Monday, March 31, 2008

Progressive Lending

I've been listening to some of the speeches for aggressive new regulations for the mortgage industry. The speakers find it easy to throw blame at the evil capitalists in the lending industry.

The speeches fail to recognize that many of the people engaged in creating the mortgage mess thought they were being progressive.

There is a large number of not-for-profit organizations that push home ownership on people who don't have the financial ability to own a home. There is a whole subindustry in the legal community dedicated to erasing bad credit histories. Several of these firms are located in Salt Lake.

As I am intensely interested in the non-profit sector and local community, I've spoken with a number of people in these industries. The people who were creating the mess really thought they were progressing society by extending home ownership to a new class of people.

Many of the players in the mortgage mess weren't driven by simple capitalist greed. They were driven by the buzz of putting a person, who would not otherwise afford a home, into a home.

The mortgage mess didn't happen by people plotting to defraud banks. It was driven by the ecstasy of doing good.

The people who trained home owners to think of the appreciation in their home's value as a bank account were actually following a rather standard pathway of progressive ideology where you claim to have a new way of thinking that will lead to a brighter future ... but that leads to ruin.

In many cases, the greedy conservative bankers weren't the perpetrators of the mortgage mess. They were witless victims who thought that the toxic mortgage portfolios they had purchased would behave like mortgage portfolios of the past.

Yes, there are crooks leaching off of all aspects of business and government. The really dramatic problems almost always happen when a group stomps forth and claims to have a progressive new way of thinking about an industry.

For example, the dotcom boom was driven by a progressive new think where grabbing marketshare was more important than having a business model that made profit on sales. Market values ballooned as companies undermined the market. Then the progressive new think collapsed.

In many cases, financial collapse follows a progressive new way of thinking about a financial instrument. The market fails to understand the implications of the new way of thinking and collapses when the forces of the new way of thinking undermines the market.

The mortgage mess happened because a new way of thinking about mortgages dramatically decreased the value of mortgage portfolios. Banks that bought the portfolios were undermined.

It is critical that we understand this pattern. Slapping new regulations on an industry might temporarily stabalize an industry, but the new regulations cannot change the way people think in the future.

Often the regulations simply burden an industry or create a false sense of stability. In so many cases we find the regulators setting up the next generation for a future financial collapse.

The regulations we put in place today cannot and will not prevent people a half century from now from changing their thinking about mortgages.

PS: This post slams progressivism because the central tenet of progressivism is that progressives have a new way of thinking that leads to prosperity. Progressivism is typified by the unspecific, but eloquent, call for change. More often than not, it is a call for a change in thinking.

The mortgage mess happened because there was a widespread change in thinking about mortgages.

The mortgage mess happened because their was a change in the way brokers felt about mortgages. These brokers felt the new think was progressive. Banks failed because the new think created mortgage portfolios with a high fail rate.

IMHO, this mortgage mess is a better example of the way that "new think" undermines a society than it is an example of greedy capitalists undermining society.

Think of it! Which makes more sense: "The high default rate on mortgages is the result of conservative lending practices." or "The high default rate on mortgages is the result of liberal lending practices"?


Scott Hinrichs said...

I took me a couple of days to get to this post, as I've been quite busy lately. But it was well worth the read. It wasn't just the non-profits that were in on the mortgage problem.

Many members of Congress that are excoriating lenders are the same people that voted for substantially expanding regulations and subsidies aimed at getting lower income people into home ownership. Many of these bills were passed under affirmative action monikers.

y-intercept said...

Sadly, it was a Republican congress that voted for the liberalization of lending rules. What is infruiating is that the Republicans have a tendency of doing partial deregulations that create instabilities in the market. The partial deregulations almost always cause a backlash demand for new regulations.