Logical Fallacies and the Financial Crisis [Reader Post]

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I have a friend that has a Masters in Psychology. We usually confine our discussions to beer, softball, women, and beer. The man is a master of manipulation. I have seen him deflect arguments with such skill that the other person walks away in a cloud of befuddlement. Sometimes we discuss politics. I brought up the growing divide in our country and told him I have little hope that we will ever bridge it. He explained to me the nature of this divide and why we may never come together again as a nation. These are the five logical fallacies that prevent us from agreeing.

Argumentative Theory of Reasoning: states that humans didn’t learn to ask questions and offer answers in order to find universal truths. We did it as a way to gain authority over others.

Neglect of Probability: states our brains are great for doing a lot of things. Calculating probability is not one of them.

The Trust Gap: states we just do not trust other people to do the right thing.

Fundamental Attribution Error: states when other people screw up, it’s because they’re stupid or evil. But when we screw up, it’s totally circumstantial.

Confirmation Bias: states our brains weigh information on a position we hold, not based on the logic, but on the emotional and social consequences of that position being wrong.

I bring this up because what I am about to write will not change the mind of a single liberal in the country. If you have not yet read the article, Paul Sperry for the Investor’s Business Daily has the single most damning information yet that the housing bubble, and thus the financial crises rests on the shoulders of the Clinton Administration.

At President Clinton’s direction, no fewer than 10 federal agencies issued a chilling ultimatum to banks and mortgage lenders to ease credit for lower-income minorities or face investigations for lending discrimination and suffer the related adverse publicity. They also were threatened with denial of access to the all-important secondary mortgage market and stiff fines, along with other penalties.

I will not go into a detailed analysis; it is just not my specialty. Mata has done some incredible writing on the crises and explained it much better than I could ever begin. I just ask that you read the article, the policy statement, and Mr. Sperry’s analysis. I will leave some highlights for those too busy to read the full article.

Confronted with the combined force of 10 federal regulators, lenders naturally toed the line, and were soon aggressively marketing subprime mortgages in urban areas. The marching orders threw such a scare into the industry that the American Bankers Association issued a “fair-lending tool kit” to every member. The Mortgage Bankers Association of America signed a “fair-lending” contract with HUD. So did Countrywide.

…It warned lenders who rejected minority applicants with high debt ratios and low credit scores to “be prepared” to prove to federal regulators and prosecutors they weren’t racist. “The Department of Justice is authorized to use the full range of its enforcement authority.”

For my friends on the left, once you have read the article, look back at the five logical fallacies, especially Confirmation Bias. I am not denying there was no greed on the part of the banks or Wall Street. Paul Sperry acknowledges that in his conclusion:

The fair-lending task force’s original policy paper undercuts the notion the financial crisis was all about banker “greed,” though it certainly played a role after the fact. Rather, it offers compelling evidence that the crisis evolved chiefly from government mandates and threats to increase lending to applicants who could not afford them.

But ask yourself one question. What facilitated this greed?

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23 Comments on "Logical Fallacies and the Financial Crisis [Reader Post]"

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I am one of probably many who read that article the day it came out. I think I linked to it here at FA and quoted a couple of his points here, too. I think there is a problem between those who believe in a God and a Fall from Grace/Perfection VS those who do not. IF we do not believe in man’s imperfection today, we also don’t believe in the imperfection of man’s creations, including government. Therefore liberals (who often deny God) look at government as the solution to all mankind’s problems. Even jaded liberals who realize the imperfection… Read more »
You can attempt to use reasoning with liberals till the cows come home, but it want work. Period. This is a war that we are involved in now, and have been for decades. The intensity of the war has been ratched up several notches since Obi became King, and the arrival of the Tea Party as well. The reasons why we find our selves in this mess would take a book longer than War and Peace. But in short its not just the liberals fault, its any American who bought in to political correctness at any level, any conservative who… Read more »

