While I agree that investors should, in general, understand the risks involved in their investment (and this includes home ownership), I think such understanding relies, of necessity, on expert consensus. Your average subprime mortgage recipient received in addition to an insanely overbalanced debt ratio an ‘expert’ evaluation from their lender that was frequently inept and dishonest. And this was not the exception; the housing bubble could never have been created and sustained based on housing demand and unwise borrowing by themselves.
The underwriters are supposed to be the reliable authorities on risk. When they fail as an integrated bloc to mitigate their risk, it’s hardly fair to blame consumers for failing with them.
Since when should the consumer rely on the seller to advise them of the risks?
Cavet emptor has been a fundamental tenant of commerce for a very long time. And it is common enough to understand that each party will look to their own self interest. A buyer of a home financed with a sub prime loan was getting a much larger home in a much better neighborhood for a lot less money than they otherwise thought they could. That point overode any concern about risk they probably should have considered.
In the other thread, I attempted to re-situate the OP along these exact same lines. More generally, I’m a big fan of freedom and choice and agreement, and I think that’s the right framework to analyze the “why doesn’t labor get the profits” type issues.
Your OP in this thread is a little weird though, bro.
“Buyer beware” is an exhortation, not a commandment. Self interest has to be checked by ethics, which must in turn be enforced by a legal code. Markets are regulated to the extent that they’re allowed to work; when one collapses that reveals there was some part of it that didn’t work. Blaming the consumers or the producers or the watchdogs in isolation misses the point.
The “normal” check on bad lending is that it’s a bad investment; the risk is deemed unacceptable when certain widely accepted criteria are not met. The unavoidable fact is that all those bad home loans were issued and traded. They were insured and those policies swapped and wagers placed and swapped on top of that. All of that speculation drove more lending and encouraged more bad loans.
We can sneer at the foolish buyers who jumped on that risk train when they shouldn’t oughta done so, but let’s don’t ignore the eager conductors who were pulling them on board.
They’re not equally responsible, and this is where expert consensus comes in. There’s also the matter of ever increasing house valuation which greatly outpaced income gains. That “should” have assured that fewer families could purchase houses, but didn’t.
Those high prices weren’t created through organic demand. The demand only followed irresponsible availability of the subprime mortgages, which was created by rampant subprime speculation, which was enabled by the repeal of Glass-Steagall during the Clinton administration.
The main enablers of the housing bubble were Congress; the main culprits were the speculators, and the main casualties of the crash were some of the speculators and many of the consumers, but not the underwriters and lenders.
So yes, I’ll stand by the statement that blaming the consumers isn’t fair.
One of my annoyances from the subprime debacle was that government/society didn’t bother to assess their level of risk, but were happy to enjoy the rewards of low unemployment and high GDP.
It’s the same mistake made with the Big Three Automakers.
At some point, AIG posed too large a risk for society. Following the Great Depression banks were required to debt to asset levels low, everyone saw what happens.
If you’re wondering why this topic bothers me so much, it’s because I wasn’t willing to take the same risks everyone else was before the crash.
Everything during the run up screamed disaster. I sat with mortgage brokers that tried to sell me on zero down variable mortgages. I heard the same sales pitches everyone else heard, an I had to sit and watch how house prices went up and up and up. I was shown charts depicting how much of a sucker I was for renting. How how much money I was losing not having it in real estate.
Problem is, I’m not special in any way. I’m not smarter than anyone else. In fact, I was a recent immigrant completely unfamiliar with home buying in the US.
So for years I rented a shitty one bedroom while everyone else owned 3bdrm townhomes. I took the standard deduction while everyone itemized. I missed out on four years of “building equity.”
During that time, a lot of people took a lot of risk, and for many of them it paid off huge. Unemployment fell, wages rose, no one complained.
Now everyone is waking up with a hangover wondering what the hell happened. The answer is simple: we all took a risk, and we all lost.
I agree with you in principle, but if you asked them at the time, they would have said that they certainly were assessing their level of risk. The banks all had big risk management departments, and they even had sophisticated software to help.
The problem was that they all had very good reasons to push it just a bit further. A CEO who refused to take these bets would have, in the short run, been uncompetitive with other companies who did. Unless the CEO was very powerful, he’d face a shareholder revolt. If you remember, all the feeble attempts at regulation were met with cries of “we won’t be competitive.”
