Your New Healthcare System

Aug 2 2010

Clearly, this is a model of back-scratching, ignorance, not-caring, willful stupidity, crass overreaching, sleight of hand, class warfare, wishful thinking, arrogance, rank evil, or all of the above.

These idiots won’t be happy until they’ve destroyed the American economy.

Details here



On recycling

Mar 14 2010

While visiting one of my regular reads, I came across a summary of what’s wrong with our continued national fetish for recycling.

Having extensive experience in the waste industry, I’ve never been a fan of consumer (curbside) recycling. It’s a completely different business than the trash business.

The trash business is simple – fee for service. You pay someone to come and pick up your trash. They take it away and either burn it or bury it. Fee for service.

Recycling, as it’s done today? Not so simple – it’s a commodity play, basically a bet that they can pick up your allegedly recyclable cast-offs, and a market will exist in which the person who picked them up can sell them (after cleanup/aggregation/processing) for more than it cost to perform the collection, separation, and processing.

A very different business from trash collection. And as I used to say back when I was in the waste business, if someone wanted to be in that commodity business, more power to them, but I couldn’t understand the idiocy by which municipalities asserted common ground between that business and recycling. I was further dismayed to find that trash companies took the bait and accepted this absurd bastardization of their business. There’s at least one former company in the industry (Browning Ferris Industries, now a fully-digested part of Allied Waste, which is itself now a fully digested part of Republic Waste), a true blue-chipper, and a great company in its time, which was utterly undone by the idiocy of pretending that recycling was the business it was in.

Why the idiocy? Because of the actions of a misdirected board, the chairman of which, former EPA administrator William Ruckelshaus, decided BFI should pretend to save the world, while destroying the business at which it actually excelled. He did some good things while in that slot – breaking the back of organized crime in the New York market is one of those. I can think of no others, and his actions ultimately killed the company’s ability to operate as a viable standalone entity. His recycling mantra was the murder weapon.

I was reminded of all of this from the Ace of Spades post previously mentioned. From it, I traversed a link to the interesting Sippican Cottage website. (be sure to read his “About Me” snippet). And from that link, a reminder of the several-years-old Penn & Teller “Bullshit” segment on the idiocy of recycling, notwithstanding the fervor of the idiots who believe in its value, below.



Lots of things make sense to recycle. Oddly enough though, virtually every one of those things happens to be an individual aluminum can. Almost everything else is a waste of time and effort, on both economic and environmental grounds. Curbside recycling, outside of aluminum cans, is counterproductive make-work, worth nothing other than the psychic self-stimulation it provides to misinformed consumers and maladjusted recycling coordinators. We’re not now, nor have we ever been, running out of landfill space, and landfills are now and remain the most effective and safe way to deal with the nation’s garbage.

Other things will come along which can rationally be used to reduce volume going into landfills, but when they do, it’ll be because there’s an economically justifiable method for recapturing value from the items that would otherwise be buried in the ground. Mechanically separating waste streams, while hoping that the market for the resulting commodities doesn’t crash while you’re baling them up and praying for an opportunity to sell them, has a flaw in it:

As with any human activity, if you can’t find an economic justification to do it, with only a very few exceptions, you shouldn’t be doing it.



A concise definition of “rights”

Mar 13 2010

From Dr. Walter E. Williams. (via his posting at George Mason University’s site)

I’ve incorporated it here in its entirety because it’s so short and so important that I want to ensure it remains close at hand.

Is Health Care a Right?

Most politicians, and probably most Americans, see health care as a right. Thus, whether a person has the means to pay for medical services or not, he is nonetheless entitled to them. Let’s ask ourselves a few questions about this vision.

Say a person, let’s call him Harry, suffers from diabetes and he has no means to pay a laboratory for blood work, a doctor for treatment and a pharmacy for medication. Does Harry have a right to XYZ lab’s and Dr. Jones’ services and a prescription from a pharmacist? And, if those services are not provided without charge, should Harry be able to call for criminal sanctions against those persons for violating his rights to health care?

You say, “Williams, that would come very close to slavery if one person had the right to force someone to serve him without pay.” You’re right. Suppose instead of Harry being able to force a lab, doctor and pharmacy to provide services without pay, Congress uses its taxing power to take a couple of hundred dollars out of the paycheck of some American to give to Harry so that he could pay the lab, doctor and pharmacist. Would there be any difference in principle, namely forcibly using one person to serve the purposes of another? There would be one important strategic difference, that of concealment. Most Americans, I would hope, would be offended by the notion of directly and visibly forcing one person to serve the purposes of another. Congress’ use of the tax system to invisibly accomplish the same end is more palatable to the average American.

