TCS Daily

Underselling Capitalism

By John E. Tamny - April 13, 2007 12:00 AM

In a recent Los Angeles Times op-ed, "Overselling Capitalism," University of Maryland Professor Benjamin Barber wrote of the "crisis" in the capitalist mindset, where the "'Protestant ethos' of hard work and deferred gratification has been replaced by an infantilist ethos of easy credit and impulsive consumption that puts democracy and the market system at risk."

While doubtlessly well intentioned, the contradictions and falsehoods within were numerous.

Let's begin with the idea that hard work and deferred gratification are no longer part of the capitalist mindset. In the 2006 edition of the Forbes 400, most of the fortunes were entirely self-made. Unless it's suddenly become easy to steal or beg one's way to great fortune, it appears America's greatest capitalists have engaged in both hard work and deferred gratification.

Indeed, since wealth can only result from the combination of brains and capital, and as all capital is the result of prior savings, it would seem that the very business successes Barber decries sacrificed greatly in the near-term to achieve the distant object of becoming billionaires. His mention of easy credit and impulsive consumption is contradictory in that if easy credit is available, there must be a great deal of abstinence, too, such that credit is available for consumption.

Barber posits that capitalism "busies itself manufacturing needs for the wealthy while ignoring the wants of the truly needy." This might interest the middle-class patrons of Wal-Mart, who have access to top-quality goods at low prices thanks to the latter's messianic devotion to keeping costs down. Wal-Mart comes in twelfth of the fifty most valuable companies in the world according to Forbes, and within that fifty there's nary a mention of Gucci, Hermes or Armani.

To Barber capitalism "is stymied, courting long-term disaster" as it turns "reluctant consumers with few unsatisfied core needs into permanent shoppers" totally in thrall to producers who "take over their life worlds, encourage impulse buying, cultivate shopoholism and invent new needs." Barber's insights might interest Coca-Cola given its failure to trick consumers into buying "New" Coke, not to mention Blockbuster Video's inability to make movie fanatics pay late fees, or ESPN's inability to foist sports phones on its dedicated viewership.

Barber speaks of an ethos favoring "laxity and leisure over discipline and denial." That total household wealth in the U.S. hit $55.6 trillion last month didn't seem to concern or register with him, nor the impossibility that Americans could possess any wealth if indolent leisure and rampant consumption were the nation's ethos.

Barber contradicted himself once again in urging capitalism to "learn to defer profits and empower the needy as consumers." Apparently he forgot that profits are by definition the remuneration of abstinence, so it would seem we're not the prodigals he says we are.

Still, he has a point that big business and big capitalists can help the less fortunate, and sure enough they are. He might simply be reminded that it is abstinence in the name of profits which enables the rich to offer aid. Just last week the Wall Street Journal's Jason Riley wrote about hedge fund manager Lance Laifer, and his successful efforts to fund malaria-free zones in Africa. Author Robin Meredith wrote in the latest Forbes that Starbucks (no doubt Barber would deem it guilty of "shaping" American wants) pays its servers in China $6 for an eight-hour day; a low wage until one considers a nearby "Chinese-owned teahouse where the staff works a 12-hour day for $3.75." Barber calls on pharmaceutical companies "to sell inexpensive retro-vials to Africans with HIV instead of pushing Botox" stateside, but he forgets that it is the profits earned from Botox sales that enable pharmaceutical companies to sell or give away low-cost goods in Africa.

Capitalism is the villain in Barber's piece, yet capitalism has proven time and again to be the singular cure for the poor health threatening the Third World. According to the 2005 Economic Freedom of the World report produced by the Cato Institute, the nations in the top quintile of average per-capita GDP also have the highest average life expectancy; 77.7 years versus 52.5 years for citizens of countries in the bottom quintile.

Barber concludes by saying to "sustain itself, capitalism will once again have to respond to real needs instead of trying to fabricate synthetic ones." He gets it backwards. That capitalism gives people what they want means that it alone will have the wherewithal to provide the jobs, aid and medicine to those not lucky enough to live in cultures blessed by the most compassionate economic concept ever known.

John Tamny is the editor of RealClearMarkets. He can be reached at



unkown capitalism
Why would this left wing prof Barbar know what capitalism is any more than the the LA Times does, or most profs, or most journalists, or most politicians, or most people? They all keep repeating the same anti capitalist propaganda in all the media, movies, everywhere. All capitism means is: private property, free markets, rule of law. It's agnostic of whether some guys works a little bit, or a lot, if you achieve, or if you're lazy, or give away your fortune like warren buffet. But leftist always smear capitalism because they know they can confuse people to make their case for more statism, which is what they really want.

Rats, maze and cheese
People are the rats, laws are the maze, and the godlike elite, whether they be corporations, pundits, professors, politicians, preachers or capitalism, are the ones building the maze and laying out the cheese. That's how the world works, right?

Uh, wait a minute. Capitalism is us rats, too, and in capitalism, we rats help build the maze and help lay out the cheese, right?

Right. That's why elitists like Benjamin Barber hate capitalism: They don't want the rats' input on how to build the maze or lay out the cheese because all too often the rats have different goals than the elite. In other words, the Ben Barbers of the world hate capitalism because they hate sharing the power to determine how the world turns out with us filthy rats. Period.

That's why I see capitalism as the great blessing that keeps me relatively free of the elites. For example, I'll never buy one of Barbers' books.

Living "house poor"
Seeing this mess from the vantage point of a career spent in real estate offers me a few insights I'd like to share.

