Against the Fall of Night

There have been many memorable moments in my teaching career. A memorable moment never occurs just because of something I say but because of the impact it has on the audience. Without an impact, my words quickly fall back into the nothingness from which they come.

I distinctly remember a Saturday morning MBA class back in the fall of 2002. I was explaining Friedrich Hayek’s ideas on the rule of law. After interpreting Hayek’s ideas, I began to explain that the seed corn for respect for the rule of law must be stored during prosperous times. In other words, the metaphorical phrase “eating our seed corn” is applicable not only to physical assets and money, but also to ideas. During economic downturns, as the fear level goes up, the pressure on the rule of law often becomes great; it become difficult to keep intact respect for this important principle of a free and prosperous society. Of course, it doesn’t take too long until the Faustian bargain—trading the cultivation of long-term principles for short-term expediency—backfires.

I gave as an example the housing market. I explained why I thought housing was overpriced, and why we could expect to enter a manic phase of the market. This was in 2002; I was naïve and had no idea how overpriced the housing market was to become. I explained that because we were not storing the seed corn of respect for the rule of law, when the housing market did crumble, many would demand to be bailed out for their mistakes. To be sure, I didn’t anticipate that the banks would demand to be made whole for their costly errors. I was thinking more of homeowners who would claim that they which tricked into buying overpriced homes and would ask for government bailouts.

There was a bright and energetic woman sitting in the class. That day she played the part of Rick Santelli (the CNBC reporter who went off about homeowner bailouts on live television)—even before any of us heard of Rick Santelli. My version of what was to come resonated with her; she was outraged. “I’m going to be bailing out those who bought more housing than they can afford,” she emphatically exclaimed.

Both the student and I were innocent that day. Neither she nor I had any idea or how bad things would get. Meet Jim and Danielle Earl:

In 2001, Jim and Danielle Earl bought a home in California with a $500,000 mortgage. As housing prices began to rise, like many others, the Earls began to use their home as a cash cow. In 2005, they refinanced their home for $880,000.  By the time their house was foreclosed on, they owed over $1,000,000.

According to the Wall Street Journal: “ Investors…bought the house for $697,000 at a lender’s trustee sale and put $40,000 of work into a remodel, replacing carpeting and appliances, as well as upgrading the kitchen.” Investors then sold it to new buyers for $800,000.

Last week, just as the new owners were about to move in, the Earls, accompanied by their lawyer and a locksmith, broke into the home and moved back in. The police were there but stood down for the break-in.

In the Wall Street Journal, Michael T. Pines, the attorney for the Earls, is quoted as saying:

I’m trying to teach homeowners what their rights are. In my opinion, they are the legal owners of the property. All of these foreclosures, all of these evictions are grossly unlawful. All of the loans that are currently outstanding are grossly unlawful. Homeowners have a right to get their houses back because they were illegally stolen from them. I feel very confident in saying they have the legal right to do it.

In other words, Pines believes that not only are the foreclosures are illegal; but the mortgages are illegal too. Apparently, foreclosed homeowners should be given the homes free and clear of any financial obligations. Danielle Earl said, despite being over $880,000 in debt, “I don’t believe I owe anything at this point.”

Of course, not owing anything is the logical conclusion of placing a moratorium on foreclosures. A house is foreclosed on when the mortgage loan payments is not being made, usually the home owner has been delinquent for many months. The only possible way to still keep the delinquent homeowner in the house is to forgive or substantially write down the debt.

But why not write down or forgive the debt? Wouldn’t that be a good social policy? Wouldn’t that hasten an economic recovery?

There are many reasons that forgiving the debt is a bad policy. First, it will delay a housing recovery as housing prices are prevented from reaching a sustainable price level. Next, it will make it very difficult to sell foreclosed homes; new home buyers will find it impossible to obtain title insurance for such homes. Importantly, it creates a moral hazard for other homeowners to default on their loans.

But most importantly, it would further destroy respect for the rule of law. A vibrant economy depends on a vibrant middle class playing by the rules and believing that the rules are fair. Despite politicians continuing to claim that the banking sector bailouts were a necessary evil, there is still widespread disgust and anger; the general public feels they were forced to bail out the banking sector’s gross errors. The next wave of disgust and anger will occur as those who play by the rules watch those who don’t play by the rules reap large windfalls. Why should homeowners be rewarded when they bought houses they couldn’t afford and then took out home equity loans? Dangerous populist political movements will be born out of such disgust and anger.

