Should the Fed Have a Moral Compass?

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profette_IHB

profette_IHB

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<p>I came across an interesting article on the Fed's moral obligations. Here is the abstract:</p>

<p>"The Federal Reserve's actions in allowing household financial fragility to develop and then deliberately sacrificing the well-being of people who were already disadvantaged in order to combat inflation were morally unjust. The Federal Reserve's trust in the markets and its reliance on economic efficiency were responsible for its denial of the housing bubble, the measures it took to deregulate the financial services sector, and its encouragement of financial innovation. Thus, the Federal Reserve should now restore the losses that have been incurred by households and enact measures to prevent future household financial imbalances"</p>

<p>David Zalewski 2007. "Should the Oracle Have a Moral Compass? Social Justice and Recent Federal Reserve Policy." <em>Journal of Economic Issues</em>. 41(2): 511-17.</p>
 
And, for the ubernerds like myself, <a href="http://www.irvinehousingblog.com/wp-content/uploads/2007/11/moral-compass.pdf">here is the whole article</a>. Enjoy!
 
Giving away taxpayer dollars to offset boneheaded decisions made by Alan Greenspan and people looking to get rich quick doesn't qualify as a moral compass.
 
Well, the Fed should have a moral compass, but "the Fed" is just a bunch of

people who are hired to do certain things. Does the author think that "the Fed" has

tons of gold nuggets to fling on the heads of the disadvantaged, if their policies were horribly flawed and the disadvantaged are thereby harmed?



But somehow, I must note, the solution almost never does any harm to the advantaged. I would settle for our policies not deliberately causing the rich to get

richer, sometimes at the poor's expense and sometimes not. The rich are, I think,

quite rich enough already.



Gov't policies to help the poor are almost always hijacked by the wealthy and middle class. If someone want to help the poor, what they need is safety, good education, and some micro and mini loans to start small business.
 
<p>His premise is flawed. The Fed did not force anyone to borrow more than they could afford to pay, and no households have incurred any losses attributable to any Fed policy. While it's true they may no longer be able to stay in the home upon which they took out a loan, you can't logically argue this as a loss because the terms of their original loan haven't changed; they simply can't (and likely never intended to) pay the adjusted monthly mortgage payment. The asset itself may be depreciating, but that isn't a loss until the home is sold. Again, no Fed policy popped the housing bubble, it was the market (specifically, investors in RMBS securities) itself that stopped the flow of money to the mortgage brokers. Even stipulating that they couldn't have gotten the loan without the Fed policy in the first place, no one at the Fed stood behind them and forced them to sign loan documents at gun point. No one at the Fed required anyone to stop lending, they even made it cheaper for banks to borrow, and if it wasn't for the Fed policy to date we'd have had a massive crash on August 9th.</p>

<p>Profette, I know you've kept up on the details and events that have gotten us to this point, so I hope you left a nastygram for whomever is pumping out this garbage. It's clear that the only people to blame for this problem are the people who are now clamoring for the government to save them. The other day awgee referred to Ben Franklin by misquoting, "<strong>Those who would give up Essential Liberty to purchase a little Temporary Safety, deserve neither Liberty nor Safety</strong>"; considering the modern day bent of politics in the country, I would amend that to include "and those who surrender personal responsibility to escape personal liability sacrifice the liberty of us all." Mr. Zalewski clearly is an idealogue trying to argue the evils of the current administration, laying the groundwork for later claims that Bush and/or Republicans are responsible. The truth is that normal everyday people are responsible... for not being responsible.</p>
 
<p>Ok, read the article, there are huge boo-boos on page 513. Guy doesn't even know that an interest only loan does not have negative amortization. Guy thinks changes in interest rates by the Fed have an effect on all the exotic mtges. Obviously never heard of the London Inter Bank Rate, which is, surprise, surprise located and determined in ENGLAND.</p>

<p>I personally have closed lots of negative am mtges--mostly in the 80s--and I will say that none and I mean NONE of the people signing understood the loan, and they weren't all poor souls either. I tried to explain, really I did, but conclude it was hopeless. Maybe in the future borrowers should have to pass a stringent test to get this kind of loan. Of course, once they understand it, they'll (almost) never want it.</p>

<p> </p>
 
Here are the articles <a href="http://www.businessweek.com/magazine/content/06_37/b4000001.htm?chan=search">"Nightmare Mortgages"</a>, and <a href="http://www.businessweek.com/magazine/content/06_50/b4013052.htm?chan=search">"A Farewell to ARMs? Not Quite Yet"</a>. These are two that are cited in the original article.





