I fear it is looking as if the piper may want his due.

I understand the economy was fueled for the past couple of years out of home equity, that like credit is not endless. Now I suspect it remains to be seen in the beneficiaries of the dangerous wealth shifting at the expense of the tax and industrial base can get away with a shuffle off to Buffalo while the country suffers.

Why are the Democratic candidates silent about this liquidity crisis, which is looking more and more like a debt crisis?

Don't they see this could potentially derail all their plans (like health care reform)?

On the positive side, this could put an end to the war in Iraq.

Will Bush work with Congress to pull the right levers? I have all the confidence in the world that Bush will handle the coming economic crisis as well as Herbert Hoover handled the Great Depression.

Re: have all the confidence in the world that Bush will handle the coming economic crisis as well as Herbert Hoover handled the Great Depression.

George Bush will not be in office by the time the next recession hits, which I predict to happen around 2010-2011, just in time for a Democratic president and Congress to take the blame in 2012.

Good question. 

Re the subprime problems, key Dems (HRC for one) have been talking about trying to buy more time for potential foreclosure victims but getting the Fed mortgage agencies to buy back the loans.  The challenge is bailing out deserving people without rewarding those who don't deserve to be bailed out.

You want to help the homeowner who got in over their head because of an unscrupulous lender, but you don't want to necessarily bail out the bubble-inducing investor who ignored the risks they were getting into.

Re: The challenge is bailing out deserving people without rewarding those who don't deserve to be bailed out.

Easy: benefits for verified owner-occupying homeowners, but nothing for speculators. However, there should be protection for renters who, if they are current on their rent, should not be evicted from foreclosed housing as long as they are willing and able to continue rent payments (which provides useful income for whoever takes back the property as well as a degree of property maintenance, helping keep up the house's sale value).

What happens if the lender who currently own my mortgage goes under? I assume that somebody else picks it up at a bargain. Is that right?

What I would like to hear is that the lender comes begging to me on his knees for me to agree to paying him a reduced rate, but as the Geico gecko says, "that is a complete fantasization, of course".

I'd say you're being overly optimistic. Hoover, for all his faults, had a brain.

Depends.

<SNARKALERT> If this one is like the last republican-led risk-a-thon, Uncle Sugar will be asked to help out those poor, poor, lenders that were just trying to make the American Dream of home ownership available to all you deadbeat lowlifes.</SNARKALERT>

If the "bargain" (see: bottomfishing) guys that bought all the paper from African countries that got debt forgiveness from the rest of the world get yours, they might tear up your mortgage book and demand full payment. Tomorrow.

Or,

Some populist presidential candidate could come along and say that, when elected, he will institute a home mortgage program that would refinance everyone's first and current home (that they agree to live in for at least his presidential term) for 5% fixed. If you could afford your mortgage at 5%, no problem. If not, then you were either living way beyond your means or speculating.

Or,

Bernanke is really a hard nosed "markets" guy (or a Bush style "compassionate conservative") and doesn't give a *hit if some are thrown under the bus....

BTW, is anyone taking bets on which melts down completely: Jim Cramer or the financial system? ;<)

Alphonse ( Al ) Kada
Iranians are fighting the Americans in Iraq so they don't have to fight them on the streets of Tehran

. . . I received a press release from the Fed saying they’ll lend more money to the banks to lessen the crunch . . . . Jared Bernstein

Jared,

I've seen reports that the Fed is buying (highly unusual) MBS rather than taking MBS as security for its loans to the banks.

Is it true? Has Bernanke's helicopter taken off?

Interesting counterpoint from Max Sawicky over at his blog:

=== Whether they knew it or not, a lot of people bet that house prices would go up indefinitely. If they don't, a lot of them get screwed. I bet that they would not. If they get screwed, maybe I get a shot at a good deal on a new house. If their bets are covered by government policy, they get to live in a house they couldn't really afford, and I stay priced out of some houses. Maybe some of my taxes are used to subsidize others with higher incomes, net worth, and house value. ===

If your lender goes under presumably someone will pick up its assets including your mortgage. It shouldn't affect your mortgage though you might have an opportunity to negotiate a better deal for yourself. Many did that witht he RTC during the savings and loan problems.

Daniel A. Greenbaum

The big money types in the US will rein in their chest-beating - self-made-capitalist - HEMAN - hypocritical cant long enough to ask American taxpayers for a break "to keep the system solvent". Like happened with Long Term Capital or Chrysler and so on. It's when the little guy needs a break that the tough get going. Seems like the bankruptcy laws were changed just in time to protect banks from the housing crisis. Gullible Democrats supported it - since Greenspan must have seen this coming.

