The Multi-Dimensional Social Contract

I agree, it's important for people to understand they shouldn't live beyond thier means. People used to know this at one time, but that was also a time when money and material acquisition had not become the god it is now, and credit was not handed out freely. How can a society on one hand accept that it's ok to hammer the message of unchecked consumerism home hundreds of times a day, portray the "American dream" as everyone living in a McMansion, driving new SUVs, having expensive toys and clothes, eating out all the time, etc - and then turn around and express surprise that everyone want's to buy into the message? Where are the role models and messages to the contrary? I repeat, where are the role models to the contrary? Our priorities are terribly screwed up, and bear little resemblance to the priorities of generations of past Americans, and now we're all paying for it. Who didn't think the bill was going to eventually come due?

How can a society on one hand accept that it's ok to hammer the message of unchecked consumerism home hundreds of times a day, [...] - and then turn around and express surprise that everyone want's to buy into the message?

JSpencer -- everybody did NOT buy the message. That's a large part of my point. But it will be those of us who didn't who will be footing the bill for those who did.

Where are the role models and messages to the contrary?

They're right next door to the houses with "foreclosed" signs.

Don't look now, but we're not going to just be paying for our own sins, but the entire world's! Hooray we are the saviors of mankind.

Like JSpencer, I believe that people shouldn't live beyond their means.

But millions of people didn't just take out mortgages they couldn't afford. They were awarded loans. Institutions like banks are supposed to perform due diligence. They're required to deny loans to applicants who won't be able to afford to repay them.

Instead, those institutions told them they were good risks. That's how they got the mortgages in the first place.

Right?

I absolutely agree, and said so as clearly as I could in this post, that there's governmental stupidity and institutional culpability here. But.... that's it? These individuals have no personal responsibility for this? That they were led to the trough, and their heads were forced in?

George, are you seriously arguing that people shouldn't live beyond their means, but when they do, it's not their fault?

Let's go even deeper than the mortgage crises..,Trickle down economics. It is because greed sits at the base of capitalism that sucks the life out of its own body...the workers...the very ones who struggle to pay their mortgages.

With jobs being outsourced to other countries to make more profits for upper management and shareholders, the common man cannot make his mortgage anymore.

This is the source of our woes and finally it's pain made it to Wallstreet.

Now Wallstreet wants to F us again by asking us to bend over even further so they won't have to take as much of a loss.

F-that! (yes I'm cursing today...lol...)

I say, "Trickle UP" economics. Forgive the working poor their mortgages, see their monthly burdens fall away hugely, allow them to consume more american-made goods offered at slightly higher prices to offset bringing more jobs home to higher american wages. Provide a package for universal health care..see those costs plummet since half the reason people get sick is from being stressed out. The largest stressor? Money! (Is this really that hard to understand? )

Let Wallstreet take the hit and we'll trickle up wealth back to them if they promise to behave and be good, moral and thoughtful investors next time.

Oh, and alternatives to foreign oil dependance. We need non-greenhouse fuels to go off like rockets. We increase the price of our food staples (the only real wealth we have anymore thanks to Wallstreet and corrupt, amoral, anti-american CEOs) to sell on foreign markets to make up some of our debt. People go back to work. They pay more taxes. They consume more from not having to worry about the mortgages they couldn't pay because their jobs were outsourced by crooks and the economy gets a bump. The common man, THE BEDROCK OF THE ECONOMY becomes happier, healthier and more productive. Everybody wins.

You do anything but this and you can kiss the US of A goodbye. This "package" is that vital. One false move and trickle down economics will have squeezed the last breath out of our financial core.

Losing your house to foreclosure is not without its negative sides. Finding a new place to live, moving children to new schools, the cost of moving, the long-term impact on your ability to get a loan in the future, and the depression that accompanies realizing how bad of a mistake you've made are all consequences that I, personally, consider to be pretty strong deterrents to repeating the mistake in the future. A million families have faced this situation in the past year. This bailout may help another million. And I daresay that they will thank their lucky stars that they were not in the first million and will at least think twice before making this kind of “investment” again.

