North Texas Objectivist Society (NTOS) Message Board › The Morality of Moneylending: A Short History

The Morality of Moneylending: A Short History

A former member
Post #: 52
http://www.theobjecti...­

What do you think?
Old Toad
OldToad
Group Organizer
Dallas, TX
Post #: 607
This is a very interesting article regarding the history and philosophy of money lending, but I do not think it addresses the question of the article's own introduction:

The villains, we are told, are not the borrowers -- who took out loans they could not afford to pay back -- but the moneylenders -- who either deceived the borrowers or should have known better than to make the loans in the first place.

This implies that the borrowers are the villains "who took out loans they could not afford to pay back." With respect to the author, I think this is unfair, too.

In principle, I don't question the morality of money lending, whether from the lending or borrowing perspectives.

But I do think most moneylenders -- as businessmen -- are typically in a better position -- more sophisticated, if you will -- to evaluate business decisions and projections as to the likelihood of market fluctuations than most mortgage seekers. For their own sake, the moneylenders had better check into the soundness of the lending-borrowing scenario and the value of the security. They have paid professionals working for them, i.e., "underwriters," who are supposed to do that. It seems that in the sub-prime market, they failed to do that properly.

In this context, I think it is fair to suggest that the moneylenders "should have known better than to make the loans in the first place." More fair than to suggest that the borrowers "[should not have taken] out loans they could not afford to pay back."

And the moneylenders are now suffering huge losses for that poor judgment -- as they should.

Of course, the borrowers also should carefully consider a mortgage -- but they are rarely professionals or experienced in this area. A typical person may buy and finance just a few homes in his lifetime. Many sub-prime homeowners are suffering huge losses, too -- partly for relying on their own inexperience and poor judgment.

By and large, I don't think either the moneylenders or the borrowers are "villains."

It seems we are all in for a painful economic period as the moneylenders reconsider each of their underwriting standards for making mortgages. Borrowers, too, will be learning and reconsidering the nature of their borrowing. The recent housing market was built on "easy" (ill-considered) lending and borrowing practices. Many of us will pay a price for this even if not directly involved as the market prices for homes readjust to realities that moneylenders ignored in underwriting and as borrowers, too, get first-hand negative experience with such loans. Those left holding the bag as the realities sink in will pay a big price for these lessons. It's like inflation -- everyone's home market value is affected.

Should the government do anything about it (except get out the the home mortgage business)? No.

But does the article fairly address the issue it raises, i.e., in the sub-prime mortgage crises, as between moneylender and borrower, who bears the responsibility?

It seems that many of these lenders were making mortgages based on underwriting standards that even the fed mortgage agencies wouldn't touch. Also, it isn't the fact that most of these loans are being paid back -- it's the rising and unanticipated default rate that is killing the moneylenders. Going from a default rate of a small percentage, normally factored into the equation when underwriting, to a default rate that is only a little higher can wipe out the interest profits, add to the number of foreclosures on the market, etc. Then the dropping market value in home prices -- the security for existing loans places both the moneylender and the borrower upside down -- and all the housing market in a downward spiral.
A former member
Post #: 136
Who bears the responsibility?

The borrower!

So if the lending standards are "ill-considered" then WHO would you have set the standards? Goverment? THEY already set the standard!

The major point I took away from this article was that businessmen, lenders, are in a no-win situation. How true that is! If lenders tighten, then they are accused of all manner of evil by the government. If they losen standards and the default rate climbs, then the public accuses them of all manner of evil.

I predicted the current siutation over a year ago, looking at the then current M1 & M2 money supplies. People, borrowers, taking advice from fortune cookies like "land, their not making anymore of it", rushed out and brought homes they couldn't afford, and started living from paycheck to paycheck on their credit cards. Which they have now proceeded to defualt on as well. Just exactly where does it end...you tell me!

