The American Scene

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Articles filed under Subprime Freakout

Yet Another Shoe Drops

Now that subprime plastic can’t be “refinanced” with another card or paid off with home equity, credit card defaults are beginning to spike. On the bright side, there was no federally-sponsored rent-seeking megacorporation encouraging every warm body to have six credit cards. On the not-so-bright side, there’s $950B in debt outstanding and banks are hoarding this “cash” stuff, which I’m told is fairly significant in a liquidity crisis.

So Simple a Caveman Could Do It

Discussion of the current financial crisis is often shrouded in a bunch of pseudo-technical jargon. People, especially intelligent and highly educated people, are often hesitant to ask basic questions. But as Socrates tells us, the beginning of wisdom is a definition of terms.

Imagine you live in a cave in hunter-gatherer society. Og is going to spend the day hunting. You have previously harvested some berries, lived frugally, and now have an extra handful of berries you can give Og to eat while he hunts all day. You and Og make a deal. When he returns from the hunt, he will give you two handfuls of meat. That’s debt. If instead of promising you a fixed amount of meat, you agreed that he would give you a fixed share – say half – of what he brings back to the cave, that’s equity. As an example calculation, if Og takes one handful of berries under such a debt contract and a second handful under such an equity contract, and if he comes back into the cave with, say, 10 handfuls of meat, then he has to give 2 handfuls to the debt holder and 5 handfuls (half of 10) to the equity holder. He is left with 10 – 2 – 5 = 3 handfuls of meat for his dinner. This combination of debt and equity is called his capital structure.

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The Current Stock Market Decline…

…should not freak you out, at least in and of itself. This is a ferocious bear market, but, so far, it is an almost exact repeat of what happened after the collapse of the .com bubble about 5 years ago. In fact, if we were to repeat that experience, we would see further declines from where we are today:

There were, in the grand scheme of things, pretty limited consequences of that equity bubble popping for most people in America. Partly, of course, this is because both the Fed and the Chinese government decided to make credit very easily available to U.S. consumers, and therefore many people who got a lot “poorer” in their 401K statements, suddenly got a lot “richer” in home equity. A ton of this increase and decrease in wealth was illusory. I agreed to say your house was $10 million if you agreed to say mine was worth $9 million, and suddenly we were both richer. It’s great until many people try to convert this wealth into other kinds of goods at once. In this way it was a lot like the .com bubble. My guess (and it’s only a guess) is that these two events will come to be seen as two sequential manifestations of the same underlying imbalances in the financial system.

What should concern you deeply, however, is the ever-growing TED Spread, as per a prior post. It is now well over 400 basis points, or about 50% above its historical peak at the time of the 1987 stock market crash, and about 10 times its “normal” level. It has continued to rise every week throughout the past month, indicating further worsening of the credit crisis, and rising perceived risk of contagion. We’ve injected so much debt into the system over the past decade that not only can’t we borrow our way out of the consequences of the real estate bubble popping, but we’re going to have to start paying off a lot of the existing debt in the face of a poor economy. What Paulson and Bernanke are doing is to make this adjustment only painful instead of catastrophic.

This Little Piggy Marked to Market

Our version of North Korea’s heroic national struggle appears to be keeping up with teh marketz. Worse than the wave after wave of failures and buyouts — at least for a conscientious commentator — is the pounding surf of new and opaque terminology, each carrying what feels like more and more analytical freight and econopocalyptic power.

The latest of these is ‘mark-to-market’.

Tim Carney is where I turn first to get sane quick about what the heck is going on. Only afterward can I brave the blogs. Hilzoy, posting at The Washington Monthly, thinks we’re crazy to switch to some other thing called ‘mark-to-model’. Barry Ritholtz leads with this quote:

“Suspending mark-to-market accounting, in essence, suspends reality.” -Beth Brooke, global vice chair, at Ernst & Young

And Mark Thoma has fun, via Andrew Leonard, pointing out that mark-to-market reaches across the aisle.

