The Death of Capitalism?

Those pesky banks and bankers are at it again. Yves Smith at nakedcapitalism, Mike Konczal, and others have been providing first rate, up-to-date documentation and descriptions of the mortgage morass that may tip our fragile economy into another downturn. A guest post at Barry Ritholz's blog provides the best metaphorical description I have read, one that I wish I had written. It's gotten me thinking about my own experiences with banks and mortgage lenders.

My first encounter with a bank was as a small child when I opened a "Christmas Club" account. I remember my businessman father carefully explaining to 8 year old me that Christmas Clubs were really bad ideas because they paid no interest. One had simply to exercise some self-restraint and foresight in order to accumulate money over time interest-free. He pointed out that there was the problem of where to store the accumulated funds and that for amounts to which one anticipated a need for ready access, banks were a good solution. He let me open the Christmas Club account because he thought it would be a good way for me to see that one could foresee one's future needs at Christmas and by putting a small amount away every week accumulate enough to buy presents. I think he hoped it would also encourage  generosity of spirit.

My next encounter with a bank was as a teen, when my father introduced me to the president of the bank where he did business. We were there to open a checking account for me to deposit and manage my "income" from my after-school and summer jobs and to secure my first car loan, which I would pay with the income from my after school and summer jobs. ("Dad, I need a car." I said. To which he replied: "I'll say to you, Maxine, what my father said to me when I asked him for a car: 'You can have your own car, when you can pay for it' " That's when I got a car, when I could pay for it, and a nice little used Kharmann Ghia it was.) It was at this bank that I developed the (apparently) misguided notion that the bank and I were partners. That's because this bank treated me like a partner. They didn't want to lend me more money than I could reasonably expect to pay back. They didn't want to charge me endless fees. It was a simple arrangement: they provided banking services and I prudently took advantage of them.

Credit is a mixed blessing. Like saving, it allows us to "smooth" our income, to transfer money across time periods. Saving allows us to transfer income forward to the future for which we are rewarded with interest. Credit (or borrowing) allows us to transfer income from the future to the present, but at the price of paying interest on the borrowed funds. I've written before about how I came to have my first credit card. I got off to a rocky start with it, running up a not outrageous, but painful-to-pay-off balance. The pain was sufficient and the lesson was learned and learned well. "Live within your means, Maxine," I said to myself. And so I have.

But credit is the quintessential American capitalist thing most frequently experienced directly by consumers (IMO). I remember in grad school when one year my adjusted gross income was around $6000. Bloomingdales offered me a credit card and I took it. Never used it, but I took it. I remember feeling secretly pleased and amazed that someone so poor could carry around a credit card from an upscale, overpriced retail outlet at which one could not possibly afford to shop. I think I acquired a Neiman-Marcus card the same year. I did eventually use N-M once to buy a wedding gift for someone (after I graduated).

By my last couple years of grad school I was earning enough working part-time to qualify for an FHA mortgage on a small townhouse in the city where I was working and attending school. I cobbled together some small amount for the down payment and the closing costs and I was a homeowner.

I hit one rough patch about 8 years into my 10 year residence in the house. I was non-tenure track faculty, required to fund 100% of my salary from grants. I was about to be down 50% in salary support if a grant or two didn't come through in time.  There was a real possibility that I would lose my job (or more likely drop to part-time while I looked for a new job).

Under the misguided notion that the corporation holding my mortgage was my partner (the loan had been sold several times), I thought I should probably phone them to find out what my (our) options might be. I was thinking I could make interest payments for 3-6 months and then structure some sort of "make up" payment once I was employed full-time again. It took me 3 weeks to track down a phone number for the company that owned the loan. No 800 number. Every time I was put on hold or phoned the wrong department, I paid for it. I finally got to someone who seemed responsible, laid out my situation, explained that there was a good chance I would not lose my job, that even if I did, I was a PhD economist and most likely would have a job rather quickly, that all I wanted to know was what my options might be if I did lose my job. The person on the other end of the line very kindly informed me that there were no options, that he was putting a flag on the account that if I missed one payment they should start foreclosure proceedings immediately. He thanked me for letting him know and saving them some time.

Well, there you are. Doesn't that make you feel better? I know it evoked some interesting feelings in me.

As luck would have it, a fairly large grant on which I was principal investigator came through, my job was saved and my house with it. Being no slouch at spotting losing propositions, I did two things...well, three things actually. I got married. I went on the job market and took a tenure-track position. And I (we) bought another house.

But this time, I knew what to avoid mortgage-wise. We found a local bank that holds all of the mortgages that it originates. We paid an extra half percentage point for this. Well worth it in my opinion. When I had cancer (and thanks to an extremely supportive employer) there was no worry that I would lose my job (at least not right away), but it helped immensely to know that if I had and we had to sell the house, the bank would have worked with us. And they did work with us in non-predatory ways on refinancing, home equity loans, and anything else we needed for the 10 years we owned the home.