True rights, such as those in our Constitution, or those considered to be natural or human rights, exist simultaneously among people. That means exercise of a right by one person does not diminish those held by another. In other words, my rights to speech or travel impose no obligations on another except those of non-interference. If we apply ideas behind rights to health care to my rights to speech or travel, my free speech rights would require government-imposed obligations on others to provide me with an auditorium, television studio or radio station. My right to travel freely would require government-imposed obligations on others to provide me with airfare and hotel accommodations.

For Congress to guarantee a right to health care, or any other good or service, whether a person can afford it or not, it must diminish someone else’s rights, namely their rights to their earnings. The reason is that Congress has no resources of its very own. Moreover, there is no Santa Claus, Easter Bunny or Tooth Fairy giving them those resources. The fact that government has no resources of its very own forces one to recognize that in order for government to give one American citizen a dollar, it must first, through intimidation, threats and coercion, confiscate that dollar from some other American. If one person has a right to something he did not earn, of necessity it requires that another person not have a right to something that he did earn.

To argue that people have a right that imposes obligations on another is an absurd concept. A better term for new-fangled rights to health care, decent housing and food is wishes. If we called them wishes, I would be in agreement with most other Americans for I, too, wish that everyone had adequate health care, decent housing and nutritious meals. However, if we called them human wishes, instead of human rights, there would be confusion and cognitive dissonance. The average American would cringe at the thought of government punishing one person because he refused to be pressed into making someone else’s wish come true.

None of my argument is to argue against charity. Reaching into one’s own pockets to assist his fellow man in need is praiseworthy and laudable. Reaching into someone else’s pockets to do so is despicable and deserves condemnation.

Walter E. Williams is a professor of economics at George Mason University. To find out more about Walter E. Williams and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate Web page at www.creators.com.

Granted, those pushing the current federalization of the American healthcare system may truly believe that healthcare is a right. If they do, they’re wrong, just as they’d be wrong to claim that everyone has an innate right to any tangible, finite product or service of which others would have to be deprived in order to provide it to them.

But I don’t think any of the Obamacare pushers truly have an opinion about healthcare as a right. This headlong rush to socialization isn’t about rights, and it’s clearly not about reducing costs. It’s about control. Control of the quantity and quality of service that Americans can choose to purchase, from whom, and via what methods.

Picture this: Say the cost of hamburgers increased 15% per year over a 20 year period, and as a result, some people could no longer afford hamburgers as often as they’d previously become used to. Pretend further that, unlike in our current framework of healthcare provision, there wasn’t a requirement that all burger joints had to provide hamburgers at their emergency drive-up window, regardless of ability to pay.

Would declaring hamburgers to be a basic human right, and stating that the federal government should exercise market control of hamburgers, suddenly become an argument that would pass the giggle test? Of course not.

And it amazes me to see that the argumentational artifice of “healthcare as a basic human right” passes that same test. If it didn’t, people would spend the time that they should be spending asking what our elected overlords are really trying to accomplish.

This ain’t about healthcare, people. It’s just not.



Your quote of the day

Dec 28 2009

From Douglas McIntyre:

Stable home prices may be overrated. Every month that there is an artificial barrier that prevents real estate prices from falling faster is a month that the market does not reach rock bottom, and rock bottom prices are what eventually bring buyers into the market. Real estate prices are being destroyed by the current “hundred year storm” in the industry and buyers will find the bargains irresistable, even if mortgages rates are not at a historic low. The government can draw out that process unnecessarily instead of standing aside as it takes it natural course.

The taxpayer will write a check to Fannie Mae and Freddie Mac in the name of keeping real estate prices from falling. That taxpayer might buy a house with his check, but the government is keeping home prices too high.

Everyone (well, some people anyway, the ones who were paying attention, not including those who were playing the game) worried about the clearly-building bubble in the real estate market. Poof! Turns out it was real.

And now, those who should have taken action (Greenspan’s folksy alleged wisdom notwithstanding) are blowing as hard as they can, attempting to reflate the bubble. Marvelous.

