So, the Obama plan to prevent foreclosures. What to make of it?
Well, the obvious point is that it represents a massive transfer to borrowers from lenders and the rest of us. As far as I can tell, there is no penalty for having borrowed more than you could realistically afford to repay--not so much as a speck of dirt on the credit report. The administration's release talks a lot about "responsible homeowners", but very few responsible homeowners have payments that amount to 43% of their monthly income. There are exceptions, of course, such as people who have just lost their jobs, but most of the people being helped are, nearly definitionally, people who bought more house than they could afford in the belief that prices would keep rising indefinitely and they would make big bucks. It was leveraged investing, just like a hedge fund, and often at the same kind of leverage ratios.
It's hard to muster too much sympathy for lenders who made loans to these speculators, except of course for the fact that "borrower-friendly" rules like the ability of bankruptcy judges to cram down mortgages means that those of us who have not been speculating in real estate get to pay higher mortgage rates when we do buy. Expect Chapter 13 bankruptcy to become extremely popular over the next year or so. Also expect your own credit card lines to be cut and interest rates to rise as lenders attempt to minimize their exposures to those bankruptcies.
Obama's in a tough political position. If he simply gives money to mortgage lenders to compensate them for modifying bad loans, taxpayers will scream. On the other hand, if he further impairs their balance sheets, it will cost the taxpayers in other, potentially much worse, ways. He chose the politically easy route. Me, I think if we think homeowners should get free reductions in their interest rates, we should pay for it, not make a law forcing someone else to do so. But this is why I am a reactionary bourgeois tool of the capitalist system.
Copyright © 2010 by The Atlantic Monthly Group. All rights reserved.
So. The housing bubble is to be prevented from collapsing fully and responsible non-owners are to be prevented from getting good deals.
Great.
Never mind the practical and moral objections based on moral hazard -- this plan won't help the people who are seriously under water. This plan will help those who aren't really far under water or even in trouble and who choose to game the system at the expense of their honest neighbors.
I don't get it. By what principle of government or moral code do you force virtuous people - people who didn't borrow beyond their means - to pay for the sinners?
This isn't all of us getting together to help out the less fortunate. These people jumped on the bandwagon of easy money and "endlessly" escalating house prices. How does that give them the right to my money?
When did we decide that anything President Obama wants to do is constitutional, fair and moral?
Glad I decided not to buy a house I couldn't afford. I'm rewarded with still unsustainably high prices for the local property value and job market. Sweet!
My only hope is that the implementation by the gov is so poor that it doesn't artificially prop up values.
A collection agency is currently chasing me in the hopes of finding a former grad school housemate of mine who recently defaulted on a loan. I haven't seen him in years, so I can't help them.
I would love to, however. He was the same clown who never wanted to pay his rent or his share of the phone bill when he was a student. And this despite being richer than the rest of us put together.
None of my other roommates and housemates have ever had this characteristic, and none of them are being chased by collection agencies.
Draw whatever conclusions you will.
As I understand it, the Obama plan doesn't "force" the lenders to do anything: it provides incentives, in the form of fees to services who make modifications and by splitting the cost of reducing interest payments. So, for borrowers paying 70% of their income in interest payments (i.e. people who shouldn't have bought the home to begin with), the lender won't have a sufficient incentive to modify and the borrower will lose the house.
Also, describing people who have lost their jobs as "an exception" here is kind of silly. It's a pretty HUGE exception.
I think the plan could be improved if they forced the lenders, underwriters, bankers, MBS/ CDO issuers and hedge fund managers to take care of these peoples lawns, do their laundry and watch their kids.
If these people were all actually doing something of value rather then inventing and passing along crap pieces of paper to steal from the real productive economy, the public trough and private savings we could actually something of worth come from them.
I bet we could make great butlers out of them.
I think we have all been paying the penalty. Blaming the sheep for the sins of the shepherd is now passe. If something is not done to stop the cancer that is destroying the U.S. housing market the 'responsible' parties will suffer even worse losses.
In other words we must actually DO SOMETHING, to undo the stupidity that got us where we are.
The "bright" side is that if this program shouldn't work by invisible hand standards, it won't. If House prices need to come down then whether you prop them up with Alt-A or no-doc loans or you do it with government subsidies, the prices will still come down. The only question is who will pay the piper and how much will they pay when the time comes.
As a guide to present and future policies, consider this the Santa Claus administration and remember Santa visits those who believe the most.
I'm a renter who didn't buy a home because I felt the prices had gotten way out of hand. From my perspective, upwards of 80% of the voting population is complicit in what happened. I can't tell you how many times I heard disparaging comments from friends and family about the fact that I still rented.
When 80% of the country contributed in some way, then we are all responsible for fixing the problem. You may not have bought a home you couldn't afford - maybe you bought your house in 1991. But, you we after your kids or your friends to buy, you need to buy a place, rent is like throwing money away, think of the tax advantages, if you don't buy know you will never be able to, home prices always go up, etc. etc.
Nearly everyone is contributed, so we all end up having to pay the price for our collective ignorance.
On the one hand I am fairly miffed about people who bought more home than they could afford being bailed out by the rest of us. On the other hand I realize that for years they have been encouraged by the government to become homeowners.
Obama spoke of the necessity for this move to prevent the unraveling of the middle class. I would have thought though that the greater housing affordability that has occurred would actually help expand the middle class.
So yesterday Obama signed a $787 spending package and today announces plans for another $75 billion. And I believe next week he has called for a fiscal responsibility summit or some such. My head is about to explode.
"It's hard to muster too much sympathy for lenders who made loans to these speculators, except of course for the fact that "borrower-friendly" rules like the ability of bankruptcy judges to cram down mortgages means that those of us who have not been speculating in real estate get to pay higher mortgage rates when we do buy."
I've read this sentence four times and I have no idea what it means. Are the lenders who intentionally made bad loans to be given some sympathy because of bankruptcy laws and high mortgage rates? Huh?
It’s called “social justice.”
Basically the idea that the ants should be fleeced so the grasshoppers don’t starve which when you get down to it is pretty much the raison datre behind the entire Nanny State of which this is but the latest expansion.
but very few responsible homeowners have payments that amount to 43% of their monthly income. There are exceptions, of course, such as people who have just lost their jobs, but most of the people being helped are, nearly definitionally, people who bought more house than they could afford in the belief that prices would keep rising indefinitely and they would make big bucks.
Other exceptions include: People who lived in California. Most weren't speculators hoping to "make big bucks," but were simply people who wanted place to live.
my husband and I are such suckers.
We left the Silicon Valley because we couldn't afford a home on one income. We instead moved to a new state, with no family nearby, so we could not be up to our ears in debt.
We bought a home that we could afford on one income, even though we had two at the time, because we foresaw me leaving the workforce for a while when we had a child. We capped our future gross income by leaving the Valley, deciding that was a good tradeoff for the home.
Our house payment+taxes is 24% of our monthly gross income. We pay on time, every month, without a problem.
We've had our HELOC line slashed by 50k, our credit cards slashed by 20k. We have no debt on these, but suddenly as credit dries up, we need to save even more cash for that rainy day.
We are now bailing out everyone else. We should have bought too much house, stayed in the Valley so we'd be making more money, and walked away from underwater homes with no penalty.
re: the: but the people in CA just wanted a place to live:
some of us refused to mortgage pur lives that way. other people we knew simply bought too much home on a 7/1 ARM ANYWAY and never had a plan for what to do when rate reset came other than "we'll refi or sell". it was crazy then. why should they get bailed out for a bad decision by those of us who made good ones?
"Most weren't speculators hoping to "make big bucks," but were simply people who wanted place to live."
But, when the price/rent ration gets too high, you just need to suck it up and rent. Prices in all of California from Sacramento, to SF, to LA are down by a 25%+. Those people who bought - just for a "place to live." Really should have been renters, if they had just waited 18 - 36 months they wouldn't have a problem.
The whole concept that "owning" was the only possible choice is what got us into this mess. Owning only makes sense when the numbers work. When it's cheaper to rent - you should rent.
You hippies voted for this weaselly socialist opportunist because....
oh yeah. Hope, Change, & Kool-Aid.
I'm so happy people who can't afford their stuff get to keep their stuff on my dime.
I don't understand politics but I guess it wouldn't work out to point out that people have bought more than they should. Nobody like a scold.
Has anybody proposed housing swaps? The person with the 43% of income mortgage could be moved into a smaller place that is affordable. After all, the government, directly or indirectly, will be owning a substantial percentage of mortgages. It seems like it would be a success to let people in danger of default choose a lesser home from the pool so there would be fewer foreclosed homes. I guess there is something politically bad about this.
Tying up so much of income in a house is a horrible idea since it limits options but banks & realtors have been pushing this for a long time. Back in the days when loans were actually based on income, I almost had loans turned down since I was buying less than I could afford. The loan people assumed that I was hiding debts. No real American would buy anything less than the max house.
Perhaps, although if someone bought more home than they could afford when they were employed and then lost their job, they still bought more home than they could afford. Someone who borrows money to make a large purchase like a home needs to consider things like “what happens if I lose my job or if my income drops” when deciding how much debt to take on. Losing your job doesn’t change the fact that you were overleveraged to begin with.
Now how many of the people who are having problems with their mortgages and are unemployed were people who overleveraged themselves to begin with versus acted responsibly overall but still found themselves in trouble only because they lost their jobs is uncertain which is why I suspect Megan called it “an exception” rather than a “pretty HUGE exception.”
"Tying up so much of income in a house is a horrible idea since it limits options but banks & realtors have been pushing this for a long time. "
If you include parents/friends/co-workers the number of people guilty of overhyping the real estate market was huge.
@Basic Fact
You forgot to include "get off my lawn!"
I think your post illustrates the essential difference in ideologies between us though.
I see people who are financially unsavvy getting in over their heads and blame the dumbasses who gave them a loan just to earn a quick commission. No thought to stakeholders or the person who will no doubt lose their home at some point.
