Rioters versus Bankers

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Jason Kuznicki

Jason Kuznicki is a research fellow at the Cato Institute and contributor of Cato Unbound. He's on twitter as JasonKuznicki. His interests include political theory and history.

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153 Responses

  1. Avatar Elias Isquith
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    says:

    Second, the comparison disregards the fact that the bankers’ main fault was to have lent too much

    lol

    ETA substance: I disagree.Report

    • Avatar Elias Isquith in reply to Elias Isquith
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      says:

      Dalyrimple’s argument only works if we start the clock after the bankers had lobbied zealously to change the laws so as to make what was previously illegal (because it was seen as dangerous) legal once again.

      No one with any brains is arguing that all bankers are evil because they’re bankers and bankers are evil QED. Responding to such an argument is a cop-out and it’s lazy. (Not implying that you are doing this, Jason.)Report

  2. Avatar Rufus F.
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    says:

    I like Dalyrimple too.

    My father-in-law is a CFO at a firm that absorbed many of the people who once worked at Arthur Andersen after they dissolved. Those people are to a man upright and honest individuals. As is he. My wife says that when the Enron scandal blew up it was one of the few times she’s ever seen him cry, not because he was in any way connected, but just at the fact that it happened.Report

  3. Avatar DensityDuck
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    says:

    bububububububu they’re riiiiiiiiiichReport

  4. Avatar Just John
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    says:

    The problem was not that they lent too much but that they lent quite badly. In a world in which the difficulty of access to capital is a never-ending refrain, there’s actually so much capital that bubbles are routine and the current real returns on intermediate term US Treasury debt is negative.

    Bankers and other wealthy individuals and their associations also have a profound influence on what is legal and what is not. This is not to say that looting and rioting should ever be legal — or even that it’s not deporable — but the existence of individual consciences in the financial world doesn’t mean that no insidious conditions have sprung from the tremendous influence of that world.

    As for “justice,” the vast majority of rioters and looters will not be arrested or prosecuted because that’s a logistical impossibility. A rising underclass is too big to fail.Report

    • Avatar Jason Kuznicki in reply to Just John
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      says:

      The problem was not that they lent too much but that they lent quite badly.

      And of course no one borrowed badly.Report

      • Avatar Tod Kelly in reply to Jason Kuznicki
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        says:

        I think, though, this line of thinking only looks at one part of what the bankers did – making bad loans. I think the crisis would have been far more tolerable – and temporary – had there just been a bunch of bad loans and an industry bubble.

        But this crisis led to the chickens coming home to roost with the credit default swap fiasco, which certainly was “not criminal” only because they lobbied to make it so to make ill-gained revenue.

        I agree that the bankers are not the same as the looters, but you can’t just focus on the standard business practice one hand was doing and ignore the total malfeasance the other was engaged in.Report

      • Avatar Patrick Cahalan in reply to Jason Kuznicki
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        says:

        I see people do stupid crap to their computers all the time.

        It’s my job to protect them, to some degree, from the consequences of this behavior. Because we don’t expect Random Employee or Random Undergrad to understand all of the possible ramifications of computer security.

        We don’t expect people to “borrow goodly” (you can argue, of course, that this is a really bad idea, but that’s where we are, as a society). We have institutions that take on the responsibility of managing this for us.

        To say that people ought to borrow more smartly is like saying that the horrible state of computer security across the U.S. is entirely the users’ fault.Report

        • Avatar DensityDuck in reply to Patrick Cahalan
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          says:

          Not only that, but in most cases the “bad borrowers” were paying for the lender to advise them. If I’m giving someone $200 to tell me what loan is best for me, and they say “this one”, then I’m going to assume that they really are advocating the loan that’s best for me.Report

          • Avatar Patrick Cahalan in reply to DensityDuck
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            says:

            To some extent, most of them were.

            Honestly, the guy who was making the loan offer isn’t the same guy as the guy who changed income verification requirements.

            The loan officer is looking at the real estate market, and looking at the buyer, and thinking… “Hell, dude, you can get this ARM with PMI and in 6 months your house will be worth enough more that you can refi for a lower interest rate *and* drop the PMI and you’re gravy”. It’s not their fault the market exploded and the borrower couldn’t refi for a lower interest rate and they couldn’t cover the existing rate +PMI, let alone the adjusted rate +PMI.

            The loan officer is really just a salesman, not an economist.

            The guys and gals higher up in the orgs who make all the decisions, *those* are the economists. Those are the ones who should know better.Report

            • Avatar wardsmith in reply to Patrick Cahalan
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              says:

              I know someone who recently got an ARM mortgage. He is paying something like 2% interest. The key to bad ARM’s were their mandatory refinance options and penalties for early payoff. Those things were poison from the get-go. Of course what we should do is start an entire OP on banks, I could dig in then assuming I can find my old links. Had extensive email discussions with a bank IT security officer, the dude reminds me of you Patrick. He’s very focused on the esoteric.Report

              • Avatar Patrick Cahalan in reply to wardsmith
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                says:

                Market-ticker and Dr. Housing Bubble are two good sites for real-estate related links.

                Karl sometimes goes out in the weeds on politics, but he’s a reasonably cogent guy on economics. Dr. Housing Bubble is sadly hilarious. He started writing about the Bubble long, long before everything blew up.Report

              • Avatar Patrick Cahalan in reply to wardsmith
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                says:

                re: XKCD

                I’d use four-word passwords if people didn’t stupidly limit the number of characters to some tiny number.Report

              • Avatar DensityDuck in reply to Patrick Cahalan
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                says:

                I think you’re in the wrong thread, but XKCD was wrong, because the number of bits to get a plaintext word is only as many as you need to get all the words in the dictionary. “DOG” is exactly as hard to guess as “ANTISEMITISM”.Report

              • Avatar Pat Cahalan in reply to DensityDuck
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                says:

                Sure; well, his math is based upon assumptions and he didn’t get it totally right.

                On the other hand, dogbook!Megaphone1cowpie is a better password than ^9iQz#3!.

