by Benjamin M. Adams @BenAdamsEsq December 6, 2016
Practicing in the field of consumer bankruptcy, foreclosure defense, and loss mitigation, I’ve met more than a few people who own homes that are underwater. (Sometimes people refer to these as underwater mortgages.) The distinguishing feature of these mortgages is that the outstanding indebtedness on the mortgage or mortgages is higher than the value of the home. Over the course of my representation, most of my clients who stopped paying their mortgage (often long ago) proceed via one of several avenues available to apply for a loan modification. Moreover they usually proceed, in rather direct course, into a trial loan modification offered to them by their lender. More often than not the terms of that modification contain better-than-market interest rates, even considering today’s great market for rates.
A certain subset of folks, my clients that is to say colloquially, have on the other hand continued to dutifully pay their mortgage on-time each and every month. Most of them do this with eyes wide open about the raw deal they have gotten and continue to get. Perhaps they are making a payment on a mortgage note with a balance of $550,000, knowing that the house by which it is secured wouldn’t net them $350,000 on the open market. Moreover, they are making payments, often at a relatively high rate of interest, that can only be afforded through the exclusion of other necessities. They do this despite a lack of personal assets which might be exposed if they default.
That is all to say that from a standpoint of personal economics, these people ought to have defaulted a long time ago, but they haven’t done so and often have refrained from default even in the face of severe financial turmoil. Some feel honor-bound. Some are too frightened to stop. Some have no clue what is going on in the world (and stop as soon as I explain it). The point is that Mary comes to me for help because all of her friends and neighbors have gotten favorable modifications on their mortgages. Even her crazy Uncle Ted got one. Mary figures that she should be able to get help. After all, she thinks to herself and often says aloud, “I haven’t ever even missed a payment. How can the bank treat my crazy Uncle Ted better than me? Ted stopped paying his mortgage when the Democrats controlled the Senate. Do you hear what I’m saying? I’ve never even made a late payment!” So this is about the time when I tell Mary how the world works.
Crazy Ted got a fixed, low-rate mortgage modification because he stopped paying the mortgage, not in spite of that fact. More to the point, this wasn’t an aberration of any sort. I explain to Mary that my experience is that banks won’t give substantial assistance to borrowers who stay current. Sadly, it doesn’t matter how bad is Mary’s circumstance, nor does it matter that her house is deeply underwater. The truth is plain, cold and rather easy to convey– Your mortgage lender is not redoing your deal for as long as you are current on your obligations. They don’t even want to talk to you. For me, there is a correlative set of thoughts, to which I sometimes give voice. When I do, I merely ask, “Why would they? Would you if you were in their place? Mary, imagine I borrowed money from you, promised to pay you back in certain amounts and assume I just came to you in the middle of the deal and asked you to make it better…”
One may or may not be surprised to learn that it doesn’t take but a moment for Mary and most whom are similarly situated to realize that it makes more than some sense. It seems unfair in a purely moral sense, but it also seems to make business sense from the lender’s perspective. Moreover, my clients all understand that these mortgage loans were business transactions and hence properly governed by the mostly-Machiavellian rules of business. (The correlative thought here for Mary is perhaps she ought to begin thinking of the relationship with her mortgage lender on strictly business terms.) Mary doesn’t fight it much. The sole lingering bitterness is that she is mad at herself for not getting over as well and as quickly as crazy Uncle Ted, even though he’s get several screws loose. From there, Mary and I decide which course is best for her.
So this should not be terribly difficult to see how all of this applies to Donald Trump’s phone call with the Taiwanese President.
First, however, let’s take a moment to remember some of the things not often talked about with respect to China. First, on a personal level, I continue to connect this regime to the atrocities of Tiananmen in 1989. Cruel and oppressive autocracies like the one that carried out that bloodbath do not as a rule cede power voluntarily. That bloody 1989 regime became the ruling regime in 2016 without any intervening process which could remotely be described as democratic. Remember, how we reminded the world that Castro was oppressive? In China, Tiananmen can’t even be discussed. Let that sink in. It cannot be discussed. Yet we are supposed to believe this is not the same leadership with a different face? Of course it is. I am not suggesting that we should only trade with Democratic nations. We deal with any number of oppressive regimes. Some sell oil. Some sell bananas. I am suggesting that we are naive to think the Chinese government, which ordered its citizens crushed by its owns tanks for the crime of peaceful protest, are for some reason dealing in the purely-Machiavellian world of international politics with a greater measure of moral purpose.