Bullshit and jive

I heard they were only allowing banks to use MBS as collateral for loans...

wink, wink. nudge, nudge. like they'll be paid off?

it seems to me that this whole "sell the loans to wallstreet" thing was meant to get around fractional reserve requirements?

To boldly go...

Accepting the sale rather than the pledge of the collateral -- here, mortgage backed securities (MBS) -- may be a distinction without a difference -- but not because the Fed will suffer a loss (the collateral is worth something on the dollar and it's up to the Fed to make sure it takes enough of it to secure the loan).

It is a distinction without a difference because in both cases the government is printing money (expanding the money supply) in order to keep the bubble inflated.

The question for citizens is whether we want to maintain or more worrisomely, add to the current system liquidity. I know I don't have an answer.

Unless the government is going to bail me and every other schmoo out whenever we can't make our obligations, there should not be one dime given to these unscrupulous lenders, private equity and hedge funds. Oh, but the house of cards will fall and the whole fake money illusion created by 3 card monty financial instruments will reveal how the economy has been falsely propped up for the past 6 years by speculation, smoke and mirrors. We can't have that; hence massive bail out; see : Neil Bush and the savings and loan collapse.

Why is a Bush always involved in the biggest tragedies of our lifetimes. Marvin Bush was the operator of the security co that shut down the twin towers 2 weeks before 911, perhaps to install strategically placed demolitions? Jeb Bush engineered the usurpation of the real 43rd president of the US, Al Gore. Lil GW Bush, well what hasn't he done to destroy this nation?

Later in the day ---

Bloomberg is continuing to use the phrase "purchase of securities including mortgage-backed debt" to describe Fed actions, see Ye Xie today at 17:41 EDT, and Lanman and Vits ("buying assets including mortgage-backed securities") also today at 18:11 EDT

That's $38 billion to be spent over the weekend in addition to the $18 billion already spent, and looking at the chart of the stock market's last hour, it looks like da boys in the trading rooms knew the "helicopter" had taken off.*

* Or maybe not. Bush was awfully confident this week. Maybe he knew the President's Working Group on Financial Markets, the old "Plunge Protection Team," was ready to pull the trigger.

N.B. Bernanke has been known as "Helicopter Ben" since his 2002 speech citing "Milton Friedman's famous 'helicopter drop' of money," a speech in which he pointed out that deflation (and presumably, a credit crunch?) can't happen because "the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost."  And the Fed would loan this money to banks taking back "private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral."

Sounds like what's been happening over the past couple of days.

Re: wink, wink. nudge, nudge. like they'll be paid off?

Of course they'll be paid! That's the way these things work. Banks pledge their portfolios as collateral all the time for bridge loans, including pledging collateral to the Fed. This is not the first time this has ever happened, although the magnitude of the loans is definitely extraordinary. But the Fed is acting very responsibily, to prevent a temporary credit crunch from crashing the economy. That's one of the main reasons we have a Federal Reserve (look up the history of the Panic of 1907). Nothing sinister and nothing dastardly about it.

The percentages vary widely by city and region - both for subprime and for ARMs. So in that sense, the risk is not at all evenly spread. There are cities with very little of either; cities where the bulk of mortgages are one or the other.

What's surprising and dangerous here, though, is that major European financial houses have been playing this suckers game. Between the rising Euro and the perception that the US economy's being mismanaged, a great deal of American stock investment in the last several years has been into European stocks and mutual funds holding them. The belief has been that Europe, at this time, is just on the whole better managed, financially. And, as the flow of investments has shown, this has been the belief of the the monied classes in America, who are supposed to be so convinced by Bush & Co's rhetoric and accomplishments.

But now it turns out the Europeans have been idiots on the American subprime front too, which means the perception of Europe as a safer harbor for investment is at risk.

As I understand it, so many of these loans have been packaged in such a way as to make it almost impossible to know "who" to negotiate with. Because it's not longer one lender, it's often a kind of "pass through" affair.

This, to me, is the huge tragedy here. If anyone gets bailed out, it may be the large lenders. But the poor soul that's trying to find a way to save their house, pay what they can - or refinance - is left high and dry. Without a home. Going bankrupt, perhaps, at a time when the law has made that ever so difficult.

