Mainstream​ economics — the true picture

23 Apr, 2019 at 16:22 | Posted in Economics | 2 Comments

Mainstream economists’ picture of economics looks like this:

noahbuilding

In reality, I would argue, it looks more like this:

neoclassical building

2 Comments

  1. It is obviously a house in great decay, a shackle, undoubtedly a robber’s nest and , a shelter for shady people.The place needs to be thoroughly renovated immediately! 🙂

  2. It is obviously a house in great decay, a shackle, undoubtedly a robber’s nest and , a shelter for shady people.The place needs to be thoroughly renovated immediately! — Jan Milch

    Actually, in many cases they were beyond renovation because the predatory bank that hired “contract” mortgage brokers (fly-by-night brokers cashing in on the subprime boom) who came into minority neighborhoods and pushed the Ponzi scheme of subprime- alt- predatory lending schemes, sometimes using NINJA loans, refused to maintain and upkeep the property after foreclosure, so it was literally gutted of anything valuable inside (coper pipes, fixtures, etc.) and therefore could only be torn down and turned into a green-space, frequently turned into community gardens—all at the communities expense.

    The con went likes this. Nicely dressed women (usually a minority herself having just got her brokers license so she could cash-in on the real estate boom fueled by the subprime lending, which was ever increasing the price of homes) comes into the home of a minority, say in majority black homeownership neighborhood in Chicago somewhere, and pulls out her nice little flip-chart and begins her sales pitch provided by the bank pushing the toxic subprime loans. The mantra goes likes this: “You will save $600 a month on payments” as she flips through the various charts with pretty bar graphs showing those wonderful savings, all conveniently provided by the bank. Never once though is there a word about the downside of these toxic loans — when interest rates change so does your payment, or interest only payments don’t decrease the principle, or when balloon payments kick and you can’t refinance as promised was so easy, you are essentially screwed and will no doubt lose your home.

    I know the way the Ponzi scheme works because my wife and I bought a home in a blue-collar neighborhood (Renton, a suburb of Seattle) where many homeowners (HO) worked for Boeing just down the hill. We worked at Microsoft but refused to buy a home in Redmond where two incomes would be required to maintain the mortgage. The banks targeted such blue-collar neighborhoods relentlessly, I suspect, because they knew many of these homeowners were living month-to-month on their stagnant wages and would jump at the chance to lower their monthly mortgage payments. After repeated salespeople trying to come flip their charts for us we invited them in for giggles-n-laughs and to see how they sold this Ponzi scheme. The lady even bragged she had one herself; I would wager she doesn’t have one (or her home) any longer. Our home is paid off now, and gifted to our daughter and her new husband while we are now living in Japan, so they can continue to further their academic careers in science and medicine rather then settle for stagnant wages the rest of their lives.

    As a trained accountant turned software engineer I knew the idea of fiduciary duty was passé in the age of predatory finance-capitalism. No need to verify incomes when with NINJA** agility loans could be made, packaged, sold upstream, turned into a tranche, derivatized, and like magic, the devils derivates could blow the world up!

    And Wall Street, ever the wolves they are, could never let a good crisis go to waste! So as the devasting consequences of the 2007-2008 GFC worked its way out compounded by the Fissuring Workplace and job losses, Wall Street continues coming into middle class neighborhoods and buying up distressed homes, turning them into rentals, than jacking up the rent so only the few can afford to live there anymore. One Wall Street investment firm, Invitation Homes, spins off so many corporate names (DBAs) they should be called Medusa Homes! We regularly her mainstream economist talk about the “free market” being like an “auction” where buyers and sellers come together and strike a deal. Well, the market is rigged and it is one hell of a winning auction for the predatory wolves on Wall Street!

    Under George W. Bush administration, the FTC was virtually in a state of regulatory capture (just as we are today under Trump and Cronies) and resisted all efforts at reform to reign in the subprime lending virus:

    Alan Greenspan at the Federal Reserve was refusing to regulate subprime lending, saying, “We are not skilled enough in these areas and we shouldn’t be expected to [be].” For part of that period, from 2002 through 2004, one of us—Pat—served on the Consumer Advisory Council (CAC) of the Federal Reserve. The council was so named even though representatives from the banking industry held the majority of seats on the CAC, which was handpicked by the Fed. Pat and other CAC members alerted the board to the dangers of subprime loans and subprime mortgage-backed securities, and tried to convince the board to exercise its authority to regulate mortgages. At the time, only one Fed governor, Ned Gramlich, advocated for greater regulation of abusive subprime loans. Under Greenspan’s aegis, however, the board refused to take corrective action and failed to update its mortgage disclosures, which were so obsolete they were worthless to most consumers. Even worse, by 2004, Greenspan was encouraging homeowners to take out risky adjustable-rate mortgages instead of safer fixed-rate loans. (Engel, Kathleen C.. The Subprime Virus (pp. 7-8). Oxford University Press. Kindle Edition.)

    (….)

    The Fed under Greenspan not only kept interest rates low, but also refused to intervene to protect consumers despite growing evidence of abusive mortgages. Likewise, Congress and federal regulatory agencies were unmoved by stories of defrauded consumers. The dominant ideology was that if there were problems with mortgage lending, the market would solve them. In addition, if consumers were taking on credit they couldn’t afford, that was their choice and their problem. The market’s job was to offer consumers choices, and consumers’ job was to take personal responsibility for the choices they made. On the corporate side, responsibility meant maximizing the bottom line for the benefit of shareholders, without regard for the consequences of abusive lending to consumers or society. (Engel, Kathleen C.. The Subprime Virus (p. 20). Oxford University Press. Kindle Edition.)