But I totally agree with you about government and society. The government didn’t have the problem of worrying about stockholders, and should have done something. But Greenspan didn’t believe that bankers are greedy. The states attorney generals who did try to limit the mortgage brokers got shot down by the Greenspan Fed. If they had put the brakes on in 2005, perhaps, maybe the recession and the crash could have been much milder.
I see it like a bunch of cows on a clifftop. Each cow keeps munching the grass near the edge. Cows who hold back go hungry. The cows keep getting closer and closer, because they haven’t fallen yet. Eventually one goes too far, the cliff collapses, and they all die. The government should put a fence up to keep the cows away, but they will moo “that grass beyond the fence looks so green.”
Caveat emptor was an excellent and sufficient rule when risk could be determined by looking into the mouths of horses.
Do you contend that every potential buyer is cognitively able to evaluate risks the the same extent? Do you think a high school dropout janitor would be able to effectively compare different loan packages, let alone make a reasonable assessment of market direction? May I remind you that the PhDs in the banks blew that also.
BTW, many subprimes went to people who could not buy a home at all without them, and not for upgrading. Some subprimes got sold to people who qualified for a prime loan, because the commissions were better. How would our average buyer be able to determine he was being lied to, especially since the criteria for approval were proprietary?
Sorry I haven’t been able to participate in this thread as much as I wanted to, but I’ll answer this:
She can’t go after Sarah in either case, of course. That’s the point of the parable.
But Allison herself, given the reasoning she employed in the parable, will surely also think she has a right to recover the capital even if Sarah’s work turns out badly.
BTW in response to some of the things you’ve said above concerning Sarah as a skilled technician, I in fact considered suggesting a revision of the parable in which Sarah’s not a great artist, she’s just messing about, and Allison is an art dealer who knows she could sell Sarah’s stuff as “outsider art” so long as Sarah is allowed to bring the thing to completion. Sarah’s own reputation etc are definitely not on the line. (It wasn’t supposed to be in the original either–hence my stipulation that she doesn’t put herself on the art market or anything like that.)
This revision was to be an attempt to make it an even clearer case in which the one doing the labor has definitely engaged in no risk, and the one engaging in all the risk has done the labor–yet everyone intuits that its the laborer who should have final say on the disposition of the product, not the risk-taker. And all of that is really just a roundabout way of highlighting the fact that risk doesn’t determine our judgments of desert, but rather, the existence and nature of prior agreements does. (I was also intending it to suggest that in the absence of agreements, it is labor, not risk, that determines our judgments–but that was not meant to be the main point.) The question isn’t “who risked more” but “what did we agree to, and did we do so freely?” We could agree to a risk principle, we could agree to a labor principle, or we could agree to a hybrid. And whatever we agree to, that determines who “deserves” the returns. Risk alone doesn’t get you that.
So I was arguing. But you’re saying that our intuitions about Sarah’s deserving the return can be cashed out in terms of risk after all–she risked something in creating the artifact. Can you not imagine a scenrio in which the Sarah character spends a lot of time and effort making something, but risks nothing, and deserves to have final say in the disposition of the resulting artifact?
No. It goes back to my arguments in the other thread. It doesn’t matter if Sarah “feels” like she didn’t risk anything. Just as it doesn’t matter if Allison is a billionaire and only invested a few thousand. The situation you described makes it sounds as if Sarah enjoyed doing it, but that doesn’t change the fact that she invested herself in the project.
I think in the scenario you describe “risk” isn’t the most appropriate term but rather investment. Sarah spent a lot of time on that project, so what was the point? After two years she has created something, that to someone has value even if Sarah doesn’t care. And like her other works it’s possible she’ll just give it away to a friend, which she is free to do. As I said in the other thread, the original investor (in this case time and skill) can do what ever they want with the proceeds.
The fact still remains that Sarah represents a skilled tradesman. Just because she had no reputation before hand, and doesn’t care after, changes nothing. Allison still has no claim to be an artist, or the creator of the art. That would give Allison proceeds from the investment.
I think all you’ve done is try to create more back story to try to influence the results. So I’ll say again, when you go to a casino, the dealer doesn’t care about your life, or how much/little you care about the money you put down.
If I’m sitting next to you at the blackjack table, and I clearly don’t care about the money I’m betting, does that some how make the winnings yours? If I’m super rich and the $20 means nothing to me, but you’re super poor and $20 means everything to you, nothing changes. I’m the one that puts the $20 at risk, so I’m the one that gets the returns.
Remind me: In the other thread, did you consider the dishwasher to have risked nothing, or only to have risked the least of the four? If the latter, what did you consider the DW to have risked?
