Give Money to Homeowners, Not Banks
It's TARP II time and it could be almost as much fun (for the banks) as TARP I. Tough guy Barney Frank is insisting that at least $40 billion of the money in TARP II go to help homeowners. The only problem is that most of the plans on the table for "helping homeowners" actually send checks to banks.
The basic deal is that the government will pay banks above market value for their mortgages so that they will allow homeowners to stay in their homes without foreclosing. While the banks will still take a loss, the government will split the tab in exchange for the banks not foreclosing. Effectively, the banks are taking the homeowners hostage in order to extract taxpayer dollars.
But, we don't have to give in to hostage-takers.
Why don't we require a rule that after we have determined the ransom to be paid the bank, that we just offer the amount to the homeowner and let them decide for themselves what to do? In other words, if we would have to pay the bank $30,000 above market value to buy out the original mortgage, why don't we just offer to hand the $30,000 to the homeowner.
The homeowners would then be free to negotiate themselves with the bank, with their $30,000 in hand. Alternatively the homeowners could just hand back the house to the bank and use the $30,000 to buy a new home, start a business, or whatever else they choose.
Of course it is questionable whether handing $30,000 to homeowners facing foreclosure is the best use of taxpayer dollars. It costs about $3,000 to pay for a year's health insurance coverage in the State Children's Health Insurance Program. This $30,000 handout would be equal to 10 kid years worth of health care.
We can all have sympathy for people facing foreclosure. But should we hand a family a check equal to 10 kid years worth of health care, just because they were foolish enough to listen to the braindead policy wonks and ideologues who told them that buying a home in a bubble-inflated market was the best way to accumulate wealth?
The best way to help homeowners is to change the rules on foreclosure, so that they have the right to rent their homes for a substantial period of time. This is the no bureaucracy, no taxpayer dollar path. However, since it doesn't give taxpayer dollars to banks, it is apparently a non-starter in Congress.
I wonder what will happen after we do the various bailouts. Are we building an economic foundation that can sustain itself and grow?
Can a housing bailout somehow help restart asset building that can later provide for education, training or for small business development that can replace some of the lost construction jobs?
I am far from being any sort of economist, but it appears that the housing bubble was built on a house of cards and when it went, a major part of the economy collapsed with it. About 30% of the workforce where I live and in many places was somehow related to the construction economy.
With nearly one third of the economy gone, where will people work? Many of them will have to start from scratch. Their scratch may end up being small part time enterprises and training to do things very different. They need personal assets to do that.
Can helping foreclosure families somehow be tied to building individual assets? That may not fit for everyone, but can it at least be an opportunity if someone makes a personal plan that is not built upon second and third Mortgages that pay for SUV's, etc?
One other thought---more people are now saving than for a long time. Should we take advantage of that momentum and rebuild from scratch?
Bob Spencer
January 13, 2009 9:18 AM | Reply | Permalink
All homeowners need help, not just those that are nearing foreclosure. The way to reduce and reverse the 10,000 foreclosures we are seeing daily is to refi as many of the loans as possible that haven't yet gone bad in order to prevent them from going under. Right now, the banks are lending little and the rates are still too high but making matters worse, many who want to refi cannot do so because the loss in home values has eliminated their equity or but them underwater. Direct relief through low interest refinancing for all who qualify would stop the hemmoraghing with respect to foreclosures, free up huge amounts of capital in the hands of consumers as a result of decreased mortgage costs which in turn can help to stimulate real and sustainable economic activity. If we focus on and only help those about to lose their homes, the crisis will never end. With 10,000 foreclosures per day with no end in sight it is obvious there are millions who now are just getting by who, without some relief, will also be faced with foreclosure in the months ahead. If the government finances the mortgages directly as they did during the depression we can effectively address much of the mortgage crisis, stimulate the economy quickly, and bring in a profit for the government in the long run. Name any other bailout activity they are currently engaged in that will actually pay it's own way.