You see people who are financially unsavvy getting in over their heads and blame the financially unsavvy individual.
I don't think either of us is inherently "wrong", but yours is by far the more cold blooded worldview, and one not shared by voters (or in your parlance "hippies"/"socialists"). The fact is the banks made huge money on these people. I read about some guy in California who made $14K a year getting a loan for $600K for a house. You know he was given a package that led him to believe he could afford the low downpayment. Is this guy entirely to blame for not knowing about how ARM's work? About how banks make their money?
Only ones who don't deserve to help pay for this are those who've been voting Libertarian for thirty years.
Why couldn't the BO plan at least put a lien on the house of anyone taking this deal so that those who eventually sell at a profit have to pay back the taxpayers first?
In fairness Megan, you're also biased because you're a renter and about to be forced to pay for it. (Like me! I moved down to DC two and a half years ago and decided to rent because I specifically thought that the housing market was overpriced. Now I paying for all those idiots who called me an idiot for not getting in on the market. Actually, I guess I am the fool.)
I do not want housing prices to fall. If they do, the banks will be in even greater trouble than they are now. Obama's plan will stabilize housing prices by preventing foreclosures.
I also don't want to see people lose their homes. Sorry for being so soft-hearted. I blame my parents.
Unemployment is a huge exception, but weirdly, the overextended homeowners may have actually precipitated unemployment this time, rather than the other way around.
I do not want housing prices to fall.
Why do you hate young families?
In all seriousness, being "soft-hearted" doesn't dictate a particular outcome here.
I see people who are financially unsavvy getting in over their heads
If we cut the BS, you just called them legally incompetent -- unable to enter binding contracts. Fine by me, just don't withhold the rest of the consequences.
Why do you hate young families?
Frackin-A right.
Mike M: "I read about some guy in California who made $14K a year getting a loan for $600K for a house. You know he was given a package that led him to believe he could afford the low downpayment. Is this guy entirely to blame for not knowing about how ARM's work?"
The "homeowner" (not yet, he isn't) is to blame or entering into a contract he did not understand. The bank is to blame also for extending the loan to someone who can't pay it back.
So why should responsible people like me be forced to pay for their mistakes?
“From my perspective, upwards of 80% of the voting population is complicit in what happened. I can't tell you how many times I heard disparaging comments from friends and family about the fact that I still rented.”
So, jmo being harangued by friends/family = “upwards of 80% of the voting population is complicit”?
Yep, sounds reasonable…
Mike M:
"You forgot to include "get off my lawn!"
---No, its "Get off my lawn, HIPPIE!" [clicks shotgun]
(note to the slow: humor. it's what's for dinner.)
(along with hippie)
(again, kidding).
"I see people who are financially unsavvy getting in over their heads and blame the dumbasses who gave them a loan just to earn a quick commission. No thought to stakeholders or the person who will no doubt lose their home at some point."
---False dichotomy I agree with you, I think if you make a bad loan, its partially your fault, too. You're betting on a risk. But good banks hedge those risks by higher interest rates and close scrutiny. Bad banks loan out by the buttload and throw caution to the wind.
"You see people who are financially unsavvy getting in over their heads and blame the financially unsavvy individual."
---Yep. Don't try to make me feel bad for these folks by calling them "financially unsavvy." They played a game they knew they had no experience in.
Their complaining about losing their homes now is like their going to Vegas, playing poker with pros, and losing their shirt. "But I didn't know what I was doing!" Then you shouldn't have played!
"I don't think either of us is inherently "wrong", but yours is by far the more cold blooded worldview,"
---No, yours is "mommy" world view, where everyone holds hands and every loss is a "tragedy" to be understood and remedied. Mine is the "daddy" world view where you take responsibility for your actions and man up for your mistakes, dust yourself off and move on.
"and one not shared by voters (or in your parlance "hippies"/"socialists")."
---more than 1/2 the country was against the stimulous just passed. The Dem's didn't win this election via stimulus; they won because the controlling parties were in office during an economic meltdown. It was more a "well, the other party bankrupted me, other guy deserves a shot" more than a validation of either side's economic arguments.
Of course, this isn't really an economic package but pork. Obama is hoping the econ rebounds by 2010 elections.
"The fact is the banks made huge money on these people."
----yes, as they should have, because the high interest rates=offset risk. Bad banks didn't hedge enough good mortgages with bad.
"I read about some guy in California who made $14K a year getting a loan for $600K for a house."
---funny, I just read about a bunch of banks that went under. Sounded fair to me.
And anecdotal evidence does not equal valid evidence. That's pulling at heartstrings, not tapping into the left side of my brain. I can point out a billion anecdotes where "community organizers" put pressure on banks to give credit-unworthy douchebags loans on threats of lawsuits. Neither is a statistic we can, ahem, take to the bank.
"You know he was given a package that led him to believe he could afford the low downpayment."
---No evidence of that. And banks are selling loans--they are salesmen, that's what they do. Barring their not living up to the terms of the contract or breaking the law, bitching about a salesman hard selling you is about the most bottom-basement bitching you can do. That's like complaining a car salesman really wanted you to buy his car. No kidding.
"Is this guy entirely to blame for not knowing about how ARM's work?"
---YES.
"About how banks make their money?"
------He doesn't have to know how banks make their money. he needs to know WHAT HE BOUGHT wWHEN HE SIGNED FOR A LOAN. That simple.
Rule # 1 of buying something: Do not buy something you can't afford.
Rule # 2: Do not buy something you don't understand.
A mortgage is a product that you "buy." Don't get it? Then don't buy it. Plenty of people have never bought in their entire lives.
Mike M, the people who did these dumb things aren't the poor little orphan annies you have trumped up in your mind. They are people who can't get good jobs because of incompetance, laziness, unreadiness, or just plain little training in either having a good career or managing money. Yet they got "house fever."
Owning a home for these people is not a blessing, its a curse. Obama can bail them out all he wants---they will be right back to failing in 6 months. These people should be renting, not buying. It was THEIR GREED THAT MADE THEM DO IT. My god, as a liberal, you should be thrilled that the greedy got punished here.
You need to remember that being some pat on the pack, we'll-make-sure-you-lose nothing mommy state is worse for someone that doing nothing. You enable bad habits, you will get a society of people with bad habits, as people with good habits leave in disgust, or give up good habits.
Dems just helped reinforce bad habits.
"But this is why I am a reactionary bourgeois tool of the capitalist system."
Megan and the rest of the Chicago School monetarists are not true capitalists. A central bank is a socialist institution. Geithner and Bernanke are part of the President's working Group on financial Markets a.k.a. the Plunge Protection Team. They were already manipulating markets, so why not the housing and credit markets as well?
This whole mess was not a failure of capitalism. It is a failure of crony-capitalism. Pseudo-capitalism. Corporatism. soft fascism.
Throw them in the water, let's see if they can swim.
Mike M would give everyone a floatation device. And then wonders why no one learns to swim anymore---and watches them drown when Mike runs out of floaties.
We're so screwed
One of the major causes of the financial meltdown was the distortion of the US housing market so...let's roll out another plan to distort the housing market. Now that is change I can believe in!
Stan, you hard-hearted asshole, you apparently want to prevent me from ever being able to afford a home.
I blame your parents, who probably already own their own house, unlike me, and stand to benefit from this.
This whole mess was not a failure of capitalism. It is a failure of crony-capitalism. Pseudo-capitalism. Corporatism. soft fascism.
Kleptocratic Oligarchy is the term you are looking for.
My only hope is that the implementation by the gov is so poor that it doesn't artificially prop up values.
I'm optimistic about this. Recall how the widely hyped Bair-FDIC plan crashed and burned.
Can anyone verify the following?
the NYT article and the WSJ suggest that the write downs would be relative to INCOME, not to house value.
That is, if Smith and Jones are next door neighbors, and each bought their home in Hercules, CA for 600k but it's now worth 200k, and Smith's household income is 35k while Jones' is 80k, the new mortgage for smith will be less than half of Jones'.
can anyone tell me I'm wrong?
Well, I read the CNN story on the plan. I see little that helps the hardest hit areas like CA and Las Vegas.
To those that wonder why the responsible ones have to take it on the chin with no benefit: Well, we get some benefit, because a neighborhood full of forclosed houses will end up as rental units or empty. We had this situation in Texas after the oil bust and some neighborhoods never came back. Some took 10-15 years before they finished the development. The existing homeowners were socked with huge utility bills to pay off the bonds used to build the water and sewer systems and had empty lots full of weeds around their houses.
I think anyone that signs up for one of these plans should be forced to pay back the government their costs when selling the house. It could be via a second lien with an interest rate equal to the government's cost of borrowing, adjusted yearly. It could be waived if the house is sold at a loss and reduced to match the cash out if the equity cashout can't cover the amount. THAT would eliminate much of the moral hazard. And it means that those of us with reasonable mortgages aren't totally stuck with the bill.
(We have a 30-year fixed with payments that are less than 10% of our gross income.)
I think Obama is giving people what they voted for. And voting is better than war. Martin Wolf in FT gives the best perspective on the fact that what needs to happen is that 'balance sheets need to be rebuilt.'
Dear John Thacker, my parents have been gone for many years. Please leave them out of it.
It's hard to muster too much sympathy for lenders who made loans to these speculators, except of course for the fact that "borrower-friendly" rules like the ability of bankruptcy judges to cram down mortgages means that those of us who have not been speculating in real estate get to pay higher mortgage rates when we do buy.
This is the oddest complaint I see about the cram down provision. For one, we're already all paying higher rates, whether we speculate or not. Two, what's wrong with making mortgages more expensive and harder to get, given the burst of easy credit that we're all presently living through?
A few details of the plan
http://www.calculatedriskblog.com/2009/02/comments-on-housing-plan.html
Stan:
"Dear John Thacker, my parents have been gone for many years. Please leave them out of it."
---Too late, you already brought them up.
Stan's parents were assholes for raising their son to not want young people to own homes.
Michael:
"And voting is better than war."