First, the notion that it is smarter to rent than to buy has taken root very deep in the American soul. Sales agents have not the slightest difficulty convincing people to plunge every dime he or she earns into the bricks that serve as their retirement plan and, coincidentally, as a place they get to live in.

What the agents don't tell their buyers is that the numbers in this paradigm only work to the degree that prices continue appreciating. Otherwise, it's a house of cards.

When I was in the business there was a rule of thumb, where you only let a purchaser spend 30% of his income on house payments. I understand that has been relaxed now, in this age of greed. But it was a good rule, like a limit at the roulette table, enforcing a certain amount of good sense against the plungers and their wilder inclinations.

So people became "house poor", where they're earning what sounds like good money but every last dime is going into the house. And they still have to live, so daily expenses start going on the card.

And after a year or two, the balance is getting higher and higher, and can't be paid down, so they get another card. And transfer the balance.

It's the same mentality that compels people to put down large sums on the lottery, when an acquaintance with the law of averages could tell them the more they play, the more they lose. Every time.

Naturally you, dear reader, are much too wise to be caught in this trap. I merely write about certain unconscionable practises in the real estate and mortgage industries. Hopefully some intelligently designed regulation will come of this.

In particular I would like to see no-interest loans (balloons) and VRMs-- variable rate mortgages-- outlawed. These things turn owning property into a game like Vegas, wher you can either win or you can lose.

First of all, based on your post, I assume that "... is smarter to rent than to buy ..." should read "... is smarter to buy than to rent ...".

Then you go on to say:

"... plunge every dime he or she earns into the bricks ... [creating a state where] the numbers ... only work to the degree that prices continue appreciating. Otherwise, it's a house of cards."

Well, duh. If you buy ANYTHING you can't afford, you build a house of cards. This problem does not expose bad practices by the Real Estate / Mortgage industry - they're merely letting people do what they want to do. Rather, this exposes endemic problems with the educational establishment, which graduates people who are manifestly incapable of understanding the consequences of their own decisions.

so now you are projecting your own personal failings onto the entire economic system?
You don't need to have housing prices go up, in order to build equity.

What WE want.
Capitalism provides us with what we need and want, not what someone else thinks we should have.

That is what causes socialist's teeth to grind.

Village of the Damned
I notice you never accept that people have personal responsibility here. So the mortgage industry relaxed standards. Does this mean the consumer HAS to buy more house than he needs? YOU seem to always blame the system. We are the system and freedom aka capitalism requires responsibility.

There is no risk free investement. People need to sit back and look at if buying makes sense. I am supposed to feel sorry for some guy who buys a 900,000 one bedroom condo in SF because he like SF but cannot afford it when he could move to some other place and likely have a higher standard of living for far less?

Life is about choices. Your bad decisions are not mine.

I claim that a huge part of this current problem is the utter failure of public schools AKA the liberal social welfare state. Public schools have become social playgrounds for liberal dogma and the result is a populace ignorant of economics and finance.

Perhaps we need a shift to real education instead of babysitting services?

Life is all about hard work. I have a relative who is a retired businessman. He drives a school bus primarily for poor black kids. What he has noticed is the utter lack of interest in getting a education and the utter lack of interest in anything that leads to self reliance and future advancement. He says there is one child whom he is utterly impressed with bu the majority are indifferent.

Now, do schools teach the worth of work? Why have generation of black kids been thrown to the trash? It is a crime what the liberal establishment has done to inner cities. Jesse and Sharpton, self appointed asses of theleft keep their own people down while they preach hate and racism.

It is time we rise up against this utter failure of a social experiment and return tot he virtues of hard work, self discipline and individual achievement.

What WE want indeed.
marjon is right on the money.

I should have realized sooner....
... that I wasn't a Democrat when I'd get mad at the teacher for punishing the whole class for the actions of a few troublemakers.

The Problem With Variable Mortgage Interest Rates
“In particular I would like to see no-interest loans (balloons) and VRMs-- variable rate mortgages-- outlawed. These things turn owning property into a game like Vegas, wher you can either win or you can lose.”

A fixed rate mortgage is not inherently superior to a variable rate mortgage in a competitive and open market.

I searched for, but could not find, a variable mortgage with an adjusting index based on long term global interest rates…such as the 10 year or long treasury. Variable interest rates are based on short term rates, which are artificially set by the FED. Many consumers know this and steer clear of variable rates, except for perhaps special circumstances. In the last couple of years long term mortgage rate have increased about 3/4 of a percent, while mortgage rates on variable loans have increased by as much as 4 or 5 percent for some. This is NOT because of the economics of variable rates, but because of the illogical policies of the FED and their captive mortgage oligopoly. Lenders are currently offering 6.25% 30 years loans, while adjusting variable rate instruments to 8.5%! This makes no sense at all. The currently adjusted variable rate should never persistently exceed the currently offered fixed rate, even if both rates are increasing due to an upward trend in long term interest rates.

Congress should address the dysfunctional aspects of the mortgage market. There are two changes that are critical:
1. Re-write of the FED’s charter.
2. Correct the policies that incent mortgage lenders to base long term adjustable mortgage rates on short term cost of capital.

To roy and all his detractors
Both are correct!

Actually roy, it was limited to 33% of gross income. However, that should be fine in most cases and I do agree that large increases in the limits have helped create the situation you describe.

As to his detractors, come on!! What is wrong with having an affordable mortgage limit? Perhaps you could have a limit that only extends to those whose total income is under 10X the poverty level?

The reason I bring this up is that, I think, Mark, CRC128 and dbt 3481 have a basic problem with the limit because it hurts the more wealthy who can afford to put larger percentages of their income into a home or property.