January 13, 2009 12:02 PM | Reply | Permalink
Two questions which should have been asked, but weren't:
1. Who owns the banks and lending institutions which are being bailed out? Don't take the easy way out and say that banks are owned by other corporations, go that extra step and find out who owns those other corporations, and who owns the corporations which own the corporations until you get to a person or people.
2. Why should the American taxpayers be bailing out foreign owned corporations?
My understanding is that Chrysler Corporation was purchased several years ago by a German company owned by Germans. Why is the USA even considering bailing out a company owned by foreigners?
January 13, 2009 4:27 PM | Reply | Permalink
Actually Chrysler was sold by Daimler Benz to a holding company that is, I believe, US based though I could be wrong about that. Many observers have anticipated the holding company is only waiting for the right moment to dismember and sell the parts off of Chrysler to other automotive interests.
January 13, 2009 5:42 PM | Reply | Permalink
And what is your belief based on, wishful thinking?
January 13, 2009 10:09 PM | Reply | Permalink
My belief is based on my recollection of news reports. My memory is that the holding company was New York based but I'm not absolutely certain about that.
January 14, 2009 3:33 AM | Reply | Permalink
oleeb:
Giving you all benefit of any doubts, why would you assume that a holding company based in New York is American owned and operated?
I believe the name of that holding company is Cerberus Corporation and there has been a report that it is a privately owned corporation and that they refuse to identify their board of directors or their stockholders.
Yet, the US Treasury is offering them a bailout in the tens of billions of dollars? Insane.
January 14, 2009 8:06 AM | Reply | Permalink
"Established in 1992, Cerberus Capital Management, L.P. is one of the world's leading private investment firms with $16.5 billion under management in funds and accounts. Through its team of more than 275 investment and operations professionals, Cerberus specializes in providing both financial resources and operational expertise to help transform undervalued companies into industry leaders for long-term success and value creation. Cerberus is headquartered in New York City, with offices in Chicago, Los Angeles, and Atlanta, as well as advisory offices in London, Baarn, Frankfurt, Tokyo, Osaka and Taipei. More information on Cerberus can be found at www.cerberuscapital.com."
"NEW YORK - October 19, 2006 - John W. Snow, the 73rd Secretary of the Treasury of the United States of America, has been appointed Chairman of Cerberus Capital Management, L.P. Prior to becoming Secretary of the Treasury in February 2003, Secretary Snow was Chairman and Chief Executive Officer of CSX Corporation."
http://www.cerberuscapital.com/news_press_release_111406.html
-- ARG
January 14, 2009 6:33 PM | Reply | Permalink
Interesting. However, all that still doesn't tell who owns Cerberus, who profits when Cerberus profits, and who is on its Board of Directors.
It does indicate that Cerberus is more than just an American company.
The CEO, while an American, is just a front man for the real power behind the throne - the Board of Directors.
Who they are, and why should the American taxpayers be bailing them out is still a valid question which should be answered before any US taxpayer money is used for a bailout of a company they control, be it Chrysler or any other one-time American company.
Otherwise a bailout for Chrysler/Cerberus is just a giveaway without even knowing who is benefitting the most from that giveaway.
January 14, 2009 6:53 PM | Reply | Permalink
"Who they are, and why should the American taxpayers be bailing them out is still a valid question..."
But if you dont know who they are why are you isisting that they are "owned by foreigners?"
State some facts please.
And if one looks at who owes debt to who then the U.S. itself is owned by China.
January 14, 2009 11:35 PM | Reply | Permalink
When a person or a corporation feels the need to hide something, in the case of Cerberus, its Board of Directors and owners, it is always best to think the worst and allow them to publish the facts to set the record straight.
Their not publishing the facts indicates to me that the "worst" is even worse than I am thinking.
That raises the possibility that Bush and Paulson are majority owners in Cerberus and this bailout is just one hugh ripoff of the US taxpayer.
