Moral Hazard in Mortgages

“The cherished American ideal of self-reliance has a flip side”[1]  Before getting to the implications, or flip side, I want to fill out what informs this ideal. One could add to it the ideological stance that came into its own in 1980 with the election of Ronald Reagan, who declared that government is the problem. This implies that government should be minimized, and otherwise corrected as much as possible. Government is hardly to be viewed as the solution. This is the legacy of the Kennedy assassinations of the 1960s, the Vietnam War, and Watergate as well as Ford’s pathetic “WIN” buttons and Carter’s micromanagement and failure in regard to the hostages in Iran. I was not old enough for the Kennedys’ truncated optimism (and that of Martin Luther King) to resonate; I knew the political (and economic) pessimism of the 1970s and the energizing “fix it” mentality of the early 1980s. Of course, Reagan’s “new federalism” failed, as did his aim to balance the federal budget, and the jury is still out on whether “peace through strength” pushed the USSR off the cliff.

Reagan is perhaps best known to historians and political theorists for having formally shifted the political paradigm’s default to “government is the problem” after at least a decade of political and economic paralysis. Dovetailing with the American ideal of self-reliance, the default on government was still a headwind for Barak Obama as he found he had to capitulate even on a “public option” for health insurance—relying instead on the same private insurers who had been excluding pre-existing conditions and otherwise cancelling policies at the advent of a new illness. In other words, that the health-insurance lobby could still call the shots at the White House suggests the continuance of the headwind running against government. Relatedly, in the 1990s Bill Clinton had to give up on his vision of using government for grand purposes because the American people were “not there.” Clinton found in the presidency instead a plethora of smaller accomplishments, such as adding to local police forces and otherwise acting as the mayor of an empire as if it took a village. He had figured out how to avoid the headwinds.

With this background in mind, we can now get to the matter of the implications of self-reliance and “government is the problem” as regards moral hazard. In economic terms, it refers to “the undue risks that people are apt to take if they don’t have to bear the consequences. In other words, if the money is free, why not spend it on a designer purse?”[2] Because of moral hazard, backed up by the ideal of self-reliance and the default of “government is the problem,” there is significant discomfort with the idea of bailouts and safety nets in American society. The notion that even a small portion of aid even to homeowners who are “under water” (i.e., they own more on their mortgages than their houses are now worth in terms of equity on the market) might find its way to the undeserving (or cheats) “can be enough to scuttle support, or restrict help so drastically that few can use it.” Adding to this sentiment, typically by vested interests, is the sanctity of contract dogma. This means that a mortgage borrower is obligated to pay whatever he or she had agreed to pay regardless of changed circumstances either of the borrower or the housing market.

Bankers “say that generously easing loan terms or reducing mortgages outright would only encourage homeowners who can pay to pretend they can’t. It would also, the bankers say, send a dangerous message: a financial commitment isn’t really a commitment.”[3] Additionally, homeowners “who keep paying their mortgages, even if their homes have lost value, reasonably wonder why neighbors who weren’t as responsible are getting help.”[4] Behind both of these concerns is resentment that someone else might get something too easily (i.e., beyond that which is deserved and what one can get oneself). It is not a very laudable mentality, psychologically and ethically. In other words, it is rather small. Even worse, bankers who themselves received bonuses paid for in part from bailouts were keeping borrowers from also being bailed out. It is as if the financial crisis of 2008 hit only one side of the ledger.

Shaun Donovan, the secretary of the Department of Housing and Urban Development, said that although there is was a “nugget of truth” to the moral hazard argument, “only about 10 or 15 percent of Americans who can still pay their mortgages try to walk away from their debt. Most troubled homeowners, like the Katrina victims, are genuinely hard up.”[5] Accordingly, the bank bailout should have been oriented to them. Had it been, the banks’ balance sheets would not have been toxic and “two birds” would have been “killed” with “one stone.”

The “specter of moral hazard haunts a basic tension in American life: to what extent are people responsible for their own problems? The more trouble you’re in, moral hazard suggests, the less we should help.”[6] This relationship is the inverse of what it should be. That is, moral hazard should not apply as if survival itself were conditional. I am perhaps as innately American as they come, being born and raised in the Midwest, or “heartland of America.” Even so, when I hear politicians or others refer to others’ survival as somehow conditional (typically as based on a work history), I sense that the ideological belief is distinctly American. I revolt at the sheer self-centeredness of the people expressing the view and I reject the validity of the claim itself. For a society in which survival is deemed to be inherently conditional (as defined by people whose survival is not an issue) is no society at all. Put another way, if we all knew in the back of our heads that were we to fall on hard times and not be able to provide for our own shelter and food without taking them from others (i.e., remaining in society), life for all of us would be a little lighter and less existentially anxious. This is not to say that everyone has a right to a t-bone steak once a week or a mansion. The moral hazard argument conflates these with sustenance needs.

