Grasshopper Society...

The Grasshopper lobby has done its job well.  Ants today are reviled as "greedy bastards".

Some interesting facts I have learned lately.

Of those that had government sponsored re-financing of their homes in the last year, 51% have defaulted again.  This is not hard to believe.  Combine the fact that your home is underwater with the fact that you think of yourself as a poor victim and the lender as an evil greedy reptile (which is the dominant theme of those providing zero down and ARM mortgages to people, under the direction of congress via Fannie Mae and Freddie Mac in their risk policies so that "every person could own a home"). 

From a systems approach, underwater asset and no shame or consequence  in denying obligations because you feel victimized, the better question is "Why WOULD'NT you default on your obligations"?  The gov now has the problem that they have chosen frame the borrowers as "poor victims", which in itself is predictable, because basically they constitute a voting block to be pandered to, and thus created a system that ENCOURAGES defaults because of it. 

I have written in the past about the method I use how to spot Bad Financial Policies, mostly to help identify potential corporate financial shenanigans, and these same methods apply here.

Whenever you hear about a business or government practice, reduce it to you and your neighbor.  If it doesn't make sense on that level, it doesn't make sense.  It works like this.

If my neighbor came to me and asked me to loan him money so he could have some gambling money in Vegas, would I loan it to him?  Maybe.  If I was smart, I would make him pledge his car or something.  I am sure I wouldn't loan him the money if my recourse was only his potential winnings, because I would then be taking the whole risk of  gambling for only a return of my money, while neighbor has all the upside potential.  This is exactly the same as financing a home for speculative reasons.

So why would I make that loan?  What if there was a quasi-government agency that would buy all the loans I made that way because they wanted to encourage Vegas gambling?  What if they gave me my money back and a fee a day after I made the loan? I have no risk and a guaranteed return.  I would make those loans to about anyone who came to me wanting one.  I would also advertise to tell people that I am willing and able to make those loans.  

So those people lose their money.  Whoever bought those loans from me still wants to be paid.  But their collateral has disappeared, the "winnings from Vegas". Who is the bad guy here?  

I wouldn't have made the original loan had the quasi-governmental agency not existed.  So who had the business plan to encourage these loans in the first place?  Well, it was the government, who set up the quasi-governmental agency.  THIS was the driver of the mortgage debacle.  The implied guarantee that the US government would stand behind debt that would be considered a bad risk. This, in turn, drove the debt securitization and derivative products that were the added coup de gras as they multiplied the bad loan consequences 30 fold.  

Without the government policy and risk reduction, none of the other issues surrounding it would have materialized.  Of course, the politicians involved in crafting these massively destructive policies then place blame everywhere but where it belongs.  On them.  If you are a parent, you recognize this behavior.

Those of us in the oil business recognize these issues instinctively.  Non-recourse financing.  How to structure debt to minimize your risk.  How to recognize when the markets have overheated and the competition for your borrowing is out of whack, ie you get lower cost and lower risk dollars.  In the real world, these overheated systems can only occur for short amounts of time.  Money pulls out. The risk exposure gets too great.  To build a real pressure cooker bomb that can destroy the house, you need government policy.

Oh well.  Another fascinating tidbit I learned in the last few months is the mobility of wealth.  I had read several articles in the Economist and elsewhere that led to a book, "Intellectuals and Society", that provided some pretty clear insights into wealth distribution and mobility.

We are bombarded with news about the widening wealth gap between the "richest" and the "poorest" and take that as a portend of societal collapse. "The rich have far greater income gain than the poor" is how one article in the Washington Post characterized the issue. 

However, if you follow the data by specific people, rather than as percentages of a whole bucket, you find that the income of those in the bottom 2o% in income in 1996 rose 91% by 2005, while those that were in the top 20% in 1996 rose by only 10% by 2005, while those in the top 5% and 1% in 1996 actually declined.

How do reconcile these two apparently disparate statistics?  Obviously, because those that were in the bottom 20% don't stay in the bottom 20%.  We don't have a static society. This is affected by a variety of issues.  Young people entering the workforce, better jobs in other areas.  In any case, doesn't this bit of information change your perception of wealth in our society altogether?  

Moreover, more than 75% of Bottom 20%ers in 1975 were in the Top 40% of earners in 1991.  5% of those initially in the bottom 20% were still there in 1991.  29% 0f those in the lowest 20% in 1975 were in the top 20% 15 years later.  THIS is the success story of America.  For every "failed case" or "permanent poor" member of our society, there are 6 cases that rose to the very top from the same rung.  

As an oilman, I recognize this very clearly.  In fact, I am one of those statistics.  In 1996, I had an income of less than $10,000.00.  My company was in risk of failing (fortunately I worked it out and honored my debts), I was up to my eyeballs in debt, and my wife had divorced me (the Houston Junior League frowns on poverty). Today, well, I am much better off,  although the Houston Junior League can still kiss my ass.

Economic class mobility is the name of our game.  It is real, and it dwarfs the grim Fairy Tale of the Permanent Poor we are constantly fed and take as objective reality.

So, rule 1.  Whenever you see arguments made on a percentage basis over time, realize that you most likely do not have enough data to make a conclusion or to drive an action.  

Another buzzword to watch out for is "households" over time.  This is another statistical trick used by our media and think-tank Kreskins to illustrate poor performance that isn't really there.  

How?  Whenever the term "households" is pulled out, grab your wallet, because the number of people within households has been declining over the years.  The number of households is increasing faster than the per capita number of people. The only reason to use it is to HIDE per capita results.

In fact, that the number of houselholds is increasing faster than per capita population is itself a sign of prosperity.  More per capita income allows smaller households to emerge.  The use of "households" statistics consistently understates rises in per capita standard of living and consistently overstates income inequality trends.  For instance, there are 39 million people in "bottom 20% households", and 64 million people in "top 20% households".  In other words, if everyone in the US had exactly the same income, there would STILL exist a significant disparity between Top 25% and Bottom 20% of households.  The appropriate metric is "per capita".  Again, you have a misleading statistic with households only and have, at minimum, some more arithmeticking to to do to get to an actionable metric.

Saturday morning economics!  Sorry to spoil your day...

Comments

[Hondo Lane]

And rule 2. Watch out for Junior Leaguers and run the other way. You young men out there just getting out of school with your P.E. degrees remember that. Landmen, same for you. Geologists, same. Geophysicists...well you're not gonna' marry anyone good looking enough to be in Junior League, but there has to be some club for scrapbooking spooks which your wife can join, so just be aware!

[Incognitus]

Very good article, congratulations.