One basic assumption in this bailout process which should be questioned is that the financial institutions are owned by Americans and operated in the interests of Americans. That assumption has not been proven and is probably not true.
.
January 15, 2009 8:04 AM | Reply | Permalink
I don't think you're being fair to homeowners here. They weren't foolish enough to listen to brain dead policy wonks. It was the policy of the US government to promote home ownership as a path to wealth. Heck, in a lot of ways it still is. Sure, you schooled the other wonks by calling the bubble and timing it perfectly. But can you really blame people who listened to their nearly-elected president when he said this was the way to go? Bush tricked some people into Iraq and others into subprime mortgages.
January 13, 2009 9:23 AM | Reply | Permalink
I think at least some homeowners deserve some of the blame. I remember when my wife and I applied for our mortgage back in 1997, after doing a lot of home shopping. We thought the amount we were asking for was substantial, and represented about the limit of the monthly mortgage payment we could reasonably carry. The bank came back and told us they were willing to loan us about 50% more than we had asked for. We declined that amount. But I imagine many other people, when given that kind of news, decided to go out and shop for a more expensive home.
A lot of people have been greedy and stupid, and have maxed themselves out to the very extreme limits of affordability, so they could buy a super-ultra-dream home instead of just a nice dream home. Should we be helping them?
My son turned 18 last June, and since then has been receiving credit card offers offering incredibly high credit limits - credit lines that my wife and I had to work about ten years to achieve, even adjusting for inflation. It's crazy. But even crazier are the people who succumb to these temptations, and spend irresponsibly and gluttonously.
I'm not talking so much about people at the bottom of the scale, who stretched themselves so they could own a home, rather than no home at all. I'm talking about people in the upper-middle range: people who should have purchased a house at about 1/2 to 2/3rd of what they paid, but went for the glittering, toney manse instead.
I'm also not interested in schemes aimed at helping people preserve their "home values" - which is often just a code for helping people keep home prices high in their area so they can keep their schools and neighborhoods white. There are lots of hard-working and thrifty people who have worked their way up in this society, and can now afford to buy homes whose market prices have fallen dramatically because of the collapse of the bubble of oversupply and extravagant prices. And I don't want the government involved in schemes to keep them locked out, and preserving the segregational stasis.
January 13, 2009 10:07 AM | Reply | Permalink
I see what you're saying, Dan. I guess I am talking about people at the bottom of the scale who, unfortunately, have now been classified as "people who never should have owned homes in the first place," which I find pretty annoying as these are the same people who were told for a decade that the cycle of poverty, or at least their big chance at upward mobility, came from accepting the "good" debt of home ownership.
Are we dealing mostly with McMansionites and home flippers or with people who justly wanted a leg up and who were told quite clearly how to get it?
January 13, 2009 10:18 AM | Reply | Permalink
Alternatively the homeowners could just hand back the house to the bank and use the $30,000 to buy a new home, start a business, or whatever else they choose.
Many of the bad mortgages were occasioned by people who:
- refinanced their existing house(s) to get a small down payment to buy another house, meanwhile lying about whether it was a primary residence or an investment property on the applications, or
- refinanced their house to get more money to invest in a small business, often getting no-document mortgages because their small business was not profitable and they weren't creditworthy and/or they weren't reporting the income from their business on their taxes.
These are not people deserving of help.
January 13, 2009 9:50 AM | Reply | Permalink
It seems Mr. Baker you are finally nearing the solution I've been proposing which goes further and is far more effective than what you are bringing up: simply use the TARP funds to directly refinance the mortgages. No banks need to be involved. Better yet, refi the mortgages at existing value and then split the difference between existing value and the old mortgage with the banks. The bank takes a 50% hit on the difference, Uncle Sam absorbs the other 50%. Meanwhile, homweowners get a low, fixed rate mortgage they can afford and Uncle Sam makes a profit in the long run. Why is this so hard for people in DC to grasp and start getting behind? It also serves as a tremendous and immediate simulus to the economy becuase it frees up massive amounts of capital for spending by families due to their now far more reasonable mortgage payments.
