The problem is that too many exploding products--products that were designed from the beginning to become unaffordable--were sold around the country. Smarter, more effective regulation can help us avoid repeating that mistake.

Exactly. If I were to believe the talking heads and financial writers I might think that this whole mess is the fault of those who borrowed the money, rather than the deceptive products and practices that were used.

But one of the bigger risks of letting the banks write the current media script is that credit worthy, but risker borrowers will be unable to ever find financing.

It is not out of the realm of possibility that banks will welcome regulation that prevents them from making risky loans at the expense of actual reform of their practices and products.

BTW, nice interview on Fresh Air. I especially liked the tidbit about a class full of Harvard Law Students having trouble figuring out the rate on credit card application.

This is like the free traders that basically say the answer to ugly free trade is MORE FREE TRADE!!!! As if free trade and free speech were the same.

I am not the wonk, I don't know what regulation would be good and what would be bad.

I would accept no-regulation for one thing: bailout of the non-rich home owners AND NO BAILOUT of institutions and investors.

My fear is what we will get is bailout of institutions and investors while the individual home owners get the shaft.

How do we ensure that won't happen?

"The problem is that too many exploding products--products that were designed from the beginning to become unaffordable--were sold around the country. Smarter, more effective regulation can help us avoid repeating that mistake."

This is not quite fair. I am not sure there is any truly predatory loan. You surely have a lot of predatory lenders.

Each of those products has a place. If you know exactly what you are doing, have ready access to refi's, and you know your market. Banks don't make money on foreclosures, nobody does. The only person with a financial interest in pushing a bad loan is the originator and to some degree the intermediate lender.

The industry wants this to be a story about owner-occupied housing. But an as yet undetermined amount is investors who either mistimed their market or last access to a compliant lender. Investors losing money is not a tragedy, in some cases it is a positive good, bubbles are not good, that some investors feel the pain as it deflates some is not necessarily bad for that young couple who only want to own a home.

Certainly we could put a mechanism in place to review existing loans and find some way to get the truly predatory ones refinanced, at least for homes that are truly owner-occupied.

. But not every sub-prime loan is inherently predatory and not every investor who took one out a victim. This is particularly true for stated/stated and no doc. People borrow and lenders lend stated/stated or no-doc 100% LTV for a reason, and all the players know the score. People are willing to make a leveraged bet on real estate using other people's money and other people for a price are willing to lend them money. It is not much different than taking your credit card to the Casino. We don't bail out gamblers and there is no reason to bail out real estate speculators.

'Foreclosure' is an ugly word with ugly imagery. But it is also the formal process in which millionaires end up losing their real estate investment. How much of the recent uptick in foreclosures is really just people walking away from a no-equity investment in Phoenix? Where is the pain actually being felt? Because I can say that the anecdotal evidence to date hasn't been that compelling. Its like the Estate Tax and family farms. It becomes remarkeably hard to find real victims.

Foreclosure rates, price drops, lenders failing. Certainly measures to watch, not necessarily easy ones to understand. We are being set up for a bailout for investors. ARMs are not new, predatory lending is not new, what is new is that you can't make a flat out fortune in Las Vegas using other peoples money to buy condo units. Well tough, people missed the wave, they jumped on the gravy train just as the gravy bowl was pulled.

I was hired to take our company into a new real estate investment direction. My continued employment counted on at least one of three particular investments working out prior to next Dec 1. Returns from those investments among other things were supposed to fund my salary. Oops they fell through, one disasterously, and I laid myself off. Am I a victim? Hell no. That's real estate. We just need to make sure we understand who are the players. Because rich people losing money is only a crisis to the Opinion Page of the WSJ. Just as me losing a job is just a guy losing a job. It happens all the time but rarely makes it to crisis.

I was listening to the NPR money show and the guy was saying the sub-prime crash in general is not a big deal, and the Fed can just lower certain interest rates if it get to bad. Basically "pour more money into lousy loans."

Really annoying actually.

People are overlooking the role of Fannie Mae in this, by buying up loans they freed up money for the lenders to start a new cycle. In addition reselling loans shifted the risk from the originators to those buying the loan portfolios. Mortgage brokers and other middlemen also make money on the origination and take on no risk - why wouldn't they push mortgages on anyone who can fog a mirror.

Scandals like this can't exist without the, at least implicit, complicity of government. There seems to be some indications that governments will offer some sort of bridge loans to those in distress to help them in the near term. Those who profited the most from amoral dealings will, as usual, walk away with the goodies.

--- Policies not Politics
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Poor people are too juvenile & unsophisticated to handle things like Credit. Best to prevent them from getting it so they don't make bad choices in the future.

