America Needs More Credit, Not More Debt!

Brian Doherty | March 19, 2007

Our former web editor Tim Cavanaugh (whom I hereby acknowledge as an important influence and A-1 fella) has some amusing thoughts (as well as worthwhile data) at the LA Times's opinion section blog about the crisis in debt--and the crisis in lack of debt. Worth a meaty excerpt, with that standard Cavanaugh wit and an apt old movie reference for every occasion:

The economic left, values conservatives and bien pensant moderates are in full agreement on this one: Poor people's access to debt is driving them to fiscal ruination or worse. The new documentary Maxed Out makes the case for massive increases in federal oversight that will prevent suicidal college students from getting credit cards. Generation Debt glamourpuss Anya Kamenetz, whose hard-luck bio includes the Dickensian detail that she "graduated from Yale seven months after the 9/11 attacks," has built a stellar career on the premise that having to pay your student loans is no different than serfdom. Ambitious politicians and math-unencumbered reporters are in hot pursuit of the culprits: predatory lenders, indifferent regulators, Madison Avenue captains of consciousness—everybody except people who borrow large sums of money with no intention of paying it back.

It's interesting that the conventional wisdom once said the precise opposite—that the deserving poor didn't have enough access to debt. As an audio-visual aid, you can do no better than the great "collateral" speech from The Best Years of Our Lives..... Fredric March, playing a rising bank middle manager who has just returned to his job after serving as an Army NCO in the Pacific, reads a rambling riot act to a banquet of porcine small-town bankers who have criticized him for providing loans to bad-credit-risk veterans.....

The joke of history is that all that easy money March was calling for created one of the greatest booms in the country's history—the suburbanization of America, which is now derided by the bien pensant classes who claim there's too much ready credit out there. The difference now is that it's coming from the free market rather than a package of government guarantees, from an industry that expanded to fill a demand and is now contracting as the demand has been filled. In a sane world, we'd say this is a free market behaving as it should, and marvel at an economy where so many people who were once locked into the renters market have gotten a chance at homeownership. Some of them have blown their chance—by exhibiting the same kind of behavior that made them bad credit risks in the first place. But most have not. In fact nine out of every ten Americans carrying sub-prime loans are still making their payments.

No question: read the whole thing.

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|3.19.07 @ 10:45PM|#

Cavanaugh is nail on the head on this.

There are millions of Americans in homes today (many of whom have refinanced out of interest only and ARMs over the last few years), who would be renters without subprime lenders eager to cash in on offering opportunities to people who couldn't buy a home any other way, and speculators eager to take on their risk--at the right price.

If regulators, rather than the market, squeeze future subprime borrowers out of the American Dream--for their own good--it'll really be a really, really sad thing.

"The regulators said the guidelines, if formally adopted by the agencies and followed by lending institutions, could result in fewer borrowers qualifying for subprime loans. The mortgage industry had hoped for less stringent guidelines.

John Robbins, chairman of the Mortgage Bankers Association, said the group was concerned that the guidelines "may restrict credit to many consumers in high-cost areas and deny credit to many deserving low-income, minority and first-time home buyers."

http://biz.yahoo.com/ap/070303/regulators_subprime_lending.html?.v=2

SIV|3.19.07 @ 10:53PM|#

Leave "regulation" to the invisible hand
but people borrow recklessly, in large part, because they have no economic sense.

I think the lack of economic education/knowlege is intentional.

|3.19.07 @ 11:08PM|#

The Big Gummint problem with the credit industry is not insufficient oversight in BORROWING, but in LENDING. I suspect lenders believe they'll be bailed out when their unlikely loans collapse (via no-escape bankruptcy laws or actual cash handouts; see also: S&L fiasco ca. 1983). Hardly a victory for smaller government. If lenders face financial ruin proportional to their clients, THEN we can start talking about invisible hands.

Fluffy|3.19.07 @ 11:10PM|#

Lenders do face ruin proportionate to their clients. The wave of bankruptcies in subprime lending in the last 18 months reflects this.

Debt sucks.|3.19.07 @ 11:23PM|#

"but people borrow recklessly, in large part, because they have no economic sense."

Or because they have to pay for college and come from a lower middle-class family.