As for the CEO’s who have culpability for their side in this morass; what will be the repercussions for them personally? Successfully navigating the sale of a company or managing a company in bankruptcy, while stressful, is actually considered good management training. Their contracts are written in such a way that losing the corporation does not impact their salary nor, usually, their bonuses. Will they lose their houses? Struggle to afford a car three years from now when the one they have wears out?

Obviously, a number of individuals will make the same mistakes again, as will a number of these CEO’s and corporations. But, in my opinion, the individuals are receiving a punishment that is far in excess of that being doled out to those who profited from these loans. Even those individuals who get to keep their homes because of the bailout will carry a mark on their credit for quite a while. What about the CEO’s?

More to come….

Who’s to blame?

As has been discussed, this issue is so huge that there’s plenty of blame to go around. I would argue that we all are to blame.

Nearly four years ago, Alan Greenspan was sounding an alarm. The ratio of household debt to income was at a record 1.2. I am not in anyway absolving Mr. Greenspan from his responsibility in creating this mess, but he also noted that, “many have recently become increasingly concerned about the exceptional run-up in home prices”. Wow! Four years ago and we’re finally getting around to doing something about it now. Why would the financial institutions ignore this warning and continue on their path of making questionable loans? Why did we, as consumers continue to spend? Why did the politicians ignore the problem and not push for more oversight? Why did we, as members of a democratic society, not demand that something be done from our government and our financial institutions and from ourselves?

One more….

Be careful what you wish for…

With a debt ratio of 1.2, I doubt there are many families in the US that are “living within their means”. But the phrase “living beyond your means” is getting thrown around a lot without a real definition. I would venture to say that, unless I have no debt and six months of living expenses in the bank, I am “living beyond my means”. I do not yet fit that criterion, but I’m working on it having no debt and two months of expenses in the bank. I do not, however, own a house. I would argue that having a mortgage, as long as you carry six months of emergency funds including the mortgage payment (not an ARM ;)) , would not be “living beyond your means”.

But, if we were all to begin this starting tomorrow: live as frugally as possible until we have six months of savings in the bank, the financial system would further collapse, possibly beyond all recognition. Taking that much money out of the system that quickly would shutter businesses faster than just about anything else we could do. The stimulus payments were marketed to do the exact opposite. Don’t save it or use it to service your debt. Go on a vacation, buy something you really don’t need.

So, “learning our lesson” too quickly would actually bring about a substantial worsening of the situation. Let us hope we don’t learn too fast.

sorry - one more...

Who really pays?

Given all this, I believe the million or so familes who have actually been foreclosed upon have paid the lion’s share of the cost of this fiasco. The employees of the now-defunct financial institutions are also paying a high price with the loss of their jobs. And both of these groups will pay their share of the public cost.
The US taxpayer will pay a lot in cash but, if we “learn our lesson”, it should just become part of our monthly costs. As a group, we are spending much more than that now on servicing our debt, since we have all been “living beyond our means”. Consider it a “cost of doing business” in the United States of America and let’s all start learning the lesson. Without some kind of change, you who hold credit card debt, vehicle debt, second mortgages, student loans? Any of you could be the next ones who have been “financially irresponsible” and could “screw it all up for the rest of us”.

The individuals now whose homes will be rescued get a pretty good deal, though they will pay with poor credit and, hopefully, many will learn to be wiser in the future. Many will likely have to delay their retirement by a few years. I, for one, believe they should be forbidden from getting an ARM. Of course, I believe no one should be able to get an ARM. Those should have been seriously curtailed four years ago when the alarms were already being sounded.

However, somehow, the politicos and the titans of finance will likely get out of this virtually unscathed. The politicians will be able to point fingers at “the other side” until this is just a memory and history will judge them, probably incorrectly and only after they have rationalized their actions to themselves.