My role remains restricted to providing links, inventing timely portmanteau words, and coining ruefully humorous catchphrases — a sector of journalism which will never go out of business.


I’ve written extensively about the seriousness of the risks to the economy created by the current financial crisis. That said, I’ve also tried to show that with diligent management of the dangers, the foreseeable probability of catastrophe can be reduced enormously.

I think that it’s also useful to see this in a broader context. Suppose that we fail, and the worst comes. Suppose, in fact, we have a repeat of something on the order of the Great Depression. It would be terrible, but here’s something to keep in mind:

By many measures, the Great Depression is the worst economic crisis that America has ever faced, and it was really just a temporary pause in the ongoing growth of the economy.

At times of obvious economic difficulties, it’s traditional to trot out two kinds of quotes: (1) statements from whoever is in power saying that “the fundamentals of the economy are sound” in order to show foolish lack of awareness, and (2) statements by thoughtful pundits that the characteristic American, or Anglo-Saxon, approach of economic liberty has failed, and more statist economies will now become globally dominant. But at the level of decades, the fundamentals of the American economy have always been sound, and the political institutions, technical capacity and social mores that define the American system have always found a way to prevail.

None of this is cause for complacency. This growth is not some law of nature; it has taken millions of lifetimes of exacting work, risk-taking and careful management to achieve. But we shouldn’t lose our nerve.

I’m reminded of something I saw a stock market trader say on about September 12th or 13th, 2001, with the smoldering skyline of lower Manhattan behind him: “Nobody’s ever made money betting against the United States of America.”

Handicapping the Impact of the Bailout

A couple of days ago, I wrote a post that crudely estimated that if no material government action were taken to contain the current financial crisis, then the odds of a Great Depression level economic catastrophe were on the order of 1-in-4. I did this by using the natural experiment of the impact of Monday’s House vote on the Dow, in combination with a long-run view of the relationship between major downward movements in the Dow and subsequent economic results.

There is another way to try to get at a similar handicapping question. Remember that the hypothesized mechanism that would lead to a general economic collapse is a cascading series of defaults on debt that bring down numerous financial institutions. In this situation, the stock market is a bookie, but the debt markets are the action on the field.

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Are Paulson and Bernanke Fear-Mongering?

I wrote a post called “Irresponsible Folly” on Monday that harshly criticized House Republicans who voted against the bailout. Within about two hours, I received over 250 emails, almost all critical of my views (topping the previous record for negative emails received after my critical “Wilma Jennings Bryan” post about Sarah Palin’s acceptance speech). The vast majority of these emails were civil, intelligent and principled. Almost half of them asked some version of what I consider to be an excellent question: “How do we know that we really are at risk for a financial catastrophe if we don’t pass a bailout?”

Contagion – a cascading series of defaults resulting in a loss of confidence in financial institutions, and therefore in a severe economic contraction that hurts just about everybody, whether they were responsible or irresponsible about debt – is the catastrophic scenario that Paulson and Bernanke are asserting is a real risk for us. There are different levels of potential pain. It looks like we’ve moved past the “only the foolish get burned”, and “only the foolish plus rich speculators get burned” levels. The next level is a serious recession in which normal policy tools and the normal operation of the market can correct things. The next level is something like the Great Depression, or full-scale contagion. The true nightmare scenario (yes, even worse) is a loss of confidence in the ability of the U.S government to make good on its obligations. This would result in a run on the dollar, which is to say a run on the big bank called the U.S. government based on a loss of confidence by investors, both foreign and domestic.

This is all easy to say, but what are the odds of any of these negative scenarios occurring?

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The Bail-Out Vote

I’ve only done two posts on the bail-out. They make the case that the (now modified) Paulson proposal is the worst possible course of action, other than any available alternative. In John Boehner’s pungent formulation it’s a “crap sandwich” for which the members of his caucus should, reluctantly, vote (though I suspect the phrase he used behind closed doors was a little more….alliterative).

