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ledocs
06-22-2011, 12:39 PM
Anatomy of an argument on the Internet

Badhatharry (BHH) wrote this, in response to eeeeeeeeli, here:

http://bloggingheads.tv/forum/report.php?p=212526 (http://bloggingheads.tv/forum/report.php?p=212526)

” I know you disagree and that pretty much sums up the titanic struggle. I have no idea what it means to be an advocate for citizens. It sounds really nice, though. But what I suspect is that that impulse knows no bounds…”

I think the standard model for advocacy for citizens is Legal Aid. There is no mystery here. If BHH has no idea what it means to be an advocate for citizens, this could be evidence of a singular lack of curiosity on her part.


http://en.wikipedia.org/wiki/Legal_aid (http://en.wikipedia.org/wiki/Legal_aid)

”…[Elizabeth] Warren's appearance on the scene is coincidental with the 'financial crisis' and the myth that people were duped into buying houses they couldn't afford. We don't need Elizabeth Warren. People need to relearn that they need to responsible for their decisions. She and her office building full of do-gooders cost lots of money and we simply can't afford it. Not only that but this kind of protection always grows. It never contracts.”

I took issue with the characterization of “the myth that people were duped into buying houses they couldn't afford.” I asserted that there was such a phenomenon as predatory lending, that predatory lending had occurred during the financial crisis. I cited the Wikipedia article devoted to “predatory lending” as a demonstration that predatory lending is a recognized phenomenon. I go on to point out that invocation of “the myth that people were duped into buying houses they couldn't afford” is tantamount to a denial that predatory lending occurred during the financial crisis.

BHH then denies ever having said that there is no such thing as predatory lending here:

http://bloggingheads.tv/forum/report.php?p=212539

“You might want to consider actually reading some books about the financial crisis instead of relying on Wikipedia citations for your information. I have never said that there weren't predatory lending practices. Those are as old as man and why the warning caveat emptor came into being. But people were not compelled in any way to be stupid, although there will always be stupid people.”

Let’s consider all the things that BHH manages to throw into this short paragraph. First, merely because I have cited Wikipedia on “predatory lending,” there is the injunction that I should “consider” reading some books about the financial crisis. But since I am believed by BHH to be so ignorant of the realities behind what she chooses to refer to as the “financial crisis” (in quotation marks), I ask her to cite some books about the financial crisis that make her point about “the myth” she invoked. That request was met with silence. But it is, by way of contrast, quite easy to find references to reputable sources that assert that predatory lending was a serious factor contributing to the crisis. For example, “The Financial Crisis Inquiry Report,” pp 90-91, makes the relevant points about predatory lending very succinctly and cites various sources to the effect that a high proportion of American borrowers in the residential housing market are unsophisticated. Also, Stiglitz, Joseph, “Freefall,” refers repeatedly to predatory lending practices as a major factor contributing to the genesis of the financial crisis, e.g., in the Kindle edition, Locations 19, 582, 601, 1108, 1792, 1947, 221, 3028, 3462, 3471, 3958, 4278, 5161, 5249, 6117, and 6641. However, BHH has sources, presumably in books and not in mere articles such as those in Wikipedia, superior to Stiglitz that show that Stiglitz is wrong on this point, is spinning a liberal myth, but she is retaining for her own purposes the relevant citations. I believe that former blogginghead Arnold Kling has written an article which argues that predatory lending was not a major contributing factor to the financial crisis.

So, first, there is the denial of having said, by implication, what she said, namely that predatory lending is not a problem. But then we elide from a denial of the phenomenon itself to correct interpretation of the phenomenon. The ground shifts. “Those [sc. predatory lending practices] are as old as man and why the warning caveat emptor came into being. But people were not compelled in any way to be stupid, although there will always be stupid people.” I somehow doubt that BHH knows how the apothegm “caveat emptor” came into being. I am not sure that anyone knows this in a precise way, so I don’t see how she could know. But it sounds good, this is one of her bids for seriousness, she knows this Latin phrase. I also doubt whether she can explain the verb form, but whatever. According to the OED, the first attested use of “caveat emptor” in English was in 1523. I’ve got a book called “A Textbook of Roman Law, from Augustus to Justinian,” by Buckland, Third Edition, Cambridge Univ. Press, 1966, and there is no discussion of “caveat emptor” in that text. I don’t find “caveat emptor” cited in the standard dictionary of classical Latin in English, Lewis and Short. A similar phrase, “ut emptor caveat…,” is attested in the “Digest” of Roman Law of Justinian. It seems likely to me that the phrase “caveat emptor” initially had to do with the cash purchase of tangible property, not with predatory lending, and that its origin is late-medieval or Renaissance. It could belong to English common law. It is not “as old as man,” nor did it arise in response to predatory lending. I also doubt that predatory lending practices are as old as man. I doubt that they are as old as the beginning of the historical period. We would, of course, have to define what constitutes predatory lending, and the Wikipedia article has a survey of that topic.