In 2004, Stephen Roach was quoted: (Economist)

…the chief economist at Morgan Stanley, has long argued that the Fed is a “serial bubble blower”. Its cheap money is stimulating another round of irrational exuberance. America’s property market certainly looks pricey: the ratio of house prices to incomes is currently at a record high, and about a fifth above its 30-year average.

He was right then, and it’s still true today. Clearly, they’re at it again.

To avoid gloom and doom? Too late – that already occurred, and should have been left, in late 2008, to burn itself out by whatever means necessary. Stretching the pain of the adjustments over the next 30 years is not preferable to allowing the markets to have regained equilibrium on their own.

To assure affordable housing for everyone? As any economist, observer of recent history, or both should be able to point out, the fact that everyone with a pulse was allowed to purchase a home, even when many would clearly have been better served to rent or live with their parents, did nothing but goose the price of real estate to the point where it not only became unaffordable to all those this magical low price was supposed to help, it ALSO cratered the financial system.

Great work, Fed/Treasury (but I repeat myself). Give yourselves a pat on the back. And then get the hell out of the market. You’re killing us.



Reasons for pessimism

Nov 6 2009

From the AP via James Taranto (“Close Enough for Government Work“):

—– Quote —–
“President Barack Obama’s economic recovery program saved 935 jobs at the Southwest Georgia Community Action Council, an impressive success story for the stimulus plan,” the Associated Press reports.

Hey, great news! Just one little problem: “Only 508 people work there.” The story continues:

The Georgia nonprofit’s inflated job count is among persisting errors in the government’s latest effort to measure the effect of the $787 billion stimulus plan despite White House promises last week that the new data would undergo an “extensive review” to root out errors discovered in an earlier report.

About two-thirds of the 14,506 jobs claimed to be saved under one federal office, the Administration for Children and Families at Health and Human Services, actually weren’t saved at all, according to a review of the latest data by The Associated Press. Instead, that figure includes more than 9,300 existing employees in hundreds of local agencies who received pay raises and benefits and whose jobs weren’t saved.

You read that right: Civil servants got pay raises, and the Obama administration claims credit for “saving” their jobs:

Officials defended the practice of counting raises as saved jobs.
“If I give you a raise, it is going to save a portion of your job,” HHS spokesman Luis Rosero said.

Aren’t you excited to think that these people may soon be in charge of your health care?

—– End Quote —–

One of several possibilities seems obvious here:
1. These guys are idiots
2. These guys think we’re idiots
3. Both



Fred on the Economy

Dec 29 2008

Moderately old, but new to me:



Stupidity, populism, and playing to the idiots? It’s evergreen.

Sep 20 2008

Where to start?

The short-selling ban that is in place from yesterday through October 2 (or later) is an abomination. Not only is it bad policy in an absolute sense, it’s made worse by the cynical hypocrisy of those who begged for it to be put into place.

It’s one thing for an amiable boob like Patrick Byrne to whine about short-sellers and how they’re killing his company. I’m willing to give Byrne some small measure of benefit of the doubt, since finance isn’t his claim to fame. But when the chairmen of the Federal Reserve and the SEC, along with the former CEO of Goldman Sachs, now Treasury Secretary, start whining out of the same hymn book, they’re not serious, not believable, and are clearly playing to the idiots in the audience.

Short selling, the act of selling shares you don’t own, with the expectation that you’ll be able to buy them back later at a price equal to or lower than the price at which you sold the. Simple, really. And it’s got nothing to do with wanting to harm the company whose shares you’ve sold short. It’s simply an expression of opinion that the shares are overvalued, for one reason or another.

Selling short, then spreading false rumors against a company is an offense for which one can be pursued in a court of law. Funny thing, though – not selling short, then spreading false rumors against a company is also an offense for which one can be pursued in a court of law. If you do the verbal algebra, it becomes clear that selling short has nothing to do with the illegality of false rumors. And the law recognizes this – selling short is, in anything approaching sane regulatory times, not illegal at all.

Selling short can occur for many reasons, in many different contexts. Everyone I’ve read focuses on bets that a stock might or should go down. I’ll go you one better. For instance, to take a random example, let’s just say that the Investment Banking group in Goldman Sachs’ Chicago office were doing a public offering of stock for a client.

