Sunday, April 4, 2010

Immaturity and the Housing Bubble: Review of Edmund Andrews's "Busted"

Andrews is a long-standing reporter for the economics section of the New York Times. This is what makes the story he tells in Busted: Life Inside the Great Mortgage Meltdown so scary. Andrews's book presents two closely connected stories: the history of the creation of the US housing bubble that started the current economic crisis and his personal story of getting into an incredible amount of debt in the years that led to the collapse of the housing market.

This is a book that needs to be read, even though it will make you lose your faith in humanity for a long time to come. Andrews analyzes in great detail how the lending institutions gradually became more and more driven by the desire for instant profit without stopping to think for a second what will happen long term. The author also brings to light the incredible, mind-boggling stupidity of Greenspan, Bernanke, and Co. He demonstrates how corrupt and dishonest the Bush Jr. administration was.

None of this, however, is very new. At least not to me. From the moment I moved from Quebec to the US, it became obvious to me that the housing prices in this country were ridiculously over-inflated. I saw my friends and colleagues pay really insane, seven-figure prices for poky little apartments in Manhattan or run-down bungalows in Connecticut and immediately realized that this was the game I would never agree to pay. Mortgaging away your life for the next 30 years in hopes that the bubble will get even bigger and the price of your house would magically grow seemed like a genuinely stupid proposition even for someone like me, who at 27 was woefully ignorant about economy. Today, when I understand the workings of this country's economy and politics a lot better, I am even more reluctant to participate in this insanity.

What really bothered me in Busted: Life Inside the Great Mortgage Meltdown was not the story of the housing bubble. It was the story of a nearly fantastic immaturity. Immaturity on both sides, the lenders' and the borrowers'. Those who handed out completely unsecured loans to people incapable of ever paying them off and those who accepted loans they could never even imagine paying off. Andrews was one of those who accepted. And accepted. And accepted some more.

The immaturity and total intellectual impotence of this man - who, once again, writes for the economics section of The New York Times - is mind-boggling. He decides to take out a loan to buy a half-million dollar house. As a result, he knows that his entire paycheck will go towards his alimony payments and the mortgage with not a dime left over for the bills. Of course, he hopes that his new wife will make enough money to cover all of their living expenses. Nothing would be all that wrong about this picture, if it weren't for one tiny detail. His new wife has been a house-wife who hasn't worked a day in the past 20 years. Besides, she is accustomed by her former husband to living the life of luxury. She didn't even do any work around the house because her first husband paid for a housekeeper. On top of that, Andrews gets this woman to move to a completely different part of the country. Then, he expects her to find a well-paying job - with no skills, no connections, no experience of being an employee - and start paying all the bills: "We had both assumed she could earn enough for us to get by. We didn't have any idea how she would do it; we were both simply sure that she could do it." It is incredible to encounter such profound intellectual impotence from any one over the age of 12.

This is not the weirdest thing about Andrews's relationship with Patty, the woman who eventually became his second wife. He left his first wife and proposed to Patty before Patty and he had ANY kind of a relationship. They hadn't even as much as kissed, let alone had sex or lived together. And these are not some horny teenagers. These are people who are almost 50 at the time. During marriage counselling, Andrews and Patty discover that they do not see eye to eye on 90% of issues discussed. This, however, does not suggest to them that it might make sense to postpone the wedding until they actually get to know something about each other.

Andrews's path to penury begins when he takes out a sub-prime mortgage on his new house. Over the next few years he gets so far into debt that you couldn't dig him out of it with an excavator, just to keep the stupid super expensive house. And you know why? In his own words, "Even though it was all about buying a house in the suburbs, it felt vaguely exciting, edgy, and a little gangsta." When a balding, paunchy, white gentleman in his late forties is motivated to take out an impossible loan because he wants to feel "gangsta", of all the stupid things, you know that something is seriously wrong here. And this is supposed to be a well-educated upper-middle-class individual, who works as a journalist, for Pete's sake!

In order to climb out of the financial hole he has dug for himself, Andrews tries every crazy borrowing practice out there. He runs up a staggering credit card debt, empties his pension account, and even hits up for money his elderly mother. There is just one thing he doesn't do: try to cut down the costs. Andrews goes through his wedding to his second wife in throes of a panic attack over mounting bills and huge debt. After that, he proceeds to pay the caterers that were hired for the wedding. Of course, the idea that people who can't pay the electricity bill might be able to do without a catered wedding never crosses his mind.

For a while, Andrews's family income rises to $200,000 per year. I don't know about you, people, but for me this is a staggering amount of money. One could live like a king on half that amount. Still, Andrews cannot make ends meet. Even though the debt is growing and his interest rates become sky-high, he keeps spending on things that cannot possily be considered necessary expenses: cable telivision, HBO, beach house, Ipods, expensive clothes, the list is endless.