In the former Soviet Union, where the rule of law was not respected, there used to be a maxim: “He who does not steal, steals from his family.” In other words, take every unfair advantage that you can get; since everyone else doing so, if you don’t, you are at a disadvantage.

In 2002, when I predicted that underwater homeowners would demand to be bailed out, I never foresaw that they would be breaking into homes with the police standing down. I never foresaw that they would demand that their mortgages be completely forgiven. Eight years of politicians and ordinary Americans working against the rule of law have made such nightmares possible.

The English poet A.E. Housman asked in his poem Smooth between Sea and Land:  “What shall I build or write against the fall of night?” When there is a sea change in collective attitudes about how society should be organized, the answer to the poet’s question is nothing. Nothing will change until individuals change their minds.

In his classic essay “Individualism: True and False,” Friedrich Hayek cautioned: “While it may not be difficult to destroy the spontaneous formations which are indispensable bases of a free civilization, it may be beyond our power deliberately to reconstruct such a civilization once these foundations are destroyed.” We can hope we change our minds before night falls.


11 Responses to Against the Fall of Night

  1. Velvet says:

    I too remember that day. Also, in 2004, when I worked for the #1 national builder in their Rockville office, I can remember the VP’s that be, forcing people to go to settlement with sloppy work inside their home, only to be told after the money exchanged and the moving truck in the parking lot of our office: “Enjoy the Holiday Inn. We don’t have a Certificate of Occupancy for the house. You’ll need to stay elsewhere.” It was unreal. Grown men would be screaming, pounding tables, crying. But, alas, that’s how my ethical former employer chose to treat people. And I said, to anyone who would listen: “When the market turns, we’re going to be sorry we treated people like this.”

    No one, and I mean NO ONE in that company ever believed that would happen. But this is what happens when you have a bunch of people in a business where they have no business being. Real Estate sadly attracted tons of opportunists, and it created the shambles we are living with today.

    The lessons should have been loud and clear, but they will continue. I am working to find a job and found a perfect one with a Hedge Fund who invests in Real Estate. They want an analyst. Their job description and my resume are practically a mirror image. But, guess what they want? A 2 years out of undergrad numbers person to run numbers and make investment recommendations. This is very very short sighted. Why?

    Because there’s more that goes into real estate valuation than looking at something on a piece of paper. What if you acquire a property that the former owner has walked from, and what if there’s a million dollar bond they also walked away from? What if you don’t know this because you are sitting in an office and don’t really understand how real estate development works to even know that a bond exists, until the jurisdiction holding the bond tries to contact the former owner, and he can’t be found. Or what if there’s a high school across the street that just got accrediation as an IB or magnet school and suddenly everyone wants to live in this neighborhood? Sitting at a desk in NY you’re supposed to know this?

    Wow. Just wow. But these people won’t budge. And they’ll be crying in 2 years about their investments gone wrong, how they jumped into the market too soon, and on and on and on. Opportunists, all of them. They don’t deserve to be in it. If all the opportunists would leave and leave the rest of us who really loved it to pick up the pieces, we’d all be better off. But then again, I always believe the market corrects itself. Just like a scab, ya gotta stop picking at it!

    Those homeowners are unbelievable. And their lawyer thinks that the home (the home that wasn’t really theirs anyway due to the lack of equity) was taken illegally? How about living in a house you aren’t paying for? Isn’t that illegal?

  2. Chris C. says:

    Dr. B, I wish I could feel better about the future of our culture, but my observations and reading of current events and the commentary of people whose opinions I respect all point in a southerly direction, if you get my drift. There are some people, even some groups of people that will fight rearguard actions against the dissolution of our cooperative society. By this term, I mean one in which the vast majority of people are honest in their everyday dealings, and assume others are the same way. That we do not need to do a background check on every single person with whom we would do business so as not to be “burned”. But that is where we, as Americans, are heading. This one change in attitude will create not only a further factionalization of people, but add greatly to transactional friction. That double-whammy may prove to be the straw that breaks the back of our recession-burdened camel, which has already been sorely weakened by excessive numbers and selective enforcement of laws and regulations. No one likes uncertainty except predators, because they know how to take advantage of it. Not just the burglars and con-men, but the politicians.

    I greatly fear that we are fast approaching the time for fight or flight. As for me, my tag line on one online board is “Rage, rage against the dying of the light”. I will not go quietly.

  3. H says:

    Prof B,
    This explains why I get so irritated with the commercial on radio that includes the quote that – “mortgages should be against the law.” I just could not fathom how someone could carry this mentality. Now I understand.