Why, Mr. Baker, aren't you proposing and getting behind something like this? It makes a lot more sense than all the complicated proposals we've seen for throwing money at the creeps who brought this mess upon us all. I would genuinely love to hear what you've got to say about this. Perhaps I'm crazy but it makes a whole lot more sense to me than the stuff they've tried so far which we all agree has not worked and won't work.
January 13, 2009 10:55 AM | Reply | Permalink
I happen to have had personal experiences with organizations and private banks that sincerely thought they were helping people acquire assets by giving no down payment loans. They didn’t try to trick people, but really believed that one of the best ways to escape poverty was to build assets through home ownership.
Too many of those loans failed and I suspect that many of the loan recipients are losing their jobs now as well.
Even when my wife applied for a home loan, the credit union, of all places, tried to talk her into taking a loan that she would not be able to pay. In fact, the monthly payments would have been well beyond any sanity.
I also know of people that are as dumb as I was when I was their age and they wanted a house so bad that they got suckered into no interest balloon loans, etc.
Many well meaning loan makers and homebuyers made mistakes along with the weak people that were simply trying to impress with their oversized house and its loan.
With all of that, I still say that many of those people could benefit and would welcome a chance to build their lives by doing everything from going to graduate school to learning entry-level health care skills. With the right guidance, some could build new businesses.
As I see it the economy and government is far too centralized and focused upon short term rescue packages to launch a new economy that never really existed except for a housing bubble.
Bob Spencer
January 13, 2009 11:08 AM | Reply | Permalink
There is no justification for helping "homeowners". We decided to intervene on behalf of the financial system because it provided public goods as well as private goods. Access to cheap liquidity was and is a major boon to all kinds of businesses, not to mention the government.
As I've previously mentioned in the context of bailing out automakers, virtually nobody else fits the bill, and certainly not people who lied on their mortgage applications so they could buy a bigger house than they could afford.
Now, I'm not going to defend some of the sweetheart deals given to banks, or the overprotection of bondholders and stockholders in the banks. The government should have fought harder and longer to get a better deal for the taxpayer. But that doesn't mean that diverting funds intended to restore the health of the financial system should instead be given to citizens who are distinguished only by their financial irresponsibility.
January 13, 2009 11:44 AM | Reply | Permalink
This idea that somehow the millions of people who find themselves in trouble are all irresponsible liars is pure bunk.
God forbid we should help our own citizens! Let em suffer! Let's focus on the academic questions instead of the real and malignant spread of this crisis and all the human suffering it is causing. Meanwhile, let's be real smug and superior about the misery these people are going through. Let's teach em a lesson eh wot? That sure is a helpful, productive approach!
And when the cancer spreads so far and wide that it comes for you who know better than the great unwashed and importantly did not "lie" to get your mortgage shall we tell you to go fend for yourself too? Chances are, my oh so superior friend, many if not most of the people in trouble are a whole lot more like you than you imagine.
January 13, 2009 12:08 PM | Reply | Permalink
Oleeb I get so goddamnably mad when the powers that be, screw up and then, without a moment's thought, come out with talking points that put the blame on the powerless. And those who attempted to help the powerless.
A lower middle class worker is talked into a mortgage that within a few years or sometimes, a few months, changes its interest rate. A single spaced five or ten page document that, when properly analyzed pushes a payment up from say 800/month to 1200/month.
The average homebuyer does not have a thousand bucks to get a lawyer and there is no negotiation to be had anyway. Only the very rich get to negotiate a loan anymore.
The rate changes on the mortgage, and the buyer has no way out.
In the snippets we see on cable or even in some articles like WSJ, the term variable mortgage or ARM gets used. Throw away terms that do not address the problem, the pain that is felt by the naive and inexperienced.
At any rate, I am with you.