Such offerings typically include an underwriter’s option for an additional 15% of the shares being offered as “the green shoe”, to cover overallocations. Since an investment bank typically has no interest, and certainly has no requirement, to be an owner of stock in the companies for which it provides underwriting, if an offering looks successful, and the demand is high enough to make exercising their option for the “green shoe”, the normal action an investment bank takes is to sell short a number of shares equal to the amount of the green shoe, knowing that they’ll be able to replace those shares with the additional 15% for overallocation. If the stock has run up in the aftermath of the offering, better still – they can sell stock that’s more expensive than the offering price, knowing full well that they can replace it at the offering price. But at a minimum, they already know the price at which they can buy the stock in the future, so this isn’t a bet that the stock will go down.

Treasury Secretary Hank Paulson, having been the head of investment banking for Goldman Sachs’ Midwest Region (1983-1988), then managing partner of the Chicago office, followed by co-head of IB for the entire firm, can safely be presumed to know all of this.

Neither SEC Chairman Cox and Fed Chairman Bernanke has any experience in capital markets, but neither of them can assert ignorance of the role that short selling plays in the market.

And who’s been calling loudest for limitations on short selling? The investment banks, solvent and formerly-solvent:

Lehman:

Lehman executives complain that they have been singled out by hedge fund investors that are short selling — or betting against — their stock, and Mr. Fuld has called senior executives at competitor banks demanding that their employees stop criticizing Lehman.

Morgan Stanley:

The mood was far different at Morgan Stanley, which lobbied vigorously for the ban on short selling. The bank’s shares shot up 21 percent, to $27.21, on Friday. Analysts said the reprieve might be only temporary, though, because the firm’s business model still requires a big balance sheet and core base of deposits for financing.

Goldman Sachs:

…the SEC is this afternoon holding a meeting to “determine if they need to take further steps to curtail what both Mac and [Goldman Sachs CEO Lloyd] Blankfein characterize as improper short selling that is really causing damage to the share price of Morgan Stanley and Goldman Sachs.” Blankfein also spoke with Cox to complain of short selling of their stock, as did New York senators Chuck Schumer and Hillary Clinton, according to Gasparino’s sources.

And so on. Fannie Mae, Freddie Mac, Bear Stearns, AIG, and a host of others, all now functionally dead as public companies, claimed loudly, with much gesticulation, that short sellers, not their crappy business models or abysmal risk management, were the reason for the drops in their stock prices.

New York’s AG Andrew Cuomo:

Likening such traders to “looters after a hurricane,” New York Attorney General Andrew Cuomo Thursday said his office is investigating “a significant number” of complaints about improper short selling in shares of Lehman Bros., AIG, Morgan Stanley, Goldman Sachs and other financial stocks.

Cuomo said his investigation would use the New York state Martin Act, which subjects violators to criminal as well as civil penalties, to combat the illegal practices.

“The markets need to be stabilized,” Cuomo said. “And one way to bring about such stability is to root out and deter short-selling that is based on the spread of false information.”

Sorry, Spanky – you left one class of people out: Weather forecasters before a hurricane. Deter short selling based on the spread of false information? Sure – go ahead, although there are already laws in place to do that, so knock yourself out enforcing them, with my blessing and encouragement. Disallow short selling itself, as though there’s no valid reason for a non-rumor-spreading trader to do? Utterly stupid. And impressive only to the self interested (the banks) or ill-educated (all other non-bankers who’ve complained about short selling).

Applauded only by the greedy & ignorant? Must be a great plan, then. I’ll take all this addle-pated nonsense about “gangs of people getting together to sell shares of a stock” seriously when several things also happen:

  • The same idiots decide to go after “gangs of people getting together to buy shares of a stock” (Cramer – I’m looking at you and everyone like you).
  • Someone explains to me the difference between a short seller selling a share of stock and an actual holder of the stock selling a share of stock. The market neither knows nor cares.
  • Which raises the question of what’s next? Disallowing down-ticks entirely? Disallowing any sale of the stocks of the protected 799 alleged-financial companies? Even by widows and orphans who actually hold shares? What is this, the Hotel California?

Issue Two” (please read that to yourself in John McGlaughlin’s voice, for best effect)
Read the rest of this entry »



That monetary hammer I mentioned?

Jul 19 2008

In a post yesterday, (just below), I mentioned the difficulties in the Pakistani stock market, and the related destruction at the Karachi stock exchange. I contrasted, in a brief and cursory manner, the market there (and the reaction to its fall) to the market here in the US (and the general lack of reaction to its fall).

I also asserted that most of the tools available to the Pakistani government for reacting to the problem are available in other markets, and that they generally don’t work, because they don’t actually address the problems, instead focusing on the symptoms.

