So what's your solution, genius? Let the banks go under and the whole economy tank?

What we're seeing is typical of a certain phase of the business cycle. As long as we allow people to buy things on time, with credit extended by people who expect to be repaid, there's going to be a business cycle.

If you know some better way to moderate it why don't you share? Writing articles with rabble-rousing headlines just doesn't cut it.

This is far more than just a business cycle, though I agree that criticism is less useful than a concrete plan to get us out of this problem. It's easy to criticize, after all.

The big problem - the potential disaster for our economy (and that means everyone, not just fat-cat bankers or underwater home-owners) - is that credit is drying up. A credit crunch would be an economic disaster for the whole country - nay, the whole world. And coupled with rising inflation, a falling dollar, and record-breaking budget deficits - ALREADY, before these problems really even get started - it means we could be in for a protracted period of very lean times. We're talking years and years here.

I don't know the solution, but I suspect that there isn't one. Not much of one, anyway. We let this problem happen, because we elected a Republican President and Republican Congressmen who were economic imbeciles. Their anti-regulatory fervor meant that these new financial products had no adult supervision. Meanwhile, Bush's borrow-and-spend fiscal policies, tax cuts for the rich, and economic blackhole in Iraq caused the value of our dollar to crash, oil to surpass $100/barrel (from less than $20 when he took office), and our budget and trade deficits to skyrocket.

The chickens have now come home to roost with a vengeance, and there's not going to be any 'magic' solution. We now have long-term structural problems, combined with a burst bubble in housing and credit markets. I'm as pessimistic about our future economic outlook as I've ever been, and I don't see any way out of a long period of pain. Anything we do will just make another problem even worse. I hope Barack Obama has smarter people than me looking into this!

Quoting from Baker's article;
"we keep the financial system operating smoothly and prevent a chain reaction of credit collapse."

This is the whole point of a bailout, to keep a few big defaults from sinking the entire system.

Quoting from Baker's article;
"The government temporarily takes possession of the bank, replaces the current leadership with competent managers, straightens out the books and then sells it back to private shareholders."

Since when does the government have the power to do this? I don't mean the legal power. I mean the savvy to separate the wheat from the chaff, the competent from the incompetent? Running a bank, especially a modern, globally competitive investment bank is one hell of a difficult job. This is where I differ from Baker and most populists. I can see the government taking possession, straightening out the books, and selling off the assets. That's it.

Quoting you;
"The banks have been overcharging the American people shamelessly. You won't garner a lot of sympathy for the "poor" bankers. They've been guzzling the blood of Americans for a while now."

No substance here. Just venting your spleen.

Quoting you;
"That levies the punishment for mismanagement where it belongs, yet protects the victims of that mismanagement."

Are you so sure you can separate the victims from the villains? Or do you automatically conclude that all investors and lenders are villains? Are those who trusted that rating agencies would rate independently, and that all involved would follow the law, guilty of some crime because their investments did poorly?

Baker's addendum is interesting (David Ignatius in todays Washington Post has commentary on the same subject). It will take some thinking but I do have an immediate question. You can force the banks to allow those in default to stay on as renters...but for how long and under what conditions? What's to stop the banks from selling the property and the new owners - who wish to be landlords or have their relatives or friends as renters - from evicting?

Offensive,

You might try reading the proposal that you're criticizing, then you would know the answer to some of the questions you raised. Specifically, the proposal suggested a right to be a tenant indefinitely, although I would expect that the period would be specified in any legislation that might pass. To accomplish its purpose, it would need to be a significant time period (e.g. 10 years).

The terms are also specified -- the judge handling the foreclosure calls in an independent appraiser (just like banks do when they issue mortgages, although their appraisers are not always as independent as would be desired), who determines the fair market rent based on other rentals in the area.

The proposal also says that the right to rent follows the home, so that if the bank sells the home, then the former homeowner still have the right to rent at the fair market rent.

Finally, the point about competent management is very simple. You need to get someone in there who knows that they are doing (in contrast to the current clowns) TO STRAIGHTEN OUT THE BOOKS.

I don't want the government to run the banks.The current crew put them into bankruptcy, you need government appointed managers to deal with them in the period of bankruptcy until they can be resold as to shareholders.