--Tell that to the Jews when Hitler got elected. Democratically.
Anyone cowardly/idiotic enough to assert that voting is always preferable to fighting needs a few years in communist country with "elections."
What??? -- Hitler lost the election. He was later appointed by von Hindenburg.
I was going to post a comment but Basic Fact did a much better job than I would have.
I dunno I guess I would take the outright hatred for people who are losing their homes a little more seriously if even half that ire was reserved for those who got bonused and commissioned for making faulty loans then securitizing them. But you'll never see that from a glibertarian apparently. The moneyed and powerful are to be defended at all costs. Look at the recent election results these past few cycles to see if most agree with you.
For the record, I do not think these people should have been given these loans - so all of these arguments about caring more for "lazy people" (again - the elitism on this board is astounding, you don't know any of these people) is bunk. At what point do you blame the people who provided these people with the noose with which to hang this economy? At what point do we realize that the securitization and packaging of these bad loans by individuals who should have known better is far worse than somebody taking out a loan they couldn't afford (who realistically may have been told he COULD afford it - big difference).
Until these questions are answered, its easy to dismiss all this ranting as just more class warfare, albeit of the reverse variety of the kind so often complained about by the investor class.
Also - half this country certainly did not vote against this stimulus plan. Overwhelmingly people want this because they're scared of the future. Look at a poll sometimes, Obama is giving people what they want. You can either come to grips as to why that is or continue to indulge in fantasies that a bunch of welfare queens are out to get your money and it just isn't fair.
"This whole mess was not a failure of capitalism. It is a failure of crony-capitalism. Pseudo-capitalism. Corporatism. soft fascism.
Kleptocratic Oligarchy is the term you are looking for."
AKA the kind of capitalism practiced in this country for the past 30 years. I'll take calls for a free market more seriously when I see such a thing actually functioning in the real world.
I would take the outright hatred for people who are losing their homes a little more seriously if even half that ire was reserved for those who got bonused and commissioned for making faulty loans then securitizing them.
You'll see that when Obama introduces a program to keep the hundreds of thousands of laid-off bank employees at their jobs.
For my part, I didn't like the bank bailout, either, but the housing thing hits especially close to home because I'd like to buy a house but uncertainty is holding me back.
"I dunno I guess I would take the outright hatred for people who are losing their homes a little more seriously if even half that ire was reserved for those who got bonused and commissioned for making faulty loans then securitizing them."
Why, were they paid with my tax dollars or shareholder money? If the latter, I don't much care. If the former, consider said ire delivered.
"At what point do you blame the people who provided these people with the noose with which to hang this economy? At what point do we realize that the securitization and packaging of these bad loans by individuals who should have known better is far worse than somebody taking out a loan they couldn't afford (who realistically may have been told he COULD afford it - big difference)."
Speaking of Barney Frank and Sen. Dodd, I take you are demanding delivery of ire in that direction too?
"Overwhelmingly people want this because they're scared of the future. Look at a poll sometimes, Obama is giving people what they want."
Link?
Obama doesn't hate young families. First and foremost, he wants you to be able to keep your job. Where would things end up without some -- gasp! -- government intervention to arrest our triple downward spiral in housing, credit and employment?
To expect a rational resetting of home values is just not realistic. Left to its own devices, the market would overshoot badly, because of a little thing called human psychology -- i.e., fear. So you want the housing market free to keep plunging? Fine, but it's likely to come at the cost of much, much higher unemployment.
Mike M,
I think you're misreading the board - perhaps just to get in your "glibertarian" jibe - so clever, so clever.
People here tend to feel like irresponsible borrowers AND lenders should lose their money.
Your class warfare talk is ludicrous - I'm a grad student, not an i-banker. Artificially inflating home prices punishes responsible borrowers or those like me who know they can't afford to borrow yet.
Megan and the other renters aren't the only ones who are (understandably) miffed by having to bail out people who got in way over their heads. There are also those of us who were silly enough to buy a house we could afford, and pay off the mortgage.
I got laid off a while back and could really use some of that bailout money now. But since I paid off my mortgage early instead of just saving the money, I can't make a case for getting any of it. Why does that seem like we're setting up perverse incentives for the future? Now if the government wanted to just buy the houses and rent them out, that would at least make some sense (much as I dislike government interference in the marketplace). Guess that's why politicians won't go for it.
First and foremost, he wants you to be able to keep your job.
No kidding. He needs me to pay taxes for the "stimulus" spending he'll still be doing in 2011.
Re: Expect Chapter 13 bankruptcy to become extremely popular over the next year or so.
Maybe-- maybe not. They still have to qualify for bankruptcy. Bankruptcy courts have had long practice at snifing out frauds. I doubt people with mortgages they can afford will find sympathetic judges waiting for them.
Re: How does that give them the right to my money?
This is not about who has a right to what. As a practical matter we WILL be paying for their choices no matter what-- well, maybe you could move to Mars to escape it, but not otherwise. Put this on your PC on a sticky note: THERE IS NO SUCH THING AS AN UNPAID BILL. If people default on their mortgages the rest of us will be picking up the tab and there's no power on Earth that can prevent that. You might as well try to make 2+2=5.
If people default on their mortgages the rest of us will be picking up the tab and there's no power on Earth that can prevent that.
Yes, but this way I get to pick up the tab without also getting to buy their house.
People here tend to feel like irresponsible borrowers AND lenders should lose their money.
That's great, but it is the lenders that are being protected by this program. The feds are effectively going to overpay for these loans so that they can move the toxics away from investors and into Freddie and Fannie.
Mike M is right, at least in spirit. You folks are so eager to beat up on the little guy that you can't even sort out who the real winners are from this proposal.
Servicers are going to get a deal from the government at an effective price well above what their investors could possibly get from the free market, while getting cleaner balance sheets to boot.
This is as good as the government raising the white flag, surrendering in the battle to pay market prices for bad assets. The little guy borrower is just an accidental beneficiary of what really is a lender bailout package. Feel free to criticize the deal, but at least make an effort to actually understand it.
Anybody else notice the "allow judicial modification of mortgages in bankruptcy" clause?
That's a market killer. Heck, that's an economy killer.
If you don't understand why, ask yourself what happens next
1) People have the option of keeping their home in foreclosure by declaring BK
"What happens next?"
2) People in danger of default declare BK so they can keep their home.
"What happens next?"
3) Judges modify mortgages, thereby depriving mortgage companies of the security aspect that makes mortgages attractive and keeps mortgage rates low
"What happens next?"
4) This incentivizes people to come up with an excuse to declare BK so their mortgage can be moditified judicially, leading to more of 3)
"What happens next?"
5) Realizing that they have no real enforceable security interest, lenders start treating mortgage loans more like credit cards. Rates go up to double digits, 20%+ for some borrowers, and it becomes much harder to get a mortgage loan, to boot
"What happens next?"
6) Since nobody can get or afford a loan at today's prices, real estate price levels crash much further than they already have. My local market has lost roughly 30%, and was beginning a recovery. This could cause us to lose 80% of what is left or more.
"What happens next?"
7) Every balance sheet that relies in part or whole upon real estate, every loan collateralized in part or whole by real estate is now dead
"What happens next?"
8) Everyone who had a stake in such loans comes down with devastating losses. This means corporations, bondholders, stockholders, etcetera
"What happens next?"
You take it from there.
t very few responsible homeowners have payments that amount to 43% of their monthly income.
Is that 43% of gross or net? My house payment is over 50% of net, at least in a month where I don't work any overtime. But I have very few other expenses - single, no kids, paid-off vehicle, and no debt besides the mortgage and a small and soon to be paid off student loan, and a very stable job.
I worked my ass off for years to save up for a down payment, and bought a smaller house than I would have liked. Yes, my market timing sucked, but I'm still making my payments - and it's frustrating to see those who bought more house and put nothing down getting free money paid for me. I don't really care if housing prices continue to drop short-term - I'm not selling anytime soon.
And I predict that the more we do to prevent people from losing their houses, the more mortgages will cost in the future, because banks will build in the cost of those handouts.
"AKA the kind of capitalism practiced in this country for the past 30 years. I'll take calls for a free market more seriously when I see such a thing actually functioning in the real world."
Such a thing has functioned right here, Mike-but it was more than 30 years ago. I guess I shouldn't expect you to know that, with the government running most of the schools.
I haven't read all the comments, so maybe this question has already come up.
Will there be a check and any penalty for those who lied about their income or assets, or will they be bailed out?
Now, now Mr. Melson, no fair looking past intended effects when judging policy. They want to help the little guy, you big meanie! (stamp foot)
While I doubt things will play out as you outline, I agree with your real point that the effects to come are hardly limited to the simple model of economics people like Ann Arbor, Mike M and RW present. As Kruschev said, economics is a subject that does not greatly respect one's wishes, and the people on one side of America's present debate are wishing for much from their policies.
"I'll take calls for a free market more seriously when I see such a thing actually functioning in the real world"
What next, denial of music, light, air and love unless you see such at some point?
Rob Lyman:
"For my part, I didn't like the bank bailout, either, but the housing thing hits especially close to home because I'd like to buy a house but uncertainty is holding me back."
My guess is that if this plan goes into effect and is widely used, you will be less confident about buying a house. You would probably prefer to see houses find their market value. I am quite worried that we're creating a zombie economy. We may have an undead housing market for a generation.
Actually, I think the people who really are under water will just walk. Some borderline homeowners will pay 31 percent of their gross income for years and never get anywhere. Others will game the system and get a significant amount of free taxpayer money.
http://www.gallup.com/poll/114577/Stimulus-Support-Edges-Higher.aspx
Link for gallup poll results - people want this stimulus.
Comments like this are proof that our education system is lacking. If housing prices drop that means more people will be able to afford homes. This also means less people will lose their homes.
Basic logic should be taught at the elementary school level.
If housing prices drop that means more people will be able to afford homes. This also means less people will lose their homes.