                Because if it ain’t in the dictionary, you’re going on brute force. And when you’re going on brute force, password length is way more important than character set.Report

            • Avatar DensityDuck in reply to Patrick Cahalan
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              says:

              “The loan officer is looking at the real estate market, and looking at the buyer, and thinking… “Hell, dude, you can get this ARM with PMI and in 6 months your house will be worth enough more that you can refi for a lower interest rate *and* drop the PMI and you’re gravy”. It’s not their fault the market exploded and the borrower couldn’t refi for a lower interest rate and they couldn’t cover the existing rate +PMI, let alone the adjusted rate +PMI.”

              …well, no, I guess it isn’t. But when I bought my house, the closest anyone ever came to explaining the risks inherent in an adjustable-rate mortgage was to make me sign a piece of paper with the phrase “I UNDERSTAND THAT THE PAYMENTS MAY INCREASE IN THE FUTURE” written on it. At no point was an adjustable-rate mortgage described as a highly risky investment that would probably be undesirable for borrowers with limited cash reserves in case the investment went bad (i.e. most house buyers).

              (I got fixed-rate mortgages, although I did have to ask three times to get them.)Report

      • Avatar Just John in reply to Jason Kuznicki
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        says:

        Lending badly is not a matter of making only loans that get repaid. Good risk is still risk. Aggregate default risk became much greater than it was made to appear to be, and as that started to become more and more apparent the general financial industry reaction wasn’t to take corrective action but rather the boldly ride the wave all the way to hell.Report

        • Avatar dhex in reply to Just John
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          says:

          To say that people ought to borrow more smartly is like saying that the horrible state of computer security across the U.S. is entirely the users’ fault.

          well, isn’t it sort of like bad driving? like the dangerous assholes i see on my infrequent car trips, putting on makeup, reading the newspaper, texting, etc (or my favorite, reading the newspaper while shaving *and* driving).

          not everyone is expected to be an amazing driver, or a professional driver / it security professional. but there’s a certain level of non-crappiness that should be expected.

          that said, i have little pity for those who lended poorly or borrowed poorly.Report

          • Avatar Patrick Cahalan in reply to dhex
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            says:

            > Isn’t it sort of like bad driving?

            Yes, it is.

            And yes, there is a certain level of non-crappiness that should be expected. And in the three particular cases of computer security, driving, and personal finance, I’ll readily admit that in both cases the level of non-crappiness that we *do* expect is probably less than the level that we *should* expect.

            But those are the conditions on the ground. And while we have limited governors for driving competency, we have two industries who grew up *around* those conditions on the ground in the case of computer security and finance. And they get paid to cover the gaps between what we *should* expect and what we *do* expect.

            That’s the service they’re providing.Report

          • Avatar DensityDuck in reply to dhex
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            says:

            “well, isn’t it sort of like bad driving?”

            Yes, in the sense that most of the people were taking a taxi, and assuming that the taxi driver was competent and licensed, which turned out not to be the case.Report

              • Avatar dhex in reply to Just John
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                says:

                “Yes, in the sense that most of the people were taking a taxi, and assuming that the taxi driver was competent and licensed, which turned out not to be the case.”

                now, i think this is a good response in the case of bad ratings, bad advice, outright fraud in terms of what’s in a particular “debt vehicle”, and the like.

                but it seems like a far less good response in the case of individuals and their mortgages. math exists for everyone, and calculators are cheap.Report

              • Avatar DensityDuck in reply to dhex
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                says:

                Too easy. That’s like saying “well of course you should have handled that cancer surgery yourself, after all scalpels and local anesthetic are cheap, and there are plenty of anatomy textbooks out there!”Report

              • Avatar dhex in reply to DensityDuck
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                says:

                if people aren’t capable of doing what is simple grade school math before committing themselves to six figure (or more) long-term mortgages, then all is pretty much lost, isn’t it?Report

              • Avatar Rufus F. in reply to dhex
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                says:

                But, wait- let’s go back to the bad ratings. People also committed themselves to bad investments that the rating agencies said were really, really safe investments. I mean, if I had invested in a CDO, which I didn’t, sure we could say that I was stupid for thinking that was a safe investment. (As if we all even knew what they were before 2008.) On the other hand, the rating agencies actually said “that’s a really safe investment”! And you know, their only job is to tell you what is safe to invest in and not fish things up by doing stuff like giving a golden rating to Enron days before their collapse. I mean, at this point, you’d imagine we’d be asking how they could have fished things up so badly (hint: you pay them a great deal of money to rate you, which is maaaaybe a conflict of interest). Instead, we’re running around like chickens with our heads cut off because the Great and Powerful S&Ps might give the US one less A. It makes no sense.

                So, sure, there were plenty of bad decisions made by plenty of people, but this mentality that the professionals shouldn’t be “scapegoated” because the amateurs didn’t know how to do the professionals’ jobs either can only take you so far.

                That said, I do agree that, on the other end of things, people should have been much more wary about the mortgages they were taking out.Report

              • Avatar dhex in reply to dhex
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                says:

                replying to rufus (i can’t see a reply button under his comment for some reason):

                i agree – which is why i separate the two issues. it’s basically fraud, be it on the part of a ratings agency or a bank peddling a ratings agency “vetted” vehicle. or if fraud is too strong, i’d settle for calling it three-card monty. (same diff at the end of the day, methinks)Report

      • Avatar E.C. Gach in reply to Jason Kuznicki
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        says:

        Who is more responsible for an outcome: a team of highly educated investors, lenders, and lawyers? or the person they make a deal with, who, on the whole, probably isn’t as well educated, isn’t made particularly aware of the deal (credit card agreements anyone?) and isn’t an expert like their lending counterparts?

        Not saying that this gets people off the hook, or that they are not repsonsible at all, but clearly it’s a mistake to assign EQUAL responsibilty to clearly UNEQUAL parties.Report

        • Avatar Jason Kuznicki in reply to E.C. Gach
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          says:

          I expect individuals to know their own finances, in the broadest sense, a whole lot better than the bank does.