If a person is seriously under water, the sheer depth naturally dwarfs any consideration of culpability. If someone is barely breathing or starving, a natural sentiment of sympathy orients others to the question of how the plight may be quickly assuaged. I submit that the bailed out banker actively resisting any assistance for homeowners near foreclosure has a rather unnatural “hardness of heart,” or hardness more generally. To make aid conditional where basic necessities like shelter, food and medical care hang in the balance is to apply moral hazard beyond its ken. This overreach operates at the expense of human rights.

Essentially, applying moral hazard conditionality where survival itself is at issue for others is to presume a godlike position for oneself. In other words, the propensity to judge others’ extent of deservingness is premised on self-idolatrous pride. Given the nature of self-idolatry, it is no surprise that bankers who have benefited themselves (as well as their banks) would apply moral hazard to their counterparties but not to themselves. The conditionality does not apply to those bankers, whose lobby—which Sen. Durbin said owns Congress—makes sure of it. The resulting asymmetry can be interpreted as a reflection of the bias in the “self-reliance” and “government is the problem” default—a game-board that is tilted toward the rich because they can afford to be self-reliant and scoff at government as part of any solution to societal ills.

Ideally, a social contract, and thus a society, should be in balance, with basic human rights being beyond the reach of the inevitable swings in the political-ideological pendulum (i.e., the headwinds). Where the latter are definitive (and exclusive), sustenance needs, being an inherent human right, become valid outside of societal limits. In other words, where moral hazard is applied to basic shelter and food needs, people needing them have the inalienable human right to take them without regard to societal rules bearing on them. Even in political theory, possession of property is salient. Thomas Hobbes refers to the right of self-preservation as going beyond any law. Is extending moral hazard to cover necessities worth making society (and its laws) conditional?

1. Shaila Dewan, “Moral Hazard: A Tempest-Tossed Idea,” The New York Times, February 26, 2012. 
2. Ibid.
3. Ibid.
4. Ibid.
5. Ibid.
6. Ibid.

E.U. Presses Italy to Tax Church Businesses

One of the chief benefits of federalism is the ability of one system of government to check another within the overall federal system. In the European Union, the state governments have so much power at the federal level—in the E.U. institutions—that it is difficult for the E.U. Government to check excesses and abuses in the state governments. E.U. law, regulation and directives rely on the state governments, albeit to varying extents. In the United States, the case is the reverse. The U.S. Government holds so many of the cards that the state governments cannot act to check abuses in the federal government. Actually, for all of the power that the U.S. Government has amassed, it does a horrible job in aiding citizens against abuses in their own state governments. Fortunately, we can look to Europe for a bright spot: the E.U. Commission and Italy, á grace de Mario Monti who is both governor of the state of Italy and a former commissioner in the E.U. Commission (the E.U.’s executive branch).

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Sanctity of Contract Breached on Mortgages

An audit in 2012 by San Francisco county officials of about 400 foreclosures “determined that almost all involved either legal violations or suspicious documentation. . . .  The improprieties range from the basic — a failure to warn borrowers that they were in default on their loans as required by law — to the arcane. For example, transfers of many loans in the foreclosure files were made by entities that had no right to assign them and institutions took back properties in auctions even though they had not proved ownership. . . . About 84 percent of the files contained what appear to be clear violations of law, it said, and fully two-thirds had at least four violations or irregularities.”[1] The problem seems to be systemic, suggesting that judges should be able to modify mortgages on the basis of nullified contract.

The full essay is in Cases of Unethical Business, available in print and as an ebook at Amazon.com.  

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1. Gretchen Morgenson, “Audit Uncovers Extensive Flaws in Foreclosures,” The New York Times, February 16, 2012.

