A better kind of patriotism

Jul 5 JDN 2459037

Yesterday was the Fourth of July, but a lot of us haven’t felt much like celebrating. When things are this bad—pandemic, economic crisis, corrupt government, police brutality, riots, and so on—it can be hard to find much pride in our country.

Perhaps this is why Republicans tend to describe themselves as more patriotic than Democrats. Republicans have always held our country to a far lower standard (indeed, do they hold it to any standard at all!?) and so they can be proud of it even in its darkest times.

Indeed, in some sense national pride in general is a weird concept: We weren’t even alive when our nation was founded, and even today there are hundreds of millions of people in our nation, so most of what it does has nothing to do with us. But human beings are tribal: We feel a deep need to align ourselves with groups larger than ourselves. In the current era, nations fill much of that role (though certainly not all of it, as we form many other types of groups as well). We identify so strongly with our nation that our pride or shame in it becomes pride or shame in ourselves.

As the toppling of statues extends beyond Confederate leaders (obviously those statues should come down! Would Great Britain put up statues of Napoleon?) and Christopher Columbus (who was recognized as a monster in his own time!) to more ambiguous cases like Ulysses Grant, George Washington and Thomas Jefferson, or even utterly nonsensical ones like Matthias Baldwin, one does begin to get the sense that the left wing doesn’t just hate racism; some of them really do seem to hate America.

Don’t get me wrong: The list of America’s sins is long and weighty. From the very beginning the United States was built by forcing out Native populations and importing African slaves. The persistent inequality between racial groups today suggests that reparations for these crimes may still be necessary.

But I think it is a mistake to look at a statue of George Washington or Thomas Jefferson and see only a slaveowner. They were slaveowners, certainly—and we shouldn’t sweep that under the rug. Perhaps it is wrong to idolize anyone, because our heroes never live up to our expectations and great men are almost always bad men. Even Martin Luther King was a sexual predator and Mahatma Gandhi abused his wife. Then again, people seem to need heroes: Without something to aspire to, some sense of pride in who they are, people rapidly become directionless or even hopeless.

While there is much to be appalled by in Washington or Jefferson, there is also much to admire. Indeed, specifically what we are celebrating on Independence Day strikes me as something particularly noteworthy, something truly worthy of the phrase “American exceptionalism”.

For most of human history, every major nation formed organically. Many were ruled by hereditary dynasties that extended to time immemorial. Others were aware that they had experienced coups and revolutions, but all of these were about the interests of one king (or prince, or duke) versus another. The Greek philosophers had debated what the best sort of government would be, but never could agree on anything; insofar as they did agree, they seemed to prefer benevolent autocracy. Even where democracies existed, they too had formed organically, and in practice rarely had suffrage beyond upper-class men. Nations had laws, but these laws were subordinate to the men who made and enforced them; one king’s sacred duty was another’s heinous crime.

Then came the Founding Fathers. After fighting their way out of the grip of the British Empire, they could easily have formed their own new monarchy and declared their own King George—and there were many who wanted to do this. They could have kept things running basically the same way they always had.

But they didn’t. Instead, they gathered together a group of experts and leaders from the revolution, all to ask the question: “What is the best way to run a country?” Of course there were many different ideas about the answer. A long series of impassioned arguments and bitter conflicts ensued. Different sides cited historians and philosophers back and forth at each other, often using the same source to entirely opposite conclusions. Great compromises were made that neither side was happy with (like the Three-Fifths Compromise and the Connecticut Compromise).

When all the dust cleared and all the signatures were collected, the result was a document that all involved knew was imperfect and incomplete—but nevertheless represented a remarkable leap forward for the very concept of what it means to govern a nation. However painfully and awkwardly, they came to some kind of agreement as to what was the best way to run a country—and then they made that country.

It’s difficult to overstate what a watershed moment this was in human history. With a few exceptions—mostly small communities—every other government on earth had been created to serve the interests of its rulers, with barely even a passing thought toward what would be ethical or in the best interests of the citizens. Of course some self-interest crept in even to the US Constitution, and in some ways we’ve been trying to fix that ever since. But even asking what sort of government would be best for the people was something deeply radical.

Today the hypocrisy of a slaveowner writing “all men are created equal” is jarring to us; but at the time the shock was not that he would own slaves, but that he would even give lip service to universal human equality. It seems bizarre to us that someone could announce “inalienable rights to life, liberty, and the pursuit of happiness” and then only grant voting rights to landowning White men—but to his contemporaries, the odd thing was citing philosophers (specifically John Locke) in your plan for a new government.

Indeed, perhaps the most radical thing of all about the Constitution of the United States is that they knew it was imperfect. The Founding Fathers built into the very text of the document a procedure for amending and improving it. And since then we have amended it 27 times (though to be fair the first 10 were more like “You know what? We should actually state clearly that people have free speech rather than assuming courts will automatically protect that.”)

Every nation has a founding myth that lionizes its founders. And certainly many, if not most, Americans believe a version of this myth that is as much fable as fact. But even the historical truth with all of its hypocrises has plenty to be proud of.