Look, the old mortgage limit was still arbitrary, a person or family living in San Diego in 1980, making less than $20,000 a year, could not afford a $550 a month mortgage (approx. 1/3 of gross income). Other expenses ate up more than $800 a month and taxes took $350 (minimum). On the other hand, a family of four (in those days) could more easily afford a $1,000 mortgage on $36,000 a year. Living expenses still took about $1,000 a month, taxes took $600 (or more) leaving over $1,300 for mortgage and extras. Still pretty tight, but doable.

Even then, creative financing cuased problems. A lot of people pulled the double loan deal. Convinced by the real estate agent that this property was a real bargain, they would borrow against other assets to increase their down-payment and reduce the mortgate to the allowable rate. Then, a few months or a couple of years down the road, find they can't make all their expenses; usually when problems with the house and repair expenses began to mount.

One thing many new home buyers don't count on is property taxes and home repairs, something you don't have to deal with on a rental.

All that being said, I am very pro home ownership. Once the mortgage is paid, it is the cheaper way to live and you have something of value at the end of the day. I'm also very pro personal responsibility; buyer beware!

But everyone should be against variable rate mortgages. They are a farce in many cases, designed only to get people into a home. A fixed rate mortgage means a fixed payment that can be budgeted for. In most cases, these variable rate mortgages go up over time and increase the mortgage payment; very hard to budget in if it is unexpected.

one thing you can count on Pauled to do, is assume the worst motives on the part of his opponents
Ah yes, the old, you only take that position because you favor the rich argument.

Not that it matters to someone who's mind is already made up, but can you point to anything that CRC128, dbt 3481, or myself have said that implies we have huge problems with an income cap? Other than generalized one size fits all problems with federal regulations?

As to your complaints about variable rates, I'm guessing you weren't in the housing market back in the 70's and 80's.

If the customer wants to gample that rates are going to go down, rather than stay the same or go up, that's his choice, not yours.

...that Roy would be so myopic. It cannot be said that variable rate mortgages are better or worse than fixed rate. It depends on the situation. I figure that Roy's brain has attrophied in his old age, and he forgets WHY variable rates were implemented. Remember the sky-high mortgage rates do to the Carter debacle? Variable rates allowed people to protect themselves from getting stuck with those high rates forever.

Variable rates make sense in a climate of relatively high rates, whereas fixed rates make sense in a climate of relatively low rates. They both have their place in the mortgage scheme, and are both useful. Don't blame the options for the stupidity of the home buyer!


debt is the problem
and debt is related to personal responsibility.

people who are badly in debt tend to be either greedy or immature. it's amazing how many people who make poor life decisions are greedy.

regulation won't solve greed.

ps. what is it about libertarians that you object to?

A slight correction
Capitalism provides us with things we want. For most of us who are sensible that coincides with things we need. For the celeb culture it also provides those frivolous things some want but are not necessary. We don't prohibit this because we live in a free society that (thus far at least) generally avoids prohibiting people with purchasing foolish things in the marketplace.

Ironic ain't it? Hollywood is generally a hotbed of lefties and also is all too easily and perhaps superficially associated with frivolous consumption. Ironic that they don't see that the socialist politics they espouse would ban the conspicuous consumption they practise. (I give Ed Begley some credit here. He may be a Green flake, but he practises what he preaches.)

Can't find someone to argue with?
I thought I at least inferred that I too am against "fixed" percentages for higher income people because they can afford to spend a higher percentage on property. On the other hand, most lower-middle to lower income people have neither the room to work with or the financial savy to deal with this sort of thing.

As for being in the housing market in the 70's or 80's no. I bought my first home in 1989 and have since purchased and sold two other properties. I have never gone with a variable rate on anything, I perfer to be able to accurately budget my expenses; if I can't get a rate I want to begin with I either don't buy or wait. Usually, if you shop around, you can find a decent rate.

Mark, I understand variable rate deals might be good if you buy in a time of high interest rates, and if the rate is tied to long-term base rates; but, again, many people don't understand the difference. I admit, I'm one of the dummies that got a headache trying to figure this out and that is one reason I always go with fixed rate loans. But the biggest reason was always being able to budget and not run the risk of getting hit by a raise I couldn't afford.

But, in my opinion, it is a good thing to help out a moderate-income or low-income, first-time home buyer with a limit. A reasonable limit of 33% isn't a bad thing in this case. It is good for the consumer, for the lender and for the general economy (less bankruptcies, defaults and families in financial trouble).

If I'm wrong, explain why? I would like information, not one-line zingers.

Now there is a statement I can agree with!
No matter the situation, that was always a point that angered me. If I didn't do it, why should I get punished?

Raise the price then make financing easier
Higher education, medical costs, some housing markets, government, all have the problem their costs keep rising beyond the ability of the consumer to pay.

The solution? Make it easier to finance the purchase.

Instead of making higher education more efficient, increase government grants or make it easier to get student loans. (And then make it easier for graduates to default on those loans later.)

Ditto with medial costs. Don't let the market force competition and innovation to drive costs down, subsidize it with taxes and insurance.

Governments insist they can't cut anything and must raise taxes.

People zone neighborhoods and restrict growth to drive up their property values. If you can't afford a house in NYC, Detroit can't even auction a house for $10k.

Government interference in free markets (subsidizing mortgages) contribute to the current situation.

who's good?
THe loan percentage limit is put in their by the auditors to protect the bank's investors. It isn't in there to protect customers. If there dumb enough to get a loan they can't afford, that's their problem.

Mortgage defaults usually end up costing the bank lots of money. That's why the limit is in place. It has nothing to do with protecting idiots from themselves.