Interesting article at Bloomberg:

“Banks Lose to Deadbeat Homeowners as Loans Sold in Bonds Vanish”

http://www.bloomberg.com/apps/news?pid=20601109&sid=aejJZdqodTCM&refer=home

Offensive,

There are over 30 million rental units in the country, the vast majority of which are not slums. I can see no reason why ownership units that are converted to rental units, rented out at the market rent,would become slums. Owners would have the same motivation and legal obligation to maintain these units as they do any other rental units.

"Current clowns"? I wouldn't call them that. Most of them did extremely well in school, possess enough obvious charm and talent to obtain highly desirable positions in very tough competition, made great fortunes as the bubble expanded, and have protected themselves from total ruin in the aftermath. That's an enviable position that most of us would like to occupy.

Good God! How old are you?

Do ya think maybe, just maybe, that some of them don't hold a candle to the most lowly janitor in Alabama that dropped out of high school, but that never, ever, would consider enriching themselves at the expense of someone else?

More George Bailey's, less Mr. Potters, please. They both had great educations. One was a prince among men. The other had money.

I wouldn't enter the nuts-and-bolts fray going on between Dean Baker and offensive to you. It's a waste of time.

Politicians' claimed concern for the problems of subprime borrowers is a typical misdirection ploy, a cover for their principal intent which is to come up with a plan which will "save" the financial system. Unless Dean can explain how "The Subprime Borrower Protection Plan" will perform that service, there'll be no interest in or support for it.

And I for one don't think Dean's even come close to suggesting how his plan will do so.

The judges are already there. You need them for a foreclosure.

Mr. Baker,

Apparently, I've not understood. Everytime a landlord wants to set a rent he has to approach a judge who gets an appraiser who comes back with a number. Then, if the landlord doesn't like it, the process is repeated (presumably a limited number of times) with the landlord paying each time? Do you have any idea of how costly and time consuming this will be?

Ellen says;
"Why? Because you say it is? And what makes you think it needs saving -- or "saving"?"

Gee Ellen, we've got a bank run on our hands (so says David Ignatius in yesterday's Washington Post, as well as many, many others who follow such things as the problems of the monolines and the probable consequences of their failure). Is it a good thing to let bank runs take their course? I don't think so.

ps I knew it was only a matter of time before Ellen showed, and, btw, that's NOT really your (smart) eye, is it E?

Offensive,

the cost should be zero unless the landlord is not too bright. The landlord is entitled to the fair market rent as determined by an independent appraiser. This rent rises in step with the consumer price index for rent in the area. Modern computers (in fact 40 year-old computers) can do this calculation in a fraction of a second. If the landlord doesn't like the rent, then he is welcome to spend millions of dollars on appraisals in the hope of getting a more favorable ones, but rational landlords wouldn't spend a dime. The irrational landlords are welcome to go broke.

btw, my expectation is that in the vast majority of cases the original mortgage holder works out erms that allows the homeowner to remain in their home as an owner. Banks do not want to become landlords.

Offensive,

that's just fine. If they want to give the property to the former homeowner and go off and whine -- seems like a win-win to me. My guess is that the people who run banks are a bit more rational (in spite of the ungodly stupidity they demonstrated in the housing bubble) and they will mostly decide to negotiate terms that allow the current homeowners to stay in their homes. In the cases where the homeowners become renters, I would expect that the vast majority would accept the rent and pray for their tenant to move out rather than abandon the property.

I'm no economist but it's abundantly clear the Bush administration has no clue about running anything. It's all but impossible to identify even one thing this administration has gotten right. This result is to be expected when we have a WH and congress that do everything for reasons that have absolutely nothing to do with what is good for America. When everything that happens in Washington is about who wins ($) and who loses, our problems will never be resolved and nobody wins.

Ellen,

I was just using "judge" as a shorthand. In some jurisdictions foreclosures are handled by judges in others it is a lower court officer. It really doesn't matter. This is an incredibly simple process.
The court officer pulls a name off a list of court approved appraisers (yes, someone does have to take two weeks to assemble the list) and then has the appraisal done. The appraisal determines the rent. (An unhappy party could pay to have the court appoint a second appraiser).