Actually, more people will lose homes in this scenario. Falling values can be good for those who wish to enter the property market, assuming that they can obtain the debt that they want and can manage the risks associated with the possible "falling knife" problem.
But they certainly aren't good for either those who currently hold mortgage debt based upon higher values or for those who lenders who are owed the money. An upside down mortgage is more likely to default, and an economy that is generating lots of upside down mortgages is probably not in very good shape, anyway.
(Moral of the story: I'd suggest being careful with that logic with yours...)
This notion of who is responsible is one I find intriguing. I'm going with 80% of the blame for the lender, maybe 20% for the (again generic) borrower.
Because at the end of the day, the decision on whether or not to lend resides in just one person - the lender. Let's go with something a little more reasonable than the scenario above. Say Brad Functor makes $20 K/yr, and is thinking of buying a $200 K house. Who in their right mind would actually lend money in those circumstances? By what sort of logic could they justify this arrangement as having an acceptable risk/return ratio? And who in their right mind wouldn't perform basic income checks?
It seems to me that all of this decision-making power devolves to the lender. Not to the buyer.
And we all know what Spider Man says.
So, given that only the lender has the power to make a loan, how can the borrower have anything like the degree of culpability of the former? Especially since it's the job of loan officer to ascertain risk? This simply doesn't make sense.
RW,
An empty house does no good. The supply of houses at the moment is relatively fixed. A lot of houses remain on the market but empty because their asking prices are too high. If asking prices dropped, more people would be able to afford to live in those houses. Therefore the net number of houses with people living in them would rise.
An empty house does no good. The supply of houses at the moment is relatively fixed. A lot of houses remain on the market but empty because their asking prices are too high. If asking prices dropped, more people would be able to afford to live in those houses. Therefore the net number of houses with people living in them would rise.
I have no idea what that's supposed to mean on the planet on which I reside.
So instead, allow me to state a fairly basic finance principal: Loans that lack adequate security (collateral) have higher default rates than loans that are adequately secured.
Very simple concept -- A borrower who owes $10 on a $5 asset is more likely to default than one who owes $10 on a $15 asset. A borrower whose collateral value is eroding is less likely to make future payments. Nobody who knows anything about finance would possibly dispute this.
Well put ScentOfViolets. I place almost all of the blame on loan originators and the bankers behind them.
RW,
You don't understand. For every person that loses their home due to lower prices, more than one person gains a home.
You don't understand.
I see vacant houses and loan defaults increasing as values fall. Supply cannot be consumed in the short run (at least not legally) without credit to support purchases and willing buyers.
Yeah, I think that I understand. This is not "Field of Dreams" -- it is possible to build it and have no one show up.
Willem Buiters writes about this ghastly plan in his FT blog today (and gets it exactly right in my opinion).
Stipulate that this is so to avoid wasting time not doing the research that really needs to be done to nail down this point: what about in the long run?
I don't think anyone disagrees at this point that housing is still overpriced. Do you think these prices should be propped up? If not, what is your alternative?
Because what it comes down to, what a lot of people want to avoid engaging head on, is that someone will have to eat the loss. The big question is, who is going to have how much of that loss crammed down their throats?
Do you think these prices should be propped up?
I think that we need to do something about default rates and balance sheets, because deflation and collapsing credit will topple more dominoes (read: Depression). That may require some price supports, although those are an unfortunate means to a greater end.
The big question is, who is going to have how much of that loss crammed down their throats?
It's a contest between the banks and the taxpayers. If banks won't write down their zombie loans, we are going to cover that cost.
People on this blog like to depict this as a battle between bad borrowers and the rest of us. They are wrong. The loans are what they are; now, it's a matter of who absorbs the collateral deficiency.
In a free market economy with properly regulated lending institutions, the lenders and investors would take the brunt of the hit, because these loans don't pass basic tests for performance that solvent banks are supposed to pass.
But we are obviously operating on a different plane of privatized profits and socialized losses. I'm feeling awfully social at the moment; I hope that you are, too.
Yes, if only there were some way to punish lenders for making bad loans. I can imagine an accounting rule where the lender has to write off the entire principal amount of the loan as a loss if the loan does not perform for a long time. The lender would deduct this "charge-off" from revenue, and add back any gains it realizes from the sale of the loan collateral. We could call this a "recovery." So, basically, a lender would lose money to the extent of "net charge-offs," which are really just losses on loans when you think about it. And if that's not enough, we could even require lenders to set aside a reserve against all of these expected future "loan losses," maybe even call it an "allowance" for loan losses. And, we could require them to contribute periodic amounts to this reserve, or "provide" for it. But clearly this is too much for the world. We simply must be content that when a borrower defaults on a loan and loses the collateral, even when the collateral has declined in value by 50%, the lender nevertheless continues to carry the entire principal amount as an asset and loses nothing.
Now, if some people don't like this arrangement where a legally binding contract governs when a lender A loses money a loan and a borrower B loses the collateral, I'm happy to let them argue about how A and B should reallocate the economic risks. Maybe government C can even pressure A to cut B a deal as a condition of C giving money to A. I just don't see how this leads to the conclusion that I as taxpayer D should now give money to B.
Rob Lyman said: "So. The housing bubble is to be prevented from collapsing fully and responsible non-owners are to be prevented from getting good deals."
That's exactly right. I am pissed because my wife and I put in a bid on a condo in West Los Angeles in 2004. Despite the fact that we offered $15,000 over the asking price, the seller received 15 offers and we couldn't afford anything more than we offered. I never even considered an ARM or "interest only" type of loan. I looked at traditional 15 and 30 year loans, had enough savings for a substantial downpayment and never considered spending more than 1/3rd of our mothly income on mortgage payments. We didn't get the condo and prices continued to rise so, four years later, we are still renting. Prices have come down a little bit (maybe 10-20% from the peak) on the west side of LA and Santa Monica but it's still very expensive. There was lots of speculation going on around here, especially on the older more run down properties that are located in neighborhoods near the freeway, etc. Speculation played a large part in driving prices so high and Obama has now decided to buy votes from the irresponsible people who drove the prices up for everyone else.
This is the most disgusting thing he has done yet.
This was actually better than I expected
- no, we can't foreclose on all the bums, and markets won't magically clear - if home values "hit bottom" it will simply take out the banking system
- encouraging banks to modify loans (and the government sharing the cost) is smart, because it keeps people that are willing to keep paying in their houses
- homes will be reabsorbed, it is already happening in the worst markets (AZ, FL,CA). New building is stppoed, preventing new supply. The Fed has tried IN THE PAST - with some success - to engineer "soft landings" for the economy. Think of this as triage after the crash
I'd feel better about if I thought the banks and government(including Fannie/Freddie) were able to weed out the frauds and BS artists among the deadbeat borrowers, but that is probably a pipedream. This, combined with a couple years of cheap mortgage money will probably stabilize the market at 2003 prices (on average)
I just don't see how this leads to the conclusion that I as taxpayer D should now give money to B.
You aren't. In your illustration, you are giving it to A, the lender. Fannie is going to replace the loan with a different, albeit smaller, upside down loan that is held by Fannie or Freddie.
Effectively, Fannie and Freddie have become the "bad banks". Lenders with lousy loans will be paid in full, at par, even though that's perhaps double or triple the market value of their loans on the secondary market.
The winner is Lender A, who gets all of his money back and a better balance sheet. Borrower B is getting table scraps in comparison, with a loan that is just a bit less upside down. He gets to keep his credit rating, but he's still overleveraged. Unless there is a substantial cramdown to accompany it (and from what I have read, that won't be happening), Lender A comes out of this one smelling like a rose.
A and B and C can all kiss my A.S.S.
Taxpayers and especially renters who want to buy in the future are the ones really getting the shaft here.
I can't believe that some of you are claiming that the banks are the ones getting the benefit from TARP and the "little guy" is getting screwed! The bank an the lender made an agreement. The bank kept their side of the bargain and lent the money. The lender is the one failing to meet their end of the contract and may back the loan. "The little guy" is doing what he promised to do -- pay back the money he borrowed! The banks are getting screwed by the liars who make promises and then not only break their promise but vote for a president who tells them they have a right to break their promise AND keep what they bought with it.
ScentOfViolets: "Because at the end of the day, the decision on whether or not to lend resides in just one person - the lender."
Indeed, I fell victim to this fact a few years ago. I didn't want a loan, I didn't fill out any paperwork, lie about my income on the application, or even try to buy a home I couldn't afford. I wanted to keep renting a small place. But it was all for naught!
The decision was completely out of my hands. The decision lay in the hands of the lender. He gave me a loan I didn't want and moved me into a home bigger than I need. And now I'm stuck in a house I didn't want to buy with an underwater mortgage!
"He chose the politically easy route. "
Wow, I think you just wrote the Obama Administration's epitaph
@Ninja Zombie
I'm sorry - are you confusing somebody desire to borrow with somebody's responsibility in lending? Or is your contention that 100% of the responsibility of this transaction rests with the borrower? Seriously?
I'm with ScentofViolets. It would be stupid to claim the borrowers have no responsibility in all this - but who ultimately stamps approved and then go collects his bonus while that loan gets shipped off to Iceland in the form of securitized debt?
When did lenders abdicate responsibility for building a sound portfolio of loans for their bank? Hint - around the time you guys came into power.
Also - everybody is conveniently ignoring those who are just losing their homes because they're unemployed and have been (and will be) for a long long time. Its easier to create a cartoon caricature of somebody living in mansion working at McDonalds and getting off scott free under Obama's socialist agenda. The Willie Horton of mortgage borrowers if you will.
Mike M: "I'm sorry - are you confusing somebody desire to borrow with somebody's responsibility in lending? Or is your contention that 100% of the responsibility of this transaction rests with the borrower? Seriously?"
Mike, I'm responding to the opposite ridiculous statement: "the decision on whether or not to lend resides in just one person - the lender."
The borrower and the lender are both responsible. If either one of them behaved responsibly, there would be no problem. I'm just disputing SoV's idea that the lender deserves all the blame.