          That’s just part of expecting people to be adults.Report

          • Avatar trizzlor in reply to Jason Kuznicki
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            says:

            Seriously? Do you really think that Bear Sterns, Bank of America, or the entire country of Iceland are going through an existential crisis because people who applied for loans suddenly decided to stop tracking their finances? I’ll have to check the numbers but I’m pretty sure it wasn’t a drop in per capita checkbook balancing that precipitated the global financial crisis. This isn’t The Oregon Trail any more, having complete knowledge of ones finances in a world of options and derivatives is a luxury not a measure of adulthood.Report

            • Avatar Jason Kuznicki in reply to trizzlor
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              says:

              Twist it about however you like, but takes two to make a bad loan. Unless you can show me that large numbers of people were forced take out loans at gunpoint, I’ll just have to say it again: Lots of people took risks they really shouldn’t have taken. And yes, they should have known better.Report

          • Avatar DensityDuck in reply to Jason Kuznicki
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            says:

            Would you take the same opinion in regards to doctors, architects, mechanical engineers, chemists, and chefs?Report

            • Avatar Jason Kuznicki in reply to DensityDuck
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              says:

              I’m not talking about anything clever or devious here. I’m talking about being able to balance a checkbook once a month, make a few predictions about different scenarios, and get a rough assessment of the risks of a loan.

              This isn’t so hard. It’s really not. It’s a basic life skill quite unlike architecture, chemistry, or the rest. (Though if you’re ignorant of basic cooking, I really do feel sorry for you.)Report

              • Avatar Pat Cahalan in reply to Jason Kuznicki
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                says:

                It isn’t so hard. But people still can’t do it, anyway.

                Which means maybe you and I have a skewed idea of what “hard” is to the average person.Report

              • Avatar Jeff in reply to Jason Kuznicki
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                says:

                “Empathy”: The ability to feel when others are suffering.

                This “sucks to be you” attitude (“You lost your home? You should have predicted you’d be replaced by an H1B. Sucks to be you.”) is the main reason liberals look at libertarians with such disgust.Report

              • Avatar Art Deco in reply to Jeff
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                Excuse me, but what is so disgusting about expecting someone who takes on five or six figures worth of debt to be able to keep household books, make conservative estimates of their future earnings, and allocate their spending over time periods? If you are too fuddled to do this, you ought to avoid financial commitments of more than a month’s duration. It is not like rental housing has disappeared in this country.Report

              • Avatar Patrick Cahalan in reply to Art Deco
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                says:

                Most people in this class (innumerates) didn’t, for years.

                And then people starting saying, “Hey, check this out, I can pay 1/2 of what you’re paying for rent, *and* I get a tax write off!”

                I start waving $1000 a month in your face in the form of a new car and a new TV, and you’re going to start thinking you need to check this out.

                And when you go to the bank and the loan officer says, “HELL, you qualify! NO problem! Why, you qualify for a loan that’s *two times* bigger than the one you’re requesting!” you just might figure that this means you’re making a safe and sound investment.Report

              • Avatar Jason Kuznicki in reply to Elias Isquith
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                says:

                I’m more or less on board with that. There’s a distinct libertarian style of moral reasoning that has more than a little overlap with the autism spectrum. (I’ve been screened; a back-of-the envelope Bayesian analysis suggests a 30% chance that I’d be diagnosed, were I to submit myself. Not that this should surprise.)

                And of course, the majority never has anything to learn from minorities.Report

              • Avatar Jason Kuznicki in reply to Jeff
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                says:

                This “sucks to be you” attitude (“You lost your home? You should have predicted you’d be replaced by an H1B. Sucks to be you.”) is the main reason liberals look at libertarians with such disgust.

                You have a remarkable ability to argue against positions no one has advanced.

                For one thing, I don’t believe that immigration costs natives their jobs. It rather does the opposite, particularly when talented and creative people arrive.

                The individuals who do get empathy are those who lost their jobs in the recession and then couldn’t pay, even when they had correctly evaluated their job security earlier.

                The individuals who do not get empathy are those who imagined that the housing market would rise forever, imagined that they could always flip that new house they bought, and imagined themselves (and us) into disaster.

                These latter people behaved foolishly. Were their actions criminal? In some cases, yes, particularly on the banking side. In other cases, no. Foolish, destructive, but not criminal, whether in this world or in any other more just world we would care to imagine.Report

              • Avatar DensityDuck in reply to Jason Kuznicki
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                says:

                “The individuals who do not get empathy are those who imagined that the housing market would rise forever, imagined that they could always flip that new house they bought, and imagined themselves (and us) into disaster.

                These latter people behaved foolishly. ”

                I’m sure there were many who did. I’m also sure there were many who went to the bank and said “I want to buy a house!”, and the loan officer said “great! You can afford a $600,000 house and your payments are only $2100 a month! Just sign here, and don’t worry about where it says ‘option ARM’, you can just refinance five years from now and you won’t have to worry about that.”Report

          • Avatar E.C. Gach in reply to Jason Kuznicki
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            says:

            Should a patient know their bodies better than their doctor? The bank is the one that makes recommendations given their expertise.

            Taking out a mortgage, auto loan, or small business loan is not some easy, matter of fact, 11th grade home economics taught process.

            But predatory lending practices are the borrowers own fault…they were asking for it!Report

          • Avatar Patrick Cahalan in reply to Jason Kuznicki
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            says:

            > I expect individuals to know their own
            > finances, in the broadest sense, a whole
            > lot better than the bank does.

            I don’t think this is a realistic expectation, with conditions currently as they are, on the ground. In fact, I think it’s a decidedly unrealistic expectation.

            For one thing, most people don’t know enough legalese to untangle what they’re actually agreeing to in an EULA, let alone a mortgage. I totally agree with you that this is the way things *ought* to be, however.

            I don’t know if you and I would have the same roadmap to get there, though 🙂Report

  5. Avatar Patrick Cahalan
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    says:

    > To single out the bankers to blame for the
    > general orgy of improvidence is to indulge
    > in that most pleasant of all political
    > pastimes—scapegoating.

    Not precisely.