Nan G
hi,
you might be surprise as I find your comment to fit here and in another post saying that OBAMA told CONGRESS they are wasting time praying in GOD WE TRUST,
that ‘s the first time I notice a double POST comment, if I can call it that.
bye

aquaman43
hi
I like the rules of your POST, and enough to recopy them by hand,
I found them very interesting to study.
thank you, for your good post, very different too.
bye

@ Gary G. Swenchonis This was my first ever reader’s post and the thing messed my name up. By the way, whoever formatted it did awesome. 🙂 Gary, I agree that there is a war in our country between the left and right. Most wars start because both sides believe they are right. Wars are not always won with force alone, intelligence plays a huge role. You say there is no reasoning with liberals, I don’t necessarily believe that. Last night on The Five, I saw Bob Beckel admit that the financial crisis was a result of congress, not the… Read more »

While I find your post thoughtful, I don’t think it addresses the similarly thoughtful argument that the GSE’s and government policy did *not* cause the crisis, which is essentially that the problem loans that were securitized were *not* the ones Democrats would like to have seen made. The important point is that is that you can’t argue this on a logical basis alone. Both government meddling and dysfunctional financial products are plausible explanations.

See, for example, here:

http://modeledbehavior.com/2010/08/27/fannie-freddie-acquitted/

http://rortybomb.wordpress.com/2011/11/01/bloombergs-awful-comment-what-can-we-say-for-certain-regarding-the-gses/

http://www.federalreserve.gov/newsevents/speech/kroszner20081203a.htm

and the chart here:
http://www.econbrowser.com/archives/2007/09/comments_on_hou.html

@ Robert Bell I take it you didn’t read the article Robert? http://news.investors.com/Article/589858/201110311638/Housing-Crisis-Obama-Clinton-Subprime.htm?src=IBDDAE or the policy statement the article refers to? Here’s some analysis of the policy statement: It warned lenders who rejected minority applicants with high debt ratios and low credit scores to “be prepared” to prove to federal regulators and prosecutors they weren’t racist. “The Department of Justice is authorized to use the full range of its enforcement authority.” Banks bundling loans and derivatives is just as much congress’ fault as it is the banks. Congress passed the laws that allowed this to take place. Banks are going… Read more »
@Aqua: Thanks for your reply. I did read the article, though it doesn’t specifically address the crux in the argument in the links I sent, which is the dramatic increase of private lending circa 2003 that was not covered by the regulations or regulators in question. Those loans/structures were not initially sold to the GSE’s and were more than sufficient to create enough bad structured products so that the balance sheets of major banks were no longer trustworthy. Obviously the assumption is that rather than being a continuous process of moving to the precipice from 1994 on, the financial innovation… Read more »
@ Robert Bell I think I see what you are saying. There is a much better analysis of the overall cause of the housing/financial crisis by Mata that you can read here: http://floppingaces.net/2008/09/22/us-economy-a-perfect-storm-of-housing-and-lending-events/ As for the article in this post, it does not go into as much detail. However, I believe it does have the smoking gun, just as it states. I understand the increase in private lending and that it may have been a contributing factor. I remember when I bought my house in 2005, all the different loan programs the mortgage company had, interest only, no down payments,… Read more »
Robert Bell, while there were some exotic loans that ended up in the GSE portfolio… who was mandated by Congress in 1999 to increase their balance sheets to what would turn out to be unstable levels… most of the low doc, no doc and stated income loans were securitized, packaged up with standard risk loans, and sold on the secondary market outside the GSEs. This isn’t an uncommon practice since the GSEs never have held all the loans anyway. The point I think that you are missing is that banks, in order to merge and grow, were mandated to comply… Read more »

I bring this up because what I am about to write will not change the mind of a single liberal in the country.

What is tacitly revealed by the foregoing statement is a presumption of personal immunity to logical fallacies 1 through 5. The presumption of immunity is necessarily extended to fellow conservatives as well.