It seems to me that biggest cost of this proposal is not the direct expenditure. The government would commit to up to $700BB to buy and then re-sell some assets. How much they would recoup is unclear, but history suggests that it is far from impossible that this would be close to break-even. How is it possible that the Treasury could avoid paying more than they are worth if the bail-out is to help the banks at all? Because the fact of the Treasury being available to buy them changes their market value.

Before we get too excited about this seeming magic, however, we should remember – as I went into in greater detail a prior post – that the ideological costs of this are likely to be extremely heavy over time. This is a terrible precedent on many levels. Further, we can’t be sure that there really would be a cataclysm without the bail-out, nor can we be sure that this will be enough to avoid one if it’s coming. We are making a bet to lower the odds of a bad outcome. It’s just that the severity of a Great Depression is sufficiently bad that it is a worthwhile bet to make. But we will pay dearly for it for many years. In this way, the bail-out should be seen as one move in the course of a long and unpredictable campaign.

Seen in this light, the wrangling over the past week has really been about laying down markers for the later stages of this campaign. The initial proposal so aggressively omitted normal oversight, that this was presumably a negotiating tactic by Paulson, who remember has spent a career as a really good I-Banker. Adding this has been a substantial positive. Upon a quick, non-expert read, I think that the other changes to the bill are mostly fig-leaves. They are still useful as signals, however, in that they identify where each side is going try to go over the next few years. Whether through luck or skill, the House Republicans, have pushed this process just about to the breaking point, but not beyond it, and have gotten a number of such concessions.

But now it’s time to swallow hard and vote for the bill.

Debt as Wealth

Here’s an observation, maybe a truism: a truly ill-conceived policy — one whose results are manifestly perverse — usually indicates some broad and deep social consensus. We are never so true to ourselves as when we are screwing things up royally. This seems worth keeping in mind as we try to sort through the question of whether racially targeted lending preferences contributed to the meltdown of the banking system.

Steve Sailer has compiled the prosecution’s brief, showing how much rhetorical and financial support the government gave to the use of cheap credit as a tool of social engineering. This is all worth noting, especially inasmuch as it proves the “ownership society” to have been built on indebtedness.

Steve’s article describes the effect of diversity-based government lending pressures as “non-negligible,” which is a modest enough claim, but I think Steve still overstates the case, and that the impact was swallowed up in the broader orgy of borrowing (and of refinancing, courtesy of commenter rortybomb). Racial equity pressures were the three-knot tailwind behind a boat on an eight-knot current. The intuition that debt could serve as a substitute for wealth had already permeated our political, economic, and social thought, so it’s only to be expected that credit would serve as the medium for all kinds of redistribution efforts. ACORN and the CRA played their parts, but their script was handed to them by the massive demand for housing-based speculative investments, and by the grand illusion that easy credit was the same as wealth.

Skillz = Fail

These are tough times for a political theorist amateur sociologist. I, for instance, utterly lack the resources of a Yuval Levin, a Jim Manzi, or a Noah Millman: I have no deep, information-rich skill set pertaining to economics or finance.

I am no Tim Carney: I cannot explain AIG in terms I understand.

When confronted with A Situation Like This, I feel more subject then ever to Rorty’s claim that philosophers are pro pitchers of platitudes.

All of which is no big deal, except that the commentary cycle we’re all living in makes it doubly hard to take a step back, take a deep breath, and ponder how A Situation Like This might be accounted for in terms of the big movements and features of our culture — not just our spending habits or our institutionalized risk but our ‘lifeworld’, our deep list of convictions and priorities. A while ago somewhere I suggested just a little glibly that the political dynamics of this campaign had slipped out ahead of the ken of the commentariat, that we were all really in pure reactive mode. Now more than ever…! As painful as it is to realize.

What to Do Now?

I agree with Yuval Levin and Noah Millman that increased transparency and oversight are desirable and likely modifications to the proposed financial bail-out plan. There may well be even more substantial changes to it over time.

We are extremely likely to put in place regulatory, legal and other structures that we come to regret later. I wrote an article in National Review last year about how, on the back-end of the tech bubble a few years ago, we did exactly this. There are reasons why we always do this after a bubble bursts.