I hate life.

|3.19.07 @ 11:34PM|#

As someone who chose a state school over an Ivy specifically so that I could graduate with no debt, I feel nothing but bemused contempt for Kamenetz and anyone else who thinks I should feel sorry for them because they went into debt to pay for a $160,000 undergraduate degree.

Ray G|3.20.07 @ 12:16AM|#

Pure arrogance on the part of those who would deny the chance to be responsible to someone else.

The bankers in the story weren't as bad as the baddies in real life today. The bankers were simply refusing to give credit to the lower tier borrowers. The Left here in reality want to actually say "No, you can't handle that kind of responsibility. You better just sit tight until we can secure a government grant for you."

You think maybe Kamenetz donated boxes, and boxes of her books to high school and college libraries?

|3.20.07 @ 12:20AM|#

That was a great article. I went to a state school, but still had to take out loans. But see, I got a degree that guaranteed me a well paying job, now I am well on my way to having the loans paid off ahead of time.

I don't know whether to recommend Kamenentz's book or not. I read it, but it took forever. Why? Because every time I started to get going, I'd read something that made me want to set the book on fire. It really wasn't that well written either. But, if you like to have your views challenged, then by all means read it.

Nick

|3.20.07 @ 12:23AM|#

Ray,

I sure hope she didn't give that book away. That was the one bright spot in reading the book, the thought that the same people she wrote the book for, were the ones who probably don't do a whole lot of reading to begin with.

Nick

|3.20.07 @ 12:26AM|#

As if graduating from college seven months after the 9/11 attacks weren't enough to destroy my financial future, now I'm going to get to sell my first house right after regulations deny credit to many who can only afford to buy my house.

Luckily, there are a lot of rental companies willing to pay $0.70 on the dollar for homes. Make that $0.50 on the dollar after all the buyers in my market are regulated out.

But, I admit, it's important that people like me aren't destroyed by the backbreaking debt of a $550/mo mortgage and instead get to pay the liberating rent of $1,000/mo that similar homes fetch.

|3.20.07 @ 4:57AM|#

Graphite, don't pat yourself too hard on the back for having the smarts to go to a state school, and avoid a crushing debt load. What you did was shift more of the cost of your education onto the taxpayer than private school attendees do, and if that isn't rent-seeking behavior, then what is? I could have had a much cheaper, and much different collegiate experience if I had gone to one of my state's government schools, but the mix of scholarship money, need-based grants and, yes, subsidized loans made a private education barely affordable. I won't say that paying off the loans was fun, and the sub-market rate I was charged was a bit of rent thrown my way, too, but I think it was worth it, and I don't even make a lot of money.

There's a good argument to be made that state subsidy of government campuses and loans to students are transfers of wealth from those who will never attend college to those who will, and will subsequently make more money than the non-attendees. If I didn't already object to state education on the grounds of freedom of thought, the financial transfers would give me pause.

Kevin

Guy Montag|3.20.07 @ 5:39AM|#

Is this shaping up to be another Wold Bank or Farm Loan clash between the Left and everybody else or is it just a bunch of superficial similarities?

In both of the above cases, measures were intentionally made to provide loans that could be paid back if the borrowers just managed themselves in a reasonable manner. When they didn't bother doing that, measures were made to provide more loans and "creative" debt management.

When that did not work in every case, demands with threats of riots were made to "forgive" the loans.

In both cases the Left came out with their concerts, schemes and "gladiators" to oppose the "evil lenders".

For some reason I am expecting Willie Nelson and the Anarchists to start some "awareness" concerts by next year.

|3.20.07 @ 6:01AM|#

Do I want to see more regulation of the mortgage industry? No.

Do I want to see all the buyers, sellers, appraisers, loan officers, and RE agents and brokers that commited document fraud rot in prison? Yes.

Guy Montag|3.20.07 @ 6:08AM|#

Do I want to see all the buyers, sellers, appraisers, loan officers, and RE agents and brokers that commited document fraud rot in prison? Yes.

As long as it is the ones who actually did those things, okay I am with you brother!

My suspicion is that when the witch hunt begins, these people will be weighed opposite a duck and be penalized just for being in the industry.