    Because the bankers were presumably the agency with both the ability and (more importantly) the knowledge to stop. Generally, we as a society don’t make our citizens understand the full ramifications of their financial decisions: this is because we have credit agencies and banks that are supposed to say, “You can afford this, I will lend you money” or “You can’t afford this, I will not lend you money.”

    When bankers don’t do their due diligence, they’re abrogating their professional responsibility as the knowledgeable party. “I now no longer care if you can afford this or not, I will lend you money.” “Oh, whoops, that was not a great idea. My bad!”

    Now, you can make the argument that bankers were operating in a new model that kept them from realizing what was going on, but this discounts something I brought up a while back on another thread: if someone tells you that they can take something risky and make something less risky out of it by magic, you are supposed to be the ones who know enough about fishing economics to know that this is going to come crashing down, because it cannot work.

    You can also argue that the banks were just doing the will of the government, and it was pervasive political force that was encouraging everybody to lend to those who didn’t have the capability to pay it back. But this hugely discounts the fact that, uh, nobody in the banking industry was raising holy hell about the fact that the government was encouraging risky loans and that the wheels would come off.

    I’m absolutely sure that the huge commissions everybody was making had nothing to do with people ignoring a fundamental law of economics. I’m also absolutely sure that the demand for quarterly profits by the market had nothing to do with it.

    To the extent that we demand, as an investment society, large quarterly profits, we have indeed created a situation wherein the banks were somewhat obliged to participate in bad activity because the other banks were doing it and the execs all lose their jobs if their bank wasn’t making the sort of money that all the other banks were making. So we have some culpability, as an investment society. And of course, the government has some culpability.

    But it still boils down to “everybody in the middle either knew, or should have known, that this was a very rickety game of musical chairs, and they neither said nor did anything to stop it, they in fact encouraged it themselves.”

    Not blaming the bankers would be like not blaming the head of IT security at a firm when the entire company gets hacked, because the head of IT was just doing what the CEO told him to do.

    Sure, the CEO bears some culpability. The workers who installed random apps off the Internet bear some culpability.

    But it’s the goddamn JOB of the head of IT security to say, “Hell, this is a horrible idea” and kick and scream and raise holy hell about it, so that everybody *knows* it’s a bad idea. Not just to go along. If they don’t, they’re not doing their job.

    And it’s certainly makes no sense to me whatsoever that they got to collect huge bonuses prior to the hack, and then collect *another* huge bonus after the hack because, well, we *need* a top-notch head of security if we’re going to fix it.Report

    • Avatar Jason Kuznicki in reply to Patrick Cahalan
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      says:

      Call me old-fashioned, but I don’t expect the entire burden of making sound financial decisions to lie with the bankers. I would think that individuals either do — or at least should — have a better idea of their career trajectory, spending habits, and other relevant considerations.

      But if I’m wrong, and if ordinary people can’t be held responsible — then you tell me: What then is wrong with a world where the bankers run everything? Why complain about that state of affairs, when after all, they know best?

      It seems you can’t have it both ways; you can’t say both that ordinary people are too ignorant to know better, and that bankers shouldn’t be calling all the shots.Report

      • Avatar Patrick Cahalan in reply to Jason Kuznicki
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        says:

        I didn’t say that ordinary people can’t be held responsible (I did, after all, say, “So we have some culpability, as an investment society. And of course, the government has some culpability.”)

        If someone advised you to get a ARM, because “housing prices are only going to go up, and you can always refi”, and you fell for it, you have egg on your face. You’re probably going to lose that house. It sucks. But you can’t afford it. I can’t wave a magic wand and make you able to afford it. The price of the house has to come down first, and that can only happen when the shadow inventory clears.

        And I didn’t say that bankers should be calling all the shots. There are reasons why we may want government, for example, to subsidize or encourage certain types of lending. Bankers hold the executor spot: it’s their job to MAKE-DO. If there’s an obvious bad consequence to that, they ought to at least say, “Hey, this is a bad idea and it’s going to bite you in the ass!”

        The head of IT security is a good analogy. He’s still just the head of IT security. He’s *not* the CEO. He’s not expected to know everything about the company; bottom line, current liquidity, all that other jazz. He’s supposed to know about his area of expertise. It’s the job of the CEO and the board to take his expertise and use it properly in the organization. But the IT guy is *paid* for what he does, and it’s his responsibility to execute that job.

        I don’t expect bankers to be the only and final arbiter of everything financial, Jason.

        I expect them to know, and to *enforce* to the extent that they are able, that you can’t take risky investments and pour magic on them and have them become non-risky investments. This isn’t even a particularly deep bit of economics, for crying out loud.

        And all the crying about being vilified is silly. You guys suck at your jobs, or you were too damn greedy over the commissions you were making, or too frightened of your boss, or the market to come out and say, “This isn’t going to work, and we need to not do it any more”. They deserve egg on their face, too… and a lot more than anybody else in the equation.

        Because they were the ones that made the actual transactions. They’re the ones that said, “This party is worthy of getting a loan”… when it was *obvious* (obvious! I know people in the industry who talked about requirements documentation at the time, and prior to 2000, and post 2008) that the borrower couldn’t even pay for their *proposed* loan, let alone qualify for another ARM if the housing market continued to climb indefinitely… which of course it wouldn’t.Report

        • Avatar Jason Kuznicki in reply to Patrick Cahalan
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          says:

          If it’s that obvious, then why can’t ordinary people realize it? “I’ve got X dollars coming in per month. In Y months, this ‘balloon mortgage’ thingy is going to eat ten times that amount. But… obviously… those super-smart bankers say it’s okay, so I’ll just go for it!”

          Sorry, I can’t sympathize with that kind of dumb.Report

          • Avatar Pat Cahalan in reply to Jason Kuznicki
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            says:

            From the link above: “Only one in seven Americans qualified as “proficient.” That means that only one in 7 Americans can reliably perform tasks like these:

            · Calculate the yearly cost of a specified amount of life insurance, using a table that gives cost by month for each $1,000 of coverage.

