t have mister government come in and bail you out, b/c if you did you would’nt have learned a thing. It’s called tough love, and it’s just a part of life. People are trying to live above their means. At some point you have to learn to be happy with what you can afford.
Tgirsch, I am not arguing against a little bit of regulation. Regulation and corporate welfare/subsidies are two separate issues. Can regulation be a form of subsidies? Sure it can and believe it or not, really big corporations actually benefit from a lot of regulation, since the smaller ones can’t afford to comply sometimes. But again, that isn’t the subject of this post. What I am talking about here is corporate welfare/subsidies.
I disagree. How do you define outright economic collapse? By most definitions, every single downward point in a business cycle is a catastrophe. You have been brought up in the era of Keynesianism. You are a firm believer in government demand stimuluses. But a careful examination of the last seventy years should transform you into a neo-classicist.
Sadcox makes a good point. There are no consequences to bad decisions anymore. First off, let’s identify the players in this. We have the ones who borrowed and we have the ones who gave them the loans. Take the borrowers first. These people were given loans when they shouldn’t have been. Their payments go up as a result of an ARM, and they get foreclosed on. Then they rent. It sucks to lose a house, but not so much when you were lucky to have that house in the first place. They just go back to renting.
But the other party in this, the lenders are the ones who are really losing big time, and yes they deserve to lose. Tgirsch and his ilk seem to think that helping homeowners is just that, helping homeowners. But any “help” in this case, is really help to the people that granted the loans. I don’t understand why the liberals can’t see this. Big mortgage lenders love it when the government hands out money to homeowners to keep their homes. They don’t want to foreclose on those homes. They lose their ass when they foreclose. So if you really want these companies to get what they deserve and to learn a lesson, just get out of the way. As for the people on the bottom end, they shouldn’t have been owning anyway, obviously. If they don’t lose their home now, they’ll lose it next year. It’s the way they live their lives. Are you willing to write a check to all of the landlords that these people moved out on in the middle of the night, over their lifetime?
We need to stop trying to soften the landings in these business cycles. We need to stop trying to micromanage markets. What is going on now is not a catastrophe really. Its just a correction. Also, there is a little something out there called a foreclosure market. I guess government has decided that that market doesn’t deserve to exist and that those lower priced homes don’t need to be on the market, and all of this is done in the name of the individuals. Nonsense. The underlying ones benefited are those who have a stake in keeping prices high. It just amazes me how easy it is for big money interests to snooker every run of the mill liberal in this country. Just say its about the poor or middle class, and most of the country will agree to just about anything, even when it really isn’t about those folks.
[…] over at TennesseeFree.com, Glen (the realtor) has started an interesting discussion about how much responsibility is being taken and by whom in this situation. Share and Enjoy: […]
How do you define outright economic collapse?
Anything anywhere near as bad as the Great Depression. And by the way, I should point out that I don’t agree with what the Fed is doing in this case — I was taking issue with your generalization, not this specific application of it.
You are a firm believer in government demand stimuluses.
It’s not about what I am, but what I am not. I’m not an absolutist. Government intervention is neither unconditionally bad nor unconditionally good. It depends on the scenario. When the market is doing fine on its own (in a sustainable manner, and without relying on excessive fraud, for example), the government should by all means stay out of the way. When it starts to falter, that’s when CCC-style initiatives make sense.
Take the borrowers first. These people were given loans when they shouldn’t have been. Their payments go up as a result of an ARM, and they get foreclosed on. Then they rent. It sucks to lose a house, but not so much when you were lucky to have that house in the first place. They just go back to renting.
If only it were that simple. Most apartments require a credit check these days. Further, I’m as uncomfortable with unconditionally blaming the borrowers as I am with unconditionally letting them off the hook. Some, no doubt, gamed the system, and most made foolish decisions, but that doesn’t mean that a whole lot of them can’t legitimately be described as victims. Whether or not you agree with that assessment, however, all comes back to our Epic Disagreement That Underlies Most Of Our Debates: whether you believe businesses (in this cases, unscrupulous lenders) can manipulate consumers (in this case, the borrowers) in to making really bad decisions. It would be one thing if the banks simply made the loans available and, as you would put it, “responded to demand.” It’s quite another when you look at how aggressively many banks pushed these loans.
Tgirsch and his ilk seem to think that helping homeowners is just that, helping homeowners. But any “help” in this case, is really help to the people that granted the loans.
Not really. First, as previously noted, the people that granted the loans are in most cases long gone. But secondly, “help” doesn’t have to come in a form that helps the bad lenders. If we’re going to do some sort of bailout (and I’m not saying we should), it would have to be of a form where the banks write off the loans as losses, but they turn the loans over to a third party to administer, and the borrowers get to stay in the homes as long as they continue to make the teaser payments (or, in the case of people who can afford more, whatever maximum payment they would qualify for if they were requalified today). Lots of these houses would still foreclose, but not nearly as many, and you minimize the impact of the collapse without unduly benefiting the bad actors in the mess.
They don’t want to foreclose on those homes. They lose their ass when they foreclose. So if you really want these companies to get what they deserve and to learn a lesson, just get out of the way.
Unless, as I just explained, you split the difference. You make the bad actor lender “foreclose” but borderline homeowners still get to stay in the house, contingent upon making continued payments to someone other than the bad actor lender. And you don’t do this blindly. If the loan application was fraudulent on the part of the borrower, you foreclose. If the home buyer is way too far over his/her head, you foreclose. It’s the borderline homeowners you’re concerned with helping — the ones who reliably make the teaser payments but cannot make the full-rate payments.
We need to stop trying to soften the landings in these business cycles. We need to stop trying to micromanage markets.