BTW, if you don't like getting zinged by one liners, I suspect you stop throwing them out yourself. Little things like constantly suggesting that the only reason I take the positions I do is that I'm kissing up to the rich. This is at least the third time you have made that claim.

I liked my 5 year ARM
It saved me a stack of money.

I got a 5 year ARM on my condo at 1%-1.5% below what I could get for a standard 30 Year Fixed. That worked out great because I planned to (and did) sell that condo and buy a house with the savings and equity I built up before the 5 years were up.

Why do you want to use the force of government to prevent me from doing that? Oh right, you're a standard lefty that thinks I'm too stupid to know what the hell I'm doing and you need to tell me.

But the effect is still to the benefit of those not all the financially savvy as well as the bank's investors.

Mark, the first time I made that remark you deserved it. This time (and I believe the last time) you accuse me of something I did not do. The only people (besides the bankers) who are helped by a higher, or no, limit are those with a little disposable income. That's why I figured you were most referring to people who can afford to do this but may have been unable to under the old limits. I was guessing, true; but it was an educated guess.

By your attitude I can assume you are in pretty good shape financially and either worked your way up from abject poverty quickly (and probably with the help of a little luck) or you have never lived below the moderate middle-class.


Because you have no empathy at all for those who struggle to make ends meet. You feel that anyone who isn't doing well is in that position entirely on their own accord. The fact is, I agree!! Certainly it was their own decisions that put them there, but sometimes the past haunts and they simply can't rise up from it. I've seen it so many times, and it is sad.

Perhaps I'm more empathatic because my rise was slower and my present financial position is lower. I came from a lower-middle income family and, at 25, found myself "bumming around" doing nothing special. Then some things in my life changed and I decided to change gears. Low and behold, I was stuck in the mud. It took about five years (and a little dumb luck) just to find a little traction and get going. Thanks to a very supportive family, I began to get unstuck and headed in the right direction. Finally, about ten years ago, I was living the middle-class life with a wife and three kids. Now I am running my third business, the second I've owned, and doing pretty good. But, through the past 20 years, there have been many tight spots and close calls. I realize I'm just one bad decision away from being back very close to where I started.

And I have very close examples of how differently things work for different people. My younger brother actually hit his stride about five years after I did, yet he is now a millionaire. Why? Several things, but these three stand out:
1. Great decisions when opportunities came his way.
2. He was never in a position where he had to worry about "feeding the family" as his wife had a decent job and her family had money and would back them up if needed (it was never needed).
3. He never had a set-back of any real magnatude. He was, in his own words, a bit lucky. He got some good opportunities that not everyone gets and never had to take a backward step.
There are other issues: we both worked hard, but he worked smarter (in my opinion); he was willing (and in a position) to take risks I could not take; and he took advantage of contacts and networks of people that I did not utilize and/or did not know how to utilize. (remember, we started on a pretty even playing field in almost ever sense; that includes most of the people we knew)

When my brother first crossed a certain personal worth level, he got a bit uppity about it. In recent years, as he has tripled his personal worth, he has also been able to see his "luck". We both agree that true "luck" happens most when hard work and preparation meets opportunity; but the two have to meet, and sometimes they just don't.

Oddly, I have been happier in my situation than he was (until recently) and I'm not sure I would change paths or financial status with him.

Good for you
But that isn't the experience of many. First, you went short term; second, you were lucky to see no major raises even in just four years.

I suppose the idea is a good one in some rare cases, but it has proved to be a dog and pony show for many in the past decade or so. Used as you did, it appears they can be a boon; used to get a laon during times of high interest rates I know they will usually pay off over time. But mortgage rates have been pretty low for most of the past 20 years. Presently, if you shop around and have good credit, you can get a long-term, fixed mortgage at around 5.25%; it has been lower, but only a percent or so. And it has been in that range for a while.

So you are saying you got a 5-year ARM for under 4% and it never went up? Good for you!! What lender did you go with? I would like to look into that.

Not luck
Apparently you know understand what a 5 Year ARM is.

A 5 year ARM is fixed for 5 years, then adjusts for the remaining life of the mortgage (would have been 25 years in my case). The starter fixed rate was actually at 4%. My only 'gamble' was that I would sell within the 5 years, and that wasn't even much of a gamble.

There are many people that use similar short term ARM's to keep costs down when they 'flip' a house (buy, usually do some renovations, and then sell for a profit).

Yes some people get screwed and get some hard times over it. I bet they never do that again. I don't know why you feel the need to have the government regulate these loans. It's bad business for a lender to issue a loan to somebody that won't be able to pay it back. These limits are, and will continue to be, a protective measure without government intervention.

The responsibility here is on the individual to know what they are capable of (and probably their friends and family to help educate them if they are going to do something stupid). Government has no place here other than to make things harder and more expensive than they already are.

Projecting the Idiot on the Village
Of course Roy sees the pitfalls of borrowing money as predatory!

Afterall, he's more brilliant than everybody else and if the fundamentals of homeownership elude Roy, then clearly nobody else has the acumen to select the terms and size of their loan. Anything Roy can't get is predatory trickery. Hence last summer he managed to argue the evils of depreciation-and having been exposed as thoroughly ignorant of the rudiments of finance, he managed to prattle on and on in typical circumlocotory fashion, going so far as to deny his own words.

Really, the only thing thing is that why Roy derides voluntarily accepting variable costs of ownership and "renting" rather than buying-but as usual he misses the real culprit-the real force that a homeowner can't anticipate or control- real estate taxes.