Since I’m as likely to be subject to the fallacies as the next person, however, I suppose I could be wrong.

@Aqua: I hope you did not think that I was criticizing your post, I was not. As a matter of fact I enjoyed it very much so. Psychology/criminal Justice were both my fields and I still enjoy reading articles/posts related to psychology/criminal justice and how their influence on societies as a whole and the individual. Also, thanks for your reply. I agree with what you said. But I also think that we all have a collective responsibility for letting our society become what it is today. I just read a ram. poll that stated that 79% of Americans believe that… Read more »

@Gary G. Swenchonis: A most excellent post, sir. In a society, there are only two possible ways for one person to deal with others: 1. By reason and persuasion, or 2. By force. The dirty little secret which no progressive will admit to himself is that they have chosen method number two. To a progressive, a man has no right to exist if he refuses to serve society (led by them, of course).

The conservatives, unfortunately, never seem to understand the nature of the evil they are fighting.

Another part of this story is how banks created and used CDO’s and other insured structured mortgage securities to turn those sour minority lemon loans into lemonade. A Nobel prize was awarded for the false math behind the these CDO’s. And like Obama’s, they were not deserved. As a result, the low low standards intended only for Obama’s friends were made available to all borrowers. So a disease which might have been withstood if it only applied to minorities spread to become the dominant form of speculative borrowing in hot housing markets, made hot by the influx of money. Doesn’t… Read more »
@John Cooper: Thanks John! “To a progressive, a man has no right to exist if he refuses to serve society (led by them, of course).” A Truism for sure! What these idiots don’t understand and or refuse to believe is that their current Masters will stay as their New Masters even after the revolution is won. The libdems politicians and Obi who encouraging their foot soldiers in the war on poverty will keep their positions of power, and increase their wealth. While the average socialist footsoldier will be just another number with the same rights, the same pay, the same… Read more »

@MataHarley: A genuine clusterf*#k, no doubt. And every bit of it manufactured by those in Congress and the WH over many POTUS terms. Few are without culpability. Right on Mata!!!!

@ Gary G. Swenchonis
Hi Gary, I did not take anything as a negative. I understand exactly what you were saying. I don’t think all liberals are beyond help, but we have certainly seen some, even on this blog that will never be able to be reasoned with.
One thing that I find frustrating is the unwillingness of conservatives to push for and accept small victories. Liberals did not get us into this position overnight, and we will not remake it overnight. So pushing an all or nothing agenda does not always help our cause.

@MataHarley:
Thanks Mata!

And let’s be honest here. While Democrats deserve the lion’s share of the blame, GW Bush and his “compassionate conservatism” was right in line here. He too believed that universal home ownership was within grasp and within government’s ability to create… here are some quotes from GWB: We’re creating… an ownership society in this country, where more Americans than ever will be able to open up their door where they live and say, welcome to my house, welcome to my piece of property. Remarks to the National Association of Home Builders, Columbus, Ohio, October 2, 2004 I’m asking Congress to… Read more »

Thank you RS. We share the same view.

@RS, FHA and low down mortgages have been around for decades… .and not the problem. USDA and VA… both with zero down requirements and both (until just this past month) sans mortgage insurance as well. USDA has now added MI. State VA loans are also adding MI, but are generally lower mortgage rates than the federal VA loans with just an upfront funding fee, and no MI. There is nothing wrong with minimal down under the right circumstances and with with qualified buyers. Nor should Congress be meddling in lender criteria, dictating x amount of down either. As I said,… Read more »

@Aqua, not a clue why the thanks… but you’re welcome anyway, guy!

@ Greg

What is tacitly revealed by the foregoing statement is a presumption of personal immunity to logical fallacies 1 through 5. The presumption of immunity is necessarily extended to fellow conservatives as well.

You were close. I put that in there for a reason, but it was to demonstrate #3, the Trust Gap.

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