Though we may not have had any control over how our nation was founded, we do have a role in deciding its future. If we feel nothing but pride in our nation, we will not do enough to mend and rectify its flaws. If we feel nothing but shame in our nation, we will not do enough to preserve and improve its strengths.

Thus, this Independence Day, I remind you to be ambivalent: There is much to be ashamed of, but also much to be proud of.

Selling debt goes against everything the free market stands for

JDN 2457555

I don’t think most people—or even most economists—have any concept of just how fundamentally perverse and destructive our financial system has become, and a large chunk of it ultimately boils down to one thing: Selling debt.

Certainly collateralized debt obligations (CDOs), and their meta-form, CDO2s (pronounced “see-dee-oh squareds”), are nothing more than selling debt, and along with credit default swaps (CDS; they are basically insurance, but without those pesky regulations against things like fraud and conflicts of interest) they were directly responsible for the 2008 financial crisis and the ensuing Great Recession and Second Depression.

But selling debt continues in a more insidious way, underpinning the entire debt collection industry which raises tens of billions of dollars per year by harassment, intimidation and extortion, especially of the poor and helpless. Frankly, I think what’s most shocking is how little money they make, given the huge number of people they harass and intimidate.

John Oliver did a great segment on debt collections (with a very nice surprise at the end):

But perhaps most baffling to me is the number of people who defend the selling of debt on the grounds that it is a “free market” activity which must be protected from government “interference in personal liberty”. To show this is not a strawman, here’s the American Enterprise Institute saying exactly that.

So let me say this in no uncertain terms: Selling debt goes against everything the free market stands for.

One of the most basic principles of free markets, one of the founding precepts of capitalism laid down by no less than Adam Smith (and before him by great political philosophers like John Locke), is the freedom of contract. This is the good part of capitalism, the part that makes sense, the reason we shouldn’t tear it all down but should instead try to reform it around the edges.

Indeed, the freedom of contract is so fundamental to human liberty that laws can only be considered legitimate insofar as they do not infringe upon it without a compelling public interest. Freedom of contract is right up there with freedom of speech, freedom of the press, freedom of religion, and the right of due process.

The freedom of contract is the right to make agreements, including financial agreements, with anyone you please, and under conditions that you freely and rationally impose in a state of good faith and transparent discussion. Conversely, it is the right not to make agreements with those you choose not to, and to not be forced into agreements under conditions of fraud, intimidation, or impaired judgment.

Freedom of contract is the basis of my right to take on debt, provided that I am honest about my circumstances and I can find a lender who is willing to lend to me. So taking on debt is a fundamental part of freedom of contract.

But selling debt is something else entirely. Far from exercising the freedom of contract, it violates it. When I take out a loan from bank A, and then they turn around and sell that loan to bank B, I suddenly owe money to bank B, but I never agreed to do that. I had nothing to do with their decision to work with bank B as opposed to keeping the loan or selling it to bank C.

Current regulations prohibit banks from “changing the terms of the loan”, but in practice they change them all the time—they can’t change the principal balance, the loan term, or the interest rate, but they can change the late fees, the payment schedule, and lots of subtler things about the loan that can still make a very big difference. Indeed, as far as I’m concerned they have changed the terms of the loan—one of the terms of the loan was that I was to pay X amount to bank A, not that I was to pay X amount to bank B. I may or may not have good reasons not to want to pay bank B—they might be far less trustworthy than bank A, for instance, or have a far worse social responsibility record—and in any case it doesn’t matter; it is my choice whether or not I want anything to do with bank B, whatever my reasons might be.

I take this matter quite personally, for it is by the selling of debt that, in moral (albeit not legal) terms, a British bank stole my parents’ house. Indeed, not just any British bank; it was none other than HSBC, the money launderers for terrorists.

When they first obtained their mortgage, my parents did not actually know that HSBC was quite so evil as to literally launder money for terrorists, but they did already know that they were involved in a great many shady dealings, and even specifically told their lender that they did not want the loan sold, and if it was to be sold, it was absolutely never to be sold to HSBC in particular. Their mistake (which was rather like the “mistake” of someone who leaves their car unlocked and has it stolen, or forgets to arm the home alarm system and suffers a burglary) was not to get this written into the formal contract, rather than simply made as a verbal agreement with the bankers. Such verbal contracts are enforceable under the law, at least in theory; but that would require proof of the verbal contract (and what proof could we provide?), and also probably have cost as much as the house in litigation fees.

Oh, by the way, they were given a subprime interest rate of 8% despite being middle-class professionals with good credit, no doubt to maximize the broker’s closing commission. Most banks reserved such behavior for racial minorities, but apparently this one was equal-opportunity in the worst way.Perhaps my parents were naive to trust bankers any further than they could throw them.

As a result, I think you know what happened next: They sold the loan to HSBC.

Now, had it ended there, with my parents unwittingly forced into supporting a bank that launders money for terrorists, that would have been bad enough. But it assuredly did not.