As for the CEO’s? Some may lose their jobs, but most will retain most of their positions on most of the boards on which they sit. They are unlikely to be out of work for long. I seriously doubt they will lose much in the way of their material possessions, and their retirement age will unlikely change drastically, though they may make less than they had hoped just a few short years ago.

And so, while this situation “didn’t happen in a vacuum”, it doesn’t seem to me that the costs: financial and emotional, short- and long-term, are being meted out equitably. I’m not saying I have a better way, but I think someone smarter than I should at least look. The biggest inequality in all of this is that the people who actually made the decisions and gained financially from this fiasco are the ones paying the smallest cost. In my little world, it is the greatest inequality that deserves the greatest attention.

fin

Sil, comments like this are why Ayn Rand has a following. Or were you planning to use your own funds to "forgive" mortgages?

chmbrln -- a very thoughtful series of comments, thank you.

My guess is that we're about to make a very sharp return to fiscal conservatism -- not just here in the US, but all over the world. And my hope is that it will happen at every level, from individuals to governments.

You're correct that a rapid contraction of individual $ would cause problems of its own. Since we're heading into a dark (and probably long) economic tunnel, I suspect that the contraction is going to happen regardless; it's how things are handled on the other side that matters.

But we're nowhere near through this "thing", and while I understand the penchant for blame, I don't share a need to draw and quarter scapegoats. It's going to get worse before it gets better, and the ripples are going to be wide. When all is said and done, we'll all have paid a mighty price.

And yes, you're right about the complicity at every level. People like me, who actually do have months of backup in the bank, and normal, fixed rate mortgages that fit within the old debt:ratio margins, certainly saw the problem building. We could have been shouting louder, I guess?

My real compassion is reserved for people who were deliberately misled about what they were buying; who were rushed through the closing documents, and who's information was falsified by overzealous brokers.

But Polimom, the executives who played these economic games like repackaging everything in sight so that no one could tell any longer what they were buying need punishment. Extreme punishment. There is nothing else that will make their successors think twice about sending us through this same nightmare again if they can do it and walk away with their platinum parachutes intact. And yes, I think that bankruptcy laws must be rewritten soon and with industry lobbyists locked out of the committee meetings and preferably out of DC completely. We're in the place they wanted us to be and look what it means for the country.

Jim -- if they broke the law, then they should be prosecuted fully. If they were playing within the rules of "the game", then clearly we need some major adjustments to the rules. But I disagree with you that anything less than extreme punishment for individual executives will deter future nightmares. The only thing that will deter this from happening again is a major overhaul on how the financial world is regulated.

Allow me to add my own anecdotal account. When I purchased my home back in 2001 I incurred a (fixed) mortgage of $210,000 -- the purchase price was $325,000. Over time the supposed value peaked over $600,000. But that's beside the point. The point is that I'm self-employed. As a result I have to provide my own health care. The option I chose several years ago was a plan with a high deductible, 80-20 co-pay with a high limit, and with a personal health savings account to ameliorate the high deductible and limited coverage. In other words, I'm the kind of guy McCain would like to make out of all of us.

But here's the problems: (1) at present the personal savings account has to be expended at the end of the year. Otherwise you have to pay taxes on it as if it were income. Okay fine. More importantly though; (2) any expenses beyond the savings account in any given year are paid for (2a) totally out of pocket under an out-patient scenario, or (2b) 20% out of pocket over the cap for in-patient care. That's assuming the "care" in question is covered. In that respect, Blue Shield seems to be trying to re-write the rules after the fact. But while that is an interesting (and arguably deplorable) aside, that's not what I'm trying to talk about.

Actually, even taking all that into consideration, it gets even more complicated than that. But I don't want to bore you with the details. But here's the bottom line: I think I'm a pretty smart guy, and I tried to the best of my ability to weigh all of the possible outcomes in my decision as I could think of. I had regular check-ups covered, in-patient care covered, and even out-patient care covered -- up to a point. Beyond that (which is to say in the worst case scenario) I figured I could rely on the equity of my home, and the (unused) equity loan I took out on it several years ago for that very purpose, just in case.