            · Calculate an employee’s share of health insurance costs for a year, using a table that shows how the employee’s monthly cost varies with income and family size”

            Yes, it’s hard to sympathize with this, because it’s almost impossible for me to empathize with people that are this bad at math.

            And this is most people. I have to remind myself of this about three times a week.Report

      • Avatar E.C. Gach in reply to Jason Kuznicki
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        says:

        I think it’s a matter of bankers know what’s best, for themselves.

        Assigning parity between an individual or household and a large corporate entity is the same reason why we don’t let consumer confidence stand in for consumer protection.

        Consumers are no where near as united in goal or resources as the corporate party they are dealing with, at least in most instances.Report

    • Avatar Mike Schilling in reply to Patrick Cahalan
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      says:

      Once securitization made bad loans profitable, suddenly there were lots of bad loans. It isn’t because the people taking out the loans suddenly got dumber or less responsible. It’s because there was lots of money to be made in making and packaging bad loans, and yes, I hold the people who were profiting from the situation more responsible than the one who have suffered from it.Report

    • Avatar Jeff in reply to Patrick Cahalan
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      says:

      It’s more like blaming the users who access the company remotely (see EULA analogy above). The company lowered its security to get more users, but the users should have known that the company’s security was lowered (through some kind of libertarian magic) and not accessed it.

      Feh.Report

  6. Avatar Plinko
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    says:

    The analogy would work a lot better if there some acknowledgment that a massive portion of the protests and riots in Tottenham also did not loot any businesses or burn any houses down.Report

  7. Avatar clawback
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    says:

    I’m guessing you wouldn’t quote the paragraph about the importance of obeying the letter of the law so approvingly if the discussion were about immigration or drug laws.

    Any yes, many of us would have been delighted to see the improvidence of the bankers punished by reality.Report

  8. Avatar DensityDuck
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    says:

    Weren’t you the guy who had that “thought experiment” post about how “the most important thing is to follow the law” is an intellectually unsupportable argument?Report

  9. Avatar MFarmer
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    says:

    “If the bankers are guilty, so are the people and, even more, the government. ”

    This sentence carries the heaviest load, even more.Report

    • Avatar Chris in reply to MFarmer
      Ignored
      says:

      I don’t think the people are all that guilty, not so much because they didn’t have the knowledge that the bankers did about the risks involved in their decisions, but because the people were acting independently, for the most part, with no real knowledge of what other people were doing. That is, when someone applied for and accepted a loan for a home that he or she probably couldn’t afford, that person probably had no knowledge that his or her neighbors were doing the same thing. Banks, on the other hand, not only knew that everyone was giving out bad loans, but were actually buying and selling those loans from each other every day. They knew that it was an unsupportable system in the long run, but did it anyway, because the short term profits were high.

      The government, on the other hand, scewed the pooch as badly as the banks.Report

      • Avatar Patrick Cahalan in reply to Chris
        Ignored
        says:

        > Banks, on the other hand, not only knew
        > that everyone was giving out bad loans,
        > but were actually buying and selling those
        > loans from each other every day. They
        > knew that it was an unsupportable
        > system in the long run, but did it anyway,
        > because the short term profits were high.

        This. And to some extent, that’s (like I said above) partially our fault because of the way we handle investment capital and the stock market. Short term profits need to be high, from an organizational standpoint. Having everybody working in the org also profit off of it puts a huge incentive for companies to keep going until the rug comes out underneath.Report

      • Avatar Jason Kuznicki in reply to Chris
        Ignored
        says:

        This is an eminently fair criticism.Report

  10. Avatar Jeff
    Ignored
    says:

    I would think that libertarians would want the bankers punished more. A core piece of the libertarian philosophy is informed consent, and the public was NOT informed of what the banks were doing. No-one could make an informed choice on whether to borrow or not because the banks had muddied the waters (and put aligators in them).

    Or do I not understand libertarian philosophy?Report

    • Avatar Jaybird in reply to Jeff
      Ignored
      says:

      I believe that libertarians are okay with the bankers not being paid back after bankruptcy is declared and then, if it comes to that, the bankers not being bailed out and their assets being sold for pennies on the dollar to bankers who are less stupid.

      Is that “punishment”?Report

      • Avatar Jason Kuznicki in reply to Jaybird
        Ignored
        says:

        No, we have to bail them out, then put them in jail. Then maybe bail them out again, in a different sense.

        That’s what serious people do.Report

      • Avatar Jeff in reply to Jaybird
        Ignored
        says:

        Not really. What of a bank that lied to its lenders but didn’t go bankrupt? That bank would have committed the same offense as the bank that failed, but what punishment would it receive?

        The punishment should have come at the time of the offense, but since only a goverment entity would be able to investigate or prosecute, there can be no real punishment from the libertarian point of view.Report

        • Avatar Patrick Cahalan in reply to Jeff
          Ignored
          says:

          > What of a bank that lied to its lenders
          > but didn’t go bankrupt?

          Presumably if you lie to your lenders, and you have stockholders, when you report the correct (and boy howdy is that one humdinger of a correction), the market murders you (rhetorically) and the CxO gets fired along with the board.

          If you lie to your lenders, and you’re a privately held corporation or partnership, you lose most of the value of your company.Report

    • Avatar Jason Kuznicki in reply to Jeff
      Ignored
      says:

      I would definitely like to see some of them punished, yes. One branch of libertarianism (not mine) would even outlaw fractional reserve banking.

      I would say though that many of the worst offenders among the bankers were central bankers — who kept interest rates incredibly low for a very long time. That helped fuel the bubble, but alas, it’s not a crime to run a central bank in a politically popular way. That’s democracy for you.Report

      • Avatar Art Deco in reply to Jason Kuznicki
        Ignored
        says:

        who kept interest rates incredibly low for a very long time. That helped fuel the bubble, but alas, it’s not a crime to run a central bank in a politically popular way. That’s democracy for you.