Enough pedantry, however. I agree with BHH that there is a natural tendency among some humans to take advantage of other humans and that this problem will probably never be entirely solved, or not in a way that would not have such unfortunate side-effects that we would not prefer to live with less than perfect solutions to this problem. But what conclusions should be drawn from this fact? She has conceded the phenomenon of predatory lending, it is coincident with the human species, in fact, and she then gives her approval to some unspecified laws that protect the consumer in America from predations in the financial industry. It’s just that this Elizabeth Warren thing is unconscionable, it crosses some line. What that line is, however, BHH is keeping to herself.

Commercial law is a complex field. There is no regnant principle in contemporary America that it invariably falls to a buyer to inform herself exhaustively about possible defects in a product or service. There are disclosure laws involving real estate transactions, and they vary from state to state, I believe. Then there are federal disclosure laws when a Fannie Mae or Freddie Mac mortgage is involved, which is normally the case in a US residential real estate transaction. There are disclosure burdens that fall upon the seller, and upon the seller’s agent(s.)

Let’s concentrate on this gem. “But people were not compelled in any way to be stupid, although there will always be stupid people.” What is the significance of asserting that people were not compelled [sc. in the course of borrowing during the period immediately prior to, and during the “financial crisis”, say during the subprime lending boom] in any way to be stupid? It is apparently that someone who is deceived or cajoled into entering into a bad contract, a contract that turns out not to be beneficial to them, should just take his lumps. It is that the government (i) has no responsibility to seek to protect such people from predators and (ii) even if we could identify such a responsibility in theory, implementation of the responsibility is too expensive for society and ends up becoming a Frankenstein’s monster of ill-conceived and unaffordable regulation. In any case, of course there are predatory lenders, says BHH, it’s just that there is no solution to this problem, governmental or otherwise. Everyone should fend for himself, and the government should stay out of the business of aligning itself with the borrower against the lender, except to the extent of existing law, which, for unspecified reasons, must be fully adequate and not supererogatory.

But let’s not stop there. What is the point of saying that no one is compelled to be stupid, and is this statement true? Do people really, by and large, have control over how stupid they are? Can’t genetic inheritance be interpreted as compelling some people to be stupid, if stupid in fact they are? And if not genetic inheritance alone, genetics combined with the circumstances of their education? Furthermore, what we are talking about here is a kind of practical intelligence, not raw mental capacity. Some people are too credulous. They do not realize that someone who represents himself as their benefactor or agent, someone who is cunning, might not care at all about their welfare, financial or otherwise. But it is not, per BHH, the part of government to intervene in the market transaction or to protect the excessively trusting from the time-worn malefactors. Well, maybe it is, after all, since we have laws to this effect, also per BHH, but those laws, whatever they may be, are certainly adequate, we don’t need the heavy hand of Elizabeth Warren and her new, well-intentioned but unaffordable bureaucracy.

ledocs
06-22-2011, 12:42 PM
Anatomy of an argument on the Internet, part 2

“There are laws in place to punish firms which sell tainted products both in the food industry and in the financial industry. This is not nannying….These laws existed before Elizabeth Warren ever showed up in Washington. But now she is going to teach people what products they should buy. That is none of the government's business. People need to assume the responsibility to read a contract before they sign it or get help doing so.”

It seems to follow from what BHH has said above that it would not belong to a government-funded educational system to educate K-12 students in how to protect themselves in the marketplace, what the legal regime is in the marketplace as regards consumer rights, how to do meaningful and useful consumer research for the purchase of goods and services, the government should just stay out of this realm entirely.