The Profitable Aristocracy: On the Conditionality of the Managerial Elite

Downton Abbey, a television series that began in 2011 on PBS’s Masterpiece Classics, depicts through narrative life in a British manor beginning with the sinking of the Titanic in 1912. For European viewers and more generally for the rest of us, the program proffers a glimpse of the world a century back. The advent of the telephone and phonograph seem to pierce through the manor’s socio-economic hierarchy that had undoubtedly been in place for centuries. It is the sheer social distance between the servants, almost regardless of their particular rank within their hierarchy, and the nobility in the house that is so striking to me. Moreover, the “Your Lordship” and “Your Ladyship” are not contingent on the manor’s owner employing or even paying the servants.

Lady Mary between the man she was to marry and the man she loves. (Carnival/Masterpiece)

In other words, nobility is by birth and is therefore not contingent on any financial arrangement. Indeed, after being fired, servants at Downton continue to address their former employers by their respective noble titles. This can easily be distinguished from the business or commercial culture wherein respectful demeanor is typically contingent on being paid. A worker who is fired is apt to quickly drop the former air of respect—even turning downright disrespectful. Even a longstanding regular customer can find the respectful demeanor of a waiter or front desk clerk quickly turned into something else entirely if a tip is not judged to be sufficient or there is a dispute on a reservation or room charge.

An acquaintance of mine who is from India was staying at a Staybridge for a number of months on business. As per the hotel’s policy, any of the long-term “guests” could invite friends or co-workers to the weekday late-afternoon receptions at the hotel. He invited me to a few of the receptions. Arriving before him on one occasion, I was stunned at the rude conduct directed at me by the front desk employee and another employee who was helping with the reception. It was ironic that they referred to their paying customers as “guests” yet could not have been of lower class in how they treated a real guest. The man helping at the reception ignored me and the front desk employee stood behind me bragging about how she had just thrown out a “non-guest.” When my friend arrived, I had to inform him that I would not be able to join him at the reception. He too was shocked at the employees’ behavior. “I live here!” he said still astonished.

From my own experience, Days Inn is far worse with respect to a low-class approach to management.  In reading reviews by customers, the lack of accountability at Days Inn is truly astounding. In Downton Abbey, Granny remarks that once the little people get a taste of power, it goes to their heads like strong drink. Hearing this line, I was reminded of when I made a noise complaint while at a Days Inn. Actually I made one early one morning, then another a night later because the noise above had gotten worse. The front desk employee refused to act on both occasions, so I phoned the police the second time. Even that did not end the noise, which lasted until 6am. From what the Days Inn centralized customer service dept representative later told me, the manager had retaliated against me by reporting to that dept "several altercations with front desk staff including profanity." Days Inn itself refused to come down on the local manager as the hotel was a franchise (they could have demanded a video recording as proof of the alleged altercations). As it was, I was left with the impression that the corporate office was impotent while the manager was utterly corrupt and beyond virtually any accountability. I was stunned that insult could be so easily added to injury as a manager was allowed to turn on a customer in the wake of his own failure. In the context of Downton Abbey, the manager  had completely lost touch with the fact that even as a manager he was a servant, rather than nobility. Management, in other words, is not of nobility. We allow managers to presume far too much, and all too often they get away with it because of their power in their respective organizations.

My point is that the “nobility” in a commercial society is utterly fake, as shown through the extent of conditionality. Customers and employers doubtless regard the perfunctory manners of managers as fake—i.e., as something we are expected to pretend is authentic rather than contrived simply to get something. Social respect in a non-noble, commercial society is simply a means of manipulation fueled by greed.

In watching Downton Abbey, I had the sense that “Your Lordship” and “Lady Mary” are expressions from a felt obligation that does not depend on getting anything in return because the nobility are due it regardless of any monetary transaction. In America at least, where such a thing does not exist, viewing nobility in another time and place makes the contrived nature of social respect in the American commercial society all the more apparent. Far too much in terms of behavior is assumed to legitimately be conditioned on money.

In fact, the American aristocracy could be said to be Wall Street, with lower “counts” being the professional caste (lawyers, CPAs, physicians), while the aristocracies of clerics and scholars operate without the requisite currency and thus must appeal to another place and time. The clerics and scholars have more in common with the nobility than with rich CEOs and professionals, whose basis is utterly contingent (i.e., being wealthy). In other words, the motives in how the respective aristocracies are addressed differ. Respect for a cleric or scholar is rooted in obligation, whereas respect for a business executive or a profession is based on the commercial element (i.e., wealth being valued, as well as self-interest).