        I think the ‘Taylor Rule’ was violated for some months in 2001-02. The monetary screws were tightened in increments over the period running from 2002 to 2006.Report

        • Avatar Tom Van Dyke in reply to Art Deco
          Ignored
          says:

          This Joe Nocera NYT Mag article has stuck w/me, & I’d be interested in opinions from the more wonky.

          http://www.nytimes.com/2009/01/04/magazine/04risk-t.html

          “Yet even faulty historical data isn’t Taleb’s primary concern. What he cares about, with standard Value at Risk [VaR], is not the number that falls within the 99 percent probability. He cares about what happens in the other 1 percent, at the extreme edge of the curve. The fact that you are not likely to lose more than a certain amount 99 percent of the time tells you absolutely nothing about what could happen the other 1 percent of the time. You could lose $51 million instead of $50 million — no big deal. That happens two or three times a year, and no one blinks an eye. You could also lose billions and go out of business. VaR has no way of measuring which it will be.

          [M]anagers began to manipulate the VaR by loading up on what Guldimann calls “asymmetric risk positions.” These are products or contracts that, in general, generate small gains and very rarely have losses. But when they do have losses, they are huge. These positions made a manager’s VaR look good because VaR ignored the slim likelihood of giant losses, which could only come about in the event of a true catastrophe. A good example was a credit-default swap, which is essentially insurance that a company won’t default. The gains made from selling credit-default swaps are small and steady — and the chance of ever having to pay off that insurance was assumed to be minuscule. It was outside the 99 percent probability, so it didn’t show up in the VaR number. People didn’t see the size of those hidden positions lurking in that 1 percent that VaR didn’t measure.

          Etc.Report

          • Avatar Mike Schilling in reply to Tom Van Dyke
            Ignored
            says:

            This is very true:

            At the height of the bubble, there was so much money to be made that any firm that pulled back because it was nervous about risk would forsake huge short-term gains and lose out to less cautious rivals. […] All the incentives — profits, compensation, glory, even job security — went in the direction of taking on more and more risk, even if you half suspected it would end badly.

            I only skimmed the article, but I never saw this point discussed: when weighing a combination of risk, it’s very important whether you’ve got independent events or not. If there’s a 1% change of each of six different things going wrong, and they’re all completely independent, it’s a trillion to one against everything going bad at once. If they can all be caused by the same event, it’s only 99 to 1. How much of the problem was not realizing that the various risks were all related?Report

      • Avatar Jeff in reply to Jason Kuznicki
        Ignored
        says:

        The central banks were not the ones that sliced and diced and rolled up the mortgages, so that no-one knew who owned what.

        If you’re going to outlaw fractional reserve banking, who is going to investigate and who is going to prosecute? Not the Eeeeeeeeevil gubment, certainly?Report

        • Avatar Jason Kuznicki in reply to Jeff
          Ignored
          says:

          As I said, I wouldn’t outlaw fractional reserve banking. I don’t think it’s a coincidence that mortgage rates were historically low for a very long time… and suddenly there are all these risky loans being made and securitized. The one provided the incentive for the other.Report

  11. Avatar Robert Cheeks
    Ignored
    says:

    Back in the day, weren’t the banksters strong armed by the gummint (Janet Reno et al) to make these bad loans to minorities? Just askin’….?Report

    • Avatar Jason Kuznicki in reply to Robert Cheeks
      Ignored
      says:

      Not strong armed, no. But when the central bank dictates very low interest rates, and when your competitors adjust to match, you as a banker have two choices — offer the same risky, too-favorable terms, or go out of business.Report

      • Avatar trizzlor in reply to Jason Kuznicki
        Ignored
        says:

        And when the rioting gets good, you as a citizen have two choices – get out there and smash some windows, or go without a TV.Report

        • Avatar Jason Kuznicki in reply to trizzlor
          Ignored
          says:

          What’s stopping you — say, right now? Go out there and smash.

          If you believe for a moment what you’re saying. Otherwise, you’re just trolling.Report

          • Avatar trizzlor in reply to Jason Kuznicki
            Ignored
            says:

            Sometimes sarcasm and the internet don’t mix. My point was not that following the lowest common denominator during a riot (i.e. looting) is good, my point was that following the lowest common denominator during a financial crisis (i.e. predatory lending) is bad. If we’re going to talk about how the bankers aren’t like the looters, we should hold them to the same standard.Report

      • Avatar Robert Cheeks in reply to Jason Kuznicki
        Ignored
        says:

        No, I mean the AG’s office sent thugs to the banksters telling them either make these loans to minorities (BOTH parties favored this bs!) or the next time you wanna merge, it ain’t gonna happen..or threats to that effect.
        I’m wondering if the gummint/regulators let the banksters bundle these bad loans and sell ’em off on the market to get back their money? Is this true, or some version of it. If so, the ground of the problem is with a corrupt gummint..yes/no?Report

        • Avatar Mike Schilling in reply to Robert Cheeks
          Ignored
          says:

          And minorities are responsible for a significant number of the bad loans?Report

          • Avatar Robert Cheeks in reply to Mike Schilling
            Ignored
            says:

            Actually Mike, I was asking questions. However, it looks to me as some really bad commie-policy, supported by Bush and the Neocons/Rinos layed the ground work for the housing bubble and the ensuing financial collapse. I point the finger at the politicians, primarily, but you have to remember there were GOP dudes who went before House and Senate finance committees saying this is some bad stuff but Barney, Maxine, and Chris said “it’s all good.” Nope, don’t blame the poor, but I do wonder what they thought? That they’d get this great house, not pay for it, and what, Obama’s stash would take care of it.Report

        • Avatar Jesse Ewiak in reply to Robert Cheeks
          Ignored
          says:

          Yes, it is true in right-wing fantasy land. In actual reality, not so much.Report

          • Avatar DensityDuck in reply to Jesse Ewiak
            Ignored
            says:

            I’ve seen “poor people caused the housing crisis” from both sides of the political aisle. The only difference is the implied motivation; the right suggests that the owners were undisciplined and spent all their money, and the left suggests that the owners were greedy and took more then they could afford.Report

    • Avatar Jeff in reply to Robert Cheeks
      Ignored
      says:

      Short Answers to Stupid Questions: No.Report

    • Avatar Jeff in reply to Robert Cheeks
      Ignored
      says:

      To be charitable, you MIGHT be talking about “red-lining”, where the banks would draw risk lines around minority neighborhoods, regardless of ecomomic factors in the neighborhoods. It was de facto racism.