I will read them later. David Zalewski is misinformed on mortgages, hedge funds, and how the secondary mortgage market works. From what I can tell, he consistently cited the businessweek articles. Is that where he got his poor info? Hopefully, someone will read them before me, and have a comment.
 
1) Federal Reserve lowers the fed funds rate to 1% and the Chinese and GCC (Persian Gulf) countries set their interest rates to negative real rates to maintain currency parity


2) US and British mortgage lenders are flooded with demand for AAA paper.


3) US and British homeowners are allowed to get loans at high loan/income ratios with interest being deferred and in some cases no verification of income


4) US and British homeowners start to speculate on property in Florida, OC, NYC, Latvia, Croatia, Spain, etc


5) Fed raises interest rates and LIBOR starts to move upwards


6) Real estate market experiences deflation


7) Suddenly people realize 3% caps in OC and 1.5% cap rates in Italy make no sense and scream "Sell Sell Sell"


8) Newspapers and members of Congress wonder why did the Fed not promote a free market for gains and socialism for losses





Am I missing something in this sequence?
 
<p>Nah, look up the AFEE and Journal of Economic Issues. </p>

<p><a href="http://www.orgs.bucknell.edu/afee/">http://www.orgs.bucknell.edu/afee/</a></p>

<p>Hmm, has a slight tone to it, doesn't it. Let's look up their ancestral legacy: Institutional Economics: <a href="http://en.wikipedia.org/wiki/Institutional_economics">http://en.wikipedia.org/wiki/Institutional_economics</a> </p>

<p> </p>
 
The very existence of the Federal Reserve is immoral. How in the world can you expect an organization designed to enslave a populace through the control of it's currency to have a moral compass? Pure idiocy.<p>



Permit me to issue and control the money of a nation and I care not who makes it's laws. -- Mayer Amschel Rothschild
 
<p><a href="http://www.providence.edu/Zalewski/">David A. Zalewski</a> is Professor of Finance at Providence College and the Feinstein Institute for Public Service</p>
 
Profette, thanks for confirming it. It was obvious that he was a bleeding heart liberal out to create another government bureaucracy from the very start of the paper.
 
He's a professor of finance and doesn't know that interest only doesn't result in negative am? Many exclamation points!



I don't mind if he's liberal, but I sure mind that he's stupid. He'd be jumped all over in this blog, doesn't the journal vet the articles?



When the hub submits a science paper for publication it is read by all kinds of experts, to make sure neither he nor the journal is embarassed.



I guess blogs are superior to journals. Well, they are superior to bad journals. See my futile efforts at trying to think of blogs as an art form.
 
<p>I get the feeling in the AFEE thing that the words used don't really mean anything.</p>

<p>I do think that evolution should be considered in this sphere, but by evolution I'm talking about DNA, and Darwin and his heirs, and how and how much our genes shape us, including our allocation of resources. Not some vague do-gooder blabbering. Which is not to say I approve of evolution. It is ugly, thought-free and utterly ruthless. Evolution certainly happens whether I approve of it or how it works, truth not being beauty.</p>

<p>Suppose, for example, we evolved from beings that didn't need to build shelters? Our whole house/mtg discussions would never come into being. But there would still be resources, and they would still have to be allocated. How?</p>

<p> </p>
 
<p>Well, he's a professor, I'll give you that. </p>

<p><em>David A. Zalewski is Professor of Finance and in the Feinstein


Institute for Public Service at Providence College. He has published


in the <strong>Journal of Economic History</strong> and in </em><em><strong>Essays in Economic and