R C Dean|3.20.07 @ 7:30AM|#

This is all an illustration of moral hazard, and completely invevitable since the big S & L bailout. The sloppy lending, the government "saviors", the taxpayers footing the bill - the first time was tragedy, the second time is our damn fault for being too stupid to learn from history.

|3.20.07 @ 9:21AM|#

So we're pretending that is outcry is over the extension of credit to low-income people, rather than the terms of that credit?

When you can't even acknowledge your opponent's argument, it's a pretty good indication you don't have a comeback.

|3.20.07 @ 9:29AM|#

joe:

Which terms? People taking more risk by offering sub prime loans shouldn't charge more interest?

|3.20.07 @ 9:31AM|#

This is all so overblown. The vast majority of all borrowers make their payments and the vast majority of subprime borrowers do as well. Sub prime is not a huge chunk of the lending market, and the current outcry is grossly out of proportion to what is happening.

Lenders going out of business for offering unsustainable terms is good and proper. These lenders don't constitute any big proportion of total lenders, and that is good too.

|3.20.07 @ 10:09AM|#

So we're pretending that is outcry is over the extension of credit to low-income people, rather than the terms of that credit?

You're out of your element, joe. Why the hell would anyone lend money to high risk borrowers without a greater return? Do you think that subprime lenders want foreclosures? They do not. They want borrowers to repay their debt. They expect borrowers to repay their debt. The increases in foreclosures indicate that lenders screwed up and now the lenders are the ones paying for it. What's that you say? The borrowers are paying for it? How? By losing their homes? Whose home? Who put up the money for it? Who is taking the biggest loss? The borrower walks away with some dings on their credit, but now they are freed from a huge chunk of debt. Their credit will clear up if more quickly than you think if they take a little care. The lenders are going out of business. It's carnage out there. Every day another lender is shutting down, or laying off hundreds of workers. Now, do-gooders want to protect the borrowers from these dangerous lenders. Of course they will be protected from the dangerous lenders. They will be protected from all lenders. The subprime market is hurting right now, but some lenders will survive. They will learn lessons, costly lessons from this debacle, but they will survive. The only way to protect the borrowers without eliminating their chance to own a home is to let the market be. It will find the right way. There are growing pains. They will hurt, but the market will work it out.

Thanks for allowing me some space for a rant. I will offer some more reasoned comments later.

Edward|3.20.07 @ 10:19AM|#

Eat, drink, and be merry. The future belongs to the hard-working Chinese anyway. Like every great civilization before us, we are doomed. Libertarianism is the perfect ideology for our decline.

|3.20.07 @ 10:25AM|#

JasonL,

The question is, how much more? And when does the combination of the risk and the level of interest amount to a negligent acceptance of default risks?

"This is all so overblown.T he vast majority of all borrowers make their payments and the vast majority of subprime borrowers do as well." The counter-response is overblown as well. The vast majority of sub-prime lending isn't what's being atttacked, just a subset of that field that is pushing the envelope.

highnumber,

Don't ever misunderestimate me. "Do you think that subprime lenders want foreclosures?" No, but I think a lot of them make poor decisions. What's that you say, they pay for it by going out of business? Yes, will all of the effects that that produces for the broader economy.

Dave W.|3.20.07 @ 10:34AM|#

So we're pretending that is outcry is over the extension of credit to low-income people, rather than the terms of that credit?

I had not heard of Maxed Out until last night, when my wife brought the book version home from the library. Comments:

1. The author / filmaker is named Scurlock, which sounds a lot like Spurlock.

2. D00d is way to indulgent with poverty-stricken bankrupts. It gives you the feeling that he would have the personal bankruptcy laws too lenient. this is a serious flaw in an otherwise excellent book.

3. Mr. Cavanaigh ("Cavs") characterizes what Scurlock wants as: "massive increases in federal oversight that will prevent suicidal college students from getting credit cards." Now I have not seen the film, but based on the book this characterization seems partially wrong. What Author Scurlock seems to want is: (1) liberalization of personal bankruptcy laws; and (2) a return of usury laws. These policy prescriptions probably would prevent most college students, including suicidal ones, from getting credit cards. However, I think it is wrong to characterize this as a "massive increase[] in federal oversight." btw, I think the usury laws should be brought back -- I think they are part and parcel of a more libertarian past. As far as how tough the personal bankruptcy laws should be, I don't yet have much opinion, but, like Scurlock, I think they should be at least as lenient as the corporate bankrutcy laws.