Finally, I mentioned in passing that the solution that seems most likely to help resolve matters can be found in monetary policy. It’s the one that everyone has avoided, though they surely have thought of it. Fed chairman Bernanke has begun nibbling around the edges of monetary policy, but may not, based on recent past history, be able to pull the trigger on any actual implementation – huffing and puffing that you really dislike inflation isn’t the same as, say, Paul Volcker (with the full support of Ronald Reagan, and not caring at all what Wall Street wanted) jacking interest rates to the moon and killing inflation dead.

Monetary policy is a complex subject, and one at which I’d hardly claim to be an expert. The meat and potatoes are simple – make money too easy to borrow and people will treat it cheaply, spend it too easily, and invest carelessly (think “drunken sailors”). Result? A debased and devalued currency. Follow that with a commodities supply/demand crunch, and the devaluation of a currency can spiral, as crucial commodities, priced in dollars, increase in price due to the decreases in the real value of the dollar, encouraging (if the Fed is gutless enough) further loosening of credit, further real devaluation of the currency (now itself effectively valued in “barrels of oil”, “tons of iron”, “Euros”, &c).

Silly “stimulus checks”, of the sort pushed by Congress this year and shamefully not vetoed by Mr. Bush, had a one-time effect on spending, which makes sense – they were a one-time return of tax dollars, disproportionate to actual taxes paid, and could reasonably be expected by anyone with a memory extending longer than six months ago to have had precisely the anemic and worthless effect that they did. Undaunted, Speaker Nancy Pelosi thinks (or at least claims to think) that all we need is $50 billion more in such stimulus. Which proves at a minimum only that her memory extends even less into the past that the rest of the nitwits who voted for the somewhat politically astute, but utterly economically absurd notion of the initial stimulus.

Politically astute – why only “somewhat”? Because one-time stimulus is politically astute only if one is trying to impress those who lack mental acuity. On one view of how we might measure such a thing, elementary statistics, something close to 50% of all people have less than average intelligence. Or, as George Carlin put it:

Think of how stupid the average person is, and realize half of them are stupider than that.

Of course that one-time stimulus seems helpful, at the time, and if you don’t think too deeply about it, to have someone handing out money. Better yet if it’s someone else’s money. And if it’s done in a crafty enough way, those same people who don’t think deep thoughts might be gulled into missing the realization that if the money’s better in our hands than the government’s during these current difficulties, why not every year?

But enough of that – I could go on in (small) circles about monetary policy, but have already devolved into fiscal and tax policy, so to keep this from turning into more of a rant than it already is, I’d like to tie this post back to the one from yesterday, and I have found the perfect foil with which to do so.

In an article in the Saturday July 19, 2008 Wall Street Journal, the always-readable James Grant, of Grant’s Interest Rate Observer asks “Why No Outrage?” (subhead: “Through history, outrageous financial behavior has been met with outrage. But today Wall Street’s damaging recklessness has been met with near-silence, from a too-tolerant populace”)

No, he’s not suggesting that we man the barricades, pitchforks in hand, Molotov cocktails at the ready. But he does make the easy case that things haven’t worked out as well as hoped in our current system of carrots, sticks, checks, and balances.

“Raise less corn and more hell,” Mary Elizabeth Lease harangued Kansas farmers during America’s Populist era, but no such voice cries out today. America’s 21st-century financial victims make no protest against the Federal Reserve’s policy of showering dollars on the people who would seem to need them least.

Long ago and far away, a brilliant man of letters floated an idea. To stop a financial panic cold, he proposed, a central bank should lend freely, though at a high rate of interest. Nonsense, countered a certain hard-headed commercial banker. Such a policy would only instigate more crises by egging on lenders and borrowers to take more risks. The commercial banker wrote clumsily, the man of letters fluently. It was no contest.

The doctrine of activist central banking owes much to its progenitor, the Victorian genius Walter Bagehot. But Bagehot might not recognize his own idea in practice today. Late in the spring of 2007, American banks paid an average of 4.35% on three-month certificates of deposit. Then came the mortgage mess, and the Fed’s crash program of interest-rate therapy. Today, a three-month CD yields just 2.65%, or little more than half the measured rate of inflation. It wasn’t the nation’s small savers who brought down Bear Stearns, or tried to fob off subprime mortgages as “triple-A.” Yet it’s the savers who took a pay cut — and the savers who, today, in the heat of a presidential election year, are holding their tongues.