This is like the free traders that basically say the answer to ugly free trade is MORE FREE TRADE!!!!

And I think that is pretty much true. As the WallStreet Journal noted recently, over 40 million jobs could be lost to outsourcing.

The author went on to note that when the educated elite start losing jobs, they'll rise up and be heard because, unlike the poor, they have political and economic connections to use.

For all I know, there might be a big shift in the way that we live life here in the US and, gasp, maybe we'll even adopt things going on in Venezuela.

It seems fair to me to bail out the rich, in this case, since the poor, many of them, probably got cash back on close and had a little fun. Now, the banks need their money back.

Something worth monitoring, perhaps or eventually coming to a neighborhood near you: community-based homeowner equity protection.

Example. The Syracuse Home Value Protection (HVP) program, described here, and more recently here (covering 129 properties as of Sep 2006).

nb. Yale SOM (link corrected) is a participating partner which, in this case, includes Robert Shiller (Case-Shiller index, Irrational Exuberance, housing bubble doomsayer, e.g. Built of Sand, Barrons, 26 Mar 2007).

In your case, agreed; but if 10-20% of your other neighbors -- many of whom may not be blessed with generous sisters -- experience problems similar to that of your sister and her family, you may well find yourself seeing something like this.

And even if your neighborhood appears to be stable (homeowners have been around for a while, turnover's low) most subprime loans have been used for refinancing (and MEW, that is, equity withdrawal).  That couple down the block who just returned from that marvellous Hawaii vacation may be going into foreclosure tomorrow. 

I know how to differentiate between institution, investor, and pretty much us peasants with a mortgage.

I think it's harder to differentiate between family that got a sub-prime with every good intention, now has a house, and a bad problem on their hands, with family that honestly yes took the equity out with a sub-prime and went to Hawaii, but all with the good intentions they were sold, with folks that knew ahead of time how bogus this was and intended to cheat the system.

Again, I want to make sure the market feedback goes to the institutions and the shareholders. They are the ones are capitalist society says should bear the brunt of giving out a stupid loan. My fear is that it will be all taxpayers that bear the brunt and that the institutions and investors will be made whole.

So frankly, if I understand your example, and I am not sure I do, I may agree with you, but I just am not worried (yet) about making whole too many homeowners including ones that somehow knew they were scamming the system.

It’s a bit simplistic, but the stark fact is that the subprime mortgage crisis is fundamentally about the stagnation and decline of working class wages in America over the past decade and more.
If the percentage change in wages from 1959 to 1981, when Reagan became President, had held at 5.478% for the past 26 years, average weekly earnings for private industry today would come to $53,802 in annual wages, rather than the $29,473 we now have. (These are my own calculations, based on Table B-47. Hours and earnings in private nonagricultural industries, 1959-2006 in the 2007 and 2004 Economic Reports of the President.) If American workers had been earning an extra $24,000 a year the past few years, how many people would have needed a subprime mortgage to buy a house, or would have needed to refinance their mortgage to take some equity out?

It seems fair to me to bail out the rich, in this case, since the poor, many of them, probably got cash back on close and had a little fun. Now, the banks need their money back.

Sometimes I am dumb and if so I apologize....

Are you pulling my leg?

It's been known for at least 30 years, that under neoclassical economics, as taught in graduate schools throughout the world that:

if you have a transaction between 2 parties (like taking out a subprime loan):

- you will not get the market optimal transaction if
one party is party to information another is not

There is a famous paper 'The Market for Lemons' by George Akerlof, who later won the Nobel Prize for it, which explains this quite clearly.

In addition, more recent work (the subject of another Nobel Prize) by Daniel Kahneman, Amos Tversky and Richard Thaler, shows that humans don't make fully rational, fully informed economic decisions, and they are quite easy to fool, because of built-in biases which show up again and again in lab studies.

This follows on from an observation made in the 1950s by Herbert Simon (who helped found the modern discipline of computer science, but was also a very talented economist, and another Nobel Prize winner) that human beings 'satisfice' ie they don't consider the full range of costs and options available to them, they focus on making a choice from a limited selection of options.

Milton Friedman, in his models of the economy, explicitly makes this assumption (adaptive expectations).

Subprime loans are a field rich for such 'asymmetric' negotiations and transactions. It's small surprise the borrowers lose out.

Re: average weekly earnings for private industry today would come to $53,802 in annual wages, rather than the $29,473 we now have.

This is a bit confused, isn't it? Who makes 29k PER WEEK?
Moreover median annual salary is around 40K, not 29K. (Median is more useful here thanaverages since people like Bill Gates skew the average higher).