4. The writing in the book is excellent. I recommend the book not for its somewhat interesting subject matter or opinions, but more because it is a superlative example of clean, quick prose. I don't say that about many books.

Dave W.|3.20.07 @ 10:42AM|#

"way to indulgent"

should have been:

--way too indulgent--

Jim Lippard|3.20.07 @ 11:07AM|#

|3.20.07 @ 12:29PM|#

Giving credit to the poor is one thing--giving them loans to purchases houses they can't afford under terms that they're sure to default on is quite another. If it's built into your assumptions that housing values always go up and you'll just refinance before your negative-amortizing, interest-only, no-doc loan (that your mortgage broker inflated your income on by a factor of five), then you're probably going to default.

Jim,
You bring up a couple of good points, but you're also betraying some ignorance of the lending industry. I'll begin by explaining some of the terms you've used.

I think you're trying to refer to Option ARM or "pick a payment" loans. These allow neg am, interest only, or fully amortized payments. The popularity of Option ARMs dropped a while ago. They are not being originated at the rate that they once were. These are not subprime loans.

No one would inflate any income on a no-doc loan. No-doc means that nothing is documented. The loan application does not list assets, employment or income. No-doc loans are not subprime.

Option ARMS and no-doc loans are offered to borrowers with stellar credit. You are correct though that many people, borrowers and lenders, made the assumption that housing value would continue to rise at a ridiculous rate. Many loans were made at a high loan-to-value under this assumption. Values on appraisals were inflated to allow higher LTVs. In these cases, brokers and appraisers were complicit, along with even borrowers at times. Lenders were not complicit. It is clearly not in the lender's best interest to lend at such high LTVs if the values were inflated and the borrowers would default. Lenders always lose money on foreclosures, and clearly even more so, if the value of the home is nowhere near the borrower's level of indebtedness. This issue is part of the problem subprime lenders are facing. Lenders were loaning money to borrowers with worse and worse credit histories in what my colleague referred to as a "race to the bottom" in a WSJ article. Home prices have flattened in most of the country and dropped in some particularly inflated areas.

The market is correcting many of these problems as I type this. We are seeing all sorts of changes in loan programs every day. I just received an email this morning from another lender tightening their guidelines. I worry, however, that states and the federal gov't will decide that they need to step in to regulate the industry even further than they already do. Through all these follies, the lenders have been hurting themselves most of all. Let it be that way. The industry will be stronger for it and consumers will retain their freedom of choice.

(I like your blog, by the way)

|3.20.07 @ 12:46PM|#

There's nothing wrong with risk-based pricing. Unfortunately, many lenders go beyond that with subprime borrowers to offering terms that, realistically, cannot be met by the borrower. They also do things like flip the loans repeatedly and charge lots of fees. I'm not advocating more regulation by any means, but there are abuses. I think there's been too much emphasis on the rates charged and not enough on the fraud and overreaching (appraisal fraud has been a serious issue in recent years).

On the flip side, I'd say that most subprime lenders aren't trying to get into loans that will ultimately result in foreclosures--that doesn't pay--but they were caught up so much in the "irrational exuberance" of the refi/low interest boom that they made the same stupid decisions that they've made in the prime and Alt. A markets (with all of the alternative products (ARMS, neg. am., etc. and nice things like "stated income" (i.e., "Please lie to us about your income") loans).

Dave W.|3.20.07 @ 12:53PM|#

I'm not advocating more regulation by any means, but there are abuses.

What do you think about the mortgage and credit card exemptions to the usury laws, PL? Would repeal of those exemptions be a form of additional regulation you would oppose?

|3.20.07 @ 12:57PM|#

kevrob,

The degree to which a libertarian may ethically accept government transfer payments is always an interesting question. In this case, government interference has not only squeezed out private competitors in the market for lower-cost secondary education, but has played a big role in driving up the cost of private colleges through the subsidized loans you mention. Just how much additional cost and restriction of my options should I be expected to endure in order to maintain the purity of my beliefs in the face of a public/private education system that isn't likely to be radically privatized anytime soon? I'm just not capable of shedding tears over the fact that, say, 60 percent of my education was publicly funded as opposed to 40 percent. And as far as I'm concerned, this is all the fault of the same taxpayers whom I'm being asked to protect by attending a private college.