Possibly, there aren’t enough thrifty voters in the 50 states to constitute a respectable quorum. But what about the rest of us, the uncounted improvident? Have we, too, not suffered at the hands of what used to be called The Interests? Have the stewards of other people’s money not made a hash of high finance? Did they not enrich themselves in boom times, only to pass the cup to us, the taxpayers, in the bust? Where is the people’s wrath?

(continues)

No calls for violence there, no stoning or burning either. But he does wonder why people just accept this asinine state of affairs.

So do I.

Half-baked solutions, designed to appeal only to the stupid, will not solve the problem, and will actively and quickly make it worse. Freely available money, ala Bagehot, but at near-punitively high interest rates, can make it possible for the blockages in our financial system to work themselves out.

The alternative, where the Fed (and the implicit “Bernanke Put“, and let’s not forget the “Greenspan Put“, either) continues to think that Wall Street is more important than Main Street, hasn’t worked and won’t. (Candidate Obama has used that Wall Street/Main Street formulation in his stump speeches; the difference between his use and mine might be that I actually understand what it means, and why it’s a crucial failure in our system).

It’s probably best that I’ve never been a combat medic, because I think that a quick bleed, with full understanding of where the blood is likely to gush, is preferable to a five year drip, or worse, a five year internal bleed of reasonably knowable but still-indeterminate origin.

And if that bleed (the quick gusher) occurs on Wall Street, then so be it. Chasing the dollar down to $250 per barrel of oil/$250 per metric ton of iron ore/$0.25 per Euro seems hardly worth it, when the sole reason for doing so is to continue the pretense that what’s good for Wall Street is good for America.

The rot’s got to stop before the economy can properly heal. Half-measures will continue not to do.

See also:
   WSJ – Stupidity and the State, and Stupidity and the State, Part II
   NYT – Given a Shovel, Americans Dig Deeper Into Debt



On the bright side, this might mark a low for the dollar

Nov 6 2007

From Bloomberg, dated yesterday (first seen in this morning’s WSJ – Breakingviews column):

Nov. 5 (Bloomberg) — Gisele Bundchen wants to remain the world’s richest model and is insisting that she be paid in almost any currency but the U.S. dollar.

Or perhaps not – the story might be apocryphal, and even contains its own counterargument:

“Contracts starting now are more attractive in euros because we don’t know what will happen to the dollar,” Patricia Bundchen, the model’s twin sister and manager in Brazil, said in a telephone interview in September from Sao Paulo. She declined to discuss details of the arrangements last week.

No shock, that. The question is, how long it remains true.

“Gisele has contracts in dollars,” said Anne Nelson, Bundchen’s agent in New York at IMG Models, in an interview today. “When she works in Europe she gets paid in euros, when she works in the U.S. she gets paid in dollars, when she works in Brazil she gets paid in reais, and so on and so forth.”

Also self-evident. And it goes without saying that, in a world of fixed exchange rates (which, with few exceptions, doesn’t exist now and hasn’t for years), she could choose to simply do the math, and get her desired real pay rate at whatever nominal rate & currency she chose.

The fact that she or her IMG handler is reported to have decided to denominate pay in a currency other than dollars, presumably for future contracts, brings to mind the market mania of early this century, when people actually thought tech stocks would stay high forever.

Read the rest of the Bloomberg piece, by the way – it provides far more detail than did the Breakingviews column (due to format and space availability differences, I’m sure), and goes well beyond the only-moderately interesting fact of Gisele Bundchen’s purported payment preferences.



The beginning of a groundswell?

May 30 2007

I can’t be certain, since I didn’t read Wednesday’s LA Times, NY Times, or Financial Times, but based at least on tangentially related articles in WSJ and the UK Telegraph, there’s a rumble in the markets about cheap consumer debt, and the ill effects thereof.

First came the WSJ story, “DAY OF RECKONING – ‘Subprime’ Aftermath: Losing the Family Home“.

Mortgages Bolstered Detroit’s Middle Class — Until Money Ran Out

By MARK WHITEHOUSE
May 30, 2007; Page A1

DETROIT — For decades, the 5100 block of West Outer Drive in Detroit has been a model of middle-class home ownership, part of an urban enclave of well-kept Colonial residences and manicured lawns. But on a recent spring day, locals saw something disturbing: dandelions growing wild on several properties.

