Occupy Wall Street PROTESTERS Not Letting Up - Nationwide

[Zoebird]

we currently use a credit union in the US, and the local bank here in NZ (we couldn't find a credit union in NZ but are still looking).

[catherine]

Zoebird:

I totally respect you and I hope you don't think I think of you as a deadbeat--I certainly don't! But I don't think that the fact that banks do it, and Wall Street does it, and bankruptcy courts do it is a good enough reason for me to dump my debt.

Also, I'm a small business person and I'm grateful that I'm in an industry where I'm pretty much guaranteed of being paid, but if I weren't, I would not like one of my clients to say "oh well--tough times. My bad, your loss."

One of my long-time favorite pieces of literature is The Diamond Necklace by de Maupessant. (maybe when I first read it and loved it was subconsciously foreseeing my own karma). The protagonists spent 10 years of their lives repaying something that they thought had value and did not. For me, the take-away of that story was not, "what a poor victim she was" or "how dumb was she"; it was that paying things back takes sacrifice and you do it no matter what.

[Zoebird]

I can understand, catherine, wanting to take responsibility for your debt.

I know that MOST people feel this way, even the ones filing for bankruptcy.

The issue for me is that certain kinds of debt aren't covered in bankruptcy, and it doesn't make a lot of sense. I can't get the logic.

[Yossarian]

why that?

It makes loans affordable. 99% of students with loans are insolvent when they graduate. Everyone could declare bankruptcy. You'd have to charge 50% interest rates from the few that paid to cover the losses.

Why would a parent pay for college? Save the money, have the kid borrow, discharge the debt in bankruptcy, then give them the cash you saved on tuition to tide them over.

[Yossarian]

additionally, they are using the DEBT as collateral. It's a double-risk for them. When they do that, they make money on the debt because they sell it in bundles.

this can be seen in a couple of different ways -- corruption is one.

Another is that the bank is savvy. they don't have a whole lot of expectation of getting the money back, and so they are selling it in bundles to bring in income on that debt. They can then balance their books and/or show their profit on the debt. and if the debtor pays it back, then "all the better" because they got their up-front profit and their money back and the interest.

To me, that's a double dip.

[iris lily]

I was hoping you would step into this.

[Zoebird]

I'm not wrong on how banks operate. Here's a basic article about it.

Once a bank has sold a loan, it may use the funds it receives from investors to initiate new loans. In most cases, the bank simply accepts the funds from the investors and uses them to fund new loans, starting the entire process over again. In addition to helping the bank initiate new loans and perpetuate its operations, the ability of banks to sell loans to investors also helps relieve the bank's risk associated with lending money. If the borrower falls behind, the bank may pursue collection activities, but the investor who purchased the loan bears the loss in case of default. Since the bank gets its entire money, plus a portion of the interest rate, when it sells a loan, the bank also realizes an immediate profit from the sale.

I have stuff to say about this (positives and negatives of the system), btu I have to run my business now (teach yoga class!).

[Zoebird]

Foremost, a note on "morality" (or perceived morality) and loans.

Most people agree that loans are valuable, that they are important, and that people should only take out loans when necessary, only within their means, and pay back those loans. Most people who take out loans feel this way, as far as I can tell. This is the basic morality surrounding the debtor.

But few people talk about the morality surrounding the creditor. And there is a morality around it.

First, as has been said before, it is certainly reasonable for a creditor to assume and/or desire repayment of the loan. But, they have a responsibility in this process -- which is mitigating as much risk of loss on the loan as possible by giving a good loan to a good debtor.

A loan that is the right size for the person's income -- which plays into their capacity to pay -- with a long-view of the economy so that we can assume that the person will likely remain solvent. Another aspect, of course, is checking on the person's credit history (a form of credibility), and making sure that they tend to be good at paying back loans.

But, there is inherent risk in lending. It is an inherently risky investment because so much unforeseen things can happen -- from death to injury where there is a loss of job and thereby a loss of ability to pay, among countless others.

To mitigate these sorts of losses, interest is charged across all of the loans, and it is likely that the interest paid on a loan that is paid off will not only profit that loan, but mitigate losses for defaulted loans.