The only way to *completely* avoid public funding would have been to attend Hillsdale and pay for it with a mixture of non-subsidized loans and (probably) gifts from my parents. I shudder to think of the contortions a professor would have to undergo to escape public funding of research grants.

I see a big difference between confronting a partially-welfarized society and securing some of those funds for oneself (in pursuit of legitimate aims one would have otherwise pursued anyway), and actively contributing to the expansion of the public sector. It would certainly be "rent seeking" if I had joined interest groups demanding increased government funding of public universities, or had voted for resolutions supporting increased Pell Grants (which actually came through the student senate when I was a member). In fact, I did the opposite.

If the taxpayers suffer unfairly under the burden of my occasional use of the public funds they provide, they're welcome to elect politicians who will end the process of forced transfer payments. In fact, I'll even help vote them in, and donate to their political campaigns as well.

|3.20.07 @ 12:59PM|#

Unfortunately, many lenders go beyond that with subprime borrowers to offering terms that, realistically, cannot be met by the borrower. They also do things like flip the loans repeatedly and charge lots of fees.

An important distinction is that lenders did not do these things, brokers did.

|3.20.07 @ 1:06PM|#

"Through all these follies, the lenders have been hurting themselves most of all."

Perhaps, but not exclusively. They're also hurting the people they've extended credit to, resulting in a foreclosure boom that is driving down all of our property values, and which will result in either an expensive public bailout or a credit squeeze.

|3.20.07 @ 1:16PM|#

Dave,

Where to draw the line is an interesting question. Is there an appropriate regulatory solution? Forcing banks to comply with state usury laws is doable, but it would add a great deal of overhead to the compliance side of things. However, national mortgage and consumer finance operations are able to handle state-by-state regulation, so why not banks?

I don't think the interest rates charged with mortgages are such a huge issue, because there's been a practical limit to the rates that could be charged on first liens, anyway. The problem is more with lenders foolishly extending loans to people who lack the ability to repay them. And making things worse by giving them the illusion that they could repay the loans by using creative products. Incidentally, I don't expect foreclosures to skyrocket so much as I expect lenders to take losses to refinance loans they shouldn't have made in the first place.

For personal loans, the rates get way out there. I don't know whether setting ceilings by law helps, but I do think that the industry would be doing itself a favor by implementing truly risk-based pricing. Being late a day twice on a credit card payment does not, in fact, make you so risky as to justify a 1,500 basis point increase in your interest rate.

Before we write off the connivance of the borrowers, incidentally, there are plenty of disclosures in the loan documents that should give a borrower at least some notice that the loan could be difficult to repay. The willing suspension of reason goes both ways in this latest mess. I wouldn't mind a reworking of the Truth-in-Lending Act to make disclosures more rational and useful--they're not quite that anymore, with all of the crap that's evolved over the years.

|3.20.07 @ 1:20PM|#

joe,
The credit squeeze has arrived, to some extent. We will not see a return to the mortgage market of yesteryear, but rates have gone up, and guidelines are tightening. I am, of course, against any sort of public bailout. I don't think the "foreclosure boom" is going to affect property values so much. The inflated values in cities like Boston are coming down already. Most of the country has seen a flattening. Anyway, where I live, I'm not worried. You suckers are on your own.

Dave W.|3.20.07 @ 1:27PM|#

Forcing banks to comply with state usury laws is doable, but it would add a great deal of overhead to the compliance side of things. However, national mortgage and consumer finance operations are able to handle state-by-state regulation, so why not banks?

Well, nationalizing the whole of usury law (instead of just the exemptions) would be one way to solve this apparent problem. In a sense, a national usury law with fewer exemptions would be less regulation, in the qualitative sense, then the lender-permissive tangle of law that now exists.

the Commerce Clause is used to justify a lot of things it should not, for sure. On the other hand, this problem you describe should really be put to bed by the Commerce Clause -- i think this is the situation the Commerce Clause is really for.