Ouch. It’s a long story, well worth a read if you haven’t seen it (and you’ve got a WSJ online subscription).

The Telegraph story, in tomorrow morning’s edition, is entitled “A million debtors face court action“. It’s specific to the British market, and isn’t directly related to subprime mortgages, but does involve easy credit:

Up to a million households struggling with rising living costs and lured by offers of easy credit will face court action over their debts this year.

Easy credit, generally described, can be laid at the doorstep of banks trying too hard to put money to work, saturating the market in good credit risks, and forcing a need to move down-market to the riskier borrowers. It happens in cycles, is specific to the banking and credit card industry, and, aside from central bank interest rate target setting, tends not to be driven by government attempts to help broaden the credit base. The same problem, of course, exists at times (including now) in the US.

Where the US credit problem, typified by Detroit in the WSJ story, differs is that it’s not the banks and credit card companies driving the train. They’re involved, of course, but the prime drivers have been mortgage brokers (the 21st century version of used car salesmen?), Wall Street, and the federal government. No, it’s not been the Federal Reserve’s interest rate setting mechanism in this case, but instead the well-intentioned efforts to ensure that credit is more widely available, particularly for home purchases:

Back in its heyday, the idea that West Outer Drive could suffer from a glut of credit would have seemed far-fetched. Many blacks moving into the neighborhood had to either depend on federal mortgage programs or buy their homes outright. That’s because banks actively avoided lending to them, a practice known as “redlining” — a reference to maps that designated certain neighborhoods as unduly risky. Various attempts to get the money to flow, such as the Community Reinvestment Act of 1977, which pushed banks to do more lending in the communities where they operated, had only a limited effect.

Bank charters, and particularly those of banks seeking to merge or sell themselves to larger banks, have periodically been tied up in state and federal oversight, with one of the exits from that maze being commitments to increase their home community lending. All well and good.

Where does Wall Street come into the picture?

But beginning in the mid-1990s, the evolution of subprime lending from a local niche business to a global market drastically rearranged lenders’ incentives. Instead of putting their own money at risk, mortgage lenders began reselling loans at a profit to Wall Street banks. The bankers, in turn, transformed a large chunk of the subprime loans into highly rated securities, which attracted investors from all over the world by paying a better return than other securities with the same rating. The investors cared much more about the broader qualities of the securities — things like the average credit score and overall geographic distribution — than exactly where and to whom the loans were being made.

There are many good reasons for consolidating loans into securities, not least of which is the ability, just as insurance companies do, to pool risk and manage it via a larger sample by statistical means. The fact that a market has evolved and matured to facilitate that is utterly unsurprising. The fact that sleazy mortgage brokers have seized on that market to essentially steal from unsuspecting or unsophisticated borrowers is equally unsurprising, and deeply unsettling to any right-thinking person.

Given the broad expanse of mortgage brokers who’ve hit the market in the past seven years, many feeding on borrowers’ silly belief that home prices would continue to rise to the skies, the benefits of homeownership have been overtaken, particularly in the imaginations of subprime borrowers, by visions of massive capital gains. And with those potential (now highly unlikely) gains in mind, people have rushed into debts they would never have incurred in leaner banking times.

Several vignettes from the WSJ story that don’t flatter the mortgage brokers:

Minority-dominated communities attracted more than their fair share of subprime loans, which carry higher interest rates than traditional mortgages. A 2006 study by the Center for Responsible Lending found that African-Americans were between 6% and 29% more likely to get higher-rate loans than white borrowers with the same credit quality.

Is that redlining? An argument can be made that it’s not. Not a good argument, but an argument.

“A lot of people were steered into subprime loans because of the area they were in, even though they could have qualified for something better,” says John Bettis, president of broker Urban Mortgage in Detroit. He says a broker’s commission on a $100,000 subprime loan could easily reach $5,000, while the commission on a similar prime loan typically wouldn’t exceed $3,000.

That extra 66% commission? From selling initially attractive mortgage rates that soon became quite ugly. Like this one:

April Williams was feeling the pain of the downturn back in 2002, when she saw an ad from subprime lender World Wide Financial Services Inc. offering cash to solve her financial problems. …after a loan officer from World Wide paid a visit, they became convinced they could afford stainless-steel appliances, custom tile, a new bay window, and central air-conditioning — and a $195,500 loan to retire their old mortgage and pay for the improvements. The loan carried an interest rate of 9.75% for the first two years, then a “margin” of 9.125 percentage points over the benchmark short-term rate at which banks lend money to each other — known as the London interbank offered rate, or Libor. The average subprime loan charges a margin of about 6.5% over six-month Libor, which as of Tuesday stood at 5.38%.