But we are now in a position of choosing among unpleasant alternatives.

Consider the situation on Thursday morning. A run was happening in money market accounts – not “threatening to occur”, but actually happening. Failure to intervene at that moment would have been disastrous. This is one reason that one less-discussed feature of the bail-out plan is the federal guarantee for money market accounts. The intervention had to be large and credible, and it had to happen in the moment. Paulson had to make the pronouncement then, and not wait for approval, and it had to be simple.

[UPDATE]: Here’s Megan McArdle with a great layman’s rundown of what was happening on Thursday.

Now consider the current situation on Monday morning. If “we” (i.e., the political leadership of the U.S.) go back on this commitment, then the loss of confidence will be even worse than it was last week. We are already trying to work around some of the inevitable inconsistencies that will be present in such an emergency action. As one example, consider that a federal guarantee for money market fund accounts means that they are suddenly much, much safer. Hence, Treasury has had to modify this guarantee over the weekend to apply only to pre-existing money market fund balances to prevent a massive flow of funds that could destabilize traditional commercial banks.

This is pure ad hoc economic management by government officials. It is a Hayekian nightmare on several levels, and as I said previously, its ideological consequences are likely to be substantial, long-lasting and negative. I can make the arguments as loudly as anyone, and I believe them, that the causes of this problem that can be laid at the feet of government are ill-advised market interventions and poor regulation, rather than insufficient controls on the market. The best long-term solutions, in my view, all involve less government intervention. It will be important to make these arguments. But the patient has been hit by a car, and is lying on the ground bleeding. It’s all well and good to discuss how irresponsible he was to wander drunk into the street, how we should better design our traffic control systems, and so on. But first we need to stabilize the patient and stop the blood loss.

It seems to me that the crucial prudential judgment to be made right now is this: How much time and freedom of action does the political process have to improve the bail-out before the time and/or complexity of the process serves to undermine the confidence-building impact of the bail-out? My view is, unfortunately, “not much”. We need to pick our battles, and focus more on trying to make the bail-out as flexible and temporary as practicable, than on trying to get a well-designed regulatory reform in the time and policy space available to us.

The Economics of Injustice

I see that Richard Posner has entered the lists in the debate over David Brooks’ column about debt. See my earlier contribution here and Reihan’s contribution (where he says I am making sense!) here.

Posner is a genuinely interesting fellow. His strength and his weakness is his willingness to follow his premises through to their conclusions. This is a strength, because it means he’s honest, and because you really see where his premises lead. It’s a weakness in that sometimes these premises lead to really crazy places. I recall a college seminar where we read his Economics of Justice and trying to figure out why, logically, under his schema, debtors’ prison was unjust. (Ultimately, I think the big problem with the “law and economics” crowd is that they have a very useful perspective on the law, but it’s not a theory of justice – justice and efficiency are different things, as are justice and aggregate utility, as are justice and maximizing liberty. But that’s another topic for another time.)

In any event, I found his contribution to the “Great Seduction” debate relatively unconvincing. Here’s why:

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Would-be Jeff Skillings, Take Note

On of the key tricks that Enron played with its accounting was creating a variety of vehicles thruogh which it could “bet” on its own stock price continuing to rise. If they won the bet, they would be able to generate earnings from nothing more than appreciation in their own stock price. If, as of course they ultimately did, they lost the bet, it would turn out that a substantial percentage of the firm’s assets consisted of nothing more than shares of itself.

Well, Statement 159 plays a similar game allows firms to play similar games – entirely above board – with their debt. This could turn out to be a problem.

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Picking Up Nickels in Front of a Steamroller

In spite of all the talk about Obama’s pastor, the most important thing that happened this weekend was the shotgun purchase of Bear Stearns on Sunday. The firm – once the biggest underwriter of US mortgage bonds – lost about 99% of its value over the previous 16 days as a result of a run on the bank in which clients, alarmed by rumors of a cash shortage, withdrew $17 billion. The purchase price is less than the estimated value of the office buildings and real estate owned by the firm; it is the Wall Street equivalent of buying it for $1. There is obviously a huge risk premium built into this price, and I doubt that either Bear or JP Morgan executives really know the value of Bear’s portfolio.