I agree, however, that some people should get help before signing a mortgage agreement, and I do not find it in the least unconscionable or frightening that that help would be paid for, or subsidized by, the federal government. I don’t see why the cost of providing the help could not be included in the loan fees and amortized by the borrower over the course of the loan, if cost is really the major concern. The borrower can choose to seek the help or not, but it would be a legal obligation of the lender and mortgage broker to disclose that the help is available and recommended. From the point of view of economics, the fees for subprime mortgages were high, relative to those of other loans. Some borrowers were steered, unwittingly, into subprime mortgages precisely because the loans would be more profitable for lender and mortgage broker and would offer higher yields to investors in the secondary market than would conventional loans, not because their credit demanded a subprime loan. There is every reason to believe that in a financial market with more transparency and with government-sponsored aid for borrowers, fees and profits for residential mortgages would have been lower. There was ample room to amortize $100 to $200 in counseling fees for a performing mortgage loan, in other words, the cost is peanuts and need not be borne by taxpayers directly. This cost is dwarfed, quite obviously, by the costs to society of nonperforming and foreclosed upon loans. This concern about cost is all just more hogwash from a person who tirelessly defends freedom and the marketplace without seeming to have any particular expertise or knowledge of how the contemporary American real estate market actually works.

stephanie
06-22-2011, 02:34 PM
I somehow doubt that BHH knows how the apothegm “caveat emptor” came into being. I am not sure that anyone knows this in a precise way, so I don’t see how she could know. But it sounds good, this is one of her bids for seriousness, she knows this Latin phrase. I also doubt whether she can explain the verb form, but whatever. According to the OED, the first attested use of “caveat emptor” in English was in 1523. I’ve got a book called “A Textbook of Roman Law, from Augustus to Justinian,” by Buckland, Third Edition, Cambridge Univ. Press, 1966, and there is no discussion of “caveat emptor” in that text. I don’t find “caveat emptor” cited in the standard dictionary of classical Latin in English, Lewis and Short. A similar phrase, “ut emptor caveat…,” is attested in the “Digest” of Roman Law of Justinian. It seems likely to me that the phrase “caveat emptor” initially had to do with the cash purchase of tangible property, not with predatory lending, and that its origin is late-medieval or Renaissance. It could belong to English common law. It is not “as old as man,” nor did it arise in response to predatory lending. I also doubt that predatory lending practices are as old as man. I doubt that they are as old as the beginning of the historical period. We would, of course, have to define what constitutes predatory lending, and the Wikipedia article has a survey of that topic.

In case you are interested, caveat emptor is a phrase tossed around a lot in certain kinds of legal discussions, typically to say that it's no longer the law.

It used to be a common law doctrine regarding the sale of real property, the effect of which was that sellers were liable only for representations they specifically made and as provided by contract. This was believed to be too harsh, in that property may contain defects that are not visible even after a normal inspection, but which the seller may well be aware of. Therefore, caveat emptor was replaced with such doctrines as the implied warranty of habitability.

There's an added wrinkle to this that makes it relevant that the context is property law, in that written contracts are required in some cases, including the sale of real property. For example, if you wanted to sell me your car, we could agree on a price and we would have an enforceable contract normally. We can't do that with the sale of a house. It's not enforceable until it's in writing, and thus under the caveat emptor doctrine it would have been particularly hard to point to statements made at the time of the sale as a basis for breach of contract or even fraud. Indeed, this is somewhat more complicated, but I'm being boring enough.

In any event, you are correct that it's not a doctrine relevant to lending practices. It tends to be used casually to say there's a moral duty on the buyer (or, I suppose, borrower) to be careful, a statement with which I would agree. However, what that has to do with the discussion at hand does seem rather puzzling, as no one is saying otherwise.

Personally, I would agree with those who note that we have various consumer protection and disclosure laws, and that what we are talking about is why the failure in a number of cases. Were the laws not followed, should they be modified, what? No one is suggesting some huge overhauling of how we typically approach financial transactions from the legal perspective. Indeed, to the extent any effort to dramatically remake the laws exists, it seems to be coming from those who wish to use the current economic issues and resentment at those perceived to be responsible as an excuse to bring back caveat emptor and to apply it in areas its not been applied. In essence, to claim that regulation can't work, hasn't worked, so we need to get rid of them. Those are the people who are radicals and revolutionaries. Most people, including Warren, are merely talking incremental change within the existing environment. How conservative!

Florian
06-23-2011, 06:16 AM
Interesting observations, ledocs.

It might interest you and others to know (maybe you already know this) that the continental, Roman law tradition has evolved very differently from the common law tradition in the US. Property transactions are more strictly regulated by the state. This is the function of "le notaire," a state appointed official responsible for drawing up contracts, one of whose functions is to make sure that buyers and sellers, borrowers and lenders, are not deceiving each other. It is absolutely impossible in France to take out a mortgage or purchase property if you cannot prove creditworthiness (income, assets etc). It would be equally impossible for real estate agents to practice the kind of fraud that took place in the US.

http://www.french-property.com/reference/role_of_notaire.htm