Wednesday, July 27, 2011

Money vs. Capital

"Money well-timed and well applied can do anything." -- the 'thief taker' Peachum in The Beggar's Opera, by John Gay

I begin with a very simple and quite unoriginal question. Why are there so many grand, empty houses for sale?
As I said, this is not an original question. We can take this basic question and treat it as a symbol (?). Now, we can add another entirely unoriginal question: Why are house prices falling to three quarters (and dropping 25% per year) or even a half of their purchase prices? Let us treat that as question #2, or (?1). Finally, let us add in the third, extremely important, consuming question: What are we doing with the 20% of our people who are unemployed and facing Republican ruthlessness, who can hardly afford rents? Let's call that (?0), because it is actually the question that occurred chronologically prior to the others.

So, let's leave aside the principle question of why the U.S. economy is not hiring people anymore. I know why, and it has absolutely nothing to do with tax rates. Banks are not making short term loans, for reasons they must answer, and short term lending creates inventory, and inventory creates production. Small loans are business loans, too, and those are not coming, so the "job creators" don't exist. Actual job creation comes, when corporations fail to hire, from artisanal and small market groups supplying what the corporations will not and rising, but, if no one will lend.... Let's leave that aside, though, because I could be wrong. We could have joblessness simply because corporations pay too much tax.

Instead, let's think about those empty houses, row upon row of them, little patches of them snaking through the woods where subdivisions and suburban protection were once planned. In London, they had a problem like this in the Thatcher years, and the response of the unemployed was to start a squatter movement. Brits now look upon it with some admiration, as a goodly number of artists and intellectuals were associated with it (artist and intellectual being traditionally low-paying jobs), so if you prefer a radio history, here is one. Such attempts in the United States, where property rights are, we are told, the basis of the Declaration of Independence and the U. S. Constitution, are typically met a mite ... violently. No one would be foolhardy enough to try it.

Therefore, we are left with mute, rotting clapboard constructions staring at mounds of dirt.

Suppose a house were bought at the high market for $200,000. (I know! In 2007, $200,000 barely got a basement, much less a house.) Now, MBWF lends the young marrieds an adjustable rate mortgage for $185,000, because they used grants and other methods to put down a good plunk. The bank has now paid the builder. The builder already paid the contractors, or is about to. The real estate agent has run to the bank with her check. Money has changed hands. The bank now gave out $185,000 real. They did this because they have a 20 year loan and have the couple on the hook for a completely insane amount. Why, the first year, they'll get 1% interest on the payments (185000/(12*20)+((185000/(12*20)*0.01) or $770.84+7.71 for the twelve months and, tee-hee, 8% the next year, 9% the year after, and 18% for the rest of the time. Oh, the profits they will make!

You know what happens, I'm sure.
For some strange reason, the married couple did not experience increases in profits equal to those the bank had planned for itself. Astonishing, that. Now, we can blame the couple, of course. Regardless, let us look, amorally, at what happens next. The couple falls behind for three months, and then they either run from their mortgage or they get the repossession.

Congratulations, bank! You have the house. Now what?

Given the explosion in repossessed houses, the bank cannot sell these "distressed properties," and the prices fall. Instead of getting the imagined profit of all that lovely interest, the bank has a house for sale for a year, then two years, and then three years or more. While the house is waiting to sell for three years, it is getting no prettier, and its neighbors are looking no better.


I'm serious. Why is it in the bank's interest to repossess a house at all? If they do repossess a house, why is it in their interest to sell it? How is it better for the bank to recover $0 of the $185,000 because they were unable to gain the $1,100 a month they demanded? How is it better for them to say, "Because we did not get all the profit we want, we will get none of the money back?" How is it better for a bank to say, "No, no. We demand that adjustable rate, or you're kicked out, you evil poor people. We don't care if you can still pay the original rate and give us back all the money?"

I couldn't understand this. I could not understand why banks didn't hire real estate companies to manage their "distressed properties" and rent the danged things so that they could get the money back. It makes no sense to a human being.

It makes sense, though, to an MBA. It makes sense if this is what you learn:

Yes. Now you see it. When the bank loaned that $185,000, it wrote down the whole thing as one transaction. It wrote down the profits of $45,000 or so it expected along with the debit of $185,000, and then, when the couple failed, the exchange failed, because the bankers were dealing not with people, but with capital.

You and I spend money. They move capital. Capital is never so grubby as to be material. It is consensual, mathematical, transactional, and powerful, while money is only one of those. The bank passed the "bad loan" onto its underwriter, or it didn't, and after enough time of letting the house sit vacant, they could "write down" or "write off" the loss.

Poof! The whole terrible mess has now gone away, so far as the bank is concerned. Lesson learned: don't lend money, when you can invest capital.

You and me? Well, we squat in the dirt and wonder why.


Clyde Penquin said...

There's a story I'm seeing on the Yahoo news main page, yesterday and today, about how banks are bulldozing some foreclosed houses rather than resell them.

The Geogre said...

Oh, that's great.

Of course they'd bulldoze them, because then the bank would own LAND, and land is probably a better "commodity." Again, though, that loan... that *money* ... they don't care. The people? They don't care. In fact, I suspect that the foreclosure mania, where banks were throwing non-negligent homeowners into foreclosure en masse, was to get to the "write down" phase as fast as possible.


Hey, know how low interest rates made stocks go up, because they meant that people would get low interest loans on houses? Why are they making stocks go up NOW?

Could it be because the stock market never gave a crap about housing or consumers or businesses at all? Could it be that it was all about borrowing to trade and bet, and they simply wanted to ensure that the government didn't get to play (by taking a cut)?