Andrews criticizes the irresponsible lenders virulently. He never stops to think, though, that those who criminally handed out unsecured loans were motivated by the same basic immaturity that got him into so much trouble: have fun now and assume that things will somehow work out in the end. These people, who are so immature that it makes my hair stand on end in horror, are the ones that got us into this mess. They mortgaged away our future, and their children's and grand-children's future because they wanted that Ipod, that house, that vacation right now and didn't want to pay for them. Now, we will all have to pay for their lack of responsibility and their inhuman immaturity for decades to come.

[To be continued...]


misskate said...

Some men get a tattoo, others a red, flashy sportscar. This man's midlife crisis, a second wife and a house he couldn't afford.

What a clod!

Anonymous said...

Andrews is a fool, but an honest fool.

The mortgage bubble is an extreme example of the mania that comes upon societies every so often, aided and abetted by plutocrats but deliriously participated in by the hoi polloi as well, both thinking they can get something for nothing.

Looking back a few years, the smartest thing for me to have done would have been to get several very high mortgages in non-recourse states, take out all the home equity I could (which in my case would have been around a million dollars, likely), walk away from all the houses and loans and then retire.

But what did I do? I was responsible, saved my money, didn't buy any houses, kept renting, and am now not going to be bailed out, helped out, or otherwise excused for my profligate excesses as both the banks and the borrowers will be.

But I'm not too sad about it. My life is good. My girlfriend and I (who live together) make over $110,000 a year in a pretty low-expense area and we only spend about 40% of our income. The rest we save. We are lucky compared to most of America right now. But I still regret that I didn't participate in the bubble and get all the benefits and the early retirement I could have by milking the system.


Tom Carter said...

Great review, Clarissa. It's refreshing to see someone explain the fact that every "liar loan" for a home mortgage had parties on both sides of the table. Many of the media reports I've read about the housing crisis and foreclosures pick examples of people losing their homes, then paint them as victims of greedy lenders and Wall Street bankers. I don't defend anyone involved in that mess, but there was greed and stupidity on both sides.

Anonymous said...

Great review, Clarissa. Here's my own. You can find it on Amazon and leave comments:

Surprisingly refreshing

This book is surprisingly refreshing against the background of more renowned sources of economic analysis such as The Economist. I suspect that many financial columnists are no better experts than Mr. Andrews, but, to disguise that, they infuse their articles with annoying swarms of ifs, buts, and maybes. Another issue is that many journalists might not be allowed to speak ill of certain financial institutions and individuals, even those who deserve all the insult they can get. To his credit, Mr. Andrews does none of that smoke-blowing.

A good part of the book is dedicated to the issue of market regulation, which turned out of most interest to me. There is no doubt that Greenspan and other regulators have had a real difficulty with identifying asset bubbles. If that had been otherwise, they would've been successful hedge fund managers as opposed to relatively low-paid regulators. Moreover, even professional money managers who realize that the assets are way overpriced, find it difficult to go against the flow. To fend off impatient investors and/or maintain a losing position on margin, one has to be able to guess the bubble peak with a few months accuracy, which is far from simple. For instance, Stock Market Wizards: Interviews with America's Top Stock Traders contains an interview with a trader who lost by shorting Internet stocks during the dotcom bubble because his timing was off. A more successful example of Michael Burry (see The Big Short: Inside the Doomsday Machine) who managed to cash in on the mortgage collapse is an exception that only confirms the rule: as a contrarian, Burry got much abuse from his investors while he was losing and little gratitude when he succeeded. As Keynes used to say, for a money manager it is a lot more preferable to fail conventionally than to succeed unconventionally.

Andrews describes Greenspan as a firm believer in the "self-correcting power of free markets", which I find very odd. How can a person old enough to remember the default of Confederate bonds believe in something like that? Naturally, one can always point to alleged lobbyism and corruption, but I think there is more than that: preventing calamities is a very ungrateful job because, by definition, its results are not observable. If an American statesman engages in it, he subscribes to getting flogged every single day for any politically or economically grounded downside of regulation. The upside, on the other hand, is illusory because it's impossible to prove that one has avoided a disaster, unless a time machine is at hand. If that's the case, then no wonder that Greenspan preferred to avoid being a dislikable risk cop. Stepping aside and cleaning up the mess once in a while is a much happier occupation.

One may argue that regulation is easily justified based on the historical experience, but remember that people's short memory and instant gratification bias are at the core of what happened. No doubt, in 2010 the support for regulation is broader than ever, but give it a few calm years and the talks of "self-correcting power of free markets" are likely to reappear.

In the end, both personal and financial gambles of Mr. Andrews proved disastrous. His book, however, is a much better investment. Buy it and you'll learn more about economy and subprime crisis than from reading a $90 worth of The Economist.

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