Bear is the counterparty to many credit contracts (hence its problems). The risk of letting such an institution fail is that otherwise healthy institutions go down with it. Because of the central role of leverage in the financial sector, and the central role of the financial sector in funding every other sector of the economy, this would be a disaster. Of course, it creates a moral hazard, but on balance is almost certainly worth doing. That said, my guess is that we’re likely to see some other household name that is not too big to fail go down before this is all over – the government will need to demonstrate that it is willing to do this. Not for nothing, but I wouldn’t be investing a lot of my retirement account with Lehman right now.

Strangely, this is the kind of situation where investors can make huge amounts of money. The market almost always seems to over-correct when some crisis like this hits. So why isn’t there a sure-fire investment strategy of always buying into such a crisis? (As the old saw goes, “Buy on the sound of gunfire, sell at the sound of trumpets”). The problem is that these “over-corrections” are usually the market pricing in the probability of a massive crisis. The clear risk here is that there are more Soc Gen and Bear Stearns problems hiding undiscovered on balance sheets. It will only be clear in retrospect whether these are tremors at the start of financial contagion, or whether they are just adjustments to the popping of the housing bubble. You can see this fear and greed battling it out in the market today: the Dow opened about 200 points down this morning, briefly reached positive territory and is now back down 116 as I write this.

( cross-posted at The Corner )

2-Dollar Broker

$2/share is the price J.P. Morgan is paying for Bear Stearns. That’s down from $30/share as of Friday’s close.

To a first approximation, from the perspective of shareholders and employees, $2/share is the equivalent of zero. The prime brokerage business alone was probably worth about ten times that amount. That could mean that J.P. Morgan thinks the cost of exiting the other businesses (because it fears some proportion of Bear’s assets are marked incorrectly, or because it just costs money to eliminate redundancies and there’s a lot of overlap in investment banking and asset management) is roughly equivalent to the value of the prime brokerage (and anything else they intend to keep). Or it means that Bear’s board had sufficiently limited leverage that it had to take literally any offer above zero. Or, most likely, both.

I’m really trying to figure out the silver lining here. I guess it’s that we don’t have to worry about the contagion from a spectacular Bear Stearns bankruptcy, and the potential chaos that would bring to the derivatives markets as counterparties rushed to replace positions previously facing Bear. Beyond that, I’m hard pressed. $2 won’t even get you on the subway for much longer.

The McHomestead Act of 2011

Last spring, controversy erupted in the D.C. suburbs over residential crowding, or the excessive occupancy of homes by unrelated adults. Of course, the issue has an ethnic angle:

“These are changes in neighborhoods, and change is sometimes hard to manage,” said Fairfax Supervisor Penelope A. Gross (D-Mason), whose district includes large communities of Koreans in Annandale, Vietnamese in Seven Corners and Latinos in Baileys Crossroads. “It’s a different model. A transition from the nuclear Caucasian family to the ethnic extended family.”

Meanwhile, affluent home buyers — those nuclear Caucasian families — are moving into cool, walkable urban neighborhoods, leaving unwanted McMansions to decay on their large lots.

Isn’t the solution staring us in the face here? Maybe the exurban buildout hasn’t been the colossal waste that it’s always described as, but actually an ingenious way to gracefully integrate foreign residency patterns. Soon the unpasteurized milk set will make weekend shopping jaunts to the exurbs, where places named BryndenCrofterWindermere have become home to exotic migrants growing truck gardens on those heretofore too-large lots. The hierarchy of extended family/clan/tribe seems to map perfectly onto house/cul-de-sac/subdivision, and you can keep a lot of livestock in a three-car garage.

Innovation is the Problem

No one can accuse Paul Krugman of mincing words.

The bottom line is that policy makers left the financial industry free to innovate — and what it did was to innovate itself, and the rest of us, into a big, nasty mess.