Funny thing about those taxes, they keep going up and up, but it's them damn greedy mortgage companies that are driving people out of their houses-not them damn greedy school and municipal tax agencies that make sure those people are fleeced out of their cash. While some mortgages even contain reduced payment "kickers" to allow reduced payments-not your school district-they want cash and they want it now and forever. The truth is, YOU NEVER OWN YOUR HOME if there are real estate taxes-you are feudal serf rentin' from the master.

Will Roy call for "intelligent regulation" (hah, hah, hah, hah) to control these taxes? Not likely. He'll just keep
considering anything that tickles his ever sensitive gullet as a monstrous evil.

I never suggested that
Roy did say he wanted them outlawed, I did not. No industry does anything without some profit potential involved. VRMs are another of those because the bank is never going to assume the risk of rising interest rates.
Thus, In your case, the bank took most of the risks (on interest rates) and your risk was noting being able to sell in time. However, the bank did not know they were taking that particular risk (i.e. a base rate jump over what they were charging you in interest).

I don't like VRMs and would never get one (unless I had a deal like yours, then it might be worth the risk; even if it did take a few months longer to sell). But a lot of people are talked into them for the duration and the majority see their home budget blow up when the rate jumps and their payment goes up with it.

My bigger issue is with banks and real estate agents and their changed attitude toward home loans. It used to be that you had some real proving to do if you wanted a home where the mortgage would exceed 33% of your gross monthly pay.

Again, I don't want the government involved, I just think financial institutions and realtors are doing themselves, and their customers, a dis-service by going there without a da mn good reason.

Does the world owe you a living?
So far it sounds like you don't think so.

Many do and demand the government 'fix it'.

Not at all
There are things the government is sometimes the only entity powerful enough to change or fix; but d@mn few of them. Usually the government is only an unwanted intrusion and a serious pain in the @ss.

For me personally, I have had problems with several government entities; most notably the IRS (and I did everything I was supposed to, it was a problem that they created; but try telling them that).

Thus, I am not especially fond of government regulation nor most government agencies. I would also like to see a further real re-vamp of welfare, help people get an education and find a job, don't give them a handout.

But I do believe in helping people make it in this country. The door is open to anyone, but some are simply unable to reach the doorway; lets give 'em a push in!

I don't envy anyone; I realize the sacrifice many had to make to get where they are.

My brother and I are great friends, and he has never given a thing to my family (just the way I want it) except being a brother. I don't want what he has worked for; he earned it. (But I will go to his house and take advantage of his wet bar and big screen TV a couple of times this NFL season; however I will bring the beer! Hey, I deserve it, I helped build his deck!!)

On the other hand, I'm none to impressed with the Hollywood crowd or the Paris Hilton types; most are where they are through pure dumb luck (either of genetics or circumstances).

Funny, I do admire many (not all) pro athletes. Yes, most are gifted genetically and are a bit lucky; but you have to be willing to put up with a lot of crap and work very hard for many years to get there. Most (again, not all) probably began playing organized sports at some time between 6 and 10 years old. The majority don't go to the pros until they are 20-24 years old. The real work and stress begins at somewhere between 11-13 in middle school and will continue for 7-13 years before they see any major payoff in the pros. All the while watching athletes, some they see as more gifted or better in some way, dropping away.

Most doctors don't work any harder, and many don't have to start stressing until med school.

Predatory lending practises
First, let me thank you for gallantly coming to my aid. It always amazes me that there can be persons so unkind that they make a career out of saying any outlandish thing to make me look bad.

Second, I was in the game a while back-- when the qualifier for a loan was going from 25% of income to 30% of income. And in the business we thought that was a little risky-- you had to be a little desperate to throw nearly a third of your pre-tax income at a house.

I have no idea what it is now. Safe to say it's more. The rule was designed, though, to protect both lender and borrower against default. It was considered to be the prudent thing to do, saving people from themselves.

Now it almost seems like the point is to get them to screw up. After several years of writing super sized checks to the lender every month, they still wind up losing the house. Oh well, it's just the market, working the way it s'posed to.

I wonder how people can be so gullible as to sign a VRM, when a moment's reflection could tell them the lender wouldn't offer it if he didn't have a strong hunch the rates would be going up.

But then there were people who bought into the Nigerian bank scam too. In fact that woman going on trial in Tennessee for shooting her husband-- she was kiting bad checks to cover her losses, going for a Nigerian con. And apparently she didn't want him to find out.

He didn't find out, either.

In my experience owning a home ends up costing a lot more than renting. Its only attraction is that you are less likely to be thrown out of your house-- they have to seize it through eminent domain or foreclosure, instead of just writing you a note that you have to move next month.

They entered into it of their own free will
You are correct. I should have said "..the notion that it is smarter to buy than to rent has taken root very deep in the American soul." And I should have taken the time to proof my comment before sending it-- but, we had house guests to see after.

The problem with subprime VRMs is that you are dealing with people who may not be entirely savvy. They are assured that the mortgage they are signing on to is affordable-- barely. And that it could go up. But many of them live in a world of optimistic assumptions, and assume in a couple of years they'll be making ever so much more than they are now.

Ha! Nine out of ten have more or less the same income, and more expenses. And it's almost invariable that the mortgage DOES go up-- some times greatly so.

So yes, they only have themselves to blame. And for that matter, the people giving mortgage brokers their savings to lend out are equally naive. They should have understood that if you allow your money to be lent at predatory rates there is a good chance the borrower is going to fall under the wheels, and default on the loan.

And believe me, getting a bunch of bricks when all you wanted was a monthly income can be a very expensive and painful proposition. First, it's usually a wreck. Second, it's vacant. Third, more than likely you're in a down market or a down neighborhood. It can be a long time before you turn your bricks back into income.