It is no accident that clerics and scholars are not highly valued in American society—its values being so commercial in nature. Typically an executive or lawyer will dismiss a cleric or scholar for not being “in the real world.” Indeed, some “professionals” even presume that their undergraduate degree in a professional school makes them scholars, or able to evaluate scholars. Barak Obama, for example, has been characterized as a “legal scholar” simply because he taught in a law school as an instructor with one degree in law. I have read plenty of law journal essays written by people having earned a degree in law. Let’s just say the writing reflects the undergraduate degree. In Europe, by the way, a law professor must have the doctorate in law (JSD).

In some ways, having a doctorate (i.e., nobility in academia) is like being an earl or count because the title does not depend on the size of a bank account or any commercial transaction. After having been hooded, a doctor (this is not properly a medical designation) is forever designated as such, meaning unconditionally. The same applies to a member of the European aristocracy. Also, that aristocracy prides itself on its good manners, while I have wondered if a lot of education renders one more refined as well. Perhaps it is simply a function of being socialized for so long at university. Particular at good or excellent seats of learning, the context does not exactly reflect society as a whole.

I contend that an educated refined demeanor is superior to the conditionality of commercial relationships. It is no surprise, therefore, that the educated aristocracy is so slighted by the American society at large—including the moneyed “aristocracy,” which after all has a vested interest in doing so. As if to circumvent the true scholars, the “aristocracy” of professionals even sought to portray its undergraduate degrees as if they were doctorates, and thus among the scholarly nobility too. Nice try. Such games put the nobility as depicted at Downton Abbey at quite a distance.

The over-reaching and conditionality—both of which are indicative of low class—may have been made possible because hereditary nobility had been eliminated long ago in the U.S. In other words, American society is reductionist in terms of its notions of aristocracy—reducing it to being a function of money. How could anything truly noble be so conditional? Moreover, how could it be so low class and still be aristocratic? Our nobles must be pretenders. Might our forefathers have left us vulnerable to such hypertrophy (i.e., the over-extension of one part) by extirpating nobility? Is there nothing whatsoever to distinguish “well, he wasn’t raised right” from “he came from a good family”? A person of the latter rightfully recoils at the presence of a person of the former who is being rude “without a clue.” What of this natural hierarchy, or aristocracy? Surely it is not conditioned on a monetary transaction. A suddenly rude front desk employee “was not raised right,” I would wager. An innate sense of “with power comes responsibility” over “it’s the customer’s responsibility” is missing from America’s commercial aristocracy and its epigones (i.e., formerly servants now as managers).

In other words, Americans allow servants to over-reach in claiming authority on the basis of running something. The managers of Downton Abbey were classified as among the servants, rather than as among the nobility of the house. Yet the modern manager is seldom viewed as a servant—especially by the employees. “Labor/Management” is itself within the servant hierarchy. As much as I disapprove of a hereditary basis for any social privilege because it is unearned (although acting on a noble obligation of service over years could make it so, as illustrated by Queen Elizabeth II), I find the commercial variety even more distasteful and certainly not noble. In fact, I look at the conditionality based on commerce as rather low class. Its own lack of respect for clerical or scholarly nobility simply confirms my judgment. Conditioning one’s attitude on money is unquestionably banal. Even so, because we have nothing to compare our “aristocracy” too, it is virtually unquestioned in American society. We view the CEO as a noble rather than as being at the top of the servants’ hierarchy simply because the CEO is wealthy.

In fact, basing so much social value on money can even been seen in how the American “safety net” for the poorest of the poor is nevertheless all too contingent on job history. From the American sense of nobility, survival itself is presumed rightly conditioned on having participated in the commercial life of the society. The human rights to food, shelter, medical care, medicine, and even survival itself have been inherently conditional throughout American history. Perhaps having a non-conditional aristocracy would ironically have implied a non-conditional basic human right.

Conflicts of Interest and Paradigm-Shifts: The Case of Financial Regulation

It is perhaps all too easy to perceive a sea-change in perception when the reality of societal change is much more gradual. There is something to the argument that John D. Rockefeller’s reputation was salvaged in the 1930s not because the old man was passing out dimes, but, rather, simply because he had outlived his critics. Similarly, Thomas Kuhn, in his text on paradigm changes in scientific revolutions, bemoans that the advocates of a default theory must finally die off before their darling can finally be replaced by a new one. In other words, any given person is not apt to shift paradigms. The culprit, I suspect, is pride, which Augustine suggests in his writings is inherently self-idolatrous. I believe the human brain is capable of accepting inter-paradigmatic change, just as a person can be humble. That this is not the norm does not mean that we ought not raise our expectations to it.

The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.