      See also: “Sunset towns”Report

      • Avatar wardsmith in reply to Jeff
        Ignored
        says:

        @Jeff, what if statistically there were always a greater proportion of defaulted mortgages inside the “red-lined” neighborhoods? Would it still be racism then? There’s a great article on CRA circa 2000 that actually did a great job of predicting the meltdown, but I can’t find it in my bookmarks now.

        But CRA was always a scam in the making.Report

        • Avatar Jeff in reply to wardsmith
          Ignored
          says:

          Not sure whar the CRA has to do with red-lining, or minorities.

          The problem was taking race into account in determining risk. If a neighborhood is high-risk, it shouldn’t matter if it’s largely Black, White, Latino, Asian, mixed, whatever. risk is risk, and the are factors one could use (and that the banks did use for all-White neighborhoods). Once the banks made race a factor, they were being racist.Report

          • Avatar wardsmith in reply to Jeff
            Ignored
            says:

            The “gubmint” made the call that race was a factor, not the banks. So for instance we have Watts where there happen to be a lot of people of color living. We also have a lot of delinquent fathers in prison or absent and mothers who can’t make the mortgage payments, what with the 8 kids and all. Now is it racist that this confluence of events happens to an area that is mostly people of color, or coincidence? Extra credit, have YOU ever set foot in Watts? How about Compton? Because I most certainly have and I am not “of color”. Reality is reality however, no matter how one might like to gussy it up.

            BTW found the City’s CRA article. That was Waaayyy back in 2000, not a bad call.

            We could have a whole discussion just on that article because it is more germane to the point that a lot of what I’ve read here. However, the political class has read the article too and there are lots of legalistic rebuttals that conveniently avoid the points while painting the author as… racist of course.Report

            • Avatar Jeff in reply to wardsmith
              Ignored
              says:

              I’m not of color, but my in-laws are.

              I’ve set foot in Watts and other poor areas with a large minority population. I’ve set soot in Compton other middle-class areas with a large minority population. I’ve set foot in parts of Atlanta with high property values and a large minority population. I’ve also set foot in all three types of areas with a large majority population.

              A neighborhood doesn’t lose value JUST because blacks or latinos move in — there are a number of reasons why a neighborhood might lose value.

              From the article cited: “Implicit in the bill’s rationale was a belief that CRA was needed to counter racial discrimination in lending, an assumption that later seemed to gain support from a widely publicized 1990 Federal Reserve Bank of Boston finding that blacks and Hispanics suffered higher mortgage-denial rates than whites, even at similar income levels (emphasis mine).”

              Nope, no racism there.Report

              • Avatar Art Deco in reply to Jeff
                Ignored
                says:

                IIRC, that particular Federal Reserve Bank study was criticized for the following:

                1. Failing to control for a number of variables which affect one’s probability of approval, among them:

                a. Assets; and
                b. Assessments of credit history.

                2. Failing to remark on the default rate on the two subpopulations of borrowers.

                (I think it was Thomas Sowell who noted that since the default rate of these two subpopulations was quite similar, the notion that banks were being sytematically unfair was unsustainable).

                —-

                What is the implication of your point or those pushing the Community Re-investement Act? It is that banks will pass up business because they are run by people who have it in for blacks or by people who make use of racial categories to economize on information costs.

                The former is pretty implausible. Lester Maddox may have been willing to pay for indulging himself in this way, but Maddox is hardly an exemplar of American business. As for the latter, you might ask what alternative sources of information they might tap to make good business decisions before imposing obligations on them.Report

              • Avatar Jason Kuznicki in reply to Jeff
                Ignored
                says:

                My understanding was that the whole CRA thing was debunked once people looked at the commercial real estate market, where the CRA didn’t operate. Prices over there tracked the residential market very, very closely, suggesting that something else must have been driving them both, and the CRA was of negligible effect.Report

              • Avatar wardsmith in reply to Jason Kuznicki
                Ignored
                says:

                The key to the CRA argument was that it opened Pandora’s box to substandard loans. Banks worked mightily to figure out ways to get what they thought were lousy loans off their books. That led directly to the collateralized debt obligations, credit swaps and so on. (In point of fact the CRA loans that were still alive a decade later had no worse rate of default than others).

                If we were to go back in time and revisit this scenario without the aggressive CRA enforcement, would banks have acted less riskily as the author of the City piece (Howard Hussock) seems to assert? Or once banks began mainlining on the heroin of risky loans, the only denouement remaining was a massive credit meltdown. CRA’s in other words were the “gateway drug” as they say.Report

              • Avatar David Cheatham in reply to wardsmith
                Ignored
                says:

                A speech by a member of the Board of Governors of the Federal Reserve System:

                http://www.federalreserve.gov/newsevents/speech/kroszner20081203a.htm

                ‘Putting together these facts provides a striking result: Only 6 percent of all the higher-priced loans were extended by CRA-covered lenders to lower-income borrowers or neighborhoods in their CRA assessment areas, the local geographies that are the primary focus for CRA evaluation purposes. This result undermines the assertion by critics of the potential for a substantial role for the CRA in the subprime crisis. In other words, the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis.’Report

  12. Avatar E.C. Gach
    Ignored
    says:

    “To conflate those bankers who behaved badly but not illegally with looters is, in effect, to encourage either the impunity of the latter or the punishment of the former, who have broken no law.”

    This is either a disingenous statment or an ignorant one. “Conflating” in this case doesn’t mean they must be treated the same. But similarities between them might point toward not treating them AS differently.

    It’s a matter of degrees, and as someone else already pointed out in the comments, shrinking it down to an “either/or” is just a lazy way of ignoring the argument.

    One could just as well analogize between the two, and use that as a basis for making ethically bad banking practices more criminal, rather than assuming they must also, in doing so, advocate looting/arson become less criminal.