Dave W.|3.20.07 @ 1:29PM|#

Oh, and i take your point about usury law not being the answer to the credit problem in the mortgage area. thanks.

|3.20.07 @ 1:41PM|#

I'm not a big fan of the national regulators, who can be quite arbitrary about what they are enforcing. Giving them more power doesn't make me very happy. I don't think the lending process at the state level is broken by any means, it just got overwhelmed by the credit craze of recent years. Overall, I think the huge increase in the availability of credit over the last 20-30 years has been a net good thing. I sometimes wonder if all of the problems that have arisen aren't more attributable to the growing pains associated with plentiful credit rather than anything systemic--in other words, we don't know how to handle debt, on a collective level.

I wonder why a greater emphasis on financial literacy isn't placed on our education system? If I ran a school, I'd surely want kids to have some idea of the time value of money and some concept of the real costs of a long-term loan.

As an aside, I wonder how the bankruptcy reform will affect the unsecured loans that will be affected by any "credit crunch"? I don't see a huge explosion of defaults and foreclosures, either, but I do think that credit will be harder to come by for the next year or two.

|3.20.07 @ 1:51PM|#

Very insightful comments, Pro Libertate!
I graduated high school in 1991, and we did have to take a household finance class to graduate. Fat lot of good it did me, though. I didn't learn to handle my finances until my wife whipped me into shape.

|3.20.07 @ 2:04PM|#

To quote "Battlestar Galactica": "All of this has happened before, and all of it will happen again."

Housing bubbles and foolish real estate speculation are as old as the Republic.

Lots of boohoo stories about subprime borrowers. The reality is that a sizable chunk of these noodniks thought they could get rich off of residential real estate without have to lift a finger, presumably became some infomercial twit told them so.

The difference with this bubble is that it is nearly nationwide and much wider in scope. The subprime disaster is just the first wave, since many of those folks defaulted almost immediately. The prime ARM borrowers are the next in line to fall, along with the idiots that did adjustable cash-out refinancing to finance their lifestyles.

The point is that as a libertarian you have to be prepared to defend human stupidity, to a certain degree. Greed and shortsidedness are inherent human characteristics. There will be housing bubbles and financial idiocy long after we're all dead. There is nothing the government could do to change any of this, other than make the consequences worse for more people.

|3.20.07 @ 2:05PM|#

Y'know, I really can spell and proofread. Honestly.

|3.20.07 @ 2:06PM|#

Thanks, highnumber. It's not all surreal, impenetrable humor with me, you know :)

What kind of topics did your class cover? I recall something about balancing checkbooks, but nothing on actual finance. While I'm at it, teaching high schoolers a basic understanding of the legal system would be nice, too. All we had (1984 graduate) was something on the failings of our system of government, and the basic civics stuff we all get (e.g., George Washington didn't tell a lie and had wooden teeth).

Incidentally, I intend to forget everything that I knew about banking and lending law, now that I've become a TV lawyer.

|3.20.07 @ 2:38PM|#

Pro Lib,
I took that Consumer Ed class during summer school because I had transferred from a Catholic to a public school and I did not want to take a class with a bunch of freshmen. The summer course was taught by Mrs Angela Fuqua, the cheerleading coach. All I remember is when she brought in her husband, Dirk the insurance agent, to tell us about life insurance. And that it was 17 years ago this summer, because I remember taking the train downtown with a couple of honeys from the class and while standing on the train platform we were pelted with cicadas because it was the year of the 17 year cicadas which are returning to the Chicago area this summer. And we played with a Ouija board the last day of class. Good times.
Any wonder I had a 580-600 credit score when I got married and that banks turned me down for even checking accounts?

Are you going to be the new Matlock?

|3.20.07 @ 2:54PM|#

I blame Daley :)

No, not Matlock. I work for an undisclosed cable network.

|3.20.07 @ 3:10PM|#

The reality is that a sizable chunk of these noodniks thought they could get rich off of residential real estate without have to lift a finger, presumably became some infomercial twit told them so.

While I applaud your use of the word "noodnik," I have to disagree with your use of the phrase "sizable chunk." Most people want to own their own home. They desire this for a number of reasons:

-They believe it is a good investment. It is, in many ways. It is not as good an investment as they think, in other ways.
-They like the idea of owning their home. No landlord, more freedom, status.
-They have been told that it is the "American Dream."

