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Pathological Altruism on a National Scale

Last week I wrote about the Pathological Altruism that has inflicted the City of Richmond in its efforts to use eminent domain to “save” homeowners with underwater mortgages.  This week I look at the concept on a bigger stage, the country as a whole.

As a refresher Pathological Altruism has been defined by Professor Barbara Oakley in her book “Concepts and implications of altruism bias and pathological altruism,” as:

“…Altruism that attempts to promote the welfare of others, but instead results in unanticipated harm.  A crucial qualification is that while the altruistic actor fails to anticipate the harm, an external observer would conclude that it was reasonably foreseeable.”

The modern welfare state, from European socialistic countries to the U.S. version, reflects the growth of pathological altruism.  In this country everything from Social Security, which discourages people from establishing their own retirement plans and is itself going bankrupt, to a cache of government provided medical programs, including Medicare, Medicaid, SCHIP and now ObamaCare, are a dysfunctional set of third party payment schemes that allows the individual customers of care to avoid the decisions of who and how care is provided and payment is made within the system.

The modern “welfare system”, including TANF, or Temporary Assistance for Needy Families (formerly Aid to Families with Dependent Children) , SNAP (food stamps), WIC, Headstart,  and 122 other Federal programs for low income people (not to mention State programs that compliment these programs) encourages single parent motherhood, near permanent unemployment, and the abandonment of parental responsibilities and other dysfunctional behavior.  For example, when LBJ signed “The Great Society” legislation in the 1960’s 24% of black children were born into single mother households; today the number is 74%.

Or look today at the student loan crises.  Included in the passage of ObamaCare was a provision that allowed the federal government to take over the student loan industry; this year student loans are now greater than $1 Trillion and surpass credit card debt as the largest debt owed in the country.  Yet, only 25-30% of students with loans graduate, with many if those completing degrees in low paying majors such as ethnic studies, woman’s studies, sociology, etc.   Economists are now seeing many young people with $25,000-$35,000 in student debt, living with their parents, unable to purchase a house and/or other large material possessions (cars!)or participate in the society as adults.

The Housing Collapse of 2008

The housing collapse is in many ways, its own special version of Pathological Altruism and was a foreshadowing of the Obama Administration slate of domestic policies.

Many credit the beginning of the housing collapse with the Jimmy Carter’s signing of the Housing and Community Reinvestment Act in 1977.  This act was passed to “encourage” banks and savings and loan associations to meet the credit needs of low and moderate borrowers and to eliminate the “discriminatory lending practices” in low income neighborhoods known as “redlining”.

The Act, however, did not come into prominence until Bill Clinton’s election.  During Mr. Clinton’s first Presidential campaign he encouraged, in his book “Putting People First”,  using private pension funds to invest in affordable housing programs; after his election he tapped Robert Reich to lead the effort to “generate long term social, ancillary, and economic benefits from these private pension plans” by investing in “Economically Target Investments”.  Few pension plans agreed to participate but the Clinton Administration, though HUD Secretary Henry Cisneros was able to recruit Freddie Mae, Fannie Mac and commercial banks into the affordable housing market by exploiting one of the provisions of the Community Investment Act.

HUD and bank regulators then began the process of pressuring banks to make “subprime loans”.  Banks were required in 1993 to make 30% of their loans to low income borrowers.  This was subsequently raised to 40% in 1996, 42/% in 1997, and 50% in 2000 by HUD Secretary Mario Cuomo.  The Bush administration, under its “compassion conservative” efforts, eventually raised the rate to 56%.  During this period and until the collapse of the market in 2008, banks could not open branches or conduct much of their regular business without having a “passing grade”, meeting their sub-prime loan quotas, in the low income lending market.

Fannie and Freddie did their part in the degradation of the housing market by continuously lowering underwriting standards for the loans they purchased from banks and Alan Greenspan and the Federal Reserve did their part by keeping money “cheap”.  Total CRA lending rose from $8 billion in 1991 to $4.5 trillion in 2007.  In 1990 80% of loans were solid prime loans with large down payments; that number fell to 15% in 2007.  In 1990 a minuscule number of sub-prime loans were “securitized” ; by 2007, virtually all of them were.

