Explaining Southern California's economy

Strategic mortgage defaults: Nothing wrong with that!

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MIAMI, FL - NOVEMBER 10: Renzo Salazar, from Real Signs of Ace Post Holding Inc., places a bank owned sign on top of a for sale sign in front of a foreclosed home on November 10, 2011 in Miami, Florida.

The L.A. Times' Michael Hiltzik is appalled at the moralizing going on around "strategic defaults" — a default on a mortgage undertaken from a position of cold, hard financial calculation, rather than from some sentimental notion that a borrower should always, always pay, no matter what cards life deals him:

What often gets overlooked in the debate over walkaways is why it should matter. A default is a default, isn't it? [Old Dominion University's Michael J.] Seiler, for one, disagrees — he argues that defaults for noneconomic reasons have a uniquely corrosive effect on social behavior.

That's based on the notion that borrowers have a moral obligation to pay their debts. Yet a mortgage contract is a legal document, not moral catechism. It doesn't require you to make your payment regardless of your financial state; only that you recognize that if you don't, you might lose your house.

Mortgage lenders customarily try to price the likelihood of delinquency or default into the loan; that's why borrowers with the best credit scores typically pay the lowest interest rates. Nor is the credit score a gauge of moral purity — it's an empirical reflection of the borrower's debt load and bill-paying record.

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Warren Buffett is counting on 'hormones' to cure the housing market

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Warren Buffett, chairman of Berkshire Hathaway, attends the Allen & Company Sun Valley Conference.

Billionaire investor Warren Buffett released his annual Berkshire Hathaway shareholder letter over the weekend. As Marketplace's Heidi N. Moore reported on Monday, this is a much-anticipated and closely studied document. And as one of her sources pointed out, sometimes it's more interesting to focus on what went wrong in Buffett-land than on what went right — because Buffett provides engaging details on both outcomes.

For this letter, you want to zero in on the housing market, which in early 2011 Buffett figured would begin to recover in a "year or so." Wrong! Or to quote the Great Man himself: "dead wrong." Berkshire Hathaway has several housing-related companies in its portfolio, so Buffett would ultimately like to see the long-expected bounce-back. He's optimistic — because you can't fight human nature! Or more accurately, randy human hormones:

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Why your bank doesn't want you anymore: You're too poor

JP Morgan Chase Quarterly Profits Falls 4 Percent

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OAKLAND, CA - OCTOBER 13: A man walks his dog in front of a Chase bank office on October 13, 2011 in Oakland, California.

Controversial stuff from Bloomberg this morning about how banks are thoroughly unexcited about bread-and-butter customers who have less than $100,000 in deposits:

JPMorgan Chase & Co. (JPM), the largest U.S. bank by assets, said about 70 percent of customers with less than $100,000 in deposits and investments will be unprofitable following regulations that cap lenders’ fees.
“I’m trying to give you a proxy for what the banking industry has to look forward to if you don’t take into account business bank clients and getting more of the affluent wealth wallet,” Todd Maclin, chief executive officer of consumer and business banking at the New York-based company, said today at an investor presentation.

The biggest U.S. banks are grappling with lost revenue from regulations such as those that cap debit interchange fees and overdraft charges, making customers with low deposits more expensive for lenders to manage. JPMorgan, run by CEO Jamie Dimon, sees its greatest opportunity with affluent customers that have more banking relationships with the company, Maclin said.

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Michael Lewis on too-big-to-fail banks: Kick out the kids and break 'em up!

Check out the above video, one of the series, of Michael Lewis in conversation with Jacob Weisberg of the Slate Group. It's a quickie but a goodie. Lewis covers a lot of ground. The young guns of Wall Street shouldn't have been getting paid $2 million! Credit default swaps (a) shouldn't have been invented — "innovation" in finance is not necessarily a good thing — and (b) were bound to lead to people betting against the securities, mainy home mortgages, they were based on.

But things really get interesting when Lewis starts sounding exactly like L. Randall Wray, an increasingly prominent economist from the University of Missouri, Kansas City, and a proponent of an increasingly popular new school of economics thinking called "Modern Monetary Theory" (some call it Neo-Chartalism). Wray also says the big banks need to be broken up. I've embedded a video below in which he discusses this idea. He's not exactly Michael Lewis. But the message is quite similar.

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Greed isn't good: Gordon Gekko goes to work for the FBI

Greed isn't good. Greed isn't right. So says Michael Douglas, in a public service announcement for the FBI that asks viewers to become whistleblowers if they witness securities fraud or insider trading. Not sure how often the public sees those things. But man! Douglas clearly isn't one with the Gekko character anymore! There's always been a bit of cult around Gekko — amoral Wall Streeters who took the greed-is-good message with zero irony. Can't help but think that even Douglas won't be able change that.

Follow Matthew DeBord and the DeBord Report on Twitter.

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