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Invincible ignorance

August 1, 2011 - Harry Eagar
In the New York Times, Gretchen Morgenson writes about Wall Street's resistance to regulations:

"You'd think the mortgage bust would qualify as a teachable moment."

Not me. As I wrote earlier today, knowing economic history would not lead anyone to think that. Besides, I was raised Roman Catholic, and the Catholics have a useful concept called "invincible ignorance." It's a recognition that some people never learn.

Unfortunately, the Catholic corollary is that the invincibly ignorant cannot sin, which is not how I look at it. I say gummint can treat it like sin and make them behave, or pay the price anyhow.

Morgenson is widely regarded for her reporting of the financial crisis, at least by some. Not so much by me. She still doesn't get it.

Sure, she's entirely right that bankers are suicidal and that regulations are the only way to control their shenanigans, but while she understands lenders, she doesn't understand borrowers.

She endorses the idea that the way to avoid mortgage crises in the future is to require 20% down payments.

In The Washington Post, the unheralded Michelle Singeltary gets it right:

"Under the Obama administration, there’s a proposal to require a 20 percent down payment for families to qualify for the best mortgage rates. If they don’t meet this threshold, their loans would be considered more risky. Such a requirement would disproportionately affect minorities.

"It wasn’t the lack of down payments that crippled the housing market. The fact is, lenders can and have made loans for years that perform well without people plunking down hefty sums upfront."

Obviously. GI Loans had low, in some cases no down payments, and excellent repayment histories. FHA loans of 3% or 5% down had excellent repayment histories as long as they were not securitized. I know. I had two of them and paid both off. As did tens of millions of other borrowers.

It isn't the down that counts, it's the income.

Even with securitization and all the other sleazy practices of finance capitalism, we'd have had at least a mini mortgage crisis, because of the vast transfer of wealth away from workers to millionaires, of of jobs away from Americans to Chinese, Vietnamese, Paraguayans, you name it.

If people have to rely on their equity to avoid default, that means they are already in trouble. That can happen to anybody: sickness, accident, unhappy divorce, too many trips to Vegas. But when it happens individually, the national housing market, and even local markets, don't notice. Nothing crashes.

It's when masses of income earners stop earning income that the defaults become systemically troublesome. Add in all the poisonous practices of Wall Street, and the stew becomes indigestible.

I don't know whether the bankers and their lapdogs can't learn or just don't want to learn. It doesn't much matter which anyway.

Earlier today, i wrote a little something about knowing economic history. Knowing economic history is a curse. It prevents you from believing fairy stories. Or bankers.


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