The judge has to be able to pick a name off the list, call or e-mail the appraiser, and then write down the rent determined by the appraiser. you could get a high school kid to do this in her spare time at the minimum wage.

workerbee says;
"You've demonized anyone that isn't an elite banker."
Support your charge. Quote me.

Mr. Baker says;
"If they want to give the property to the former homeowner and go off and whine -- seems like a win-win to me."
This is a serious distortion of my comment;
"The landlord will not like the rent and won't spend the millions (your number) necessary to dispute it. He'll take his losses and move on"

They don't want to give the property away and they won't. They'll continue to collect whatever rent they can. They'll refuse to pay for maintenance and generally resist any further losses. And they'll lobby, in various ways - most importantly be refusing to extend new mortagages to low-income or poor risk buyers - for changes in the law.

Mr. Baker says;
"in spite of the ungodly stupidity they demonstrated in the housing bubble"

You continue to characterize bankers as fools. It must meet some deep pyschological need because the evidence is not there to support your contention

First. Greenspan says in his book that he believes it is impossible to know when you are in a bubble. I don't think he's right but he's hardly stupid.

Second. Many, many bankers were aware that rents were seriously out of line with asset prices but gambled that demographics or other factors would allow them to continue making good profits for awhile longer. Wrong, but hardly stupid.

Third. Many executives at mortgage companies and banks thought the policy of extending credit to anyone was crazy, took appropriate personal action, and walked away with fortunes.

Fourth. Bankers were not responsible for the bubble. There's a lot of political - and investor - pressure to keep the economy going, to keep profits high, to keep jobs plentiful. Bankers are not miracle workers. They did what they could to comply.

Fifth. Many banks and investors were as much victims of crooks and insider fudging as the borrowers.

Sixth. And most important. If you were really so sure of your opinions, your intelligence, your superiority, you would have done what the bankers at Goldman Sachs did; taken a contrary position, and made a fortune. You haven't said you did. In fact, you've pretty much said you didn't by telling me that you're still a middle-class renter.

Greenspan is wrong. It is possible to know when there is a bubble by looking at the fundamentals, as I did with the stock bubble in 1997 and the housing bubble in 2002. If he can't recognize a bubble, then he was in the wrong job.

If the unhappy former mortgage holders/ landlords don't do maintenance then their property will deteriorate and they will collect no rent. They have the same incentive as any other landlord to do maintenance. Read the proposal as many times as it takes for you to understand this.

As far as the bankers being stupid, I couldn't care less about their IQs, their investments were ungodly stupid -- they should have recognized the bubble and they should have recognized that their loans were enormously risky (and they were not being compensated for this risk with extraordinary returns). Just like Greenspan, if they didn't see the bubble, then they are in the wrong profession.

Finally, if the current group of bankers that wrecked or nearly wrecked their financial institutions throws a temper tantrum and decides not to lend money to low income people again, why should we care. First, many will be unemployed (let's hope all of them), so they will no longer be calling the shots. Second, we have a huge global financial market. There will be people who want to make profitable loans if this groups of whiners is unhappy. If they want to boycott low income areas, then it will be their problem.

Dean, did you see Alan Blinder's article in the NY Times yesterday? Basically, his proposal for the subprime mess is to follow the New Deal Policy by establishing a Home Owners’ Loan Corporation. The HOLC would buy the bad loans and make new ones with generous terms. Any thoughts on Binder's plan?

One point I think Offensive is missing is that the subprimes are only a part of the mess in the financial markets. For one thing, those loans were split up and bundled up into CDO's and then hedged with CDS's, thus exponentially multiplying the amount of investments, money and risk involved. In fact, you can't follow a trail to the end of an investment, because there is no end and because the trail has so many forks and switchbacks that not even the people making the deals were fully aware of exactly where their derivative was derived from or its life-cycle. Evidently, derivatives bundled into derivatives was an accounting nightmare when done over the counter and had to be done manually. This was true on a global basis, Offensive.

Fixing the subprime mess will maybe help the financial world recover, but it's hard to see how they'll be much more medicinal than temporary band-aids.

So, to me, it makes sense to go ahead and protect the homeowners and try to get people working, saving and spending and not worry about fixing the financial institutions. The subprimes can't fix them, but fixing the subprimes can help fix the homeowners. No sense in both of them losing. I don't see the problem with that.