So in a sense, the broker is letting the borrower do what he wants to do. As well as letting the lender do what he wants to do. But it's the house that wins. The broker gets all his points, sells the loan and then goes merrily on his way.

It's a little like running a lottery. The house always wins.

Actually in those years I was making money
"You don't need to have housing prices go up, in order to build equity."

There may be occasions where that is true. But if the market value of your home falls faster than the balance on your new mortgage, you may find you owe more than the place is worth. And when that is the case, it can be very hard to sell.

In the mid-80s it was not uncommon to find someone who wanted to sell a house he bought for $330K, only to find it was worth no more than $260K on the market (DC prices). That meant that if he had to pay a point, closing costs and a sales commission, he would end up writing a check for $80-90,000 just to get the place off his hands.

Those were not the good times.

Marginal subprime loans
"Personal responsibility" is a whole nother take on the issue-- and to me, not a very productive one. You also seem to think I'm "blaming" the victim. Or the perpetrator. Or someone. But I'm just looking at the mechanics of the deal, and I don't find it to be mutually profitable.

First, let's agree that there are a lot of gullible people out there, who can be readily parted with their money. And a good way to do that is to appeal to their business perspicacity-- by telling them how smart they are to be getting into real estate, the perpetually rising market.

The problem I have with the deal is it's a waste of money on two of the three corners of the deal. Only the broker profits. Buyer and lender (investor) both lose. So it's a gambit I don't recommend for either.

I was just sharing my experience. And if you have a million bucks you'd like to place, I'd advise you to stay out of the mortgage pool.

See? That wasn't so liberal establishment, was it? I can feel your clash of values most acutely. I just don't think it applies to my analysis of what's wrong with this kind of lending.

Pretty much agree, right to the end
I'm done paying the mortgage on my home and it now costs me around $1,000 a year in taxes plus upkeep which I do most of myself. I will have to re-roof here in a couple of years, but I figure it is costing me an average of $2,500 a year to stay here now. Even in this little jerk-water I couldn't find a rental for under $400/month and, to find similar floor space, probably closer to $600 or more (if I could find anything).

My last house cost me less in mortgage, upkeep and taxes than the rent was for a three bedroom apartment in that town; when I left I got back more than I put into it (and it was a nice down payment for this place); not a bad deal.

I don't know what it is like where you live, but when I was in San Diego in the early 80s a mortgage on a three bedroom ranch-style with a pool in a so-so neighborhood was just slightly more that renting a decent three-bedroom apartment. Adding taxes and maintenence made it significantly more, but if you could pay it off in 15 years or less, taxes and maintenence in 1999 cost my friend (who owns said house) just over $5,000 a year.

Taxes have gone up, but he shouldn't have too many maintenence nightmares in the next 20-years (he has already had the water and sewer lines re-done and the house re-roofed and a wireing upgrade.) Present rent for a three-bedroom in that part of the city is over $800 a month, and that is the cheapest he could find. His costs this year will be under $5,000 (no major maintenence needed, that pretty much all taxes). No way he could rent anything with similar floor space for under $1,500 a month.

In the long haul, if you stay at the same place for 20 or 30 years or more, it is much cheaper to buy than to rent.

However, if you move a lot, you are right; renting is cheaper, sometimes much cheaper.

No disagreement from me
I just wonder when the house of cards will fall?

An interesting comment
You've said something profound here:

"Life is all about hard work. I have a relative who is a retired businessman. He drives a school bus primarily for poor black kids. What he has noticed is the utter lack of interest in getting a education and the utter lack of interest in anything that leads to self reliance and future advancement. He says there is one child whom he is utterly impressed with but the majority are indifferent.

"Now, do schools teach the worth of work? Why have generation of black kids been thrown to the trash?"

First, it's not just the black kids. It's most of the kids on this end of the spectrum. The parents don't teach them messages of success because the parents don't understand what goes into making success happen. And they don't whup butt if the kid is failing to shape up. Failure is very accepted here.

That kid who had a lot of promise? The promise is very likely to not ever be kept. This place is a lot like Hoodfellas. Just when you think you're getting out... they reach out and pull you back in.

These kids are very strongly controlled by peer group pressure. And the kids who are on their way to failing don't like to be shown up by friends of theirs who are succeeding. I saw this a lot when I was working in those neighborhoods.

So when you say "It is time we rise up against this utter failure of a social experiment and return to the virtues of hard work, self discipline and individual achievement" I'd like to know exactly how you go about achieving that. Some have suggested requiring licenses to bear children. But I don't think the crowd here at TCS would endorse that approach. :)

Neither a borrower nor a lender be...
This seems awfully venomous, Mr We-know-who-you-are. Instead of contorting my message every which way to wring an insult from it, you might note that it was as much about the perils of being an investor in the mortgage market. Those guys are taking a bath now every bit as much as the hapless purchasers who signed for the loans.

What I was saying was that this is a bad market to be in, and that the rules of the game could profitably be changed. You do understand, don't you, that there are rules already? And that the game could be improved if the existing rules were made better?

And that the rules would likely be better if they were suggested by people with experience in the industry, not solely by GS-14s laboring in the bowels of the Commerce Dept.?

It's like having a wagon road that goes through a patch of quicksand. It's one thing to laugh at the poor jerks who get mired in it, and say they did it to themselves, and it's up to everyone to be vigilant and not depend on the Daddy State for help.

But to me it would be lot quicker, and make better sense, just to put a sign up. That way, the next guy to come down that road wouldn't have to rely quite so much on his wits.

How did you get this way? God, you're a sour person.

