Decaying Social Trust and Moral Indignation

Pop quiz!

Who wrote: “This is how the world will end—not with a bang, but a whimper.”

a. T.S. Eliot
b. W. H. Auden
c. Robert Frost
d. e.e. cummings
e. Alfred E. Neumann

Answer at the end; no fair peeking.

I don’t know about the world, but the subprime/mortgage/credit crisis shows how social trust ends. Not with a whimper, but with righteous moral indignation—on all sides.

We are in the midst of the deflation of a debt or credit bubble, itself based on an asset bubble—overpriced houses. As of today, according to the Mortgage Bankers Association, 24% of subprime mortgages are delinquent or in foreclosure; ditto for 4% for prime mortgages; and for all mortgages it’s a record 7.9%, the highest since records began in 1979.

Everyone played musical chairs. And the more frantic the music, the more rightous the talk.

Here’s the Heritage Foundation—mind you, just last November, 2007—demonstrating its utter subordination of logic to ideology, arguing against H.R. 3915, a House bill to reign in predatory lending:

[the bill] would establish an explicit series of credit standards for lenders, which could have the effect of excluding many moderate income borrowers from the ownership market. In sum, the enactment of H.R.3915 would delay the housing market recovery that is now struggling to get underway.

Yup, Congress killed the real estate bubble appreciating market.

A year earlier, in September 2006, the Mortgage Bankers Association stated that

“the subprime market has evolved dramatically in recent years, providing significant benefits to consumers…increasing regulation could decrease competition and increase rates that the subprime market offers consumers.”

But this is not a populist rant.  Consumers were far from just hapless victims.

An FBI Mortgage Fraud report 3 months ago stated that up to 70% of early payment defaults may have been linked to buyer misrepresentation on loan applications.

What about FICO credit scores?  Courtesy of BusinessWeek, meet “credit doctors,” companies who will manipulate credit ratings by blitzing credit agencies with disputes about old reports (which have likely been lost), setting you up as an “authorized user” of an account owned by someone with good credit, or just creating paper accounts.

“All legal,” they protest. Of course. No miscreants here.

So—end game—bang or whimper?

Dateline, CBS Evening News February 12, 2008.  Meet Karen T., a married San Francisco suburbanite who bought a condo as a second home for $505K, financing it 100% with mortgage debt. Now it’s worth $340K, and her adjustable mortgage goes up $900 this June.

They own another home. They can afford the rate increase. So—what to do?

Karen’s answer?  Walk away. Default.  Give it back to the bank.

Is Karen distraught? Not really. “I’m not doing anything illegal.  Everything’s negotiable in business—this is just another business decision. I don’t see why this is any different. I’m within my right to walk away from a bad deal.”

And 60% in an LA Times Real Estate blog poll agreed with her.

Karen is morally indistinguishable from a landlord turning off the heat under rent control; insurance companies withdrawing sole-provider coverage from unprofitable markets; banks charging usurious credit rates; emergency rooms turning out the uninsured; de facto mortgage redlining; and a thousand forms of “fine print."  Or—come to think of it—from a banker foreclosing on a never-should’ve-approved-that-loan loan. 

The rallying cry is always, “I’m not doing anything illegal.”

But here’s the kicker.

Karen’s not morally indignant about walking away. To her, that’s “a business decision.”

No, her moral indignation is reserved for the consequences she might face.  She leans her face on her hand, her voice intensifying, as she says, “It is devastating to think that my credit scores are going to drop 200 points," she said.

OMG, it’s just so, like, unfair!

Huh? Devastated because you were educated, had the money, and placed a 100% bet on an overheated market—and lost? And you can afford to pay the piper—but don’t want to?

Take a trip to Vegas, Karen, and see if the blackjack dealers buy it.  Better yet, go tell it to someone with half your education and income who’s been foreclosed on after having spent their last money trying to pay the bank. 

It doesn’t matter who started the food fight.  It seems that the decay of social trust is accompanied by higher levels of self-righteousness and narcissism on both sides.

When business and consumer alike choose moral bankruptcy over financial bankruptcy—without even thinking about it—and then justify it indignantly through Darwinian arguments—well, Houston, we’ve got a problem in trust-land.  Not to mention ethics-land. 

Oh yeah—T.S. Eliot

8 replies
  1. Jeff Cullen
    Jeff Cullen says:

    The Horror! The Horror!

    Charles, I’m with Andrea as well. A great piece of writing. And you used one of my favourite poems. Without wanting to get too deep, and philosophical, the Heart Of Darkness allegory is quite apt, and very profound. The sub-prime disaster (which has escalated world wide) is but one voyage into the financial Congo. One wonders whether the memo that went out to foreclose on these borrowers was titled, Exterminate The Brutes! What other unspeakable acts await us from the lost souls, even after this current issue is "resolved." The more we travel In Country, the less our moral compass works – for both Captain and passenger.

    " Mr. Kurtz – he not dead…He restructed business elsewhere…"

    ps: Phew…! Deep. Headache. Sadness. I need some rest now. It just occurred to me that it is not really allegory at all. Morereincarnation. One man’s Shaman is another man’s Banker…?CEO….? President…?