I never had occasion to draw down on that loan. Nonetheless, I was notified a few days ago that the loan was effectively rescinded (meaning, quite contradictorily, the loan was still technically active, and the balance was zero, but I couldn't draw anything more on it). How about that -- a $250,000 credit line, which had never been drawn on, was contracted to $0.00 overnight, and until further notice. So now I know that if I get sick to the extent that I fall into one or the other donut holes obvious in my coverage, I'm a dead man.

Polimom,

An interesting post, and interesting comments. Like you, I am more than a bit disgusted with those who 'bet the farm' on neverending real estate price increases, and who are now bleating for help when their bet has gone sour. Perhaps some of those who made the same bet three years earlier and sold out before the peak will donate some of their winnings to a fund to help their fellow leveraged-gamblers, who were not so fortunate. Could we see some raised hands? Anyone?

Thought not.

I am amused by those who seem unable to separate the goal of keeping the US and world financial system from collapsing from their goal of imposing their idea of "fairness" on the outcomes of other peoples' decisions. Achieving the former goal is something of an emergency. Achieving the latter is a political question. Actually a series of questions, including: should we be doing it at all, who gets to decide what's "fair", are we looking at making "fair" the process or the results, etc.

I feel for Ricorun. His life sounds much like The Master's. It sounds like he has a Flexible Spending Account (FSA). He should probably look at switching to an HSA since the HSA does not need to be spent by the end of the year and can carry forward for years. His tribulations with his equity line of credit are exactly the kind of thing the Paulson plan should (if done right) prevent. Banks are short on capital and are pulling loans and lines of credit to perfectly creditworthy individuals and businesses, just to reduce their loan exposure. Without some kind of system wide fix that lets banks recapitalize their RMBSs and CDSs, credit will continue to contract until it precipitates a Great Depression. Argue with some of the specifics of Paulson's plan if you wish, but something must be done, soon.

FWIW, my take on the plan is that the newly formed "RTC2" will offer to by RMBS and CDS securities at a discount to par, but at a premium to the firesale prices available in today's panic. Since these securities produce income every month, and will continue to do so, an economic actor that can afford to hold them to maturity will do well if it buys at a discount. The income would go to reduce the need for new federal debt, and when the securities mature, the principal (whatever percentage it turns out to be of the amount originally loaned) can be used to pay down government bonds.

Those who are hyperventilating about RTC2 "paying 100 cents on the dollar" for RMBS and CDS securities are dreaming (more accurately, having a nightmare). Paul Krugman is an idiot, and is fanning the flames of ignorance on this.

Having said that, the draft legislation that came out this weekend is a bit "sparse". We really need to see more meat on the bones before we say "yes".

Rico, they did the exact same thing to me. Don't let them get away with it. When I called the phone number on the letter they basically admitted to me that it was a broadly distributed letter covering a large region with absolutely no proof that my home had really dropped in value. So if my research showed that in fact the equity that they were claiming had gone away was really still there the line would be reinstated. I went to a web site that estimates values in a given neighborhood. Not like a real appraisal but it was only meant to be one data point in any case. Then I went to the county appraisal web site and found their estimate for this year. Then I added to that the improvements I'd made to the house that the county hadn't accounted for in their estimates. I'll find out in a few days if it worked. But contract them and see if you get some of the same answers I did.

Oh, and I also found proof of how much a home in my neighborhood sold for recently.

the social contract between individual members of society.

You don't mean the social contract that he business conservcatives used to wipe their asses with in 80's?
AT&T: Whose Company Is It?
PAUL SOLMAN: In March, we chronicled the downsizing of AT&T and specifically Travis McElyea's last day at work. After twenty-eight and a half years on the job, he epitomized for us the larger story or restructuring corporate America and the phone company's January 2nd announcement that it was eliminating 40,000 people. Just 18 months shy of retirement, Travis McElyea was one of them.