If the lenders get paid in the process of families keeping their homes, that would be the best possible outcome.

Here's my thing: I think some of the rules that make it more difficult to get loans sometimes keep people who are willing to take the risk from getting loans they could very well service.

Personally, I used the SISA (stated/stated) loans because I choose to dedicate a higher proportion of my income to housing than they say I should. I drive a slightly less nice car and have a nicer house.

But, I guess my question is, how do we make sure that people have access to money while not causing a crisis where people lose their homes?

As I've said on this thread, somewhat inelegantly, I'm more concerned with the effects on homeowners who weren't involved in blowing the bubble -- the homeowners next door who are mortgage free or who are carrying prime 30- or 15-year mortgages.

I'm concerned with the "tragedy of the commons" issue. 

It doesn't matter. It has the same effect. The car dealer borrows money from the bank to cover their finance paper.

Jim Anderson

The Truth About Credit

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Boy! I have a lot to say about this, but I'm not going to ramble, so here is the point. This is the worst possible solution because taxpayers would be paying off loans. There is only one true solution to this problem, and it is a painful one. Either we take the pill, or we will get sick and suffer more. Watch this video for the answer and why.  This is the root of our credit card problem and our mortgage crisis, and the increasing problem of the downwardly mobile middle class.

Jim Anderson

The Truth About Credit

Bottom line? Manipulation of normal supply and demand is the problem. Lending money increases demand and drives up prices. Real Estate prices have been artificially inflated over the last 94 years. Once we moved to central banking, the stage was set to throw the economy out of balance. To fix the problem now, it is going to be painful. If we don't fix the problem it will be much more painful. There is no way around it. The original bandits are those that benefited in the early 1900s, and those who got to use the newly printed money first as the money supply grew. They got free value, which someone else will have to pay for later. We simply pass it on through loans. The stickler is that we pay for that privilege through interest. As time passes, the loans are bigger and bigger, and the price for passing it on is getting unbearable.

The "economic" bill isn't getting paid because we are borrowing more money to pay it. It isn't much different that paying one credit card with a cash advance off another one.

Jim Anderson

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I was listening to the NPR...

In my book, NPR == nauseating, pathetic reporting since their reporting style sounds like a broken record.

The bigger problem is keeping the pyramid scheme alive... while keeping inflation in check.

It's not entirely clear to me what the fed will do because inflation is rearing its head so the fed should be raising rates.

because of the ethanol sillyness, for example, the price of groceries are expected to climb 10% next year. so, it will be interesting to see how cash strapped families will fair...

even the major builders don't expect much to happen with home prices so borrowing equity, to make ends meet, might not be possible.

if housing prices do decline they may even see some property tax relief....

it's funny that you say that! the last time that I suggested that the government was happy because tax revenues were up, because of higher assessed values, I was told that taxes are based on a budget so, if that's true, and the budget can't be cut, then the tax rate has to go up...

overall, I think that government budgets will be OK because the homeowners with "paid off houses" or "pre-bubble houses," now with higher assessments, can afford them.

you might want to read today's nytimes story on ford and gm or visit http://www.allianceibm.org/, the effort to unionize IBM. if the testimonials on that website are accurate, IBM will only be a shell company in America in a few years.

of course, new jobs can be created but some of the leading economists are starting to worry...

He would never rebuild. He would get the US to declare war, take whatever profits and insurance he has, and just retire.

He can't rebuild. When you hollow out your companies you lose all the engineering and production know how. He might be able to create a factory to manufacture his goods, but they would be at the wrong end of the learning curve, and he would never be able to create a new product.

You may be right, but you are armchair quarterbacking. You are speaking theoretically. Having learned how this business works, I can see a more likely scenario. In reality, you'd be surprised how resourceful entrepreneurs are. In a national crisis like this, there will still be a demand for rubber, if not an increased demand. The owner has enough engineering knowledge to start from scratch if necessary. It isn't rocket science. He could hire some unemployed ex-engineers and retrain them. At war, the government will become the new customer. If there was no war, he would likely go to friendly countries where the labor is still cheaper than in the U.S., as every competitor would do. The demand for rubber parts would likely not change much, except what was being sold to countries that are then hostile.

Jim Anderson

The Truth About Credit

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small and mid size companies (where most of the job growth is) generally cannot do so.

Try telling that to the rubber manufacturer I mentioned above.  He is literally making hundreds of millions annually on his private investment.  He took a domestic company that was failing, bought it, and turned it around by doing this, and quickly started raking in unbelievable profits.  I'm not saying it is the right thing to do, but how can you argue against it with the values that built this country in the first place?  In today's world, national loyalty costs money.  In business, it is all about the bottom line, both short term and long term.