Protecting people from getting stuck
Did you ever work as a loan placement officer? That's what your arguments sound like.

"Variable rates make sense in a climate of relatively high rates, whereas fixed rates make sense in a climate of relatively low rates."

No, I don't see it. VRMs make sense when the rates are about to go up. And that's when they were introduced-- when rates were up in the 10-11% range and people not in the business were convinced they couldn't go any higher. So they were sold, using exactly the words you're using here.

Then the rates went to 13-1/2.

Offering a fixed rate mortgage makes a lot of sense when you're banking on the rates going down. You want to sell that expensive money as fast as you can, before the market drops.

Re the "stupidity" of the home buyer, it's not always easy for the lamb to see through the schemes of the wolves. I don't blame them at all... most of them are novices in the game. If I have the opportunity though, I would warn them: don't get the VRM. Pay a little more and get a fixed rate. You'll sleep a lot better.

So it was all skill and no luck?
"Why do you want to use the force of government to prevent me from doing that? Oh right, you're a standard lefty that thinks I'm too stupid to know what the hell I'm doing and you need to tell me."

I hope you realize that you lucked out. Condos are a particularly treacherous end of the business. And there have been a LOT of losers. You were one of the winners.

Everyone who bought into what turned out to be a falling market felt exactly the way you do-- that they knew what they were doing.

BTW did you know that the lending industry is very highly regulated? And you should be glad it is, too. Those regs protect you. It's not like I'm suggesting we introduce rules where there are none. I'm saying the existing rules could be changed so that both purchasers and investors could be protected from market volatility.

Roy is to Finance- What Scrubs Actors are to Medicine.
Here let me put my id here becaue TCS drops it: Superheater

Venom? No, its impatience with the village idiocy. Everything is a giant conspiracy and you can't seem to understand the biggest risk of insolvency is taxes. I just advised a guy whose $1165 monthly payment on a 6.125% percent fixed mortgage breaks down like this:

Principal: 175
Interest : 700
Taxes: 290.
Principal Balance 137,142.00

Thats right. 25% of this guy's mortgage payment is TAXES. Absent that parasitic load, if just $150.00 extra could be applied from taxes to prncipal he'd be done in something like 226 months rather than 317.

On second thought it is bitter. Its bitter because delusional morons without the slightest understanding of what they are doing are blissfully ignorant. If I was a doctor and saw every idiot with a copy of prevention magazine get a prescription pad. You're prejudicial misfocus on finance does nothing to increase the security of homeownership, but your pavlovian conditioning to approve more and more government is the greatest threat to ownership.

It is about parents and the passing on of virtues. The greates gift a person can give is one of raising a child. Licenses, hell no. I take my role as parent seriously. I daily teach my kids self reliance, work and responsibility.

How do you pass that on? The same way I got it. From my parents. That virtue is passed on by society as a whole.

Isn't odd that when the Great Depression occured that there were no riots? Yes life was very hard. However, I have known many people who lived through the depression and they had a incredible work ethic and savings ethic. They did not cower in the face of adversity, they were hardened by it. They built a nation. These are people to respect. Hard working people who ahve pride. Pride in self and pride in what they built.

Now I am told legions of poor Americans can only survive by the help of welfare? I am to think this nation of Henry Ford's and the Wright Brothers is now a nation needing welfare and hoplessness?

No Roy, the America I was raised to believe in is one of opportunity. One that all people have equality of opportunity.

Yes, equality of opportunity is not he same as eqaulity of outcome. This great nation was not built on equality of outcome. It was built by rugged indiviualist who each strived for their own dreams and goals.

Sure there are many who failed but name me a single nation were anyone could become, without intervention, great other than this nation?

The problems are not the availability of opportunity. Don't give me that. I took borrowed money and built a business. What was the cost? Hard work and dedication. A virtue anyone can pull from the soul and only in America is it available.

Chavez marches in with troops to take the oil fields and vilifies the businessman. Yet is it not the hope of success that build character? Is not the ability to march forward what drives men to be the best they can be?

When I walk to the mailbox and get payments for my hard work am I supposed to be shamed in my success? No, I feel no shame, but pride. Pride in the fact I have lived up to my OBLIGATION to myself, my parents, my family and my fellow man to provide for myself.

Self reliance is a moral obligation. The United States was built on the notion of self reliance and rugged individualism. No politician, no agency can take that from me come hell or high water.

Why are you such a defeatest? Life is hard and not all try or succeed? However, is it not better to have tried and failed than not to have tried at all? Most nations you have no chance to fail, or succeed. Freedom is the right to succedd OR fail. Failure without success is a dismal life.

I resent the liberal left, the Nancy Pelosi's who made millions and then claim to represent us all whilst denying the same opportunities they enjoyed. The leitist left. Do not as I do but as I say?

No, Roy, one man said no and all of Rome trembled.

Are we going to teach children that trying is futile and thus accept a life of servitude to the almighty state?

What price Freedom Roy?

Better a blaze of glory then a whimpering cry...

The Free Life
How is living life as a free man, where many of the decisions one makes every day can work major consequences on the rest of one's life, different from living life as a regulated man, where many of the decisions one would have made as a free man are yanked off the table by regulations, rules, laws and the omniscient prudence and unquestionable well-meaning of Uncle Sugar?

Socialism: " existing rules could be changed so that both purchasers and investors could be protecte
Let's have the government purchase all housing and assign everyone a place to live based upon their family size and job function: manager/professional, executive or laborer.

I knew who you were.

You're right. Your clients could do a lot with the money they save from not having taxes.

