Simon Fowler's Blog

rLiving Day 23: Mortgage Crisis (Directness, Power)

Posted by Simon on May 24, 2010

Money, like power, gets a bad rap. It’s seen as so purely evil that we just cripple ourselves with guilt about having it or wanting it. Or else we resent, then reject, the guilt and instead embrace money as though it were God himself, the source of all life and happiness. The Bible calls it “greed, which is idolatry” (Col. 3v5).

But money is actually a major cause of human relationships by mere fact that none of us inherently have everything we want or need: we have to trade. We’re forced into a relationship caused by something I have (in the nature of material, skill or time) that you want. And vice versa. ‘Money’ is often the means of that exchange. And that is a very good thing. In millions of fair and equitable transactions every day around the world, from markets in Soroti, Uganda to corporate offices in Boston, MA, relationships are established and built upon and people get and give what they want.

The evil of greed and idolatry is that it focuses on the means, money itself, rather than the ends; a fair trade relationship in which we both gain what we were seeking and even build something new in the process. The other evil of greed and idolatry is that it lusts in power over others; it relishes in being able to extract more than it gives. It leads to injustice. Finally, its irony is that it’s never satisfied. To the question, “How much is enough?”, Rockefeller wisely responded, “just a little bit more.”

Relational Proximity Dimension #1 is “Directness”. My relationship with someone is better and healthier the less mediated it is. It can be mediated by technology or other people: these reduce our ability to communicate fully and know each other better.

Relational Proximity Dimension #4 is Parity. The greater the asymmetry of power between me and someone else the greater the potential for difficult and strained relationships. This asymmetry can be real or perceived, and its affect on relationships can be more about the use and misuse of power than the mere existence of power disparity.

I contend that the more a relationship is mediated – that is, the less direct it is – the weaker it is, because more mediation means less knowledge. And less knowledge means less trust. Less knowledge also means, I think, ‘less human’. When we don’t know people we render them less than fully human, less than ‘normal’. It explains why we demonize some and idolize others – we’re literally ignorant about them. So the ‘less-than-human’ becomes an object, an item, something to generalize about but not an individual with a name, a story, a past and a future.

So if we consider a relationship mediated by an unfathomable array of individuals, institutions and mathematical formula, then throw in ‘disparity’ (unequal power), I think you have an explanation of the mortgage crisis: Relational distance caused less knowledge, then less consideration, then less proper care for the human being at the end of the money chain. There wasn’t a human being at the other end, in fact, they were too distant to even be noticed.

One shouldn’t ascribe evil intent to Wall St bankers, necessarily. Greed and idolatry could just as easily be ascribed to the house buyers. No, relational distance and power asymmetry were objective facts of the matter. Even a heart of gold at either end would have had trouble ensuring an equitable trade, because between the hearts of gold were bureaucratic institutions and non-human mathematic formulae whose goal was, ostensibly, to minimize financial risk and maximize financial profit for the Lender. [UPDATE: This paragraph originally started with “One shouldn’t ascribe evil intent just to Wall St bankers.” This implied we should ascribe evil intent to house buyers also, which was not my intent! Instead, this paragraph was meant to point out that greed/idolatry is neither the sole preserve of Wall St bankers, nor, necessarily, the functional cause of the problem.]

We have a dilemma, however, and I’ll end the post with this. The financial wizardry behind the crises has just been an extension of the sound and prudent engine behind the economic explosion of the last 50 years: the pooling of money and the spreading of risk. What needs further investigation is how to manage the dilemma of relational directness and financial stewardship in such a way that it fosters parity and human flourishing in the context of trading relationships.

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7 Responses to “rLiving Day 23: Mortgage Crisis (Directness, Power)”

  1. Kate said

    Have you read Satish Kumar’s No Destination? I’d be really interested in your take on it. It made me very uncomfortable in unexpected ways. In many ways, Kumar’s freedom for his pilgrimages was “bought” by his willingness to take from others. Reading his story made me think about the alleged evils of money in totally different ways.

    • Simon said

      I haven’t. Tell me more!

      • Kate said

        I’ll quote myself (’cause I’m lazy): At one point in his story, Kumar encounters someone who accuses him of being free to do his pilgrimages and other worthy activities because of other people’s support. So he off-loads the unholy activities – like working and earning money – onto other people, and he gets the glory (such as it is) and the exalted status. And I think that’s a valid criticism. It’s not as if he does much that’s actually free – it’s just that other people pay for it.