    (….)

    Alan Greenspan at the Federal Reserve was refusing to regulate subprime lending, saying, “We are not skilled enough in these areas and we shouldn’t be expected to [be].” (Engel, Kathleen C.. The Subprime Virus (p. 7). Oxford University Press. Kindle Edition.)

    Of course there is plenty of blame to go around and Bill Clinton and others helped fuel the Subprime Virus as well. But any economist today who turns a blind eye to the predatory nature of the so-called “free market” today deserves nothing less than a millstone around the neck and quick dip in a deep lake or ocean, whichever is most convenient.

    Destabilizing financial strategies such as speculative securitization and fraudulent derivatives, especially the highly dubious credit default swaps, are euphemistically called financial innovations and promoted as strategies to reduce or eliminate asset price instability. Wall Street’s power in bringing forth ever craftier financial innovations, which were supposed to indefinitely inoculate the market against economic crises, seemed to have made only the sky the limit to financial expansion. The infectiousness of this mentality went beyond Wall Street operators and other financial speculators. As pointed out previously, it also included top policy makers at the heads of the Treasury Department and Federal Reserve Bank, who miserably failed to envision the risks of crash in their policies of aggressive financial expansion. “While he [Greenspan] disavows again the responsibility for the boom and bust . . . monetary policy played a key role in creating successive bubbles and busts during his tenure from 1987 to 2006” (ibid.). There is evidence that Greenspan was, in fact, quite proud of his policy of easy money and subprime lending, as this would supposedly bring the dream of homeownership within the reach of low-income citizens. For example, at the Federal Reserve System’s Fourth Annual Community Affairs Research Conference in Washington, D.C. (April 8, 2005), he stated:

    Especially in the past decade, technological advances have resulted in increased efficiency and scale within the financial services industry. Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. . . . With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. .. . Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s.

    (Ismael Hossein-zadeh, 2014, Beyond mainstream explanations of the financial crisis : parasitic finance capital, p. 17)

    Without a doubt, subprime lending hit fragile neighborhoods the hardest. Dan Immergluck and Geoff Smith have quantified the effect of foreclosures in low- and moderate-income areas, finding that for each foreclosure within one-eighth of a mile of any given home, the value of the home dropped by over 1.4 percent.[*] As blight infected modest neighborhoods, residents whose wealth was tied up in their houses were powerless to escape. Their homes, with manicured lawns and bright, geranium-filled window boxes, sat alongside boarded-up homes marred by graffiti.

    For people of color, subprime lending was an unmitigated disaster. A Federal Reserve Bank of Boston study found that almost half of the African-Americans in Massachusetts who vacated their homes in 2007 moved following foreclosure. In Chicago, half the properties that become bank-owned REO in the first quarter of 2009 were in neighborhoods where more than 80 percent of the residents were African-American. These communities then got hit with a second blow: job loss. African-Americans, who never gained back the ground they lost in the 2001 recession, were looking at 15 percent unemployment as of August 2009. Hispanics were close behind at 13 percent.

    For almost two million children, subprime foreclosures meant having to move, sometimes to homeless shelters. Cleveland alone had 2,100 homeless children enrolled in its schools in April 2008, a 30 percent increase over the prior year. In some districts, school buses had stops at homeless shelters, motels, and RV parks. These children suffered gaps in their learning when they moved, and their friendships and sense of community were fractured. Studies on educational disruption uniformly find that children who move frequently perform less well on standardized tests and are more likely to be held back in school and to drop out.

    The one thing that is impossible to assess, but everyone knows is true, is that subprime lending extracted a tremendous emotional toll, especially on those who lost their homes. Homes are not simply assets. They are the places where people live, raise children, care for the people they love, and play, where life events are celebrated, rituals performed, and much more. When people lose their homes, they lose a deep emotional connection. For some people this loss was too much to bear. A woman in Massachusetts killed herself after faxing a letter to her mortgage company that she would be dead by the time people showed up for the foreclosure auction that afternoon. In Ohio, sheriff’s deputies were standing with eviction papers outside the home of a ninety-year-old woman whose property had been foreclosed upon, when the woman shot herself multiple times. (Engel, Kathleen C.. The Subprime Virus (pp. 145-146). Oxford University Press. Kindle Edition.)

    * Immergluck (2008), at 12–13. A report of the Joint Economic Committee put the cost to neighbors from the spillover effect of foreclosures at $32 billion for the thirty-month period between mid-2007 and the end of 2009. Schumer and Maloney (2007), at 3.

    ** Lenders further dropped their underwriting standards in response to the fact that housing prices were rapidly outstripping workers’ stagnant wages. They did this by lowering or eliminating their documentation requirements for income, assets, and jobs. In a “stated-income” or low-documentation loan, applicants reported their income, but did not provide proof. In a no-documentation loan, the loan was underwritten with no information at all on the loan applicant’s income, stated or otherwise. With a NINA (no income, no assets) loan, the income and asset fields were left blank on loan applications. The only thing worse were NINJA (no income, no job, no assets) loans, which lenders made without any information on loan applicants’ income, assets, or jobs. (Engel, Kathleen C.. The Subprime Virus (p. 36). Oxford University Press. Kindle Edition.)


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