I do, however, contend that 0% of the responsibility lies with me. And yet, for some reason Obama wants to tax me to bail out the responsible parties. WTF?
It seems that we're forgetting the third party in this mortgage fiasco, the federal government who told the banks to push the loans to people who under traditional bank policy looked too risky.
That said, excluding the truly unscrupulous, I'd say that the majority of the burden of blame belongs on the borrower.
Hey, I bought stocks for the first time in the winter of '99/'00. Encouraged by friends & family, research, and a fast-paced rising market. Lost almost all of it. My "underwater" stocks are valued at less than 10% of what I paid in good faith, yet no one's offered--nor would I expect--anyone to bail me out.
Also - everybody is conveniently ignoring those who are just losing their homes because they're unemployed and have been (and will be) for a long long time. Its easier to create a cartoon caricature of somebody living in mansion working at McDonalds and getting off scott free under Obama's socialist agenda. The Willie Horton of mortgage borrowers if you will.
Who is ignoring them? Part of being a responsible adult is building up a emergency savings fund before committing to large purchases. If someone decided to forgo that, and instead jump into the housing market instead, they took their risk and it didn't pan out. Why should they get to keep a house?
Otherwise it's privatized profit, socialized risk.
I'm with Ninja Zombie. Both the borrower and the lender bear responsibility for doing risk assessment, and deciding if they can afford to lend/borrow that amount of money.
If any lenders have been forcing people to take out loans, they should be charged and hopefully convicted of the relevant crime, just as if they used the same methods to steal money outright. Otherwise, the idea that only the lender bears responsibility is silly.
I can't believe that some of you are claiming that the banks are the ones getting the benefit from TARP and the "little guy" is getting screwed!
If you'd take off the ideological goggles, whipped out your abacus, and did the math, then you would, too.
But libertarians obviously aren't realistic or practical enough to bother doing that. Libertarians are obviously so hung up on we're-all-individuals-there's-no-such-thing-as-collective-interests mindset that they don't understand the concept of systemic risk.
Lenders made so many poorly structured loans that they caused systemic harm to the financial system. Now, the taxpayer is going to have to pay for it. The issues now are not whether who pays for it, but who gets the money and the amount of what it's going to cost.
The only way to avoid zombie institutions -- those who the Japanese are so famous for spawning -- is to tackle the real world values of the loans held by institutions. Mortgages are supposed to be fully collateralized to be bona fide mortgages. Mortgages that lack sufficient collateral are not worth their par value, even if they are being paid. As a result, banks are insolvent and the markets are in turmoil.
Once again, most of you miss the finance problem. Most of the bad loans in the system are being paid by their borrowers, and most of those loans that have defaulted are "prime". Many of the loans are bad not because payments are being missed, but because their lack of value leads to undercapitalized lenders, hence the whole mess that we are in today.
You're really suckers for bankers who are using your political blinders to mislead you from the much larger finance and economic problem. The Titanic is heading for the iceburg, and you're busy blaming the passengers instead of readying the lifeboats. See what good that does you once you're in the water.
Got it in one, unfortunately. That's what it's been about from day one.
Indeed. One wonders where they get their information. Cafe Hayek? Blogwise, they would be much better off with Economistsview, Angry Bear, Calculated Risk, Roubini's aggregator(the economonitor), Lanser on Real Estate, The Epicurean Dealmaker(mostly for fun), etc. This is especially salient because of the homogeneity of opinion - where's that accountability thing? Why is no one holding the lenders accountable for not doing basic, extremely basic, due diligence?
In the midst of all of this I'd like these paper pusher mortgage or loan offices, or refinances specialists, or brokers, who did nothing more than tack on 1-2% of the loan value and pocket it as a "finders fee" to lose their shirts.
Banks get burned
Home owners get burned
"Brokers" get to walk a way in the clear with a percentage fee of a way overly valued asset.
I really hope whatever happens moving forward that these ridiculous fees that get collected by people stuffing their hands in the free money pot disappear.
Mike M:
"Also - half this country certainly did not vote against this stimulus plan. Overwhelmingly people want this because they're scared of the future. Look at a poll sometimes, Obama is giving people what they want. You can either come to grips as to why that is or continue to indulge in fantasies that a bunch of welfare queens are out to get your money and it just isn't fair."
---dead wrong, Mike.
The country elected Obama (by the sweeping number of 52%--must be a mandate!). It did not "vote" for the stimulus plan. Polls showed that more than 50% of the country was against the stimulus plan just passed. People wanted more tax breaks, fewer handouts, and less pork. Most people wanted, ahem, EXACTLY what the Republicans were arguing for.
http://www.rasmussenreports.com/public_content/business/economic_stimulus_package/support_for_stimulus_package_falls_to_37
Don't confuse support for a leader with support for one of his specific policies. Unfortunately, in our 2-party system, people who support a leader compromise on about 80% of their beliefs in supporting him/her. Arguing that a poll showing a president is popular= president's policies are what people want is a non sequitor. Bush was wildly popular following 9/11, but you can bet those liberals supporting him didn't like his tax plan or his social stances.
But by your argument, they did, and, by your argument, they all supported the Patriot Act.
You can either come to grips with that or live in LaLa land.
And trying to argue that Obama's popularity= stimulus not for welfare queens is another non sequitor.
Logic: give some to a liberal.
Sorry, Mike M, in my haste I accidentally signed your name instead of mine to the last post.
To all: rhe 11:25AM post just made by "MIke M" was actually by me, Basic Fact, instead.
The administration's release talks a lot about "responsible homeowners", but very few responsible homeowners have payments that amount to 43% of their monthly income. There are exceptions, of course, such as people who have just lost their jobs, but most of the people being helped are, nearly definitionally, people who bought more house than they could afford in the belief that prices would keep rising indefinitely and they would make big bucks. It was leveraged investing, just like a hedge fund, and often at the same kind of leverage ratios.
Investors and speculators do not usually live in their houses and are highly motivated to walk away from a bum deal that they haven't even put a large downpayment into.
As for the job losses, after January there are more than 500,000 (500 million if you listen to Pelosi) more people potentially in this boat. That's almost like real numbers. And this doesn't count the formerly-fully but currently under-employed. Even people who bought what they could afford *at the time* are at risk.
sara, marry me.
SoV, once again, thank goodness a moron like you is defending liberalism. When your enemy is an idiot, all you need is time.
And, Joy? So saving their homes for 6 months-year will make it all better?
Look, most people are feeling sad that Aunt Annie and Uncle Ben might be forced out of their home because business is bad. But she can't afford it. She should be shipping off to a much cheaper rental, where she can use her lesser income to feed them while they reload.
This seems to be a libertarian phenomenon - a bizarre use of language in an oppositional manner to furher some ideological goal. Gee, I was riding my bicycle in traffic. So even though I was obeying all the rules, it was partly my fault that I got hit by a car. Gee, that woman was wearing a halter top when she was raped while jogging in the park after dark, so she's partly at fault. And on and on.
Yes, Tracy, you're absolutely right, lenders aren't out roaming the streets forcing people to take loans. But lenders don't go out soliciting borrowers to take out a mortgage as a general rule; the usual nature of things is for the borrower to come to a prospective lender. And only the lender can approve the loan. It's also up to the lender to practice some sort of diligence; his actions after all can affect the financial prospects of others engaging the services of the institution.
Are there facts the borrower can hide from the lender that might adversely effect the decision to grant a loan, facts that even a conscientious loan officer would find difficult to collect? Absolutely. That's why I assign the rough-and-ready figure of 20% to that portion of the blame that accrues to borrowers in general.
But the other 80%? Come on. Nobody has any business lending $200K to someone making $20K in order to buy a house. And while it's quite possible that unsophisticated borrowers don't know how to gauge the amount of debt they are able to assume - especially with these fancier mortgages - it beggars belief to imagine that any halfway competent bank official does not.
But, gee, what do we find? Why, a startling uniformity of opinion that have these ratios reversed. In my experience, Libertarians are the last people to be accusing others of a lack of financial savvy, or a lack of knowledge of matters economic.
I'm amazed that anyone feels sorry for someone who signed a paper borrowing $600,000.
$600,000.
What, does that number not mean anything? Even the most basic of understanding is how much income it would take to pay the interests. Even at low interest.
No. Fools made foolish decisions. The lenders, the borrowers, the ones who bought asset backed paper, the ones who constructed the flimsy hedging structures that rewarded extreme risk.
Maybe, just maybe if enough people lose serious money, a generation will learn that money doesn't grow on trees, that you have to earn your keep, that things go real bad for everyone when the basics of honestly living up to ones obligations are thrown out.
But no, we want therapy. Make me feel good Obama. What do I have to give you to make me feel good?
Madness. It is not going to end well.
Think this one through. The US gov't has borrowed in the last 14 months somewhere around 2 trillion dollars. Budget debt. There is talk that it won't be enough, and more borrowing is coming. I'm betting another $800 billion in May. The whole national conversation is all about how to squeek out of freely entered debt obligations. ???
Derek
RW: "The only way to avoid zombie institutions -- those who the Japanese are so famous for spawning -- is to tackle the real world values of the loans held by institutions."
Another solution to the "problem" of zombie institutions: let them die. Don't prop them up, don't bail them out. (Perhaps bail out depositors, up to the FDIC limit.)
Stop feeding zombie institutions with the flesh (or funds) of healthy Americans.
But since that would reduce the power of the government, no one wants to hear it.
Another solution to the "problem" of zombie institutions: let them die.
A few major failures would bankrupt the FDIC, which would wipe out the US financial system. Just the failure of the relatively puny IndyMac alone punched a huge hole into the hull.
Better go back to the drawing board with that idea, because it's a rotten one. Do the math -- we don't have the money to pay for it.
dkite:
"Fools made foolish decisions."
----Truer words about this stimulus have never been spoken.
Ninja Zombie:
"Stop feeding zombie institutions with the flesh (or funds) of healthy Americans."
-----Darn right.