The phase “the dishwasher risked nothing” is misleading and causing a lot of grief when it comes to allocating rewards.
From that thread, some of things the dishwasher risked:
losing his job
his last $5 on the bus to the interview
his time
My contention (which angered a lot of people) was that with respect to the restaurant [aka profits] the dishwasher risked nothing. He doesn’t risk losing his job, he gained employment because of the restaurant. The $5 he invested on the job interview along with this time spent working were repaid through salary.
And the most important point is that profit or no the dishwasher gets paid for his time*. The $5 bus fare was a risk he took to get the job and has nothing to do with the profits generated by the restaurant. All of his risks are returned in the form of a paycheck, which he is almost certainly guaranteed.
With respect to your OP and mine, let’s pretend the dishwasher goes out of his way to promote the restaurant he works at. Investing all his off-hours talking it up, writing reviews, “liking” facebook pages. Then he invests all the money he makes on marketing and promotions. As a direct result the restaurant is a success. Does he have a claim to the profits? Hell no. What he did was of his own volition. Like you said, there was no agreement for profit sharing before hand, so there can be no claim after the fact.
If the restaurant had hired a marketing consultant, they would get paid compensation regardless of profits. If the restaurant is a success they get both the compensation and the improved reputation which then generates more compensation. <- skilled trade
*Assuming solvency, so it is possible that by working at a start-up the dishwasher risks not getting his last paycheck. Note that this is possible at all jobs.
I don’t get it. What the OP describes is basicallty a “protection racket” used by criminals, warlords and corupt governments since the dawn of civilization. “I protect this village/neighborhood/banana republic country so I am entitled to whatever I wish to take from you”.
And the OP clearly has a total lack of understanding of what is meant by “risk” in an economic or financial sense and is simply trying to shoehorn the terms into his own philosophy.
From Sarah’s point of view, what does it matter if Michelle destroys her art or Allison confiscates it? Her “risk” is that she will invest her time and effort (a large opportunity cost as she could spend it elsewhere) to create something that can arbitrarily be destroyed or taken away by one of the local warbitches. Thus providing little to no reward.
Whatever “risk” Allison chose to undertake is irrelevant because it is like two criminals fighting over who gets to rob some guy. And quite frankly I don’t understand why you ascribe a greater moral position to Allison.
What typically happens in such scenarios is that the Sarah’s of the world will decide not to produce or will produce much less in secret least it be stolen by whoever has the bigger stick.
IRL, “labor” is entitled to whatever someone decides the fruit of their labor is worth. In our free capitalist country, if you think someone will pay you more for your labor or that you aren’t getting paid enough, you can choose to find another employer or not provide your labor at all. And “capital” can decide whether they want to decrease the risk of their business venture by paying more money for higher quality labor.
Of course, everyone seems to believe that companies and investors and governments have endless supplies of cash because they have a lot of it.
You mean the appropriate return on an investment is determined by prior agreements, and not directly by measures of risk?
Who’da thunk it?!
It’s true that this is what occurs in a free capitalist country. It is not true that it is what occurs in the country I live in–though many in it style it a free capitalist country.
I had this nice thoughtful and interesting reply all typed up… in my head last night.
Now it’s gone.
Basically, the idea I’m pushing is that if we’re talking about what people deserve, that is determined entirely by the agreements they have (or have not) entered into. Risk and desert are connected only via agreements. The question whether people should be entering into agreements that reflect risk or that reflect it only sometimes or that reflect it not at all is an entirely empirical question depending on what you think counts as an efficient or otherwise desirable outcome.
“You didn’t risk anything so you don’t deserve anything” is rhetoric which hides the underlying fundamentally voluntary nature of the “desert” relation. We get to decide who deserves what. There’s no such thing as “natural desert.”
Putting things in terms of desert and risk is often (perhaps not always) a way to shirk responsibility for our choice to live in a society that makes the particular rules it does. We pretend the rules are somehow ‘natural’. They’re not–they’re entirely artificial.
This is not at all to say that all possible rules governing this kind of thing are equally good. Rather, it’s just to say that we can’t simply assume that the one that ties reward directly and only to risk is the best. For that, you need an argument.
The point of the OP is that defining “deserved reward” as a function of “risk” leads to absurd conclusions – e.g. it leads to the conclusion that protection rackets are perfectly proper and legitimate, because the racketeers are taking the risk of engaging in violence while their subjects are not.