The noodniks who have been told they can get rich quick off real estate are rarer than you think. More people talk about it than actually do it. Many try, but realize that it is not as easy they had been taught. The ones who have cracked the code have worked hard at it.

|3.20.07 @ 4:31PM|#

That the "American Dream" includes owning some property - one's house or small business - can't be denied. My parents' generation were compensated for their service in WWII by, among other things, VA loans. Since serving in the military has stopped being a universal experience for young men, it isn't surprising that other instruments were developed to get people into homes that they own.

Aside to Graphite (not to threadjack):

My background may make me less sympathetic to libertarians or "libertarians" who make use of government institutions when there are private alternatives. On the one hand, my Dad was a public school teacher, like his mother was. On the other hand, I was raised Catholic, and my Mom and Dad sacrificed a lot to see to it that all of their many children went to Catholic schools from grades 1-12. I can remember, as a high-schooler, sitting down at the dining room table and discussing the letter my Mom was hand-writing to then-President Nixon in favor of school vouchers or education tax credit programs. While my folks weren't ideologically opposed to publik skools, they intensely disliked the loss of discipline and rigor that began to be felt in the 1960s and 1970s. My Dad often complained about the change in the kids' deportment over the years, the loss of respect and even basic order in his classes and the general diminishment of a teacher's authority to do anything about it. When he was safely retired, he kept his hand in by coaching part-time at a small private school, but he could never have afforded to make that switch when he had so many mouths to feed.

As I pointed out above, I managed to finance a private education, even though I was never Pell Grant-eligible. So did all my siblings, though one of my brothers spent some time at a public community college before he transferred. Almost all of us did well enough in high school to get aid on merit, as well as on the basis of need. Half the students at my alma mater get some form of financial aid, and I doubt that the average family income of our students is much different than that of the flagship State U campus.

You make a good point about state spending on education and other services squeezing out private efforts. The Catholic schools, deprived of nearly-free labor by the post-Vatican II drop in religious vocations and taking a coincident hit in donations from parishioners as attendance at weekly services cratered, found that keeping so many schools open was economically untenable. At the start of the 60s, tuition at parish schools was often nominal, if not free. Constant increases in school fees beyond the inflation rate was the norm from then on. By the mid-70s the order that owned my high school was selling off assets in order to fund the retirements of their aged members. That the expense of publik skools had also exploded was no comfort, as the property taxes assessed to pay for all that went through the roof. Eventually, many families could no longer justify "paying twice" for their children's primary and secondary schooling, even if they really didn't prefer the product the state was providing.

I applaud your resistance to making things worse than they already are, but there is still the question of how are we to someday develop a society with a healthy skepticism towards government, while we let the state have the primary authority to mold the minds of young people through its K-12 schools and colleges? Separation of school and state is much more important than "sell the roads" libertarianism. In my ideal world, all colleges would be private, privately-funded full and partial scholarships would be granted for both need and merit, and there would be a United Way-style project to fund the grants, as well as any needed loans. We've a long ways to go before we get there, but it isn't true that going to a state school is the only affordable alternative to paying the full boat at an Ivy.

I haven't signed onto the Free State Project, but I admire their "think outside the box" attitude. Would that libertarian academics, many of whom work for the Omnipotent State, could raise the funds to found a private, secular college that could be independent of government funding and its attendant influence.

Kevin

ObSpellingPedantry: nudnik

|3.20.07 @ 4:57PM|#

The noodniks who have been told they can get rich quick off real estate are rarer than you think. More people talk about it than actually do it. Many try, but realize that it is not as easy they had been taught. The ones who have cracked the code have worked hard at it.

I've read estimates that as many as 25-30% of residential sales at the height of the bubble were to speculators. That's a "sizable chunk" by my standards. Not all of them were to subprime borrowers, but the subprime speculators are the least able to weather the current downturn. Like I said, the ARM prime borrowers are next up on the rack.

Do all subprime borrowers, or even a majority, default? Of course not. But evidently enough are doing so now, since the subprime lenders are imploding left and right.

|3.20.07 @ 4:59PM|#

I've read estimates that as many as 25-30% of residential sales at the height of the bubble were to speculators.

How are speculators defined in that statement?
Can you source that?

|3.20.07 @ 5:07PM|#

|3.20.07 @ 5:31PM|#

How are speculators defined in that statement?

People who bought residences for the purpose of reselling them within a short period. Not a precise statistic, I'll grant you. BTW, I should amend that stat to apply only to the worst bubble markets. Akron and Louisville were not so rife with speculators.