“I knew better than to be stupid like that,” she says. “But they caught me at a time when I was down.”

(ellipsis and emphasis mine)

Of course she knew better, but she was borrowing in an environment that seemed to encourage hucksters and dirtballs to actively seek out people in her position. And she was hardly the only one:

Raymond Dixon, a 36-year-old with his own business installing security systems, borrowed $180,000 from Fremont Investment & Loan in 2004 to buy a first home for himself, his wife and six children, across the street from Ms. Hollifield at 5151 West Outer Drive. After all the papers had been signed, he says, he realized that he had paid more than $20,000 to the broker and other go-betweens. “They took us for a ride,” he says.

Good grief. Sure, he got taken for a ride, and he should have known better, but what ever happened to the protections that are supposed to be built into the system to keep people from rushing into bad deals? That $20,000 for the broker and the go-betweens? It was based on the juice available when the interest rate reset and Dixon’s monthly mortgage payment went up by 33%.

But the other structural problem in the market is summarized here:

“You have no time to look really deeply at every single borrower,” says Michael Thiemann, chief investment officer at Collineo Asset Management GmbH, a Dortmund, Germany-based firm that invests on behalf of European banks and insurance companies. “You’re looking at statistical distributions.”

It’s possible to offer too much separation between lenders and risk, to the point where the lenders can rely on statistics, rather than reality, to comfort themselves that they’ve done well. And where the statistics tell untruths is in cases like West Outer Drive, where:

Subprime mortgages accounted for more than half of all loans made from 2002 though 2006 in the 48235 ZIP Code, which includes the 5100 block of West Outer Drive, according to estimates from First American LoanPerformance. Over that period, the total volume of subprime lending in the ZIP Code amounted to more than half a billion dollars — mostly in the form of adjustable-rate mortgages, the payments on which are fixed for an initial period then rise and fall with short-term interest rates.

That’s the other side of the coin, and the counterargument to whether redlining is occurring when “African-Americans are 6% and 29% more likely to get higher-rate loans”. When a neighborhood like West Outer Drive is inundated with homeowners who’ve been flatly taken advantage of by mortgage brokers who are unchecked by the financing system, the good risks get mixed in with the results of the bad, and the good risks become bad risks themselves, just due to neighborhood deterioration. Improperly managed, synonymous in my mind with “managed with far too many levels of indirection between borrower, property, and lender”, pockets of default risk can be found in any securitized mortgage pool. Mix the good with the bad and the mortgage pool can come out unscathed. Not so the neighborhoods with clustered risk that doesn’t register in the larger statistical picture of the mortgage pool.

The Basel Capital Accord of 1988, designed to manage risk in the global banking system, has been the subject of much debate since then. Among the many suggestions for change over the years, you could find many titles, such as “Reforming Bank Capital Regulation: Using Subordinated Debt to Enhance Market and Supervisory Discipline“. The key to such regulatory changes is simple – it ensures that a noteworthy chunk of a bank’s capital comes in a form that invites far closer scrutiny, from more sophisticated investors who have the power to shut a bank down if its operations seem to be spinning out of risk control.

If such a think makes sense for the banking system (and it does), it hardly seems rational to exempt the mortgage market from some strictures that would force its participants to be far more cognizant of the riskiness, and clustered risks, of its borrowers. Too much indirection in risk concern, let alone risk control, can have severe effects on neighborhoods, cities (Detroit needs all the help it can get), and social classes. I’m all for free markets and the ability to parcel out risk to willing buyers, but without any recourse to the ultimate purveyors of these poisoned dreams of homeownership (the mortgage brokers), the risk that’s being sold off into the mortgage pools is only imagined to be all the risk that really exists.

Why should regulation be considered to seriously crack down on the abuses? Because we’ve seen what happens when Detroit is in flames, including every Halloween. Left unchecked, this issue could become one in which the federal government is forced, politically, to step in and bail out those who’ve been fleeced. I shudder to think of the cost of that, political and financial, even though doing so seems more justified than spending billions to turn New Orleans back into something it never was.

Addendum – And no, rising Treasury yields aren’t going to be enough to solve the problem.