Jim Anderson

The Truth About Credit

Actually, medium sized and small companies can be more agile in the white collar operations jobs, and can make decisions quicker, so all that is needed is efficient communication channels. Larger companies can't do that as well. So I'd think larger companies would have more issues. What you may have seen is poor manaagement.

I'm not sure of the specifics of what you are thinking of, in terms of close integration, but it is possible it isn't a universal issue with outsourcing. It may be specific to a particular industry specific operational process, which may need to be redesigned to accomodate geographical distance. If they can't be seperated, then of course they must both go to the same location.

I guess the point is that outsourcing may present new management challenges, but that doesn't mean it can't be done well. Those who fail at it are more than likely suffering from more basic management issues, which is extremely common.

Jim Anderson

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No, it wasn't basic management issues-- it was the combination of time zone differences, language problems, and a very different culture, one that frowns of innovation and self-reliance. The time zone problem automatically introduces a lag factor that slows work (if it must be integrated with work in the US). Language problems frustrate even calm and patient people (a major issue for companies who have moved their customer service abroad and then lost a lot of business due to those frustrations). And workers who fear to make even the tiniest decision on their own are an major headache for management that is accustomed to workers being at least somewhat self-directed.
Have you ever had any experience with outsourcing, either from the workplace side or the customer side? I've had both. My old company found Indian programmers utterly unsatisfactory after just three weeks, for the reasons cited above, and terminated it outsourcing arrangment after just three weeks. And due to the blithering incompetence of some nitwit in India who could not assist me in any way (nor transfer me to someone who could) when my credit card was charged SIX TIMES for an air reservation that the website could not even complete, hell will feeeze over before I use expedia.com again*.
When it comes to production jobs where whole factories can be sited abroad (Often with American or European management) it can work. But with "knowledge" white collar work, even with call centers and the like, it's a disaster and I don't expect it to gain much more momentum or to replace anything like the number of jobs that the chicken-littles forebode. Companies that think they can save money by this gambit will deserve to fail for their "penny wise, pound foolish" behavior. Economists also need to consider factors besides those that are easily quantifiable. There's a lot more that makes up the bottom line than just hard numbers on a spreadsheet.

* You may spare me your usual peroration about credit cards. They were the good guys in this episode. Getting no satisfaction from expedia, except the satisfaction of delivering a scorching tirade to that twit in India, I took the problem to the credit card (with customer service in North America!) and it was resolved in a matter of days.

Well, I certainly agree that it complicates things. These poor customer and employer experiences just show how managers haven't paid attention to detail. You can't abdicate, only delegate. There are many companies that make it work. Sometimes it takes a hard nosed manager to force the issue on solving the problems. Cultural difference are a factor that must be explored before you make a move like this, unfortunately it is overlooked by executives who don't take it seriously enough. However, it doesn't mean outsourcing in general is a failure.

Just about the only thing good about credit cards is their ability to handle fraud quickly. But don't give them too much credit, they have insurance that covers it, and Federal Law requires them to handle it quickly. They are still watching out for themselves. They couldn't care less about you.

Jim Anderson

The Truth About Credit

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Re: Outsourcing will work, in my opininon, because the populations of India and China are much bigger than the American population

Very large portions of those populations are not available for the outsourcing work force due to extreme poverty, illiteracy and lack of skills. At most they might be able to perform unskilled factory labor, but they are not going to be programmers or data analysts. There's only a small minority of Third World citizens who can compete with us there, and the wage costs alone aren't the only monetary factor: add in communications costs (which are about as low as they will ever be, and will be going higher soon-- remember rising energy costs?) and trtnsition costs, and the costs of doing business in a foreign venue, and a firm which outsources can, best case scenario, save maybe a third over its US labor costs. But if outsourcing becomes even more common then competetion for those workers will bid their wages up higher (this is already happening in India and would happen in China if the Chinese government were not artifically holding wages down) and outsourcing will cease to be more profitable than US operations. Also, there will be local competition for that labor too as a middle class (however small) evolves in India, China, etc. And again, I think you are discounting (even deep discounting) the problems associated with outsourcing, and I point to the fact that outsourcing rates have already fallen in response to these difficulties. Maybe a small handful of "perfect" managers can make it work, but there aren't enough of those paragons to go around. Outsourcing will remain a big issue at the blue collar level, and will be a boutqiue trend for large corporations at the white collar level. Small and mid level firms will remain anchored to the US.