Naturally, business will be blamed. Because of old rule of reasonablitiy has been replaced by.."If this moron can't even tie his own shoe, then clearly we should extend him credit, because after all, every American deserves a home of his own!" Business assess the risk through interest rate. Now I'm not certain how intelligent you have to be to understand if it was LOWER when you brought your house, and you know it's going to be HIGHER later, that you are certainly going to pay more. BUt logic doesn't apply because PEOPLE are hurting! (Pass the aspirin please.)

All the forecasting and predictive modeling in the world can't replace simple common sense. But, I do agree that businessmen deserve some blame, because few, if any, determine to fight government on principle. This is why business is such an easy target, at root, it isn't that they don't understand what's at stake, it's that they, by and large, are cowards. Better to make some profit than none...right? If your 7 figure bonus was at stake, what would you do? Senior executives that I know would cave in like a cheap house of cards and turn to jelly.

They've ignored philosophy at their own peril, and now they are going to pay the price. Take a look at mighty GE! The moron Immelt is rushing to embrace environmentalism because he thinks he can make a few bucks, despite the evil it means. Idiots like him make it difficult to defend businessmen...from THEMSELVES! They are their own worst enemy.

So what is the true root cause...philosophy! Education, multi-culturalism, entitlement. Entitlement is especially interesting. Even the Wall Street Journal has run many articles on the recent crop of college "educated" MBA's who pop out of come prgram thinking THEY have all the answers and the pout when you tell them just how wrong they are. Case in point, a hired a 20 something college grad who had a few years experience under her belt thinking she MIGHT be mouldable. HA! After working for me 3 months she wanted a transfer because "she had been a STAR at her previous employer (GE) and she couldn't be a STAR in my world because she didn't understand the business!" Naturally I transferred her whiney, pouting, ass away from me as fast as greased lightening. Now she calls me up and requests metrics on numbers she doesn't understand, doesn't know how to intrepret, and still knows NOTHING about the business...but she's a STAR in her new department where they have "team building" lunches and PC group hugs! I wouldn't be all that shocked but this is NORMAL behaviour from MBA's from "good" schools. The collective lot wouldn't know an original idea if it fell on their head. They want BIG paychecks, BIG offices, and to be STARS...without having do to the work. And THIS is the generation that will soon be in control of the nations financial systems! If you aren't scared...you should be.

Pytheus
Old Toad
OldToad
Group Organizer
Dallas, TX
Post #: 609
Hi Pytheus,

By and large, I don't think either the moneylenders or the borrowers are "villains." That seems like a false alternative.

I think most borrowers did anticipate that the payments would be higher at some point. But they were optimistic that the rates would go up slower than they did, that their incomes would go up faster than they did, and that their homes would appreciate rather than fall in market value. In the aggregate, moneylenders didn't seem to question the borrowers optimism, foolish as it may have been, and -- more likely -- they shared it, foolish as that may have been.

And we are worried or scared about this situation because making sound business decisions in your cabin won't help much when the captain steams the Titanic into an iceberg.
A former member
Post #: 137
Dear Mr. Toad,

I don't think either are "villians". But I do think lenders will be cast in the role of villians. That process has already begun, just pick up any edition of the WSJ and see for yourself.

And why shouldn't the "public" whine like cry babies since the administration already proposed its first round of a bailout.

BTW, the valuation of housing prices was based on an expanding market. Values are falling BECAUSE of a lack of liquidity in the credit market. Personally I'd rather invest in Victoria Secret.

Let me give you another real world example. I recently had government regulators in my office one of whom had NEVER even been in a credit center before! Pardon me, but don't you think if you're going to regulate something you should at least have experience in the field? Of course the government doesn't regard knowing what you are talking about as an important condition for the position of "regulator".

Recently someone posted an editorial by Ed Cline regarding a theocratic America. I'm not "sold" on the idea of a theocracy yet, but a fascist America is certainly possible because I know from experience that BUSINESS leaders would be the absolute FIRST in line to support such a system.

Do you remember the governments anti-trust suit against Microsoft? Do you know who was behind the scene PUSHING the government? Larry Elison and Oracle, among other BUSINESS leaders.

So, in the long run this credit "melt-down" will pass but the lack of business principles will be with us a long time.

Pytheus
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