Underwater and the Strategic Default PR Campaign, 0: The PR Campaign Begins

Prelude. Chris Hayes has an excellent op-ed on BP and the BP spill in relation to our current predicament, BP: Beyond Punishment:

…David Brooks made the same point a touch more artfully, chalking up the disaster to “the bloody crossroads where complex technical systems meet human psychology,” the inevitable result of “living in an imponderably complex technical society.”

Society must have seemed “imponderably complex” to those living through the Triangle shirtwaist factory fire, but luckily for us, activists of the day refused to simply say, “Shit happens” and move on….

First, let’s look at corporate accountability. Ideally, this is the kind of thing you’d want the government to pursue, but as has been dramatically demonstrated, the state’s regulatory apparatus has, in many areas, been gutted or co-opted. Which leaves it primarily to private parties to pursue accountability through the courts. In tort law, damages are divided into two types: compensatory and punitive. The former are designed to compensate victims of negligence for their economic damages: lost income, property destruction, etc. Punitive damages are awarded above these compensatory costs as a means of, well, punishing the wrongdoer.

For a long time, conservatives and big corporations have hated punitive damages. The amounts are decided by juries, who have a tendency, when faced with stories of corporate malfeasance, to stick it to the bastards. In the 1980s conservatives began a legal assault on punitive damages, in “an effort coordinated very closely with the Chamber of Commerce,” says Stanford law professor Jeff Fisher….

Aside from the practical consequences of altering the incentive structure, the Exxon case and other statutory caps on liability present a deeper threat to the American moral fabric. Set against the increasingly punitive posture of the state toward its citizens over the past several decades, the arbitrary limits on punishment available to a party like Exxon make a mockery of equal justice under the law. Our criminal justice system is the most punitive of any industrialized democracy. We have 2.3 million people incarcerated, half of them for nonviolent property and drug offenses. At least two dozen states have three-strikes laws, and in some cases citizens can face life imprisonment for minor nonviolent offenses. In 2003 the Supreme Court upheld a fifty-year sentence for a California man caught stealing videotapes.

And things are even harsher for Americans unlucky enough to need succor from the state to survive, a k a poor people. Just one drug-related felony conviction can get you booted from welfare, or from public housing (though if you own a house, the IRS will still allow you your mortgage-interest deduction). Under federal law, a drug bust disqualifies a college student from all federal student aid. As a result, between 2001 and 2006 almost 200,000 students lost access to aid. The greatest Congressional champion of this unforgiving policy was Mark Souder, the Indiana Republican who resigned after revelations of his affair with a staff member. In his farewell speech, he took solace in the possibility of forgiveness.

A punitive society is not the best kind of society: there’s a real virtue in forgiveness, in second chances. But for years we’ve been applying Rand Paul’s “accidents happen” principle to those at the top while heaping blame, scorn and draconian punishment on those at the bottom. Punitive damages are capped for corporations, while punitive policies proliferate for citizens. This tears the social contract apart, and the only way to repair it is to apply the same principles of accountability up and down the social hierarchy. We should start with BP.

Since 1980, punitive policies have increased for citizens, though punitive policies for corporations have decreased. I assume less punitive punishments by juries is some sort of “economic freedom” everyone is always talking about. So is there a way to chart this? Yes. Let’s modify a chart I made and posted at Ezra’s place of prison population against economic freedom, and add data points for the historical course of the United States (historical economic freedom, historical prison data):

I often wonder if the United States is as far to the upper-right as it is capable of moving. If not, I also wonder if there’s a way to move that dot upwards and rightwards in one move. A single move that both increases prison population and makes us more business friendly. (Anyone can do it in two moves.)

And there is a one-move solution. Two words: Debtors. Prisons.

Yves Smith has thankfully found what will be the latest, in PR Push Against Strategic Defaulters Underway (Is There a Debtors’ Prison in Your Future?):

A good Washington DC contact told me that a public relations/media push to demonize those who decide to walk away from mortgages they can still afford to pay (aka “strategic defaulters”) is underway. Expect to see a good bit of moral fervor as those who choose to cut their losses are attacked as immoral, irresponsible, and abusive….

One example comes, in of all places, a Republican motion to recommit (an amendment to a bill when it is on the floor made by the minority party). Now narrowly, one might well agree with the idea behind this amendment (to prevent people who strategically default, which will be difficult to define in any tidy way, from using FHA programs)…

But it might be more straightforward to restore debtors’ prison. David Walker of the Peterson Institute seems fond of them:

You should watch that video. I think we are going to hear a lot more about this in the upcoming weeks and months, and I’ll be writing out several blog posts in the next day or two. The message should be clear though: This is the obvious and inevitable result of failing to adopt “cramdown” legislation two years ago, as well as not taking serious government action. All the warning signs were there in 2007, people tried to find a real solution to this problem back then. Cramdown was a solution that would have worked perfectly without triggering any of the problems of other proposed solutions. Other programs, such as right-to-rent would have complimented it, and as a two-prong strategy it would have taken a lot of pressure off the system.

Instead we decided to “nudge” servicers, allow insolvent banks to hold the mortgages and their second leins at full value and hope and pray that the economy and housing market picks up enough to forbear this out. And, as anyone could have told you, it is a major disaster.

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3 Responses to Underwater and the Strategic Default PR Campaign, 0: The PR Campaign Begins

  1. Arpit says:

    Is this a serious worry or a nonsensical talking point? In certain states, walking away from your home ensures no further legal liability. In other states; the law varies. But in all states, debts can be discharged through bankruptcy.

    A great way to deal with this “debt deflationn” and attached balance sheet recession worries, of course, is inflation.

  2. Mike says:

    I don’t think debtors’ prisons are seriously coming. But I do think we’ll see a new “welfare queen” rhetoric directed at people who are struggling to do right in a terrible economy and housing market but who are given few options by the administration or their lenders.

    In a system of portfolio lending, this would never happen. Ranieri warned us years ago that modifications would fail in a crisis and the law needed to act and finance should lead it, and nobody did anything about it. Nobody supported cramdown. HAMP is a joke. And here we are.

  3. adam gold says:

    The problem is that this underwriting problem must be attacked on the front end. Fannie Mae is now trying idle threats to stop smart strategic defaulters. If they required 20% equity and personal liability in all jurisdictions, there wouldn’t be all these defaults. Renting never killed anyone.

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