The problem may not be identifying with whom to negotiate -- it's almost always the mortgage servicing agent. The problem may be that those agents have none or very limited authority to modify the terms of the mortgage -- and for many and various reasons (arcane accounting rules being among them).

Tanta at Calculated Risk has more, here.

Re: If the homeowners are merely provided benefits while their debts remain, they'll use the benefits to pay the speculators who hold the debts.

???
Homeowners do not owe money to speculators, though renters may. The speculators are the house flippers: the people who, with flat out lies about their income and assets, bought up multiple houses thinking to turn a million dollar profit on them in a couple years, and who are now drowning in debt. I bet you will find an awful lot of the distressed and foreclosed on property was never owner-occupied in the first place and there are would-be flippers now just sending the banks the keys to the properties they bought and blowing off the loans entirely.

Re: The problem may be that those agents have none or very limited authority to modify the terms of the mortgage -- and for many and various reasons (arcane accounting rules being among them).

This is not necessarily true. Since real estate trusts have every incentive to keep the loans performing they generally provide the servicers with proper authority to renegotiate at need. I work in this industry and I know about this first hand. I have seen mortgages that were as much as eight months behind reinstated through servicer-negotiation with the mortgagers. But in many cases the problem is that there simply is no reasonable deal which can save the mortgage; you cannot demand a 3% teaser rate continue indefinitely when even borrowers with FICOs of 800 are paying over 6%. Nor can an unemployed auto worker in Detroit expect to catch up on six months worth of delinquent payments.

Re: Don't like fiat currencies

All currencies are fiat currencies. Gold is not dug out of the ground with stamp from God saying “I am worth X” and if you think gold prevents inflation of inancial shenanigans please study the economic history of the world prior to 1930. From the hyper-inflation that ruined the Roman Empire to the collapse of 17th century Spain to the 19th century panics, gold-based economies often came tumbling down in rubble that makes the current situation look like a walk in the park.

That is an interesting point/question.  I'd describe trickle-down as the notion that if you help the rich (cut their taxes, deregulate the markets wherein they frolic, etc.) their added wealth will lead to greater economic output, some of which will reach the not-rich. 

Not to put too fine a point on it...this hasn't worked.  It's main impact has not been better macro-outcomes; it has been greater inequality. 

But, as I stressed in the post, and as you can read in many an article over this wkend, bubbles in important markets (dot.com, housing) can lead to overall economic slowdowns that hurt everybody.

So trickle down is really asymmetric: helps the wealthy on the way up and hurts everyone on the way down.

I have doubts that the fiscal tools will do the job. For one, the effect can be too slow. For another, Bush's tax cuts and wild spending don't leave much room for Keynesian demand stimulus. And in today's global economy, it is not certain that money poured into the American economy won't leak out. (I just drove a stretch a long stretch of interstate, and the trains alongside were loaded with containers market China Shipping, Ying Mao, etc.)

I also wonder whether this particular problem will have any greater long term impact than such as the S&L crisis, or the Latin American debt crisis, or what have you. The economy today seems to be so big and mushy that nothing really makes all that much difference, including policy.

Of course, I distrusted the crazy mortgage options and took out a fixed rate 15-year, just as that guy on the radio (Dave something) said to do.

IMO, the underlying problem is inflation, which is not being well measured at all. At the checkbook level I think it is running well ahead of official statistics.

sadly, reading through these comments, i conclude that no posters seem to understand how the financial catastrophe is going to continue to unfold.

the us dollar will probably fall to 50 cents. the euro will eventually tank in concert[since it is another fiat currency].

george walker bush will be the new herbert hoover. the usa, and its allies, will enter into a depression that will make the 1930's look benign. this is not an unwanted disaster by the erstwhile aristocrats...this is what they view as the best method for erasing the middle classes and re-enserfing the planet. dick cheney will be known as Duke Cheney. lynn will be known as the Duchess Cheney.

George Walker Bush, of course, will be known as Emperor George.

there will be no place to hide your cash because the nouveau aristocrats[reptillians/demtillians] will have throttled all assets, and their transfers, as a consequence of the gwot.

serfs you craved being so as to gain the protection from the usg/mossad-created "vandals". and serfs you will become.

and there is no arresting your slide into serfdom. you let the state go way too far.

I confess seeing the finance stars with egg on their collective faces has a certain charm

Indeed so.

In the midst of all the rubble, Warren Buffett stands like Ozymandias in the desert.

His motto: "Be lazy."

Most curious really. It all seems so simple for some.

For a decade World Chess Champion Jose Capablanca didn't lose a tournament game. Capablanca had solved all the problems he proclaimed and lesser mortals could only hope to draw with the master.