But it should be noted that lending is -- inherently -- a high risk endeavor. It is a high risk investment.

If a person puts money into a high risk investment, and the investment looses money, in general, who is to blame? Most of the time, people blame the INVESTOR, not the one (or whatever) in whom it was invested. The investor made a poor choice, and that's that. Sorry, but either better luck next time OR make a better investment next time.

The reason that I point this out is that so many people put the sole moral obligation around debts on debtors, forgetting entirely the whole process for the creditor. But, both are in a moral relationship with each other, and in my opinion, the person with the greater moral obligation is the creditor, not the debtor. This is, of course, my perception, but it bears out in leviticus, ancient greece and rome, and even in ancient chinese texts and trails right on up to the present day.

There has always been a strong admonishment against getting in debt. And if you do get in debt, pay it back! BUT, the risk (and the moral obligations of the risk) rest in the creditors, and this has long been the moral landscape around lending.

And this risk -- and the moral obligation inherent -- is most apparent in the long cultural history of debt restructuring and, yes, debt forgiveness (and also slavery, indentured servitude, debtors prison, etc, which things like bankruptcy court is meant to do away with because it is considered a social ill to have slavery, indentured servitude, and debtors prison, etc).

So this leads me to speaking about the situation of banks and investors who buy their loans.

---

I'm still looking into the history of student loans and the increased costs of education (as i think there's a "pork belly" element to it), the housing bubble was a massive situation of corporate (bank and investors) greed.

Bubbles are a real problem, and in particular have been since the 1970s when we went off the gold standard. I'm not calling for a reinstatement of the gold standard, but that bubbles seem to be more common since then than prior. While not fully cited, the wikipedia article on bubbles is actually pretty decent.

One possible cause of bubbles is excessive monetary liquidity in the financial system, inducing lax or inappropriate lending standards by the banks, which asset markets are then caused to be vulnerable to volatile hyperinflation caused by short-term, leveraged speculation.[14] For example, Axel A. Weber, the former president of the Deutsche Bundesbank, has argued that "The past has shown that an overly generous provision of liquidity in global financial markets in connection with a very low level of interest rates promotes the formation of asset-price bubbles."[15]

my opinion on the matter (moral obligations) follows the "moral hazards" model of the problems of these sorts of situations, particularly how the banks are at fault (and hence "we are the 99%").

Moral hazard

Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. A person's belief that they are responsible for the consequences of their own actions is an essential aspect of rational behavior. An investor must balance the possibility of making a return on their investment with the risk of making a loss - the risk-return relationship. A moral hazard can occur when this relationship is interfered with, often via government policy. A recent example is the Troubled Asset Relief Program (TARP), signed into law by U.S. President George W. Bush on October 3, 2008 to provide a Government bailout for many financial and non-financial institutions who speculated in high-risk financial instruments during the housing boom condemned by a 2005 story in The Economist titled "The worldwide rise in house prices is the biggest bubble in history".[17] A historical example was intervention by the Dutch Parliament during the great Tulip Mania of 1637.

Other causes of perceived insulation from risk may derive from a given entity's predominance in a market relative to other players, and not from state intervention or market regulation. A firm - or several large firms acting in concert (see cartel, oligopoly and collusion) - with very large holdings and capital reserves could instigate a market bubble by investing heavily in a given asset, creating a relative scarcity which drives up that asset's price. Because of the signaling power of the large firm or group of colluding firms, the firm's smaller competitors will follow suit, similarly investing in the asset due to its price gains. However, in relation to the party instigating the bubble, these smaller competitors are insufficiently leveraged to withstand a similarly rapid decline in the asset’s price. When the large firm, cartel or de facto collusive body perceives a maximal peak has been reached in the traded asset's price, it can then proceed to rapidly sell or "dump" its holdings of this asset on the market, precipitating a price decline that forces its competitors into insolvency, bankruptcy or foreclosure. The large firm or cartel - which has intentionally leveraged itself to withstand the price decline it engineered - can then acquire the capital of its failing or devalued competitors at a low price as well as capture a greater market share (e.g., via a merger or acquisition which expands the dominant firm's distribution chain). If the bubble-instigating party is itself a lending institution, it can combine its knowledge of its borrowers’ leveraging positions with publicly available information on their stock holdings, and strategically shield or expose them to default.

