Wall Street/Main Street

As a New Englander, I find optimism to be highly annoying.

I read Ehrenreich's op-ed piece earlier today and it brought the following book to mind.

'The Wee Book of Calvin'
Bill Duncan

'The Wee Book of Calvin', a humorous self-help book that draws on the pragmatic philosophies of Protestant reformer John Calvin, urges people to embrace the darker, more realistic side of life. Author Bill Duncan says the book is a distinctly Scottish antidote to America's "personal improvement" industry.

An NPR interview can be found here: tinyurl.com/3lmbfy

One of my pet social theories is that the reason New England is still a pretty nice place and the people are still pretty well-behaved in spite of their secular liberal views is that there is a strong heritage of Calvinism. It has been softened and hidden under Transcendentalism, Universalism, and modern secular humanism, but it is still there. That is my explanation of why so many of my extremely liberal friends live such traditional, conservative lives in seeming contradiction of their crazy social theories and left-wing political ideas.

Their big mistake, it seems, is assuming that EVERYONE in the US also has a rock-ribbed Calvinist soul, and would therefore behave just like them, if only they had easier access to grad school, farmers' markets and Fair Trade coffee.

2. Steven Malanga explains how it's convenient to blame Wall Street for this mess, but a lot of the blame begins with mortgage fraud on Main Street.

Enh. When a lender makes a mortgage loan, they have a pretty strong incentive to make sure the borrower can repay the loan, since the lender makes their money off the interest (over the long haul). That was the function/point of Fannie and Freddie (both when it was a operation owned by the Feds and afterwards) - to guarantee that the lenders would get their money back in the event of default.

The new wrinkle was the "innovative financial instruments" - that is, the lenders chopped the mortgages up and resold them as derivatives. (And then other companies offered insurance on the payment of those derivatives!) What was innovative about it was that the lenders got their money back for the mortgage right then and there. So they got to issue a loan, make some money on that and resell the loan and get their money back which allowed them issue a new loan (or otherwise reinvest the loan profitably).

It is generally more profitable to have cash instead of lending it to someone else, unless the interest rate charges are high enough to make more money lending it out, since the lender could just buy some stock or something. So if the lender gets to issue an interest-bearing loan and resell it, it works as though they get the profits from making a loan without having to make a loan, and then they could get the profits from reinvesting the money again, which is nice work if you can get it.

So the lenders have a strong incentive to make lots and lots of loans, since each loan they repackage profits them up front, the cost of the loan disappears when they resell it, which allows them to make more loans. By giving loans to anyone and his dog, they made more money than if they were stingy, but there are only so many people with good credit, so to make more loans they have find warm bodies to borrow, or they have get people who already have mortgages to refinance.

In an atmosphere of free money and a market of rising prices, mortgage brokers and the like have a strong incentive to ignore the fact that people cannot repay their loans. After all, if the people a mortgage broker has lined up for a loan default, you can always foreclose on them and find a new warm body to lend to - at a higher price. So the business model of the lenders changed from conservative lending to people with good credit for a long time, to churning loans as fast as possible, so the loans can be resold.

Of course, when defaults rise, the mortgages underlying the sercurities go bad and the guarnators have to pay off and/or the lenders cannot pay off on the securities and or the insurer of the securities has to pay off. Which creates a bit of a chain reaction, since the lender stops lending, which was what was driving the profitably of house flipping and the issuance of the securities was from creating new loans.

Of course there was fraud by borrowers; there had to be fraud by the borrowers or by mortgage brokers or a lowering of standards by lenders because the lenders had run out of honest people with good credit to loan to, and the banks needed new loans and the mortgage brokers needed to create new loans to make their commissions. (That's why you can find plenty of instances of loan officers creating borrowers out of whole cloth so that the loan officers could (essentially) give themselves a bunch of loans which they would also collect commission on.)

Fraud by borrowers skyrocketed in the wake of lenders deciding it was profitable to issue loans to any warm body, but fraud didn't cause the lenders (babes in the woods that they are) to decide that issuing crappy loans was the way drive up quarterly returns.

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['I do believe it was Poor Richard who said, 'Neither a borrower nor a lender be.'']

Rufus -

Thanks for your support. President Karth and I will make you majority whip and give you a flail with a big spiky morning star on the end to wield.

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['I do believe it was Poor Richard who said, 'Neither a borrower nor a lender be.'']

Neither a borrower nor a lender be,
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.

That's Polonius's advice to Laertes, from Hamlet. Or am I missing a joke somehow?