I find it extremely hard to believe that the costs of financial innovation will ever outweigh the massive benefits, and I accept that we may be headed for a deep recession.

Why was this allowed to happen? At a deep level, I believe that the problem was ideological: policy makers, committed to the view that the market is always right, simply ignored the warning signs. We know, in particular, that Alan Greenspan brushed aside warnings from Edward Gramlich, who was a member of the Federal Reserve Board, about a potential subprime crisis.

It seems that Gramlich was right in this instance. But how many have advocates of intervention been wrong? The costs of regulatory overreaction are difficult if not impossible to discern, but that doesn’t make them any less real.

Infinite Demands

While heading to my sister’s house for Thanksgiving, I read a very amusing essay by Slavoj Žižek on resistance to the hegemony of global capitalism and liberal democracy. Žižek winds up praising the masculinist clownofascist Hugo Chávez for reviving “democratic centralism,” which he evidently believes to be a new form of politics. But that’s not what I found most interesting. Žižek focuses most of his enmity on Simon Critchley’s Infinitely Demanding, a book that sums up a familiar political persuasion.

For Critchley, the liberal-democratic state is here to stay. Attempts to abolish the state failed miserably; consequently, the new politics has to be located at a distance from it: anti-war movements, ecological organisations, groups protesting against racist or sexist abuses, and other forms of local self-organisation. It must be a politics of resistance to the state, of bombarding the state with impossible demands, of denouncing the limitations of state mechanisms. The main argument for conducting the politics of resistance at a distance from the state hinges on the ethical dimension of the ‘infinitely demanding’ call for justice: no state can heed this call, since its ultimate goal is the ‘real-political’ one of ensuring its own reproduction (its economic growth, public safety, etc).

Consider the endless denunciations of mortgage lenders we’ve seen in recent months, which posit that lenders are, in Bob Herbert’s words, “a swarm of swindlers.” (It’s interesting to imagine the role a Bob Herbert might play in contemporary Venezuela.) It’s only very rarely that the “mortgage crisis” is placed in context

Subprime loans are typically made to borrowers with credit histories that the mortgage industry considers less than prime. They can carry higher interest rates than traditional loans or adjustable rates that can make the mortgage difficult to repay once the interest rate resets. They can also carry higher fees and prepayment penalties and thus are at a high risk for foreclosure.

If anything, the mortgage industry has become less racist and more willing to give borrowers second and third chances. This is best described as a democratization of home finance, driven at least in part by well-intentioned government regulations.

And now government is being blamed for the fact that not all borrowers have been fully capable of keeping up with their payments. The loans were thus predatory. I have no doubt that some loans were pushed in misleading ways, and this merits serious attention. But when I read Herbert, I have to wonder if making any distinction between borrowers with flawless credit histories and those with less-than-flawless credit histories is in fact “predatory.” Is everyone entitled to the same (low) interest rates and fees and penalties?

This is one of those “infinite demands” that simply can’t be fulfilled in a market economy. Lenders need to make distinctions of some kind to make a profit. So perhaps the deeper game is to delegitimate any profit-making activity, or rather to only allow profit-making activities embraced by the creative class. These activities, after all, can’t be said to victimize the poor. The poor, in contrast, must take part in a parallel economy controlled by the state: Wal-Marts are not permitted, but overpriced and politically-connected mom-and-pops are; rental housing is either directly owned by or essentially controlled by the state, with all the attendant consequences; “private” homes are basically given to well-placed “buyers” on favorable terms; civil service jobs are created to replace private-sector jobs that are destroyed or driven away.

So naturally the “creative class economy,” which remains mostly free, flourishes. After all, the exploitation that does go on doesn’t tug at the heartstrings. The parallel economy, meanwhile, is profoundly dysfunctional. A thriving black economy soaks up all the entrepreneurial energy of the poor, driving high crime and incarceration rates. While the creative class feels pretty bad about all this, even its smartest members are incapable of seeing how they are implicated: the fact that many of our inner cities are divided between perfumed corridors of creative professionals and the very poor is somehow Their Fault.

