Wednesday, July 18, 2007

Elizabeth Warren: Worlds That Never Collide

Elizabeth Warren has written about her experiences testifying to Congress on the debt crises taking place all over the country by middle class Americans:

One sub-theme united the two hearings. Defenders of the status quo claimed that there is plenty of protection under the current law and that any efforts to change the law would impair the free market, making things worse for everyone. No need to change the law to deal with subprime mortgages, national healthcare or bankruptcy. Defenders of families said the experience on the ground is very different, and that hard-working people are getting pummeled.

The stories about what is happening to middle class families were agonizingly similar. At the FDIC, witnesses who work to help families in mortgage foreclosure told about mortgage brokers who falsified documentation, lied and cheated customers, and about mortgage companies that were hell-bent on collecting, even if it meant losses in foreclosure. At the House Judiciary Committee, Mrs. Donna Smith gave compelling testimony about how hard she and her husband struggled to pay their medical bills, and how health care providers told them that if they couldn't pay, not to come back. Her story was backed up by Dr. Himmelstein of the Harvard Medical School and Dr. Mark Rukivina of The Access Project, both of whom cited study after study showing how people are struggling to pay medical bills and that people die when they cannot pay for health care.


In "Thank You For Smoking," the hero-lobbyist offers the pithy advice that all that's needed to neutralize a grim reality is to tell an alternate story, claim the data are "controversial," and the resulting gridlock will prevent meaningful change.

This first-hand account of the discussion taking place in Congress shows how the debt divide is creating two different realities for corporate elite and the investor class and everyone else. Can America be saved before it's too late?


An thought provoking comment was left by "Destor23" who writes for the blog Those Things We Say:

Why would a mortgage company seek foreclosure even when everyone in the lending industry knows that foreclosure leads to losses to the lender, often steeper losses than would result by renegotiating with the borrower?

The answer is: securitization. Lenders move their loans off of their balance sheets by selling them on the public market, usually as part of loan portfolios called CDOs (collateralized debt obligations).

The people who buy the CDOs are looking for a relatively stable, predictable return. If they buy a CDO that promises to pay 8% a year for 10 years, that's what they want.

This really hinders the lender. A lender might be able to talk to a borrower in trouble and say something like "If we reduce your interest from 14% to 8%, you'd be able to keep the house and we'd still make money." But, once that loan has been sold as part of a CDO, they can't. The investor who bought the CDO would rightly counter, "I bought this for an 8% return. If you negotiate the underlying deals down, I don't get what I paid for."

The rise of this secondary market for loan obligations, which serves the lenders by taking risk off of their balance sheets, has also kept lenders from being able to reasonably deal with their borrowers. Once they sell the loan, there's another interest involved, one who hs no reason to help the borrower out.

The regulations that would be most effective probably aren't ones that touch on the consumer. Instead, we need to regulate the secondary mortgage market. It's the investors who are buying this stuff who are saying that they'd rather take the loss of foreclosure than allow for the terms of the loan to be adjusted. And those investors aren't acting out of malice. They buy debt because they need to buy predictable returns. Many of the investors are institutions like pension funds who know their eventual obligations and need non-volatile returns in order to meet them. Still, they are at odds with borrowers in trouble and their involvement in the transaction hinders the rights and options of both the lenders and the borrowers. If that's not addressed, nothing will change.

***Later update***

Another interesting comment from Robert Feinman:

Last week on "Now" they did a bit on the fight to renew the SCHIP child health program. Sonny Perdue, the governor of Georgia, when confronted with a story about a diabetic young girl who needed daily treatment at a cost of about $900 per month and who was denied entry to the program because it was "full" said it wasn't his problem. They should talk to the local congressman since it was a federal program. He in turn blamed in on the Dems.

This isn't about a firm or a wealthy person making more money. These guys don't stand to profit personally. What is striking is their total lack of human feelings and empathy.

Psychologist Robert Altemeyer has studied people with this type of personality and finds that there is a strong correlation between the belief in a hierarchical social system, the need for a strong leader and conservative social viewpoints.

By blaming behavior on greed we may be missing a more fundamental issue, that those with a sociopathic type of personality tend to rise to the top of the hierarchy. They then impose their inhumane feelings on everyone else. Countering these people means understanding their makeup. I suggest reading his free, online book to get some insight into what we are facing.

The Authoritarians

You can't counter the opposition if you don't understand them.


Scribe said...

"Can America be saved?"

Only if and when the masses are armed with the knowledge of how the system really works and how our society has evolved into an economic serfdom.

One place to start is to broadcast in primetime the documentary Maxed Out, which I highly recommend. But that will never happen, so its incumbent on those who know to share with those who don't this vital information — vital to the average consumer and vital to the health and future of this democracy.

Anonymous said...

...."By blaming behavior on greed we may be missing a more fundamental issue, that those with a sociopathic type of personality tend to rise to the top of the hierarchy.".....

Just wanted to say that this sentence above hit the nail on the head. I'm someone who has been reading more and more about those individuals who have no conscience, and that has lead me to believe that more people than we'd like to realize, are sociopaths or psychopaths. I know this now because I was involved with one. And, it wasn't until I left the relationship and started searching for answers that I actually got some.

There are some great books to start with (you are probably already aware)and I can recommend one "The Sociopath Next Door" by Martha Stout. And there's a great blog, you may appreciate as a fellow blogger:

Enjoyed your article. And I love the phrase: 'knowledge protects'.