  2. Charlie (Green)
    Charlie (Green) says:

    You go Jeff! 

    I think it was Borges who said the only really good map is a duplicate at scale.

    Similarly, the best allegories (e.g. Conrad) are those that begin to look indistinguishable from reality…  Well said.

  3. Justin George
    Justin George says:

    I have to say, I have no problem with it as long as people don’t decry the drop in their credit scores. I mean, in theory, the mortgage providers take out insurance for this very purpose.

  4. Charlie (Green)
    Charlie (Green) says:

    But Justin, the more one relies on insurance against the moral defalcation of another, the more you encourage it, don’t you?

    When the hospital runs up a bill on you and says, "what do you care, the insurance company’s paying for it?"  When auto repair shops conspire with consumers to defraud auto insurers. 

    You’re right, that’s what the providers are buying insurance against.  And it’s exactly what makes Karen justify it as "just a business decision."

    Let’s hear from the lawyers; what good is any agreement if you can default it on when it starts to turn bad on you?  And the more people default, the higher the insurance premiums; the higher the costs to cover the insurance, the more people are likely to default.  Where does it end?

    Am I missing something here, Justin?

  5. Ian Welsh
    Ian Welsh says:

    And yet bankruptcy exists for a reason — because as a society we don’t want folks to forever be burdened by bad debts and become debt slaves.  Instinctively we know that obligations go both ways.  I’ve worked in an underwriting department and I have no sympathy for companies that didn’t properly check whether or not their applicants could and would pay back loans.  And proper checks mean much more than just hitting up Equifax, which measures only the prospensity to pay, not the ability to pay.  Companies got down on their knees and begged applicants to lie to them, didn’t check for lies and now complain that folks lied?  Sure there’s blame on both sides, but one side were supposedly professionals and the other side wasn’t.

    It’s hard to cheat an honest man.  The banks wanted to be cheated because they though they’d pass the loans on to investors and not be stuck with it. They were running a scam and got caught holding the bag and now they scream?

    I think not.

    The would have been minimal amounts of consumer fraud if banks hadn’t asked for it.  And then there would have been much fewer defaults as well.  Put people under pressure, give them opportunities to cheat and they will.  And as they tell parents — if you cheat yourself, your kids will never listen to your words "do not cheat".

    Banks taught lenders how to behave.

  6. Kelly
    Kelly says:


    A me, too, on the quote. Not with a bang, but a whimper is one of my favorites.

    When I was in my early twenties, I went to a doctor who started to prescribe one medicine, then tore it up and said “No, this one will do just as well and costs much less,” and wrote me a new scrip.

    When I said, “Oh, don’t worry, it’s all eight bucks to me,” he looked shocked and said, “Even if you don’t pay it, somebody does. That kind of thinking is why your health insurance costs so much.”

    I realized how irresponsible that kind of thinking is, and I never forgot it. It changed me.

    We think of businesses as faceless entities. Internal “shrink,” external shoplifting, fraud, and “business decisions” to let somebody else pick up the tab for your loss are all symptoms of this mental distance. Like the Apple employees caught taking $200 rebates on iPhones they’d been given for free last year. “I’m not hurting anybody,” “they’ve got insurance,” “I deserve it.” It’s become a very self-centered world.

    Wrongs committed against entities are just as wrong as those against individuals, but so many folks don’t see it. Of course the irony is, that just as the doctor pointed out, we all pay every day for our own dishonesty, in eroded trust, in higher insurance rates, and the like.

    Funny, too, that we don’t like to see our own companies taken advantage of by others. My company’s made of people! All the other companies are the faceless ones!

    You’ve hit the ball out of the park again with this excellent post.



  7. Wenchypoo
    Wenchypoo says:

    Trust but verify…so where was the verification?  When I got a mortgage 10 years ago, I had to submit all kinds of evidence that my husband was in the military, then I had to sign 22 separate documents at closing to make double-damn sure I understood everything!  What has happened since then?

    Greed.  Greed on the part of lenders, people who thought they could "flip out" and make millions of relatively easy money, and most importantly, greed on the part of real estate salespeople in their attempt to support the mortgage deduction in the tax code.

    Payments went up, interest went up, and greed turned into fear.  The fear is getting expensive for many, but the savvy know how to take advantage of it.  Stock market gurus tell us to "buy when there’s blood in the streets", yet most of us don’t apply that to the real estate market–it operates on the same principle as the stock market.

    The very people who wouldn’t touch stocks with a 10-ft. pole because they’re too risky had no trouble using that 10-ft. pole to vault themselves right into the housing market, and with nary a clue as to how it worked.

    I blame both sides.

    Now, all the hapless idiots (on both sides) want bailouts…NOT OUT OF MY POCKET!

    Since then , we’ve had an oil run-up, and are seeing a huge commodity run-up, mostly trader-driven.  The housing bubble was also trader-driven, only the traders were flippers.

    Home is a shelter, not an investment.  Until we return to that simple idea, real estate will always be the bitch of fast-profit seekers.


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