Business History</strong> and is currently researching macroeconomic policy


during the interwar period.</em></p>

<p>With symposiums like "Wealth and Power: Ethical Implications of Executive Compensation Since the 1980s" and the pap spit out in the link from profette, it's clear that this guy is making things up as he goes along. He's got no real world experience, his chosen field is economic history, and he makes the classic mistake of cherry picking evidence to support his world view, rather than letting the evidence dictate the results.</p>

<p>The saddest thing is that he gets paid to teach; someone thinks this guys microscopic field of study gives him a greater understanding of the field as a whole and then invites him to comment on current events without bothering to fact check his submission? If this is higher education, we're all getting ripped off. When I want to know who the German finance minister was in 1914, I'll shoot an email to Professor Dave; if I want social justice from the Federal Reserve, I'll make sure I don't vote for people that hire the Daves in the world.</p>
 
<p>I read the first article, it wasn't bad, and interesting in a historical sense since some of the institutions quoted, like New Century, don't exist any more.</p>

<p>And nude, I must disagree, the people whose mtges I closed in the 80s did intend to make the payments. It's just that ordinary people don't have a time horizon of more than a year. If something is gonna happen 3 or 4 years from now, to them, it might as well be forever. I dunno, do we accomodate the stupid, or let them starve? (Think of it as evolution in action (Larry Niven)).</p>

<p>I said to them: You understand, you will pay all this money and at the end of the year you will owe more money than you do now? I don't want you to say to the judge if you get foreclosured that I didn't explain it to you. And they would nod their shaggy heads and sign. The bank would have had me fired if they heard me. But not one person walked out without signing.</p>

<p>So explaining, I conclude, is nice for the soul of the closer, but useless to the fools that want what they want right now. I think now, knowing what I know I would refuse to close such loans. Luckily, my honest, now going out of business brokers, sent me only one such loan and that person insisted on it, after being discouraged.</p>

<p>Nude, awgee, if you were a mtg closer, would you consider it moral to do the closing you, yourself personally. Especially if you realized that the person signing really was too stupid to understand? Remember, a lot of people are functionally innumerate.</p>
 
LAWYERLIZ, in an earlier post you stated:





"But somehow, I must note, the solution almost never does any harm to the advantaged. I would settle for our policies not deliberately causing the rich to get richer, sometimes at the poor's expense and sometimes not. The rich are, I think, quite rich enough already.





Gov't policies to help the poor are almost always hijacked by the wealthy and middle class. If someone want to help the poor, what they need is safety, good education, and some micro and mini loans to start small business."





This is exactly the problem with liberals and their ideas. If you take their arguments at face value, you would think that they actually care about people who made poor financial decisions, and that the poor are either too stupid, or uneducated to function on their own. The solution - create a new layer of government bureaucracy.





In reality, the goal isn't to help people. The housing bubble is just another excuse to create jobs for people who have a strong desire to control the lives of others. (After all, if someone can't figure out that they aren't capable of paying off a $1,000,000 mortgage on an $85,000 annual income, then there are a whole host of other bad decisions that we need to protect them from)
 
<p>liz, I wasn't referring to the 80's, I was referring to the current problem... as was Professor Dave. Let's not compare apples to oranges, okay?</p>

<p>To answer your second question: I wouldn't close that kind of loan unless I, myself, was sure that they could repay; if it's clear the person was too stupid to understand then I wouldn't feel comfortable letting them go forward. However, if they go to a competitor for the same loan I refused them and they get it, their stupidy does not absolve them of their responsibility.</p>
 
<p>The 80s were exactly the same, except house prices didn't go down as far, because they hadn't gone up so far. The effect on the wider economy was therefore less. The loans were exactly the same except for the ones with the 1% teaser rates.</p>

<p>I remember at the time being surprised that they qualified the people at the lower amount, not the fully amortizing amount. In my naivete, I thought this was really stupid. The S & L was selling the loan, even then. I wonder if they would have done the same thing if they were keeping the paper.</p>
 
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