  4. H,

    Who is the sponsor of the ad and what is its main point?

  5. Mike L says:

    I believe this country is rapidly establishing a very dangerous precedent. If people believe that their mortgages were forced upon them and are fraudulent, than enforceable property rights and the rule of law is basically thrown out the window. As for dangerous political movements, many politicians now conduct this type of populist demagoguery, often toward banks or greedy speculators which just adds fuel to the populist fire. Society can argue about the root causes of this crisis till we’re blue in the face (i.e. Wall St, Fannie and Freddie, low interest rates, idiotic tax code, etc) but at the end of the day, each individual who signed the dotted line bears ultimate responsibility. I’m all for debt reduction, however that decision is between the bank and the individual; no policy, law or 3rd should dictate this.

    Full disclosure, I purchased a townhouse in 2005 because I didn’t want to ‘miss out’ on easy money. My property is now worth less than I purchased it for. However, I never leveraged against it and continue to make my monthly mortgage payments. Never have I contemplated missing payments, asking for assistance or letting it go into foreclosure. I don’t think I’m special. I do think the majority of this country still honors their debt, respects property rights and takes full ownership of their actions. This gives me hope.

    • Mike,

      I agree with you about the majority of the country. But what is the tipping point? If 20% of the population believed something for nothing was their birthright what would be the consequences? What would happen as Chris asks if we could no longer trust sellers in everyday transactions?

  6. Mike L says:

    I don’t know what the consequences will be, however I know that it will not help us get out of this economic downturn any faster. In addition to the personal debt accumulated over the years, this distrust might also help explain the reason why consumers are not spending. I think another cause is the uncertainty of pending government actions. Will the government offer another 1st time homebuyer tax credit? Will they bail out people who can’t make their mortgage? Will they force banks to write off debt? As I said in my original post, dangerous precedents can be set. I feel that one dangerous precedent the Federal government has set is the trampling of property rights of the Chrysler/GM secured bondholders. If we don’t know what laws the Government will enforce or how they will enforce them, how can individuals and businesses make rationale decisions?

  7. Jessica says:

    Attorney Michael T. Pines is DESPERATE to get his failing law practice (1 year old) on the map and get more business. Michael T. Pines is calling the MEDIA to come to the properties he’s breaking into to PROMOTE himself and make a spectacle of his unsuspecting clients.
    Michael T. Pines is bankrupt, he can’t save HIS OWN 6 foreclosed properties, and it’s important to note: he’s not breaking into his OWN foreclosed properties. Attorney Michael T. Pines LOST HIS OWN HOME and LAWSUIT against EMC Mortgage (see decision below); and is about to lose his 6 other properties which he’s trying to protect in BK. Michael T. Pines not a foreclosure RELIEF expert, he’s a FORECLOSURE expert.

    I just read this online via this link:
    “Recently, a judge called him out for filing frivolous lawsuits and slapped him with a $16,000 judgment that he owes one of his clients for wasting their time and money.”

    Michael T. Pines filed Chapter 11 Bankruptcy on January 11, 2010, he miserably represented himself and it was converted to a Chapter 7 Bankruptcy. Just GOOGLE “MICHAEL T. PINES” to see his background. To date, Pines has NEVER won a case against a mortgage company. Pines sued EMC mortgage regarding his own foreclosure and LOST. The judgments can be found online under UTAH COURTS or these links:

    and here:

    MICHAEL T. PINES has TWO Restraining Orders against him in San Diego County. You can find his Restraining orders on the San Diego County Sheriff’s website. Just type in “PINES” under *Restrained Last Name*. This is the Sheriff’s website:

    Pines’ foreclosed properties are as follows:

    1. 5 South 500 West Unit #1216, Salt Lake City UT 84101
    2. Case # 09-81657 – 1273 22nd Street, Ogden, UT
    3. Case # 09-81658-1246 South Meadow Run, Saratoga Springs, UT
    4.Parcel #010610036- 2336 Madison Ave. – Utah
    5.732 N. Coast Highway 101, Encinitas, CA 92024 – Law office building!
    6. Case # 1171481-21 Murphy Drive, Bella Vista, Arkansas

    Advice to the Zepeda, Bolanos, Earl & Rocha families:

    1- SUE MICHAEL T. PINES for his insane legal advice.

    2- File a California Bar Complaint against Pines. His bar # is 77771. You can get the form here:

    3- File a FEE DISPUTE with the State Bar of California:

    4- STOP using your home like an ATM, stealing money from the home and crying on TV like you are a VICTIM.

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