We are feeding the zombies our brains. They will survive and eat the rest of us, but we won't be able to stop them, because we just gave up our common sense for the zombie's sake.
The metaphor is breathtakingly accurate.
"A few major failures would bankrupt the FDIC, which would wipe out the US financial system."
----Wrong.
The banks failing would have nothing to do an individual's savings accounts. The banks would go into receivership through bankruptcy, and the receiver would allow people to withdraw their funds and place them in another institution, or else offer incentives for those people with insured-accounts to leave the money
The purpose of the FDIC is to prevent panic, which caused bank closings (not failings) from runs on the bank. To prevent chicken littles from RW from causing panics. But even during the runs without FDIC insurance, your money was coming back to you--the panics just delayed them---otherwise the bank is committing theft/conversion. Repeat: even in the absence of FDIC insurance, the bank can't not give you your money back. Never could.
The Feds reasoned people needed an extra incentive not to panic, so invented the FDIC. The FDIC was about allaying fears, not any financial reason.
And, Joy? So saving their homes for 6 months-year will make it all better?
I think this plan will skim whatever remaining cream exists off the top by keeping people in homes that they can currently almost afford. Which isn't necessarily a bad thing but isn't going to have any of the shocking effects predicted because it isn't going to have much of an effect on the bulk of the problem (if I'm reading it correctly), most of which involves homeowners with *multiple* loans and 2nd lienholders (at least currently) unwilling to subordinate. And those paying more than 43% of income on housing. There also seems to be a cap on the loan size (to conforming) which doesn't help in markets that were bubbliciously primarily jumbo.
ScentOfViolets: "Because at the end of the day, the decision on whether or not to lend resides in just one person - the lender."
Yes, just as at the end of the day, the decision on whether or not to borrow resides in just one person - the borrower.
Repeat: even in the absence of FDIC insurance, the bank can't not give you your money back. Never could.
Basic Fact, in a world of fractional reserve, the bank can certainly fail without paying all of its debts even in the absence of fraud(as, indeed, can any business). And your deposit account with a bank is just that: a debt of the bank.
The banks failing would have nothing to do an individual's savings accounts.
Maybe that's true on Planet Zoltan, Libertarian Edition, where news of the IndyMac failure didn't make it past the censors. But a bank failure in the absence of an alternative to support it, such as a sale of assets to another institution ala Washington Mutual-JPM, causes deposit insurance to kick in.
The FDIC exists because the several depressions that the US had prior to 1929 wiped out banks by the dozens or hundreds, eroding confidence in and the stability of the monetary system. But just as an insurance company doesn't collect premiums with the idea of paying for nuclear holocaust, the FDIC was not designed to deal with a nuclear hit to the banking system. Insurance can be used to manage occasional failures, not systemic failure.
Most of our major lenders are technically insolvent, so this is a risk. Just the failure of Citi by itself could bankrupt the FDIC. The agency does not have the money to pay everyone, which is precisely why they handled WaMu and intended to handle Wachovia as they did. The only that they could get around a blowout that substantial would be to literally print the money, something that we clearly cannot afford to do.
Joy, I can't agree, but you have a reasonable argument.
The shock should come as soon as possible, mainly because delaying it will lengthen this recession. But there would be less of a shock than Obama is threatening anyway.
Helping those just momentarily hurt is a non-starter. If left tot he market, banks individually would start easing off foreclosures, knowing they wouldn't get any value, and relent on the "cream" you're talking about, who they think can get it back to normal.
Banks have shrewdly maneuvered this bill to make it seem this is preventing them from taking Joe-can-usually-pay-but-can't-just-right-now's house.
The money from this bill goes to them, instead of forcing them to bend their rules and wait the six months to a year on foreclosure. In the absence of the bill, banks would be taking the hit, as would the bad consumers. The cream would survive, because banks don't want to lose them.
This is us paying for for the non-cream and the bad banks. In other words, the dummies who should be out of house/business anyway.
Basic Fact, the, ahem, facts don't support you here. Your example is valid ONLY if the FDIC can find someone to purchase the assets (loans). They'll then use that to fund the liabilities (deposits). If no purchaser can be found, then it is a straight deposit payoff.
Albeit rare, these have actually happened.
http://www.fdic.gov/bank/historical/reshandbook/ch4payos.pdf
This is just being oppositional - and not so coyly at that. The prospective borrowers make their way to a possible lender; not vice versa. What did you think 'at the end of the day' meant? At the end of the day, the borrower is on the edge of his seat, wondering if he will get the loan. At the end of the day, it is up to the lender to offer one.
This is exhibit A as to why libertarians just don't live in the same world as the rest of us; they actually think these sorts of stunts are okay. And also part of the fascinating panoply of behaviors that look like the actions of a mentally ill person. I suspect that, for large numbers of them, they suffer something similar to that afflicting one of my relatives, the "you're not the boss of me" syndrome. This relative once damaged another's car, and pleaded that the police not be called, and that they were family and would take care of the bill. Surprise - said relative refused to pay, saying that the damages couldn't possibly have been that bad. So it was turned around to "You're trying to take advantage of me, and so I don't owe you anything". When other relatives tried to intervene, to point out that the estimates were quite reasonable and the costs actually rather low, and that you made a deal, and we were there to witness it, the strategy switched to "Well, you're not the boss of me. And you know, I was going to just go ahead and pay the bill in full, but now because of something you've done, I've decided not to pay again. And it's all your fault that they're not getting their money."
This sort of obduracy, this sort of weaseling, of bad faiths, of dirty tactics employed with a righteous smugness is precisely why so many people detest libertarians. It's not just their lunatic policy prescriptions.
RG, I would agree it could happen, but think about this:
instead of increasing spending to banks via the loans the US Government is now doing, why not let the failures happen, correct the market, and if the FDIC is threatened, add excess FDIC money via loans?
This would solve the problem of pork--because the loans would only be for the FDIC---and also reduce costs---because only the money for the FDIC would be taken out.
It's a win-win; liberals make sure banks don't fail and cause the calling in of mortgages (aka Great Depression); conservatives still havethe free market in play and yet have reduced spending.
Somehow I don't think this is Obama's mindset.
Oh god, SoV, isn't Oprah on yet to distract you?
SoV:
" The prospective borrowers make their way to a possible lender; not vice versa."
yes, and at the end of the day, I make my way to Wal-mart to buy the $400 television. But Wal-mart makes the TV possible. So its Walmart's fault than I pay for it with a bad check. Simple.
"At the end of the day, the borrower is on the edge of his seat, wondering if he will get the loan. At the end of the day, it is up to the lender to offer one."
---at the end of the day, its up to the borrower to sign for the loan. I go to Walmart and see the options for TVs: $400, $50, etc. But I only want (NOT NEED) the $400 flat screen. That's wal-mart's offer for the TV I want. I can take it or leave it, or try to negotiate with the floor seller.
In your world, this makes Wal-mart the bad guy, because he offered me a TV I couldn't afford. Wrong. I'm the bad guy because I bought something I couldn't afford.
"This is exhibit A as to why libertarians just don't live in the same world as the rest of us; they actually think these sorts of stunts are okay. And also part of the fascinating panoply of behaviors that look like the actions of a mentally ill person. I suspect that, for large numbers of them, they suffer something similar to that afflicting one of my relatives, the "you're not the boss of me" syndrome. This relative once damaged another's car, and pleaded that the police not be called, and that they were family and would take care of the bill. Surprise - said relative refused to pay, saying that the damages couldn't possibly have been that bad. So it was turned around to "You're trying to take advantage of me, and so I don't owe you anything". When other relatives tried to intervene, to point out that the estimates were quite reasonable and the costs actually rather low, and that you made a deal, and we were there to witness it, the strategy switched to "Well, you're not the boss of me. And you know, I was going to just go ahead and pay the bill in full, but now because of something you've done, I've decided not to pay again. And it's all your fault that they're not getting their money."
---You just described everyone of the poor borrowers, not the lenders, dumbass. Thanks for bolstering our arguments.
"This sort of obduracy, this sort of weaseling, of bad faiths, of dirty tactics employed with a righteous smugness is precisely why so many people detest liberals."
---FTFY
"why not let the failures happen, correct the market, and if the FDIC is threatened, add excess FDIC money via loans?"
That'd be a helluva lot of loan money. The FDIC has reserves that equal ~1.15% of all insured deposits. Figuring that some of the worst off banks are also those with the most deposits, these loans would probably not be paid back.
http://www2.fdic.gov/sod/sodSumReport.asp?barItem=3&sInfoAsOf=2008
ScentOfViolets , let's psychoanalyze your family some more...things are finally starting to make some sense...
I make my way to Wal-mart to buy the $400 television...
That's lovely. But since Walmart didn't create systemic risk for the global economic system in its efforts to sell televisions to the masses, that is a failed metaphor that makes no sense whatsoever in the context of this topic.
Banking is a unique business because it serves as a de facto extension of the monetary system. The overall stability of the economy is affected by the strength of its banks. Widespread bank failures carry wide-ranging implications for the greater economy that failed donut shops, coffeehouses, porn emporiums, and other businesses do not bear. That's a fact, and a fairly basic one at that.
RG:
"That'd be a helluva lot of loan money."
---Agreed. So is the $1.4 Trillion (not counting the coming $75 billion motrgage thingy) stimulus that is far from over, of The Messiah has his way.
However, in my scenario, the onus on the people who are wise with money is much less. The burden shifts to those who spent beyond their means.
We're already borrowing this money for the stimulus, and we would have for the FDIC-plan I'm proposing.
"these loans would probably not be paid back."
---Yes and no.
In both cases, the U.S taxpayer ultimately pays what the banks/mortgage owers can't. However, in mine, we pay a lot less, and those banks/mortgage owers that have the ability to survive do so. And we get the market wiping out crummy banks while everyone gets their FDIC-insured deposits back. And we only pay for those disasterous results that are directly related to the banks closing, not the crap Obama hid in the bill.