TRAVIS McELYEA, Former AT&T Employee: I am angry that the company does not treat this as a business failure.

PAUL SOLMAN: That they can somehow get away with that, you mean?

TRAVIS McELYEA: Yeah, and, you know, I'm angry that, that Wall Street rewards it. Downsizing is treated as a tough decision, perhaps even a macho decision, that managers make, instead of a business failure


do you?

GE: No Company's Record Better Illustrates The Glories Of Corporate Globalization For The Well-Off, And The Misery For The Many

Founded by the American icon Thomas Edison, GE is now headed by Jack Welch, who has said, "Ideally you'd have every plant you own on a barge" -- ready to move if any national government tried to impose restraints on the factories' operations, or if workers demanded better wages and working conditions.

And there is your Social Contract, "I ve got mine, f*** you!"

Um no. No one is claiming that they are going to pay 100 cents on the dollar. In fact if you look at Krugman's example he clearly talks about how this plan doesn't address capitalization because of the basic assumption that the government is only going to pay around 40 cents on the dollar. This is explained more throughly here.

Moreover, no one is saying the government is going to hold them to maturity. The whole point is to turn around and sell it in the relatively immediate future. This isn't a new Fannie/Freddie.

Do home equity loans bind the banks to a contractual obligation to keep it open assuming you have equity? Most lines of credit don't.

Mikkel, no. They have the right to cancel. The letter they sent me, however, stated that if my home regained its value that I should apply for reinstatement because the cancellation was based solely on a perceived loss of home value. I called the number they provided and the conversation was as I described. So I wrote to them with documentation to back up my view that their assumption was wrong.

Polimom--

I am not saying people should live beyond their means.

When I start my comment by saying this:

Like JSpencer, I believe that people shouldn't live beyond their means.

that means I believe people shouldn't live beyond their means.

Just like I, you know, said.

As for the rest of it: what do you think happens to the people--there have been a lot of them to this point--who default?

They're not AIG. They're not Freddy Mac.

They're not too big to fail, like Bear Sterns was.

They don't get a golden parachute, Polimom.

They get evicted.

They lose their homes.

They end up with terrible credit ratings and will pay extortionate interest rates on any subsequent borrowing they do. They may never get to own another home.

They're screwed, ma'am.

I don't blame you for feeling pissed off. But this is a systemic failure. It's not million lowlifes taking advantage of the system to enjoy the highlife until they, you know, lose their homes and get evicted.

Those people will pay, Polimom. Thousands and thousands of them are already paying.

Aren't they?

George,

I hear you. I do. And I understand your passion. And no, I don't think millions of people were "lowlifes taking advantage of the system to enjoy the highlife". I think that there are many different lives and stories involved, some of which move me to great sadness. And some that do not.

I myself, as a struggling single mother, was a risk some years ago when I purchased a home with only 3% down and absolutely zero money in the bank... and only 10 months at my job at the time. A job I no longer had a month later, I should add. Yet it never crossed my mind to walk away from that asset. I, like most people, moved heaven and earth to stay current, and eventually things sorted out.

So I've been there. I get it.

But I also know people who have filed bankruptcy multiple times. It's just the normal way they do business. And I know other people who took out loans that just covered the interest on the asset's mortgage -- even though they knew they could not, no way no how, ever make a payment that included the principle. They planned, from the get-go, to get out of that house and make money on the sure gain in value to come. Was the lender wrong? Obviously. But what, then, was the borrower?

My point here isn't to condemn everybody who ever borrowed money at the margins. My objection is to the lumping together of every homeowner who has undertaken a mortgage they cannot pay into some vast category called "victim".

What I’m talking about here are those millions of people who took out mortgages that they could not afford...