Then Capablanca was beaten by a drunken lunatic, Alexander Alekhine, whose long combinations today remain beyond analysis by any imaginable computer.

Maybe Buffett will be toppled the same way but it wouldn't be a safe bet.

Even the insane Alexander Alekhine had enough common sense to never accept a challenge from Senor Capablanca.

As Pogo noted, those optimists proclaiming the end of the world will just have to continue on in their existentialist hell despite their dreams.

Best, Terry

Perhaps the issue, then, is how much? Bush has been implementing military Keynesianism for some years now. The deficit is already running strong (although getting the actual number is not so easy nowadays, from what I have read). And here we are talking about how to head off a recession. Will retargeting the stimulus do the job, or will it take more deficit spending than now? If so, how much? I'm afraid that unless it is a shockingly large number, it won't have much effect on a 13 trillion dollar economy.

It goes without saying that to get a stimulus package targeted at low income families and state infrastructure budgets is currently impossible. That would mean that the only hope would be a Democratic president and Congress that would actually pass such a program, an eventuality that is both uncertain and nearly two years off. Then, we'd have to wait another budget cycle for the stimulus program to by implemented.

Personally, I think the inflation at the grocery store is moving along quite well. Maybe, as Jared suggested, the price of stuff we rarely buy is staying down so that the overall inflation rate for food looks lower than if we paid attention only to the bread and the hamburger. Pickled squid, anyone?

The real answer to your underlying question -- Why do they charge me 30% -- is simple. Because they can. They don't care about you, they just want to make a lot of money, and getting people into situations like yours works very well for them. There aughta be a law.

My advice to you, drop the resentment and move on. The amount you owe is quite small, pay it off ASAP and move on. Or, have you tried to get some other small loan? Almost any other source is going to be much better than the credit card and charge way less than 30%.

Inflation? I wish I knew, I could get rich! But anyway you'll have to wait many years before inflation has a major effect on your dealings with Citibank.

Yes you are being cheated. But it's legal and so there's nothing you can do about it except end the situation asap. Actually there are lots of inefficiencies in the credit card industry that you can exploit to get back at them, later. I guess you have the intelligence but maybe not the time or inclination to pursue.

An example, a friend has credit card debts of like $20,000 at 0% interest. She invested the money. She keeps getting introductory offers with 0% interest rate. Why do they do that? Maybe it's like musical chairs, each bank keeps hoping that they will be the one she defaults on, then she'll be trapped by their cosmic interest and fees.

Yes, she does look like a dude, doesn't she.

Your point is what exactly? Grocery inflation is epiphenomenal on energy inflation, due to A) higher shipping costs and B) the diversion of corn to ethanol (the latter affects mainly dairy and meat prices which is where the grocery inflation is largely concentrated).
Anyway, and again, this is medicine we gave to take, to convince people to start cutting back on profligate energy usage: it is "good" inflation that will force us to do the right thing.

Anyway, and again, this is medicine we gave to take, to convince people to start cutting back on profligate energy usage: it is "good" inflation that will force us to do the right thing.

Except this is the most regressive "medicine" imaginable.  The Hummer guy fills his tanks, the single parent tries to figure out how to make the food stamps stretch a couple of more days at the end of the month.  The most profligate have the means to pay for their profligacy, and the persons who suffer most are the least of the offenders. 

But then again poor kids can get along without milk a couple of extra days a month, can't they?

aMike

Sorry, I can't accept this.  Milk currently costs $4.09 a gallon, and you're suggesting this is good inflation?  Stay out of the dairy aisle?  I'm sure that lots of nutritionists will say this is wonderful for kids.  How about the vegetables aisle?  Today's price for a head of lettuce:  On sale:  $1.99  Broccoli?  $1.99 a bunch.  Cauliflower, $1.99 a head.  So what... a diet of dried beans and rice?  in the name of good inflation?  Instant Mac and Cheese?  o.k., I guess.  Baked beans at 6-7 cents an ounce? I guess they're not too bad...roughage and all that.    Ah... dried legumes.  They're healthy.  I can get those for 7 cents an ounce (red kidney) to 4 cents and ounce (split pea). 

Myself, I'd say augment the food stamp programs and promote child nutrition first: maybe then one could talk about "good" inflation.  But now, it teaches all the right lessons to all the wrong people.  We're nowheres near the rate of inflation necessary to restrict consumption of the most energy wasteful economic classes.

aMike