Libtard:
"ScentOfViolets , let's psychoanalyze your family some more...things are finally starting to make some sense..."
---Libtard, good thought, but I long ago realized that trying to find depth in SoV's brainless rants is, to quote the great Cher Horowitz, "like trying to find the meaning in a Pauly Shore movie."
However, in my scenario, the onus on the people who are wise with money is much less.
Your "scenario" is a Fantasyland construct that doesn't even make it past the first level of arithmetic analysis.
The losses are real. They need to be absorbed and paid for by someone. We already know that the taxpayer is going to carry at least some of it, because neither borrower nor lender can fully absorb it, and the insurance isn't adequate, either.
Since the costs can't be neatly allocated to isolate them to "bad guys" and keep them away from "good guys," all parties are going to take a hit, even if that isn't particularly "fair."
This is not a political question, but a mathematical one. Your fuzzy math doesn't work. Just another basic fact.
RW:
"That's lovely. But since Walmart didn't create systemic risk for the global economic system in its efforts to sell televisions to the masses, that is a failed metaphor that makes no sense whatsoever in the context of this topic."
---Are you insane? You think it was merely the U.S. housing market causing these problems? England and Germany had their own housing bubbles and stock swindlers too. Madoff was deep in Europe, don't forget.
The metaphor makes perfect sense. Whatever you're buying---a TV, a mortgage, a car--you don't buy what you can't afford. TV's get put on payment plans all the freakin' time in poor areas, and get financed. You don't pay, they take it back. If you know you can't make the payments, don't come crying to me when they take it.
"Banking is a unique business because it serves as a de facto extension of the monetary system."
---And retail is a unique business because it serves as a de fact extension of the farmer's market.
"The overall stability of the economy is affected by the strength of its banks. "
---and its industrial sector, and its consumption, etc. Banks are very important, don't get me wrong, but banks alone don't ebar the entire burden.
"Widespread bank failures carry wide-ranging implications for the greater economy that failed donut shops, coffeehouses, porn emporiums, and other businesses do not bear."
---If every Walmart in the country closed tomorrow, BYA it would cause huge problems that would make this bankring crisis look like a tempest in a teapot. For one, Walmart is the only supplier in msot areas of most goods. People would begin to starve (walmart is the de facto grocery store to msot, especially rural poor), and jobs would be lsot by both wal-mart employees and small business owners who buy their supplies there.
"That's a fact, and a fairly basic one at that."
--So is mine. Trying to argue "oh but banking is unique" is a nonstarter.
Bad banks=bad economy, if your argument is taken to a logical conclusion (which I don't totally disagree with). Since we have bad banks on our economic asset sheet, they must be gotten rid of to improve our economy to healthy. Ergo letting them disappear under the weight of their own failings is ultimately the best for everyone.
"Your "scenario" is a Fantasyland construct that doesn't even make it past the first level of arithmetic analysis."
--What fantasy land? You mean having the FDIC do the job it is supposed to do, and if it doesn't have the funds to cover, borrowing those funds like we're borrowing now?
I love when liberals call "being realistic and minimizing costs" to "fantasyland."
"The losses are real."
----Thanks, Captain Obivous.
"They need to be absorbed and paid for by someone."
---In my scenario, the banks/ mortgagers pay first. Tax payer makes up the difference. Bad banks disappear. Bad mortgage owners disappear. Yours: taxpayers pay for all losses. WBad Banks saved. Idiots who bought what they can't afford keep them on my dime. Which is more fair?
"We already know that the taxpayer is going to carry at least some of it, because neither borrower nor lender can fully absorb it, and the insurance isn't adequate, either."
---Well, in mine, the FDIC- insurance IS adequate via loans, but I think you mean other insurance. This plan minimizes the burden on the taxpayer.
"Since the costs can't be neatly allocated to isolate them to "bad guys" and keep them away from "good guys," all parties are going to take a hit, even if that isn't particularly "fair."
---Duh, in my plan as well. (Ideally, no bailout at all, but I think even moderate conservatives would flip out). The market sorts out who can do what.
"This is not a political question, but a mathematical one."
---No kidding, dumbass. In mine, the amount on the wrongdoers > than yours. In mine, the amount on innocent taxpayers
"Your fuzzy math doesn't work."
---YOUR fuzzy math doesn't work.
Just another basic fact for you, RW.
You think it was merely the U.S. housing market causing these problems? England and Germany had their own housing bubbles and stock swindlers too.
Thanks for the strawman argument, but that wasn't my point.
Banks are effectively an extension of the Fed. They effectively print money through fractional reserves and credit.
The dive of the stock market was initiated by their possible (now real) but still-unquantified insolvency. Their values fell because their balance sheets came into question because of their mortgage investments and counterparties.
Real estate matters because that is what comprises much of their balance sheet value. That's not politics, just arithmetic rearing its ugly head.
Ergo letting them disappear under the weight of their own failings is ultimately the best for everyone.
As the math indicates, "letting them disappear" in this case really means "letting us disappear."
The Titanic is about to sink, and your goal is to make sure that the captain goes down with the ship, even if that kills all the passengers. You're so obsessed with your sense of cosmic justice that you don't mind cutting off your nose, your ears and your chin to spite your face. That's not politics, that's just dumb.
"The metaphor makes perfect sense. Whatever you're buying---a TV, a mortgage, a car--you don't buy what you can't afford."
Agreed. Except retailers don't have the means to measure whether or not you can afford their product. Banks do, and it is their duty to lend responsibly. They didn't. This is the point people are stressing.
"Bad banks disappear. Bad mortgage owners disappear."
If only it were that simple. There would be massive counterparty losses as well. Money market funds, pensions, etc. Look at Lehman Bros for an example.
http://www.cnbc.com/id/15840232?video=1039849853
That's lovely. But since Walmart didn't create systemic risk for the global economic system in its efforts to sell televisions to the masses, that is a failed metaphor that makes no sense whatsoever in the context of this topic.
Huh? The metaphor illustrates rather well that both parties to the transaction engage in it voluntarily, so it's odd to assign blame to only (or mostly) one of them. Whether Walmart created "systemic risk for the global economic system" (whatever that means) is entirely beside the point.
If the metaphor fails, it's only because BF didn't stipulate that the TV was being offered on credit to someone who was unlikely to be able to pay the debt, which would, of course, have been the lender/seller's mistake.
Agreed. Except retailers don't have the means to measure whether or not you can afford their product. Banks do, and it is their duty to lend responsibly. They didn't. This is the point people are stressing.
Retailers either rely on banks to do it by proxy, or check FICO scores themselves if they offer their own lines of credit. So what? And "duty" shmooty. It's in their interest to lend responsibly. Oh wait ... unless they're bailed out when they don't.
RW, did you buy stupid on credit, or raise it yourself?
"Thanks for the strawman argument, but that wasn't my point."
And then previously: "create systemic risk for the global economic system."
Gotcha.
"As the math indicates, "letting them disappear" in this case really means "letting us disappear."'
----Chicken little argument. the math indicates that if we simply borrowed money to back up the FDIC, and let them fail, we would not disappear.
QED.
"The Titanic is about to sink"
---Untrue. Fear mongering among the desperate liberals striving for their own pet projects to come to light.
Back to the college classroom, boy.
RG:
" Except retailers don't have the means to measure whether or not you can afford their product."
---Yes, they do, RG. If they finance you, they have to check whether you can pay it back--credit checks, etc. If they sell it, they have to check whether your check clears.
But its not their or a banks job to make sure
"Banks do, and it is their duty to lend responsibly"
---and if they find an irresponsible person, they have a choice: don't make the loan, or jack up interest rates and back it up with good loans to others. I stress the banks failures too: banks who made these loans should fail.
"There would be massive counterparty losses as well. Money market funds, pensions, etc."
---Not massive. assuming receivership, FDIC step in, etc., things will be orderly. Pensions will not go bankrupt. Money Markets prolly will not receive full value. But those losses are more than offset by the good of not burdening the responsible with problems and saving the irresponsible.
"Look at Lehman Bros for an example."
--Good example. Lehman bros. hit bankruptcy. Sutis were filed. The moratorium will be up soon. But Lehman brothers failed and the world went on. It deserved to fail. now we have one fewer crappy money house on our hands. That gives me more, not less confidence in the market.
RG, it's clear we're both reasonable about this. I just think my scenario prevents the good parts of the economy of being dragged down with the bad.
Repeat liberals: the sky will not fall, lion will not lay down with lamb. In short, The Messiah, as he has done countless times since he entered the race, is LYING to you.
Clay, thank you.
Not sure what you are getting at, Clay. Are you saying that both borrowers and lenders acted agaisnt their best interests because they knew they'd get bailed out? Or that you are willing to ignore coutnerparty and systemic risk to spite the bad actors?
The metaphor illustrates rather well that both parties to the transaction engage in it voluntarily
The metaphor shows an stunning inability to comprehend the concept of systemic risk, how systemic risk is created, or how it impacts parties who had nothing to do with the transaction.
I think that I see the problem. In this little libertarian internet bubble of yours, you folks don't understand that loans cannot fail en masse without necessarily involving more than the parties who contracted with each other. You simply can't comprehend the fact that systemic risks exist, let alone see the implications of what those risks mean for the rest of us.
If it was possible for these loans to default in a vacuum, without harming anyone else aside from those directly participating, then I would agree with you. During most periods of time, that is actually the case, and in those instances, we can allow borrower and lender to sort out their battles without us.
But during a crisis period induced by excess leverage, such as the one that we are living through now, that is not the case at all. Millions of badly structured loans cannot be ignored, even if your political inclinations would lead to do otherwise. You can either accept it and deal with it, or deny it and fail to learn from it. Many of you have made the wrong choice.
RG, Clay is stating that normally a market correct would punish lenders for overextending credit. They acted for short term gain, betting on unsustainable, forever upwards growth. In a free market, stupidity gets punished. Not everyone did these stupid mistakes.
