Friday, October 24, 2008

On the mortgage crisis

I used to be a mortgage broker. I sold only fixed-rate mortgages to people with good jobs and good credit, which is why I wasn't a mortgage broker for very long. But I'm pleased, at least, that I helped a few people get loans that will at least not ruin them in the current crisis.

My sales training for sub-prime mortgages was very explicit, and the sales pitch was direct: No matter who you are, no matter what your situation, get any loan on any terms you can to buy your house. If you own your home, you own the increase in value. In two to five years, the price of your house will have risen sufficiently (and your credit rating will have improved) that you can then get a good, fixed-rate collateralized loan at a reasonable interest rate. If you don't buy your house now, if you continue to rent, you'll be unable to afford to buy a house in the future because prices will have risen faster than you can save.

This is precisely the sort of behavior demanded of individuals as a systematic feature of capitalism: the pursuit of short-term individual benefit, which will, through the magic of the invisible hand, translate to long-term societal benefit. As Keynes noted, "in the long term, we're all dead."

A lot of people bought into this sales pitch. These are people now being excoriated as "irresponsible borrowers" who must suffer the punishment of the marketplace. But these people will be punished with homelessness and desperate poverty, while the "responsible" people who continued to rent will be punished with punitive taxation and loss of their savings to bail out the bankers and capitalists who not only encouraged this "irresponsible" behavior, but made it imperative to avoid short-term erosion of individuals' finances.

The capitalists knew that the bubble would collapse, but they couldn't get out of the game of musical chairs. Until the funny money is actually undermined, those with more funny money have an incredible short-term advantage over those with less funny money. Each individual capitalist just hoped they wouldn't be the one standing when the music stopped. Little did they know that the risk was spread out so thoroughly that the only chair left would be the one held by the taxpayers... the chair our Democratic congress, completely unfettered by an impotent Bush, have demanded we vacate so the ruling class has a place to sit.


  1. You know the interesting thing about all of this, is that havnt we all at one time or another bluffed at something? Its so unfortunate when someone calls your bluff, especially if the risk you take isnt an educated one.

  2. I think the borrowers bear some culpability. I remember when we were thinking of home shopping and I took one look at an ARM and said "Who the fuck would get one of those?"

    But the lenders bear way more responsibility.

  3. The sad part is people actually felt good about paying $2mn for a shoe box sized appartment. No one explained that it was only worth 2 million cos universal credit pumped out housing prices like they was on steroids.
    but it just felt so nice to boast about how much u paid, didn't it?
    Me, i just used to look at these London hovels priced at $2 mn or more and think, doesn't matter how much it is, it's real value is clear, it's just a dingy dump.

  4. This comment has been removed by a blog administrator.

  5. Interesting piece, I haven't read much blogs written bu those "evil, greedy and baaad baaad mortgage brokers" .) You blame capitalism, but listen - capitalism is just a different name for human nature. We want more and we want it now. That's why we are living on credit (I think in the USA you are especially used to it). What's worse, we vote for government which is doing the same - why the prices rose so quickly and so high? What about the FED (and Bank of Canada and many other central banks) pumping money to the system and pressing 1% interest rate?
    It is Human nature to cause crisis...fortunately it is human nature to survive crisis too :)
    Take care

  6. the pursuit of short-term individual benefit, which will, through the magic of the invisible hand, translate to long-term societal benefit. As Keynes noted, "in the long term, we're all dead.

    Strangely relevant to my recent post. Great minds think alike eh? :)

  7. Great minds think alike eh? :)

    Mais oui, mon frere.

  8. capitalism is just a different name for human nature

    Bah. So is slavery, war, murder and mopery on the high seas. Doesn't mean we have to tolerate it or that we can't strive to change and grow.


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