    But it’s a simple truth that everyone knows: rich people (who are usually in turn, powerful people) are almost never punished in measure equal to their less wealthy/less powerful fellows for the same bad behavior.

    There are plenty of institutional, sociological, and cultural reasons why that is, many of which are not easily reversed nor possibly should they be. There are legal forms of exploitation and illegal forms, but no one should think that the underlying oppportunism is very different.Report

  13. Avatar Tom Van Dyke
    Ignored
    says:

    FLASH—UK: Facebook riot incitement sentences too harsh. Unfair. Perps victimized, alienated, angry. Society to blame.

    Normally, to qualify for a four-year sentence, a convict would have to kidnap somebody (average sentence 47 months in 2010), kill someone while drink driving (45 months), or carry out a sexual assault (48 months).

    Note to self: Commit next kidnap or sexual assault in Britain.

    Von Hirsch and Bottoms say one deterrent factor does have a strong impact – the social ties of the potential offender. Those with strong family and community links are much more likely to be deterred by the prospect of being caught than the lone, persistent burglar, who often acts impulsively.

    You don’t say.

    http://www.guardian.co.uk/uk/2011/aug/17/england-riots-harsher-sentences-deterrentReport

  14. Avatar wardsmith
    Ignored
    says:

    My friend in London has finally responded with a rather in-depth take on the riots. I can’t post it all here, but he’s pretty convinced it is the result of about 20-30 years of government meddling in government housing and schools – for the worse. Like here in such hell holes as “the projects” (pick your big city, they were a disaster everywhere), Britain has warehoused their poor and under-performing in government subsidized (and free) housing. Welfare mothers, many in their mid teens purposely get pregnant to receive their “free” units and get away from mum and sibs (dad is never around). Project kids form gangs and protect their “turf”. Any of this sound familiar?

    The schools have changed for the worse too. Back when British schooling was the envy of the world and still the reason Asian schools (based on Britain’s) produce such quality scholars – things were different. Now, teachers are mandated by the government to “move them along” passing students who fail the exams. Further there is no real point in passing the exams since that won’t be your ticket (as it would have been in Asia) to the better schools across town. Also they are not allowed to spend extra time with problem students, not allowed to discipline them etc.

    In sum, the rioters can be traced back to Britain’s welfare projects, where by virtue of the overall breakdown they were suddenly able to cross Maginot lines (other projects) with impunity and go “exploring” in the parts of town they don’t normally “shop”. Not only are these kids undereducated, in many cases they are completely uneducated. They don’t take the public transport because they can’t figure out the maps and schedules. They don’t know where the buses go (and buses avoid their part of town). These kids are not only unemployed, they are unemployable, and are the progeny of unemployed parents who will have unemployed children of their own.

    Initially the police were instructed not to interfere with the riots (similar to what happened in Seattle). As you’ll recall, British “bobbies” don’t carry guns so when the bad guys started running amok, their primary “weapon” was the police whistle, which acted as a fine musical accompaniment to the overall mayhem. Also because of their police union they receive up to 2 months of paid vacation, which of course they like to take in the summer months on the balmy Isle of Wight. That left the police severely understaffed for the rioting and caused the government to cancel vacations, resulting in surly officers dealing with the next round of hooligans.

    This again is the man on the street view of someone who lives in London and has for 30+ years.Report

    • Avatar Patrick Cahalan in reply to wardsmith
      Ignored
      says:

      Yanno, Ward, I’ve got some sympathy for this summary. It’s colored, obviously, as all first-person accounts are.

      My response to it is tied to the discussion you and I and Koz have had running through a few threads.

      In a globalized economy, there are manufacturing jobs and agricultural jobs and value-add jobs and service jobs and luxury jobs.

      There is little call for anything except the last three in the first world, anymore. And not everybody can do the last three.

      They’re on the dole, they’re starving, or we have to send ’em somewhere else where they can get a manufacturing job or an agricultural job. There aren’t many other options.

      Unless we can bring the jobs back to our respective first world countries. And that’s got a whole host of problems associated with it.Report

  15. Avatar Steve S.
    Ignored
    says:

    What Dalrymple says boils down to this; looters are responsible for their actions, but when it comes to financiers society made them do it.Report

  16. Avatar Jakecollins
    Ignored
    says:

    JK defends the bankers? Evidently our Gaultuan overlords needed more fellating. As soon as he wipes the cum from his mouth, the CATO check will be arriving forthwith.Report

  17. Avatar Mike Schilling
    Ignored
    says:

    Once the riot is over, the looters will go back to their homes and families and resume their everyday lives. The chance of a banker finding honest work is far lower.Report

  18. Avatar Stillwater
    Ignored
    says:

    Awesome thread. Really.

    Except for Jason’s final comment in the OP.Report

  19. Avatar David Cheatham
    Ignored
    says:

    I am confused at the idea that ‘No doubt some bankers broke the law and should be held to account for it, but not all did.’

    Really? Not all did? I love the fact that we have forgotten that banks knowingly giving people a loan those people can’t afford is fraud.

    We don’t need to get into hypothetical, possible lies about documentation, the general nonsense in not trading the titles right, the utter failure to actually put loans in the CDOs…

    …because a bank standing there and issuing someone a loan they know that person will not be able to pay off is, in and of itself, bank fraud. Really. That is not legal for a bank to do.

    Granted, some of those loans were probably honest mistakes…just like some of the people standing inside a store with a broken window holding a TV were just carrying their legally purchased TV home via a poorly-thought-out shortcut.

    But at this point, arresting every single loan originate who had more than X% of the loans they signed off on fail would be, statistically, more ‘just’ than arresting people in a mob of looters.

    Both the mortgage crisis and the looting are a total breakdown in law and order…but one of them was done by professionals, after those professionals lobbied the government for years to remove regulation to stop it., whereas the looters are opportunistic people who showed up at riots.

    I think, perhaps, we should consider the people responsibly for, the people who participated in, the mortgage crisis, to be just a little more premeditated. We can treat the ‘looters’ that way when they spend a decade creating laws that say the laws don’t apply to what they’re doing…actually, strike that…they’d still do a lot less damage.Report

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