Look. This is the heart of capitalism. I want to borrow money to own property. The bank wants to lend money for which it receives a return that reflects risk and the opportunity cost of what it lends. This is a marvelous arrangement for a lot of reasons. Not least, my ownership of said property is a near guarantee that it will be maintained and mowed, improved, and the loan paid off. The fact that all my neighbors face the same incentives to maintain and mow, improve, and pay off creates a web of interlinked well-being. As the neighborhood goes, so go we all.

No good can come from neighborhoods populated by home-owners who have devolved into squatters. Nor can any good come from neighborhoods wholly or mostly owned by banks, particularly large banks with no vested interest in the community. Moreover, capitalism, as experienced and lived by a population whose ancestors started out as squatters with "tomahawk rights," that evolved over time to homesteaders and, eventually, homeowners, is getting a very deserved bad name.

If capitalism has held a special place in the hearts of US citizens, it is almost certainly because most of the working and middle class have been able over time to acquire a little bit of heaven on earth: their own home, bought and paid for by them. Their homes are tangible evidence of their hard work, their prudence, their temperance, and their perseverance. Those homes and the loans that made them possible were also tangible evidence of the partnership between labor and capital; between homeowner and banker; between mini-capitalist and serious-capitalist.

I will say it again. They are tangible evidence of a partnership, a mutually beneficial contract between banker and home buyer. Not adversaries. Partners.

What makes this worse IMHO is that the current mortgage morass appears to be the result of capital's failure to observe and adhere to the rudiments of property rights: the proper and legal transfer and holding of a title and a promissory note; the proper and legal processing of said documents to initiate foreclosure; and a level of outright cruel and confiscatory behavior that until lately I had only associated with totalitarian governments. (If you doubt me, see here).

So this is a message to bankers and anyone else who at least putatively cares about capitalism and commercial exchange. I am probably among the most sympathetic to both and to the institutions that support them. I am losing sympathy. Nay, I have lost it. This is the stuff from which revolutions are born and you will have brought it on yourselves. The problem is that capitalism when done right yields real value, real benefits to us all. So when it dies, when you have killed it, as with all of your other financial chicanery, we will all pay the price.

Comments

[Minutrition]

I just wanted to say "Thank you" for what you are writing. It is engaging, easy to read and understand, and, for once, makes me feel that economists are worthwhile.

Paul McConaughy

[Maxine Udall (girl economist)]

Thank YOU, Paul.

[The Raven]

Great essay. I have more thoughts on this, but so far they haven't jelled. Maybe, on my own blog, if I find time.

[Pancho]

Huh!...a used Karmann Ghia? Looks like we have the same taste in cars... ;-)

Hasta

[Maxine Udall (girl economist)]

Thanks, Raven. I'll look forward to reading it if you write it.

The poor woman's Porsche, Pancho. (Love the alliteration in that one!) :-)

[rjs]

im still wondering where we'll end up when this is all over; some advanced version of tomahawk rights, i suspect...

[Maxine Udall (girl economist)]

rjs, I saw something recently where local law enforcement officers refused to evict a family that had moved back into their foreclosed upon home (which I believe had been acquired by someone else in a short sale). My point being that just as US property rights and the laws governing them evolved in some part to accommodate those early tomahawk rights, so it may be that property rights and law will evolve again (or break down thanks to the banks' wholesale disregard of them) in response to this latest development. Like you, I too wonder where we will end up.

[Thomas]

"So this is a message to bankers and anyone else who at least putatively cares about capitalism and commercial exchange."

There's the rub. They very much care about capitalism which is defined as maximizing their wealth.

I would suggest an alternative conclusion: "So this is a message to bankers and anyone else who at least putatively cares about capitalism and commercial exchange. If you break the law you will be punished with confiscation of property and free time. The latter is also known as a jail sentence. "

No fixes needed other than enforcement of our laws.

[h_lina_k]

This was a wonderful essay. I am going to buy my first house in the next few months and I just had issues with my student loans being sold to another company that is charging a higher interest rate so have been considerably worried about these issues when I finally do get a mortgage.

[Safis H]

It was a nice post, and if you don't mind I would like to add something more on your concluding message.
I certainly agree on the value of capitalism when indeed is functioning well. However, the context of the underlined assumptions for a productive capitalism is never met in practise. In contrast, the system has reverted, as you already said, into a market structure where in numerous cases the gains are individualized while the costs are socialized. This leads me to admire more and more Churchill's perfect insight. He said:
"The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries".
And if you think of it, it is an astonishing insight of a man, who was leaving in a period where modern capitalism was just an infant. Keynes, long before was adding another rhetoric remark by observing that "the real political problem of our world is to combine economic efficiency, social justice and individual freedom". Hence he valuably summarized the underlined trade-offs among the economic systems and governance.
But, What I want to say from all the above? Basically one thing, or more precisely just wondering on two issues. First, on how the trade-offs can be resolved in practise. And second, on the real impact of economics on social matters. Apart from shifting “consumption” across people and among generations, what effectively else are economics implementing??
Especially, the last question was triggered by a recent conversation of mine. Once I first met in our shared kitchen my flat mate, I asked him what he was studying. He answered by saying "I study something useless".” What is it?” I wondered. "Literature” he replied and asked about me. I told him "economics" But then, instantly and unconsciously I responded "Well, you know what the great difference between you and me is? Is that I do something very useful but very few appreciate. While you do something useless but a lot more appreciate". I don’t know if I am right or not, but it makes me think of what can be done.
In general, I am sure that similar questions might have being raised many times and by numerous people. Even in this blog. But, none proved to be satisfactory or sufficiently influential. I believe, it is the sufficient answers to those questions, which might make us not talking again about failures of capitalism or inefficiencies of socialism. The focus and effort on this particular point, is what can bring a sustainable progress, with the only reservation to hold an ability to distinguish between progress and evolution. And is the first of what we are lacking.
One proposition that first comes to my mind , and which is implied by your post, is to bring more morality to economics. Or in more precise terms, is time to finally bring morality into modern economics. The “dismal science” should remain a social science. It is necessary to preclude any transformation of becoming a pure mathematical branch or business apparatus. Then the death of each economic system could be brought by its berth. Whatever the proposition might seem, for instance like Idealistic, romantic or implausible, I firmly believe that is feasible. And will become feasible when we recall that morality had changed the world and shaped the evolution of economics in their initial times and the subsequent periods. It is even true that in many cases, questions of moral turned to economic theories. Now many of those are lying in hibernation.
Sorry for my long comment