If they were allowed to fail, our economy would be stablized. Now we;'re merely revamping for another recession within the next 10 years once we get out this one, because those who should have failed now know the Messiah and dems will save them from themselves. Moral Hazard.
My last response to RW got eaten by a bad connection, so let me summarize:
Rule #1 : Don't buy what you can't afford.
Rule #2: Don't buy what you can't understand.
Rule #3: if you violate the above rules, it is not my responsibility to help you. Your failure for stupidity is not my problem or my fault.
Rule # 4: Bad lenders and Bad buyers deserve failure, and their failure is good for the economy. Saving them at the expense of goog lenders and good buyers is bad.
Rule #5: RW is basically SoV with slightly less stupidity.
if you violate the above rules, it is not my responsibility to help you.
Once again, you obviously don't comprehend what systemic risk is, its implications or how to deal with it.
You seem to think that we can just create little Packets O' Responsibility (TM), and hand them out to The Guilty Bad Borrowers who will pay their penance in their corner of the room.
We can't do that. The math doesn't work. The failures don't occur in a vacuum. The failures affect you, whether or not you want them to.
It would be nice if we could solve everything by writing essays that require people to Be Responsible. But in the real world, that is utterly meaningless, and just turns us into cyber ostriches who can't cope with reality.
Here's another, er, basic fact that you obviously don't understand -- Most of the "bad" loans in the system are being paid. They haven't defaulted. They are bad because of the collateral deficiency, not because of the borrower's conduct.
It would be really nice if that didn't impact me, but unfortunately, it does. It impacts you, too, even if you don't realize it or understand what that means.
"If they were allowed to fail, our economy would be stablized."
I'm with RQW on this, you don't seem to be acknowledging the counterparty risk. Remember, when LB failed, the government had to step in and guarantee MM accounts because there was a silent run on the shadow banking system. Imagine if Citi and BoA both went down in the same month.
Housing bailout to allow 400-year mortgages, control interest rates
[satire]
http://wineandexcrement.com/housing-bailout-to-allow-400-year-mortgages-control-interest-rates/580/
Since Megan McArdle recognizes a personal need to help homeowners without any legal inducement, I hope she takes some responsible action soon and then keeps us informed of her voluntary donations (dollar amount and percent of income). Since she proudly proclaims herself to be a reactionary bourgeois tool of the capitalist system, I encourage her to courageously muster influence among her own kind. If she is truly a tool of the capitalist system, working to convince fellow supporters to ante up quickly and generously would be far more effective than denouncing reactionary non-supporters. Or perhaps she is not the sharpest tool in the bourgeois toolbox?
RG and RQ:
I acknowledge counter-party risk; our interest rates will rise, loans will be harder to get short term. As more stupid people are priced out of loans, responsible people will take them.
"Imagine if Citi and BoA both went down in the same month."
---Liberal fear-mongering. There is absolutely no reason this will happen, and if it did, the sky wouldn't fall in. Lehman is bankrupt, and we are not at 78% unemployment. Obama and his minions are lying about this; they are deliberately exaggerating the maginitude of the panic to get their way. wake up, people.
"understand what that means."
---class, moron. I understand fully what it means. It means morons who shouldn't have gotten loans will not get more loans and will lose the houses they can't afford.
I understand more than you, who is deliberately sticking your head up your ass and pretending the darkness you see is the future. It's not, but go ahead, bow down before NotMyPresident and believe his b.s. When he extends this recession and causes the next one, hey, you can just give more money to unqualified, lazy, stupid people from the pockets of the hardworking and continue the downward spiral.
with morons like RW around, we're doomed.
RG and RW, what if I am willing to take the hit?
On one side we have moral hazard on the other side systemic risk. I believe that I understand the systemic risk. As of right now while I am not thrilled with suffering the consequences I would prefer to let the market deal with the current situation with little or no bailout. I feel that the problems inherent in a society that encourages irresponsible borrowing/lending are worse.
If this is a crisis of excessive leverage how does it benefit us to spread out the pain? We soften this landing but encourage another crisis since we have encouraged excessive leverage.
"Lehman is bankrupt, and we are not at 78% unemployment."
No, but the creidt markets almost shut down if the government didn't intervene. The oldest MM fund broke the buck and there was a silent run on MMs, hedge funds, etc. There are wide ranging implications to these actions.
I guess what I'm getting at, is what is your threshold for systemic risk? I'm not disagreeing with you about moral hazard, but please do not dismiss the risk of letting these gigantic banks fail. The FDIC would take a massive hit, as would the PBGC, insurance companies, etc.
We soften this landing but encourage another crisis since we have encouraged excessive leverage.
Excessive leverage doesn't need "encouragement." Profit seekers look for ways to make money, and lenders will happily make riskier bets if they become indifferent to the risk or if they don't have to hold the bets themselves.
A depression today won't prevent asset bubbles tomorrow. Asset bubbles used to be more frequent before interventionist economic policies came into play; they weren't exactly "learning their lesson" back in the 19th century when economic panics were frequent.
The moral hazard discussion leads us astray. You can't fix it, and even if you did, that wouldn't prevent the cycles that produce bubbles from occurring in the future.
If there is a lesson to be learned from this, it's that allowing lenders to outsource risk to counterparties is itself risky, because they make more aggressive choices when provided with that option. That's a financial and mathematical issue, not a moral one.
The solution doesn't come from better morals, which are hard to define, debatable and unenforceable, but with some fairly simple, easily enforced concrete regulations on loan products. Place limits on loan levels, the ability to refinance and loan product types, and the moral hazard problem is rendered irrelevant, because the constraints themselves curb harmful behavior.
Shifty Lender can be as moral or amoral as he likes, but if isn't allowed to make or take a variable-rate, high LTV loan as a matter of statute, then he isn't going to make one, no matter how badly he may want to. Intentions are irrelevant; what counts are his actions, and we should be looking to curb his actions.
what if I am willing to take the hit?
We don't have packets of blame or pain to hand out selectively. You can't just take the hit by yourself, you'll be including everyone else -- hundreds of millions of people -- with your plan. That hit would be a death blow that would make the 30's look like a boom time.
There's no point in doing that when we have better alternatives. A bad recession is preferable to a deep depression, and some deft maneuvering will get us there. We just need to keep Mr. Basic Fact away from the FDIC, because he clearly doesn't understand how it works...
"So why should responsible people like me be forced to pay for their mistakes?"
Because responsible people are basically the only ones with something to steal.
I'm guilty of some imprecise phrasing. Due to its use in this thread & many others I have picked up the term moral hazard as a sort of shortcut for the encouragement of risky actions taken due to a feeling that the state will not let the actor suffer the possible downside. I'm not really using it to directly refer to morals.
If there is a lesson to be learned from this, it's that allowing lenders to outsource risk to counterparties is itself risky, because they make more aggressive choices when provided with that option. That's a financial and mathematical issue, not a moral one.
Correct. So why is the discussion centering around finding ways to minimize the effects of risky behavior on the individuals & financial institutions that engaged in ultra-aggressive risky behavior? Given a government intervention that look "free" to the average person will there be any political capital spent on working out regulations that might help? I'm not convinced that there will be.
You know, there's a slightly positive way to spin the "moral hazard" element of this debate.
Consider we've been in dire straights for 6 months now, with foreclosures extending even further into the past.
Those were most nefariously in over their heads have long been expelled from home-ownership. I submit that all this moral-hazard bitching is relatively irrelevant. The worst of the borrowers are out, and while we get to shoulder the burden of the rest of those hard up, I doubt these people are the delinquent bogeymen we envision.
So why is the discussion centering around finding ways to minimize the effects of risky behavior on the individuals & financial institutions that engaged in ultra-aggressive risky behavior?
That isn't the point that I'm making. I'm noting that the discussion of who "deserves" to suffer distracts us from a more important problem: how to minimize the overall damage to the economy, which affects everyone.
If we make the enforcement of moral hazard our priority, it will backfire on all of us. As sexy as that may sound to left-wing populists and right-wing law-and-order types, the desire to fixate on blame, rather than solutions, only hurts the economy.
Right now, we are on a sinking ship. At this moment, the priority needs to be on either saving the ship or rescuing the passengers. We can allow the Transportation Safety Board to figure out later who to blame, but for right now, we have much bigger problems to worry about.
Blaming borrowers is obviously fun on this website, but it misses the point and betrays a complete misunderstanding of the actual problem. Most of the bad loans are being paid, so in those instances, you don't even have bad borrowers to complain about, anyway.
We can't isolate the pain as you would like. It just isn't possible to do when the problems are systemic. Systemic problems require different answers from individual ones, and by their nature, their ill effects cannot be isolated to the perpetrators. That's what makes them systemic in the first place.
You feel that the most important problem is attempting to minimize the overall damage to the economy. I do not agree.
Of course some of that disagreement is due to perception. While I agree that we are in serious economic trouble I am not convinced that a sinking ship analogy is correct. That analogy tends to bring an all or nothing, life and death, short time frame image that I do not feel is appropriate.
I view the current situation as more of an economic flu. We could make ourselves feel better by treating the symptoms and continue to struggle through our normal lives at reduced effectiveness but to really get well in a shorter time frame we might be best served by crashing for a metaphorical day, letting things burn out and then going back to life at much closer to full speed.
Also, describing people who have lost their jobs as "an exception" here is kind of silly. It's a pretty HUGE exception.
Well.... My husband and I (both employed) bought a home we could afford on one income. And we have a plan in case we both lose our jobs... it's called savings. I can't feel sorry for the folks who lost a home because their income went down when every financial planning article I have ever seen talks about 6 months to a year in savings. (And that goal is easier when you owe less.)
I'm seeing huge drops in my 401K, in my investments, in my home's value and now I am supposed to float more money to these yahoos who weren't financially responsible?????
Lisa
I view the current situation as more of an economic flu.
You're seriously lowballing the depth of the problem. This is not just a minor cyclical downturn, but a major deleveraging blowout that has come very close to turning into a full-blown depression. It's more like cancer than the flu.