Actually, what we need to do is take a more proactive approach to regulation, such that such irresponsible and often predatory business practices wouldn’t be allowed in the first place. Then there wouldn’t be any landing to soften.
It just amazes me how easy it is for big money interests to snooker every run of the mill liberal in this country.
My above writings ought to be enough evidence that these aren’t the droids you’re looking for. Yes, where “liberals” perceive that a little guy has been victimized, we’re generally eager to help. But I’m all about finding creative ways to help that don’t benefit the victimizers. And again, liberal politics is about nothing if it’s not about passing laws and regulations on the front end to try to prevent this sort of thing from happening in the first place.
The subprime mortgage crisis is a shining example of what really happens when we decide to deregulate and “let the market decide.” The market decides to undertake high-risk, unsustainable business practices, maximize profits on the front end, and worry about the rest later. And when “later” comes, a lot more people wind up being hurt than the risk-takers. That you would dismiss this as simply “business as usual” or just “part of the business cycle” says something profound.
On the other hand, tgirsch, perhaps it says something profound about you that you are willing to saddle the people who play by the rules with the consequences of this rather easy-to-predict phenomenon.
And one other thing that I’ve been thinking as I read the comments: the lenders who long ago sold these loans will certainly have a more difficult time selling such loans in the future . . . that is unless the only people who end up being burned by the deal are the taxpayers.
Tgirsch, we are not that far off on this. But I disagree to a certain extent. Yes, a little more regulation might be good. Perhaps that is the lesson. But the guiltiest party in all of this is the Fed. This problem originated with cheap money being available for too long. Now its just time to pay up.
Btw, if a borrower defaults on a loan withing two years of taking it out, the responsibility for it goes back to the one who originally made the loan.
On a side note, I just had a lady with a 650 credit store, get denied a loan because of her debt to income ratio. She actually makes more than she reveals, due to cleaning homes under the table. A year ago, she could have been qualified based on her bank statement. No more though. Those days are over. Apparently, lessons were learned, and its costing me money, which is okay.
nedwilliams:
The problem is, “the people who play by the rules” get hit with it either way. Have a look at what your 401(k) has done over the last several months, through no fault of your own. Most of the people who had money in Bear Stearns were playing by the rules, too. If the only people who got hurt were those responsible, you’d have a point. But real life is nowhere near that cut and dry.
Glen:
I agree that the Fed has been too willing to make “cheap money” available, but I submit that this is more a prolonging influence than a cause. The problem would still have been there without the Fed’s influence. It just wouldn’t have gone on for so long, and would have burst sooner. Still, your point is a good one, insofar as an earlier burst would have been less painful and easier to weather.
Ned was right–this is a very interesting discussion. And I agree that we’re not really all that far off in what we believe; I don’t think this is a conservative vs. liberal discussion here. But I think this is a much larger discussion, too. Here’s my story:
I moved to Nashville in August, 2004 from Memphis. I was shocked at the difference in home values. And also shocked that as soon as a house I could afford (my budget capped out at $220K) came on the market, it was sold before I could even get up to Nashville to see it.
That’s when my real estate agent started suggesting that I look into 80/20 loans so I could bump my budget up to the $400K range. I was really excited by the notion that I could afford to live in a $400K house! Fortunately, common sense got the better of me and I thought to myself, “I shouldn’t live in a house that expensive.” But my agent told me the thing to do was get in and refinance when the value/equity goes up and then get a single conventional loan. She didn’t do a hard sell on the loan, but she really wanted to get me into a house and be done with me.
Three and a half years down the road–when I would have needed to refinance–I am jobless. Why? Because I’ve spent the last five years working for real estate/development/rental companies, the last of which was based on the Gulf Coast. “Flippers” who were buying pre-construction dried up. Then the real estate market dried up. And then the company couldn’t make payroll. It’s at near collapse thanks to the crisis brought about by the cycle created from free-flowing loans and rising real estate appraisals. I agree that the market is in need of a serious correction. But it’s cost me a job. Granted, the company I worked for did not manage their growth properly; did not properly evaluate trends, etc but I did and I’m still paying the price. I still have a house to live in (since I don’t have a ridiculous mortgage), but I’m still a “victim.”
The people who are being forced from their homes aren’t the only victims. The lenders (the people, not the companies), the real estate agents, the developers/homebuilders…they all profited greatly during the boom time, but they’re victims now, too. And because the health of our economy is based, on part, by the number of housing starts (homebuilding is far-reaching in its economic impact), we’re all victims. Which is why I support a bailout. It’s the right thing to do for all of us. Though it has to be managed well (and our government is not well-known for its good management skills).
Does anyone else see some rather constant similarities between these recent events and the S&L collapse/bailout in the 1980s? Those problems were also mired in dubious lending in the real estate/mortgage market. I’m wondering how many banks/companies simply expected any current failures to get the same tax bailouts as were provided back then. It seemed to set a precedence.
Odd too that Neil bush’s Silverado company cost taxpayers about a billion in bailout payments, and that’s just one of the many cases from that ‘crisis’ with links to current events. Or am I just being paranoid?
Interesting stuff there Lesley.
Joe, paranoia is okay here. In fact, we actually enjoy it.
It won’t be the first time other Realtors have been mad at me this week. In fact, a few of my colleagues are quite upset that I had the nerve to offer full service listings at 4%. Sorry I had to throw that in there. Shameless advertising, yes I am guilty.
If you’re referring to me being mad at you, I am not. I just wondered how you could afford to offer the 4% rate if you were planning to advertise, etc. And now I know.
No not you Kathy.
Coolness. Off to our Tuesday am meeting.
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