A book: All The Devils Are Here

Back in 2007 while waves of defaults occurred after subprime loans "reset" (meaning an adjustable rate mortgage payment that increased after the interest rate increased) I naively asked a loan officer,  "Why did lenders write variable rate notes when they knew these borrowers had little or no capacity to make higher payments?"

What I heard in reply was that risky as these credit bets were, if conventional, higher fixed-interest rates were used, the borrower could not have "qualified" for as much of a loan.   My reaction to that answer?  Exactly!

I'm reading a book by Bethany McLean and Joe Nocera - All The Devils Are Here - The Hidden Story Of The Financial Crisis (Portfolio/Penguin). 

I'm learning about the origin of subprime lending and the players behind it but I'm also struck by a rhetorical question the authors pose in Chapter Six, concerning the line between predatory lending and what I have called predatory borrowing:

"But in the larger scheme of things, did it really matter who was at fault?"

In my view, it matters now more than ever and it seems that few policy-influencers want to examine the share of loans gone bad caused by borrowers who knew they were borrowing too much.

Attention to causality (i.e. fault) is important because sweeping policies are being hatched to curb systemic risks for the future.  If they get it wrong, we'll over-regulate mortgage originators - possibly choking off  liquidity for many qualified, low income borrowers. 

My biggest fear is that we'll fail to transfer liability from the American taxpayer, and to the future borrowers-lenders-investors (where it belongs).

A debate over a Kyle Bass interview

Cameron and I are jousting again. 

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This time the fodder is an hour-long interview with hedge fund manager, Kyle Bass which Cameron and I both viewed with great interest.  Taped last month, I encourage you to view it too.

Cameron writes,

“John, I watched that video, thank you for forwarding it. It was very insightful. There were a lot of things that really popped out but one especially. Bass states that Washington has a spending problem, but in the same breath he states that the solution is simple. He states we need to raise revenues 2 1/2% and reduce expenses by 5%.   

Which is exactly what I wish Washington would do, but the Republicans stance against no new taxes and no compromise on that issue is hardly going to get that accomplished.”

My reply to Cameron...

Cam,

Note that the spending reduction Mr. Bass calls for is two times the tax increase he calls for.  Perhaps that’s because giving (additional) revenue to the federal government is like tossing it in the ocean.  Politically, raising some taxes might be an expedient way to get a budget bill past the Dems in order to ultimately net a much larger reduction in spending, but we don’t raise taxes because it is morally appealing, or because we think it's a prudent way to help the disadvantaged.

I hope to visit Cameron soon while I'm in Texas during the holidays.  At this time, I'd also like to wish all six readers of this blog a very Merry Christmas.



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