(in both cases, emphasis is mine)

What is important to note is that it is the LENDING PRACTICES and HIGH RISK investing behaviors (plus some really nasty cartel stuff) that creates these sorts of problems.

I grant you, there are individual debtors involved, but the obligation of the lender is to make sure that the lending is as low risk as possible, to get the best return on investment.

So this takes me back to the first article taht I linked -- some posts back now i'm sure -- where in i emphasized

Since the bank gets it's entire money, plus a portion of the interest rate, when it sells a loan, the bank also realizes an immediate profit from the sale.

and then the investors hold the risk but the BANK is creating the bubble by choosing the lending practices (interest rates and to whom to lend and how).

When banks do this, they are no longer at risk if there is a default on the loan. The investor is at risk. And the investor purchased something that is high risk, and that may be even higher risk on account of the fact that the bank may be purposefully running or creating a bubble and then bursting it in order to bankrupt or absorb their competitors.

The truth is, Main Street has no control here (other than to not take out loans, and I think it's fair to assume that most people, when taking out a loan, do have the intention to pay it off -- though that may not be a cynical enough of a view). The banks and the government do -- they can mitigate their risks by selling the debts, and they can get their risks mitigated again by government intervention.

But who is really, truly at risk when this happens? Main street: jobs lost, debts still outstanding and mounting up, increased prices, etc etc etc.

[Zoebird]

I think that the bubble that occurred after the end of the gold standard in the 70s -- that massive commodities bubble -- only burst when the interest rates were raised to 14%.

While many argue that the benefit of low interest rates is an increase in investments, and therefore jobs, etc, there is a counterargument.

The Austrian School of Economics sees higher rates as leading to greater investment in order to earn the interest to pay the depositors.

Higher rates encourage more saving and thus more investment and thus more jobs to increase production to increase profits.

Higher rates also discourage economically unproductive lending such as consumer credit and mortgage lending.

Also consumer credit tends to be used by consumers to buy imported products whereas business loans tend to be domestic and lead to more domestic job creation [and/or capital investment in machinery] in order to increase production to earn more profit.

(broken up for emphasis, mine)

This tells me that the lending processes change considerably, creating less high-risk debt and more appropriate investment-based lending that tends to move the economy forward over the long term, rather than the lowering interest rate which provides only short-term gains and perhaps creates these bubbles.

[Yossarian]

I have trouble keeping up with the volume so let me try to keep it simple.

additionally, they are using the DEBT as collateral. It's a double-risk for them. When they do that, they make money on the debt because they sell it in bundles.

When a bank borrows to make other loans, known as leverage, it does increase risk. Some of the banks in the housing bubble were leveraged 30 to 1, which left too little capital to cover losses. The rest is history. But that is separate from selling the assets, whether sold straight up or as securitizations. Selling the loans takes risk off the balance sheet. If they make other loans, then it's a wash. So the selling of loans doesn't do much change risk unless there is a residual guarantee, the real issue is the leverage and capital ratios.

Another is that the bank is savvy. they don't have a whole lot of expectation of getting the money back, and so they are selling it in bundles to bring in income on that debt. They can then balance their books and/or show their profit on the debt. and if the debtor pays it back, then "all the better" because they got their up-front profit and their money back and the interest. To me, that's a double dip.

A lender can make a profit on the sale a loan if the buyer is willing to pay a premium for the loan (and thus receive a lower interest rate). But once the loan is sold, the repayment of the loan goes to the buyer. It's not profit to the originating bank. So the originating bank can make a profit (or loss) selling the loan or servicing the loan and collecting payments, but I don't see the "double dip".

this can be seen in a couple of different ways -- corruption is one.

I still don't get where you are coming from on this one.

If you are looking to explain bubbles, think about what effect government policy has on the availability of the loans. In a pure free market you would see much better risk pricing and perhaps greater concern about getting repaid. We as a matter of social policy have intentionally diminished those market concerns to make student loans more affordable and available, but we should not be surprised when we find out we have financed billions of dollars of education for which there is not an economic basis.