There Oughta Be A Law!

[xthread]

In another venue, someone argued 'the people who caused the mortgage meltdown be in jail?!'

I don't know if any of you, dear readers, happen to hold that view, but, if you do, would you be so kind as to tell me, in general terms, who you think ought to be in jail, and in specific terms, what you think they should be in jail for?

Let me note two important things at the outset: remember that lying to people is usually only against the law if you're doing so to cheat them out of money (which is why Bernie Madoff is in jail), and it's unconstitutional to make laws that make something retroactively illegal.

Got your moral outrage ready? Go!

Comments

[davidlevine]

Everyone involved in approving loans for people who were not actually able to pay them -- as defined by generally accepted standards and practices in force at the time -- should be jailed.

I also think a case could be made for jailing those who reduced the standards to the point that the standards could be met by people whom common sense would indicate they couldn't possibly pay (on grounds of failing to fulfill fiduciary obligations to the bank).

[xthread.livejournal.com]

<thinky> ... hmmm.. I think you mean 'those people who were approving loans to people who could be identified before the fact as having no actual way to pay back the loan.' At last count, State level cases have been brought against a number of people for fraudulently changing loan applicants applications before filing them, as well as taking out loans on behalf of people who hadn't actually applied for a mortgage. But both of those cases don't actually affect very many people.

So I'm guessing your argument is that approvers who approved dubious loans were committing fraud?

[davidlevine]

Something along those lines, yes. The important part is the harm they did to the loan recipients, who were condemned to eventual homelessness for the sake of the bank's profits, but the actionable offense is probably the harm they did to the bank.

[xthread.livejournal.com]

I think you mean the bankER's profits, the banks themselves certainly didn't come out ahead on the deal..

[davidlevine]

The banks profited handsomely from these inappropriate loans, in the short term.

[xthread.livejournal.com]

What fraction of loans do you think those were?
And what breakdown do you imagine between loans that were fraudulent, loans that were patently stupid, loans that were not especially commercially riskier than any others the bank had been routinely making for the prior five years?

[davidlevine]

I don't have enough evidence to give you an estimate in numbers. But the outcome (a deep and widespread real-estate meltdown) clearly shows that the percentage of fraudulent/stupid loans was substantially higher than in previous decades.

[xthread.livejournal.com]

That's a fascinating way of thinking about it.

I wasn't actually looking for evidence, per se, I was curious what your sense of what the data must look like was - that is, I'm more curious how you think about it than I am interested in show me the proof!

(FWIW, I think you have nailed how many people must be conceptualizing the situation)

[davidlevine]

Thanks for making me think about the question!

[xthread.livejournal.com]

I wonder if I can work up a simple game to show off how speculative bubbles work. I don't think so, if I could someone else would probably have already done it. Which is a pity, because it's useful to be able to tell when you're inside one - although not as useful as one might think, because even when you know that you're inside one, it's not clear what you should do about it. (Ask anyone who bailed out of Tech in 1997 or 1998 because they knew there was a Tech bubble in the stock market, and they didn't want to be long when the bubble popped)

(On the other hand, maybe if I look I will find that someone already has made such a game, which would be neat)

[kest]

I think, pretty much, even if you've realized you're in a bubble, it is very difficult to tell when it might pop, but it is *not* safe to assume that popping is immanent just because you've realized it exists.

[nolly.livejournal.com]

I believe Planet Money has been addressing this very question recently.

[kest]

Just for the record, I think it's kind of fascinating that a subsection of the (mostly conservative) population conceives of this instead as 'the percentage of loans given to stupid people must have been substantially higher than in previous decades.' In other words, where I tend to conceive of the problem in the regulations as making *kinds of loans* legal and *kinds of investing* legal (and especially in having the same people in charge of both), they conceive of the problem being in the *kinds of people* being offered the loans. Specifically, if they are trying to sound smart about it, rather than just saying that people shouldn't have taken loans they couldn't afford (without looking at any other factors about why people may have taken such loans), they pin it on the CRA, although almost all reputable experts disagree that this had anything to do with the problem.

[xthread.livejournal.com]

And I see a feedback system with busted control mechanisms spinning out of control, just like any other speculative bubble. We should presume that there are bad actors running around in the system, because, duh, lots of opportunities to appropriate large amounts of money, of course there will be bad actors, but I don't expect that the bad actors caused the system to spin out of control because it doesn't require them to do so - any system that only has positive feedback controls will blow up. So I tend not to impute the presence of bad actors, even though I expect that there are some.

[kest]

Ok, yes, but. Who/what busted the controls is what we're talking about here, not (just) who took advantage of the situation once the controls were busted. (I understand the point I'm making here, but I'm not sure if I'm clear, so feel free to say so if I'm not.)