Safis
Phd University of Warwick

[purple]

If capitalism can't improve living standards it is finished like any other system. And saying this isn't 'real capitalism' sounds like old Communists talking about the USSR not being 'real Communism'.

[rjs]

this may be the story you saw, maxine:

http://www.housingwatch.com/2010/10/12/evicted-family-breaks-in-to-own-home/

what this points to is that the whole ownership system seems to be breaking down...nationally, the time from when people stop paying on their mortgage til the foreclosure is 448 days; in florida, its 678; in new york, its 792...ive seen comments all over from people who are current on their mortgage who feel like they're suckers for continuing to pay; some even say they'll stop...the country is so overbuilt, with 19 million vacant houses, it could very well deteriorate into a lawless situation where squatting becomes nine tenths of the law...

[Devin]

I think an interesting question to ask is why it took so long for enough people to pursue naked, short-term self-interest to completely erode the system. In any system, it seems like there's always a personal advantage to be gained by undermining the system. Why were, for example, Soviet leaders so quick to betray the principles of the system for short-term gain, while in America bankers existed for centuries without turning into the ruthless, socially destructive miscreants that they are today?

[NIgel Rawlins]

Hi Maxine, great article. I don't think it's the death of capitalism. But you are right, these are businesses that disconnect from participating in their local community, state, country. It's by being too smart, and greedy, that they damage the good that comes from the benefits that can flow from capitalism.

I think there is an obligation for business that benefit from all that the community provides (over many years and generations) to give back, as a partner, to be fair. The sad thing is that such behaviour is tolerated and often admired.

In Australia we have had our share heroes of capitalism who are admired by the media, and then fall over several years later when their shonky practices are revealed.

[narration]

Maxine, that's a very nicely told story.

I wonder if the turning point you found isn't the general one we should turn to. The idea of 'local' in food, etc. appeals to people. Why not the same 'local' in banking of all kinds, as you did.

This is what the monsters could be broken up to be again, isn't it? Then who loans and provides other services must reckon on much more than just the moment's fiduciary factors -- and that brings the humanity we need and want, or so it may seem at the moment. A thought.

Regards,
Clive

[kaleberg]

Devin: Bankers were always noted for their naked short term interest which is why the economy regularly crashed in the 19th century. Most people survived because of pre-Marxist land reform. They were agricultural and owned their own farms on land taken from its original owners, the native Americans. This boom and crash cycle went on until the 1980s when a long persistent campaign of lies convinced enough Americans that rising living standards and economic growth were not worth the horrid price of a regulated economy. As regulation lapsed, the bankers came out to play again. This was predictable, predicted and proven.

[reason]

I want to put my hand up at the back of the class and say "Don't forget land prices. They are an important and much forgotten part of this story."

For instance, I think it is often forgotten that although sub-prime went bust, what they did do was to push up land prices for all new buyers (and even some old ones through equity extraction). Maybe that was the idea?

[reason]

If you'll allow me to comment again some things struck me about your anecdote.

Firstly, I don't see either finance or owner/occupied housing as having anything particularly to do with capitalism. Socialism usually allows ownership of personal goods (and it is arguable) that a house to live in is such. And when I grew up in Australia, most lending (for both housing and working capital for firms) was done by publicly owned banks. (Banking at one time was seen as a public service, like mail and telephone was, with cross-subsidation of remote areas.)

Secondly, I wonder about the clerk that responded to your query by upping the priority of your loan for foreclosure. How does he sleep at night? I'm sure I couldn't do his job and feel good about it. Capitalists are meant to be heartless calculating machines. But not the people that work for them. What has happened?

[Bernard]

your version of capitalism and the bankers' version are quite different now. Bankers have practiced a "winner take all" Monopoly outlook.

the loss of the partnership is their doing, their choice. unfortunately a powerful number of bankers broke the contract between with what used to be middle class America.

the new contract the Bankers have is with the Owners who decided to cash in their chips, now.