They could plot some streets and lay pavement, so they could get out of their garage and go somewhere. They could have water and sewer pipes laid to their door, and not have to rely on the well and the septic system. They could hire personal security, as the police would not come there. And they could take some training in how to fight their own fires.

All in all, if you look at the services they get for $150 a month, it sounds to me like a pretty good package. Of course they could elect to live instead in rural Alabama, where there are next to no property taxes and no services of any kind.

That's the nice thing about this country. You get your choice-- you can live in Scarsdale or outside of Scottsboro.

Owning or renting
Good anecdotal material, Mr P. For some reason most people posting here like to stay up in the realms of pure theory. I share your taste for real world orientation.

In the Washington (DC) area, where I spent my career, you generally couldn't quite get in rent what you paid out in mortgage payments, taxes and insurance. And when you figured repairs in, you definitely were putting money into the house every year-- sometimes to the tune of thousands of $$. The exception was if you had owned the place for years, and were paying down an old mortgage based on a cheap sales price.

People moved, on average, every 2-3 years. But appreciation was normally so good the game of musical chairs could proceed with everyone making lots of money. Every once in a while the music stopped.

Very sad.

But if you plan to stay in one location for 30 years to life, there is no choice. No matter what it costs, you want to own it. Otherwise you can get it looking so pretty the landlord wants it back.

My right wing rant
We can agree on most of that. People are very different now than they were in the Great Depression. Why? They had different parents, who taught them different lessons.

But the world has changed. And one thing I've noticed in the places I've gotten familiar with, is that people who give their kids no upbringing at all are having three or more kids-- sometimes 14 kids-- and generally no daddy and no steady income. The nice, decent mommy and daddy families are having one and two. After a while the numbers catch up with us, and we notice the country is filling up with worthless people.

I don't look down my nose on them-- this rant isn't about morality. But they are worthless in that they add nothing. They take away from society. One reason our taxes are so high is we have to deal with them, in the courts and prisons.

But the point is that you can't teach those kids and I can't teach those kids. They are learning whatever it is that they learn from each other. And it isn't pretty stuff.

That said, you date yourself with opinions like "Now I am told legions of poor Americans can only survive by the help of welfare?" No, that's what people were saying thirty years ago, in the sixties and seventies. Get yourself unstuck from there-- the country has moved on and left you behind.

What we're saying now is that the rules of the game are rigged in favor of those who already have money, and who can let their money work for them. People who are still trying to make money, by working hard and playing by the rules, are getting screwed.

Their pension funds are worthless, cheating them of value they added to their companies over a lifetime. And if they have investments? Somehow it works out that ordinary people in the work force have their dividends taxed at the same rate as their employment earnings.

People who don't have "earned income" get to pay taxes on their dividends at a preferential rate. They also enjoy a lot of other breaks over Larry Wage Earner.

And more and more, welfare doesn't go to poor folks any more. My taxes this year? They went to Archer Daniels Midland.

So I agree with you. There's a lot that's wrong with the country. And if we both had perfect information, we might agree on how we need to fix it.

Arbeit macht frei
You're not living your life as a free man, and neither am I. We're both living in highly regulated societies. And these societies exact a strict behavioral price from us.

If you lived in a state of nature you'd need to carry a spear. That's what total freedom for everyone is-- anarchy and jungle law.

What you and I both have done is to find our own sweet spots-- those places we like best in all the world, in terms of the trade offs between duty and freedom. You live in the Helvetian Confederacy and I live in the Tar Heel State.

Let's employ less ideology
This is an instance where I think a simplistic ideology is blinding you to the reality.

There is an existing table made up of rules. Mostly the rules favor lenders and banks over consumers and borrowers. But there are certain consumer protections.

Right now the mortgage table is tilted away from two groups: home buyers and investors who dabble in the lending pool. It is tilted in favor of two other groups: Mortgage brokers and sales brokers.

I think it is possible to devise more equitable ways of levelling the table. I don't endorse having more rules or less rules in principle. I endorse having better rules.

Rules multiply
Every year the stack of papers that need to be signed to get a mortgage grow exponentially.
Adding more to the stack will surley help?

Putting helpful laws into place
If you will look back to my original comment, "Living house poor", you will find that my suggestion for repairing the problem was not just to add more papers to the stack at closing.

My suggestion was to outlaw balloon payments (interest-only loans for homeowners), prepayment penalties and adjustable rate mortgages. If you like, and I am amenable to compromise, you could allow them under certain circumstances, and have the homeowner sign a clause at closing saying he understands the dangers inherent in these conditions.

We do have usury laws-- at least in most states other than South Dakota. And in those instances when people want to borrow high risk money they can find ways to legally circumvent those laws. So why not offer the same for those dubious practises described above?

Such laws, which protect the naive home buyer, can actually hamper the professional speculator or developer. So I would be flexible.

Also-- one of those papers one has to sign that I really find enlightening is the lender's disclosure form-- where he advises the buyer that if they make every payment over the life of a thirty year loan that nice little affordable starter home is going to cost them well over one million dollars.

They can't rely on the sales agent to tell them that. He works for the seller. And the loan officer? He works for himself. Only the law works for the consumer.

Roy's lotteries and free will
Here's another example of a perceived problem, then people are stupid you say, then you do the usual of proposing more govenment regulation. If they have free will, why not actual freedom to yes, even make mistakes. I know it's a radical idea for people who like nanny states, but they might learn their lesson from it, then take the trouble to educate themselves since you've admitted that the public school system is crappy at teaching such useful things as how to manage your household finances. Also, doesn't it fit in with an expression you guys have in English?.. "the best way to convince a fool he is wrong, is to let him make his own mistakes".

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