        (And yet he doesn’t hide that criticism. It’s right out there for people to react to. That speaks well for him, I think.)

        I’d been feeling, I dunno, inferior, I guess, reading about all the amazing things this man has done, but that interaction really struck a chord for me. He DID rely on the generosity of others. In most of the world today, money is non-negotiable part of life. If you don’t have it, you have to substitute something else (barter/trade/charity). That’s not a good or a bad thing, it just is (not even a necessary evil; just necessary).

        I’d thought of money as easily used to enable evil for so long that I was quite flummoxed by the idea that it’s morally neutral… and that people who seem to disdain the good it can do depend on others’ willingness to be sullied. Which sure doesn’t make them “better” and may even make them more suspect.

        I’m blithering because I’m still poking at the idea to see if it’ll jump up and bite me in the rear.

      • Simon said

        This is a very interesting observation, Kate. Thanks.

        It relates, I think, to a discussion I’ve had with Nick (coincidentally the Nick who responded in the other comments) and others. Specifically: do we, as a society, want musicians?

        Let me explain.

        Responding to our growing awareness of personal debt in our church and generally, a group of four of us conducted focus groups of recent graduates. It confirmed that their personal debt was just bonkers and a hideous weight around their necks, severely limiting opportunities for service and generosity. Nick – the main driver of this initiative – coined the term “The Biggest Saver” for our ‘game’ to help them reduce their debt. We had five teams; four individuals and one couple. And each had a volunteer financial mentor. Very simply they’d work out a budget to reduce their debt by a set amount by tax day (about 6 months) and they’d be accountable to the mentor, one of us from the leadership team, and to each other in monthly all-team meetings.

        Anyway, here’s the thing: one guy in the a focus group had a debt of over $80,000 and was working in a cafe, unable to find other work at that time. Turns out half the debt was for a musical instrument (I spluttered when I heard it, but apparently for that instrument it was an average price). So one might think, “madness! what’s he doing spending that amount of money on a musical instrument when there’s so little chance of getting a job that pays enough to eliminate the debt? that’s crazy, he’s no-one to blame but himself!” Now he’s not holding his hand out for donations, but one might be tempted to ask, should he loaded under a ton of debt because he wanted to be a musician.

        Maybe they’re not parallel, but it seems that a society needs people like Satish Kumar and we need people who are willing to spend years trying to discover/develop/master their musical talents. Kumar’s ‘peace walk’ seems good for us all (not sure if that’s the pilgrimage the book is about), and so is beautifully played music. Shouldn’t we be willing to fork over money so they can do that unencumbered?

        I’m not so sure. But it is worth thinking about!

  2. Nick said

    To say that “financial wizardry” drove the boom of the last 50 years is off the mark. Hard work, entrepreneurial activity, and innovation drove the boom. But financial parasites making side-bets added absolutely no value. Let me explain…

    I’m sure that everyone has greed within them. It is, after all, one of the seven deadly sins. But it is becoming very clear that the financial crisis was caused by the mortgage-backed securities market being an unregulated casino of “derivative” securities. These “derivative securities” added no value to the economy whatsoever, and they were, in actuality, side-bets on the core security, the mortgage-backed security. It is this pile of dog-doo that brought down the economy. BTW, the mortgage backed security has only been with us since the 1980s, so it cannot explain the “boom of the last 50 years.”

    In terms of loose credit, the facts clearly show that the FED failed to act to raise interest rates when credit got way too easy. Greenspan is a dyed-in the wool Ayn Rand libertarian. He, unlike Paul Volcker, failed to bring the power of the FED to bear to tighten up credit. You should read up on the case of Brooksley Born. She has a very interesting case that ties to relationships — she was a woman leading the CFTC, and Greenspan/Rubin/Summers/Levitt (4 dudes) blocked her from trying to regulate the derivatives market; in fact, they wouldn’t even let her look into it. There is a great Frontline from the Fall of 2009, where Levitt said, “I wish I had known Brooksley better.” Meaning his relationships with Greenspan/Rubin/Summers is what drove his decision to side with them and squash her. But I digress…

    With this loose credit, it was very rampant among mortgage companies (both banks and non-bank entities) to offer mortgages to people without doing any of the necessary due-diligence (in fact, these protocols are required by law). In fact, it was seen as innovative to offer folks zero down-payment mortgages; and also go after borrowers with really bad FICO scores. These were called Alt-A mortgages.

    The reason we had so much Alt-A activity is because there was so much money being pumped into the mortgage market by the “financial wizards” — the market signals failed, and too much money went where it should not have gone.