You remember the rules, right? Those pesky little hindrances to instant millions, like: significant down-payments, and debt-to-income ratios, and living within one’s means...

I myself, as a struggling single mother, was a risk some years ago when I purchased a home with only 3% down and absolutely zero money in the bank... and only 10 months at my job at the time. A job I no longer had a month later, I should add.

Polimom, your response could not be more ironic. You are exactly the poor risk borrower that irresponsible bankers gave money to. In many cases they aggressively marketed loans to people who only HOPED they could hang on and afford it if nothing went wrong.

I applaud you for being responsible in a way that those bankers, and their enablers, and their bailer-outers are not. But you could have lost your job (in fact, did), or been hit with a medical issue, or the value of your house could have easily lost more than 3%. Of all people, you should understand what a risk you were as a borrower and you could well have been one of those who defaulted and was evicted. Many of those you criticize as fiscally irresponsible were no more so than you. I'm not putting you down, just surprised you are taking a position that seems so contradictory.

How many credit card offers have you received? Me too. Second mortgage pitches? Yeah, same here.

Under deregulated "free market" rules, lenders aggressively pushed loans on people they "knew or should have known" (the legal standard for liability) were not good risks. Then they bundled them and ditched them to others who failed to honestly and diligently assess the risks or the assets. This crisis was caused by an irresponsible government for abdicating regulatory oversight and especially by financial managers for abdicating their responsibility to pursue sound business decisions.

You admit that at least some loans were predatory, but it's more than that. These firms with their teams of highly trained financial experts, accounting teams and marketing departments, are supposed to know what they're doing. They use every psychological trick on the book to sell their product to any takers, and there is one born every minute. By seeking the deregulation that enabled them to drive their companies into a ditch and us with them, they showed intent to behave in ways they believed regulators would not allow.

They must be considered to have primary responsibility, not the millions of consumers who just wanted part of the American dream, were told they could have it, and could afford it. After all, they qualified. They may have been surprised, but delighted. You probably were too.

It's the lenders' responsibility to their shareholders and their customers to make sound business decisions. They failed.

GreenDreams --

No, I wasn't surprised (though of course I was delighted). I came in under FHA -- a program established for exactly these scenarios in the 1930s. I was not seen as a poor risk. My credit history wasn't confined to the 10 months prior to applying for the loan; there was far more data than the immediate. I was seen as a marginal risk, and banks have been lending to people like me for generations. They just haven't historically done it as a significant percentage of the overall loan portfolio.

Nobody preyed upon me. So while I believe the hysteria of the obviously unreal housing bubble, combined with STUPIDLY lax lending rules, absolutely led to predators, I also know beyond any doubt that every lender and every loan was not akin to hawks on quivering bunnies.

Furthermore, there's a major distinction to how I (and other traditionalists) approached these loans: For purposes of the loan terms, it didn't matter to me whether the value of that home went down.

This is an important distinction. Going in w/ so little down meant 2 things: a) It was going to take me a LONG while to build equity in the home, which b) I hoped would allow me a modest profit MANY years down the road if I sold. But going in the door, I intended to be in that house forever. Selling it was not part of my short-, or even medium-term economic plan.

In the current crisis, bad decisions were made all the way around, imo, at every level. My own view is that the primary target for ire should be our government, but that doesn't make everybody below that level free of responsibility.

I think you misunderstood me. People didn't bail on their loans because the property value went down. They lost their homes for other reasons. It became a problem for the lenders because the loans were based on value assumptions made by the lender, not the borrower. And the government made it possible for them to market and sell loans as "products" (the more the merrier) then sell it to others who sold it to others as a bundled financial instrument and everyone along the line skated on taking responsibility for their reckless behavior. Ultimately, everyone had dollar signs in their eyes, and now those dollars are in their pockets. We're left holding the bag. You're right that borrowers too share some of the blame, but the solution for the future is the same. Accountability, oversight, regulation and sound business practices (which appear to be possible only when regulation reins in outright greed).