In fact, the Chinese have increasingly mastered the ability to engage in the realpolitik of international passive-aggression while avoiding receipt of any of the normally-associated opprobrium. After all, China occupies a nation called Tibet. This is a human rights abuse of the first order. Second, China is now occupying and expanding land masses in the South in blatant violation of both international law and treaty and in a direct challenge to the United States’ right to navigate international waters. Third, China continues to run interference for North Korea which, in a world less charitable to Chinese sensitivities, would be called its Client state.
When speaking of the benefits of international trade, economists correctly note the concept of comparative advantage. That is to say, the United States makes guns 10x more efficiently than Columbia makes guns, but they make coffee 10x more efficiently than the U.S. makes coffee. The upshot is that — ceteris paribus — the U.S. is crazy to grow coffee and Columbia is crazy to waste its time making guns when the two nations can just trade (directly or indirectly) coffee for guns. If you want to go one level deeper, you can read any Macro 101 textbook or maybe click here.
So while comparative advantage is an economic truth, it contains the kind of assumption that always renders economists imperfect substitutes for policy-makers. All things are never equal. Comparative advantage from trade is an accurate mathematical context but nothing more than that. Actual trade carries implications not only for the economy but also for national security, the environment, immigration and a great deal more. So we need to understand that international trade requires “dynamic scoring” for lack of a better term. In today’s international marketplace, China’s comparative advantage is in making crap that ends up in U.S. landfills. China maintains this cheap labor advantage by allowing wholesale and egregious exploitation of its workers, including its children. China’s advantage in making shiny things that look good but break also flows from polluted water and befouled air which, one should not need to note, is breathed by Chinese as well as non-Chinese alike. China’s other main advantage is that it doesn’t respect intellectual property rights, encouraging a vast piracy industry that specializes in ripping off American artists.
I’m not being simplistic. I get that when we buy poorly-made Chinese textiles and plastics, Walmart makes a profit and does so by employing people in the U.S.. Those employees buy iphones, use Uber, and generally contribute to economic activity in the U.S. Moreover, the Chinese factory owners then take their profits and buy iphones and ipads for their kids. Chinese also buy big stuff like cars and airplanes and NYC condos. Those Condo sales yield big commissions to realtors who pay taxes and private school tuition which goes to pay teachers salaries and so on and so on and so on. Crap has its role in the natural and financial ecosystems.
So turning back to Trump’s phone call with the Taiwanese President…
Let’s remember that Trump campaigned from start to finish about getting tough with the Chinese. How can we not say he hasn’t got some kind of mandate to at least try to re-balance Sino-U.S. relations? He clearly does. Moreover, if Trump really wants to renegotiate the terms of trade and currency with China, he needs real and substantial leverage. Starting off his presidency by dutifully reciting U.S. acquiescence to Chinese demands, as Obama and Bush did, may not be the best way to obtain that leverage. Taking a call from Taiwan’s president may not send the right message, or perhaps it sends exactly the message that needs to be sent. Time will tell.
In the meantime, Americans are told that we should quake in our boots at the thought that the Chinese may sell a bunch of U.S. Treasuries in response. I think that’s nonsense for a number of reasons and, worse, it is uninformed defeatism. If the Chinese want to start denominating oil in RMB, they are free to try. They are also free to try making the Chinese Yuan into the world’s reserve currency. I don’t see where they have incentive to do any of that. I see even less reason why they would have a broader motive to collapse our economy. After all, who would buy all their crap? What would we do with all the empty landfills?
So it should all make sense now. China is our mortgage lender. Obama is Mary. Upon taking office, he promptly and dutifully gave his recitations to the Chinese regarding the 3 communiques. Obama-Mary never risk a fight with their lender, no matter how bad the deal may look. They are cautious and more, importantly, they don’t work by shaking things up. Trump is your crazy Uncle Ted and he is willing to skip payments in order to get his lender to talk to him. He simply understands, for lack of a better term, the animal spirits perpetually at work across human relations. One hopes that he will learn how to harness those talents for the cause of enhancing American interests rather than petty acts of retribution. Don’t look now, but it looks like Trump just skipped a payment to China. Let’s see if someone is willing to talk.
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Benjamin M. Adams
The Pretty Ugly Blog by Benjamin M. Adams 