The American Enterprise Institute calculates that approximately 28 million high risk loans were processed during this period, while thousands of regulators and the banking industry ignored the “safety and soundness” rules that were in-place in federal and state banking laws.  How did this happen?

Pathological Altruism.

Patholoical Altruism in Action: Richmond, California

Pathological Altruism is altruism that attempts to promote the welfare of others, but instead results in unanticipated harm…A crucial qualification is that while the altruistic actor fails to anticipate the harm, an external observer would conclude that it was reasonably foreseeable.”

-----Barbara Oakley, “Concepts and implications of altruism bias and pathological altruism,” Proceedings of the National Academy of Sciences

An old saying my mother would sometimes use when I was, let’s say less than perfect, was, “the road to hell is paved with good intentions”.  In today’s world, that destination is Richmond, California.

We have Barbara Oakley to thank for providing a definition to describe Richmond; I would have thought more in terms of ignorance and the law of unintended consequences.  But the many negative consequences awaiting the city, and others, surrounding its plan to use eminent domain to “save” underwater homeowners are well known to the City; most are spelled out several times in the Wells Fargo lawsuit against the city and its partner Mortgage Resolution Partners.  “Saving” between six hundred and one thousand underwater mortgage holders will hurt:

·         Every homeowner in Richmond:  property values will fall and the entire residential real estate market will decline in the city.  According to City Data, there are 36,151 houses in Richmond (47% rentals).  So the city will help  less than 1% of them and  punish 99+%.   

·         All potential Richmond homeowners; new homeowners will a.) Find it difficult to obtain loans in the city and b.) Be required to pay higher interest on loans they do obtain to cover the higher risk lenders face.

·         Renters; as residential loans become more expensive, landlords will pass these increases on to renters.

·         The City of Richmond; the city will lose property and sales tax revenue as property values decline and fewer dollars are spent in city businesses as its overall economy worsens.

·         The mortgage backed securities market in California and, possibly the country; as risks rise, especially if other cities follow Richmond in this scheme, the market will decline or become more expensive.

·         State and local pension plans, 401(k) plans, college savings plans, insurance companies, mutual funds, university endowment funds, and individual retirees who own the securities involved in the mortgages in Richmond; as the city and Mortgage Resolution Partners execute their scheme, the owners of the securitized bonds will lose hundreds of millions of dollars.

·         Taxpayers; will have to cover losses suffered by Freddie Mac and Fannie Mae, two of the largest investors in the Trusts involved in the city’s scheme.

·         The “saved” homeowners; will each owe tens of thousands of dollars in taxes as the IRS counts their mortgage reduction as income!

In a recent interview with Bloomberg News, Richmond’s mayor, Gayle McLaughlin, indicated that “the economic recovery that has slowly crept across the U.S. has mostly bypassed Richmond”.  Cities like Richmond have a right and an obligation to utilize such a program for the public benefit."

Really?  

She is surprised that demonizing, suing, and penalizing capitalism, businesses, and success in general, leads to the economic recovery bypassing the city?  Or as City Councilman Nathanial Bates said in the same Bloomberg article “The way you treat your largest taxpayer is an indication of how you treat the smallest taxpayer.  It sends a negative message to the business community and potential investors who are interested in coming to your city of how they would be treated just because they are big business."

I’m sure the mayor and city council care for the people of Richmond; or, at least care enough to get re-elected.   And I’m sure that at least people with the targeted underwater mortgages love the mayor and council.  It is just that desperate, anti-capitalistic, progressive, destructive, pathological altruistic result that gets in the way. 

The city has a long and proud history as a “Progressive” city, i.e., dependent and dysfunctional; a city where entrepreneurship is defined by how often you can sue Chevron or run programs where the city government hands out money for some mythical collective purpose.

In 2011 the Mayor participated in an Occupy Wall Street protest.  In an open letter to the Occupy movement she complained that the city had a growing number of poor residents while Chevron was making billions of dollars.  Without recognizing the irony of her statement, the mayor was negatively critiquing her own path, a path she is taking the city and its residents down:  implementing social justice and social advocacy programs that have and will continue making the city’s residents poorer while the city continues punishing profitable companies, retirees, pension and endowment funds and their workers/taxpayers to complete the downward spiral.

Pathological altruism at its finest.