Alex|3.20.07 @ 5:33PM|#

It's really going to be too bad if, once again in American society, the smaller portion of the population that can't or won't deal with reality and responsibility become the standard for all of us.

"Lowest Common Denominator Laws" have always been a huge problem in our society, and I just wonder when the rest of us will stop tolerating it.

|3.20.07 @ 5:34PM|#

Can someone explain the "microcredit" fad? The idea seems to be that small, high-interest, non-collatoralized loans are exactly what poor people need (especially if they live in far-away lands). Some Indian dude got a Nobel prize for it. I suspect the whole thing is a scam.

Not a scam at all, though mostly a Third World phenomenon. The actual cost (minus government thuggery) of starting a small business in the developing world is shockingly low. The theory is that you can do a lot more good by "microloans" directly to individuals than by traditional World Bank-type megaloans, which often pad the Big Man's pocket or go toward ego-driven public works projects that do little to address the real problems in those countries.

|3.20.07 @ 5:47PM|#

ChrisO,
I work in the mortgage industry in Chicago. I saw speculators, as you call them. They're also known as investors, to use a less loaded term. They did not comprise 1/4 to a 1/3 of the market here. Anecdotal evidence, to be sure, but I don't have anything more accurate in front of me. I would speculate that only the craziest markets had that many speculators, and that they were to blame for a lot of the bubble in those areas. A lot of people did not lose money even in those areas, because they did not buy at the top.

Jim Lippard|3.20.07 @ 6:02PM|#

highnumber: I appreciate the corrections and clarifications--I was throwing too many loan types into the same bucket. (Looks like I also left out the verb "reset" in one sentence of my original post.)

The peak for option ARM resets appears to be farther out than the peak for subprime resets (though that doesn't need to correlate with origination dates).

LarryA|3.20.07 @ 6:17PM|#

I ran a school, I'd surely want kids to have some idea of the time value of money and some concept of the real costs of a long-term loan.

First you have to find a way to teach high school students the concept of "long-term" as applied to more than a week. I'd say most teenagers simply haven't been around long enough to understand the "thirty years" part of "compound interest over thirty years."

Russ 2000|3.20.07 @ 7:21PM|#

Can someone explain the "microcredit" fad?

If you mean like car title loans and such, well they aren't anything new in America, they're simply a pawnshop.

|3.20.07 @ 7:55PM|#

I took a Consumer Economics course in my last semester of high school. It was an elective course. We covered things like how to make a budget, the rule of 72 and how it affects both savings and loans, checking accounts, how insurance works, etc. I understand that many schools that used to offer "Home Economics" have ditched that in favor of something sometimes called "Life Skills," which may cover similar ground.

"Consumerism" was a hot topic in the mid-1970s.

Kevin

|3.20.07 @ 7:58PM|#

the rule of 72

Some sort of reference to Led Zeppelin?

|3.21.07 @ 1:03AM|#

kevrob,

Thanks for a thoughtful and well-argued post. We certainly share the same concern for separating school & state; I just have my doubts that we libertarians will help that process along very much by preemptively handing our portion of the public till over to the very people who are fighting to make that till bigger and bigger, year after year. Better to take that money and donate it towards efforts to privatize education and advocate other libertarian causes. I think it would be an act of delightful revenge to donate the balance of my "Robert C. Byrd scholarship" to the Reason foundation.

As one final note, I will remark that nowadays egalitarianism reigns so completely over the world of post-secondary financial aid that--of the 5 private and 1 state school to which I applied and was accepted--only the state school offered any kind of merit-based scholarships. My parents had some equity in their small business, which the admissions officers figured they could have mortgaged to pay for my tuition, so I didn't qualify for any need-based aid at all. The state school, meanwhile, offered me a full-ride (and, incidentally, privately-funded) scholarship.

Dave W.|3.21.07 @ 11:31AM|#

An important distinction is that lenders did not do these things, brokers did.

Whatever gets you through the night.

|3.21.07 @ 11:56AM|#

You, sir, are a moron.

master casuncad|3.27.07 @ 5:05AM|#

You have a good point here in your title. The Philippines also needs more credit and no more debt.

How will that be then and what's the difference about debts and credits?

Well whatever,,,THAT'S JUST ABOUT IT!!!

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