Žižek, surprisingly enough, puts it best.

The ambiguity of Critchley’s position resides in a strange non sequitur: if the state is here to stay, if it is impossible to abolish it (or capitalism), why retreat from it? Why not act with(in) the state? Why not accept the basic premise of the Third Way? Why limit oneself to a politics which, as Critchley puts it, ‘calls the state into question and calls the established order to account, not in order to do away with the state, desirable though that might well be in some utopian sense, but in order to better it or attenuate its malicious effect’?

These words simply demonstrate that today’s liberal-democratic state and the dream of an ‘infinitely demanding’ anarchic politics exist in a relationship of mutual parasitism: anarchic agents do the ethical thinking, and the state does the work of running and regulating society. Critchley’s anarchic ethico-political agent acts like a superego, comfortably bombarding the state with demands; and the more the state tries to satisfy these demands, the more guilty it is seen to be. In compliance with this logic, the anarchic agents focus their protest not on open dictatorships, but on the hypocrisy of liberal democracies, who are accused of betraying their own professed principles.

We face a choice between a society built on bottom-up entrepreneurship, in which some are allowed to fail and many more are allowed to thrive, and the status quo of hollowed-out cities, extreme inequality of skills and ambition, and steady infantilization. The politics of infinite demands, which appears to be thoroughly radical, is in fact about the conscience, and the narcissism, of the creative class. Its antipaternalism (“How dare you talk about morality/personal responsibility/marriage/fatherhood?”) is closely tied to its condescension (apparently every borrower is a victim who couldn’t possibly know any better). In their attempts to build an economy that lives up to their moral vision, the creative class radicals see themselves as the allies of the poor and vulnerable. But with friends like these …

Sub-Prime Mortgages, Prime Comedy

I’ve been meaning to post something about the sub-prime crisis for quite some time, figuring that, for once, I should write about something I know something about. Well, now I don’t have to. Instead, you can just watch this.

The Return of Redlining?

This article on rates of subprime lending across neighborhoods beggars belief.

First, the striking finding.

The analysis, by N.Y.U.’s Furman Center for Real Estate and Urban Policy, illustrates stark racial differences between the New York City neighborhoods where subprime mortgages — which can come with higher interest rates, fees and penalties — were common and those where they were rare. The 10 neighborhoods with the highest rates of mortgages from subprime lenders had black and Hispanic majorities, and the 10 areas with the lowest rates were mainly non-Hispanic white.

The analysis showed that even when median income levels were comparable, home buyers in minority neighborhoods were more likely to get a loan from a subprime lender.

Second, the key information.

The analysis provides only a limited picture of subprime borrowing in New York City. The data does not include details on borrowers’ assets, down payments or debt loads, all key factors in mortgage lending. And comparing neighborhoods is inexact; the typical borrower in one may differ from a typical borrower in another.

Jay Brinkmann, an economist with the Mortgage Bankers Association, said there was not enough information in the Furman Center analysis and other studies on the issue to draw conclusions about whether subprime lenders were discriminating against minority home buyers. One of the crucial missing pieces is the credit histories of individual borrowers, he said.

That certainly seems like crucial information to me.

Finally, the hysterical response.

“It’s almost as if subprime lenders put a circle around neighborhoods of color and say, ‘This is where we’re going to do our thing,’” said Robert Stroup, a lawyer and the director of the economic justice program at the NAACP Legal Defense and Educational Fund Inc.

The NYT, which of course faces commercial and “newsiness” imperatives, doesn’t help matters. Even after citing Brinkmann, the author writes,

But the Furman Center study, a summary of which is being released today, still raises questions about the role of race in lending practices. A separate analysis of mortgage data by The New York Times shows that even at higher income levels, black borrowers in New York City were far more likely than white borrowers with similar incomes and mortgage amounts to receive a subprime loan.

This assumes, again, that debt load, down payments, and borrowers’ assets are fundamentally unimportant, and indeed that race is more important than these trivialities.

What we need is more data.