By a series of subtle and manipulative practices that poked through one loophole after another, HSBC proceeded to raise my parents’ payments higher and higher. One particularly insidious tactic they used was to sit on the checks until just after the due date passed, so they could charge late fees on the payments, then they recapitalized the late fees. My parents caught on to this particular trick after a few months, and started mailing the checks certified so they would be date-stamped; and lo and behold, all the payments were suddenly on time! By several other similarly devious tactics, all of which were technically legal or at least not provable, they managed to raise my parents’ monthly mortgage payments by over 50%.

Note that it was a fixed-rate, fixed-term mortgage. The initial payments—what should have been always the payments, that’s the point of a fixed-rate fixed-term mortgage—were under $2000 per month. By the end they were paying over $3000 per month. HSBC forced my parents to overpay on a mortgage an amount equal to the US individual poverty line, or the per-capita GDP of Peru.

They tried to make the payments, but after being wildly over budget and hit by other unexpected expenses (including defects in the house’s foundation that they had to pay to fix, but because of the “small” amount at stake and the overwhelming legal might of the construction company, no lawyer was willing to sue over), they simply couldn’t do it anymore, and gave up. They gave the house to the bank with a deed in lieu of foreclosure.

And that is the story of how a bank that my parents never agreed to work with, never would have agreed to work with, indeed specifically said they would not work with, still ended up claiming their house—our house, the house I grew up in from the age of 12. Legally, I cannot prove they did anything against the law. (I mean, other than laundered money for terrorists.) But morally, how is this any less than theft? Would we not be victimized less had a burglar broken into our home, vandalized the walls and stolen our furniture?

Indeed, that would probably be covered under our insurance! Where can I buy insurance against the corrupt and predatory financial system? Where are my credit default swaps to pay me when everything goes wrong?

And all of this could have been prevented, if banks simply weren’t allowed to violate our freedom of contract by selling their loans to other banks.

Indeed, the Second Depression could probably have been likewise prevented. Without selling debt, there is no securitization. Without securitization, there is far less leverage. Without leverage, there are not bank failures. Without bank failures, there is no depression. A decade of global economic growth was lost because we allowed banks to sell debt whenever they please.

I have heard the counter-arguments many times:

“But what if banks need the liquidity?” Easy. They can take out their own loans with those other banks. If bank A finds they need more cashflow, they should absolutely feel free to take out a loan from bank B. They can even point to their projected revenues from the mortgage payments we owe them, as a means of repaying that loan. But they should not be able to involve us in that transaction. If you want to trust HSBC, that’s your business (you’re an idiot, but it’s a free country). But you have no right to force me to trust HSBC.

“But banks might not be willing to make those loans, if they knew they couldn’t sell or securitize them!” THAT’S THE POINT. Banks wouldn’t take on all these ridiculous risks in their lending practices that they did (“NINJA loans” and mortgages with payments larger than their buyers’ annual incomes), if they knew they couldn’t just foist the debt off on some Greater Fool later on. They would only make loans they actually expect to be repaid. Obviously any loan carries some risk, but banks would only take on risks they thought they could bear, as opposed to risks they thought they could convince someone else to bear—which is the definition of moral hazard.

“Homes would be unaffordable if people couldn’t take out large loans!” First of all, I’m not against mortgages—I’m against securitization of mortgages. Yes, of course, people need to be able to take out loans. But they shouldn’t be forced to pay those loans to whoever their bank sees fit. If indeed the loss of subprime securitized mortgages made it harder for people to get homes, that’s a problem; but the solution to that problem was never to make it easier for people to get loans they can’t afford—it is clearly either to reduce the price of homes or increase the incomes of buyers. Subsidized housing construction, public housing, changes in zoning regulation, a basic income, lower property taxes, an expanded earned-income tax credit—these are the sort of policies that one implements to make housing more affordable, not “go ahead and let banks exploit people however they want”.

Remember, a regulation against selling debt would protect the freedom of contract. It would remove a way for private individuals and corporations to violate that freedom, like regulations against fraud, intimidation, and coercion. It should be uncontroversial that no one has any right to force you to do business with someone you would not voluntarily do business with, certainly not in a private transaction between for-profit corporations. Maybe that sort of mandate makes sense in rare circumstances by the government, but even then it should really be implemented as a tax, not a mandate to do business with a particular entity. The right to buy what you choose is the foundation of a free market—and implicit in it is the right not to buy what you do not choose.

There are many regulations on debt that do impose upon freedom of contract: As horrific as payday loans are, if someone really honestly knowingly wants to take on short-term debt at 400% APR I’m not sure it’s my business to stop them. And some people may really be in such dire circumstances that they need money that urgently and no one else will lend to them. Insofar as I want payday loans regulated, it is to ensure that they are really lending in good faith—as many surely are not—and ultimately I want to outcompete them by providing desperate people with more reasonable loan terms. But a ban on securitization is like a ban on fraud; it is the sort of law that protects our rights.