    For my part, I do not believe that it is greedy to want to a safe, nice home for your family, especially if you are working poor or lower-middle class and striving for that end. In addition, homes come tied to school districts in the US, and many parents want the best public schools for their children — these tend to be in more expensive places. In America, we put owning a home as part of the American dream, and our tax code allows for a mortgage interest deduction — one of our largest welfare programs mainly benefiting the middle and upper middle class.

    The problem was that folks were put into homes and offered credit they should have never been offered. 20 years ago, they would not have been offered the opportunity. So, did they get more greedy? Or did something else happen? Why would banks 20 years ago NOT offer this type of credit to these same people? If the controls of 20 years ago were in place, you would not have even had folks who could not afford mortgages in these mortgages.

    At the end of the day, it is unclear if the “financial crisis” would have been so widespread if the derivative security market were not so out of control. The junk bond/S&L crisis caused similar damage in the 1980s, but not in this scale.

    I’ll end there — please read “The Big Short” by Michael Lewis and “The End of Wall Street” by Roger Lowenstein. These two books offer very solid, unbiased analysis of the financial crisis.

  3. Simon said

    Thanks for commenting Nick and for taking the time to provide more background detail on the causes of the mortgage crisis. It’s very helpful, and actually illustrative of my main point: these CDOs disconnected investors relationally from the productive purpose and end-user of the loans; that’s the financial wizardry I was talking about. The relational aspect of the decision-makers and influencers is also very interesting; showing how strong relationships, if exclusionary, can distort the purposes for which they exist. It speaks to an ethical obligation beyond the group’s self-determination.

    A couple of clarifications. Firstly, I didn’t say that it’s greedy to want a safe, nice home for your family. I said that if we’re going to ascribe greed to Wall St bankers you could just as easily ascribe greed to home-buyers. [Please note the update to that paragraph; I’m not sure which version you saw when you commented.] The main thrust wasn’t about home-buyers, but to say ‘greed’ wasn’t the main problem: there was an accepted financial structure and mechanism that pretty much guaranteed exploitation for pure profit over productive activity & giving people legitimate chances of a new life in their own home. A relational critique would have exposed a lack of ‘directness’, in the sense of transparency and honesty, and an imbalance of power (the mortgage lenders knew things and understood things – like loan forms – the buyers didn’t) that would place the moral burden more clearly on the lenders.

    Secondly, my badly worded sentence is trying to say that the “pooling of money and spreading of risk” – a legitimate and sound practice if one accepts the legitimacy of usury – was the engine and that the financial wizardry just took that basic concept too far. For sure hard work, entrepreneurialism and innovation were the actual ‘engine’ but I meant the financial mechanism of being able to pool money and spread the loan/investment risk enabled more innovation and entrepreneurial activity than would otherwise have been possible (this is a guess on my part, I admit). The problem came exactly as you helpfully show; the financial wizardry that created these repackaged loans were no longer tied to productive, human-centered outcomes, and in fact were cynically used to bet against them.

    Though you may not think so, I think we’re in fierce agreement. And in fact this all helps to prove the point, I think, that relational obligations on financial instruments could have prevented or exposed this kind of abuse.

    I’m less sure about what to think of the FED and regulation. Isn’t it the case that Freddie Mac and Fannie Mae were encouraged to loosen the rules for loans and at the same time obliged to underwrite them? Whether it was “regulation”, or some legal obligation that caused them to do that, I don’t think that interest rates were the only cause of easy credit. I think the lenders realized they couldn’t lose, because ultimately they were underwritten by the government even if the buyer foreclosed.

    I’ll have to do a post on usury because it seems that’s likely at the heart of the problem.

    Thanks again, Nick.

  4. Nick said

    Simon-

    I recommend you read “Secrets of the Temple” to understand the role the FED could have played in preventing the crisis. It has become clear that Greenspan was a dyed in the wool Ayn Rand libertarian who even articulated a comfort level with fraud (in discussion with Brooksley Born).

    Greenspan was a false idol for many, many elites. And, as many point out in the The Big Short, he will go down as one of the worst FED chairs in US history.

    There is no doubt that Freddie/Fannie had issues. And there is little doubt that the rating agencies had issues although they were severely compromised by the method of their funding (they have strong relationships with the bankers, not with consumers).

    So, yes I think we agree, but I would not call it a “mortgage crisis” — it was a financial crisis driven by traders on Wall Street. Traders are sorry lot.

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