January 13, 2009 12:25 PM | Reply | Permalink
Keeping a homeowner in a home that they could only afford at the low "teaser rate" of an adjustable rate mortgage is not necessarily doing them a favor.
California, Arizona and Florida are non-recourse states, where the mortgage holder can take the house through foreclosure, but cannot take any other assets of the homeowner. That is, the only collateral that the mortgage holder gets is the real property itself.
In those states, it may well be better for the homeowner to mail the keys to the mortgage company, walk away, and start over as a renter.
The various schemes to refinance the mortgage and "keep them in their homes" are more geared to helping the mortgage holders.
January 13, 2009 1:28 PM | Reply | Permalink
I am no expert on this subject. But a lower rate would keep the homeowner in his home.
Now the holder has already received a bill of goods because the value of the original mortgage was overpriced based upon....boy there is question....and the REAL VALUE (whatever that is) may indeed be a mortgage at a lower rate.
Otherwise the homeowner is out on the street, the lawn is overgrown, the building is in disrepair, the home is sold for a huge loss, and the mortgage holder ends up with less.
But again, I am looking at this as somebody who once owned several homes, usually serially like most Americans, and not as an expert.
January 13, 2009 1:52 PM | Reply | Permalink
I don't argue that all homeowners now losing their homes are irresponsible (although, in Southern Cal. at least, the majority of the homes foreclosed on to date were owned by real estate professionals... make of that what you will). But many were, and saying "I didn't read the contract." has never been and should never be an excuse.
Anyway, what I argued was that homeowner relief only helps homeowners. It isn't an efficient use of public funds.
Arguably (and I say arguably because I'm not convinced myself) aid to financial institutions is a good use of public funds. Saving the financial system and putting the instutions in a position to lend helps everyone, including those homeowners who might now be able to refinance as they planned to before the housing market retrenched.
January 13, 2009 12:59 PM | Reply | Permalink
"Anyway, what I argued was that homeowner relief only helps homeowners. It isn't an efficient use of public funds."
More smug, callous bunk. Sorry.
January 13, 2009 2:02 PM | Reply | Permalink
What's your source for your statement, "in Southern Cal. at least, the majority of the homes foreclosed on to date were owned by real estate professionals".
January 13, 2009 2:25 PM | Reply | Permalink
The argument for helping homeowners beat foreclosure has to do with the slummy effects of abandoned properties and the like. I think that's mostly bogus here.
January 13, 2009 11:58 PM | Reply | Permalink
Oleeb, some people are going to get badly shafted, no matter what is or isn't done. Those who were sane in their home purchases still paid ballooned prices when they bought. If they bought for cash, by selling a mortgaged property then downsizing their home to what they had cash to pay for, they will be hurt badly by any scheme that bails out those who went ape on big mortgages. My condo, which I did buy for cash, after selling a big house, paying off my loans on that place, then using what was left for the condo, is now worth about half of what I paid for it, and no bank takes that loss - I do. If my neighbor gets his condo refinanced at a lower market value, my property is stuck at that lower value, and my neighbor is free and clear of any loss.
But, you are right, we can't sit back smirking at the people who were stupid. The problem was the fact that for so long all real estate went up in "value" over time, so you couldn't lose money on a house unless you really worked hard to do so. That is what led to the bubble, even though the cheap mortgages were what drove up the price over the past 12 years or less.
I admit I don't see a viable solution to this. My gut feel is that eventually housing should be removed from the capitalism based economy, and be in a socialism based economy. How to do that is beyond my abilities.
January 14, 2009 12:54 AM | Reply | Permalink
You re right that many people will be harmed regardless of what is done. I just think that the approach I'm advocating would do more good than anything I've read about or heard about thus far and seems to address the actual problem that created the crisis and instead of helping those responsible for creating the crisis it helps the victims.
Remember, the crisis that has robbed you of the previous value of your condo is the mortgage crisis. The large number of mortgages that can't be paid is the problem. This stems from the fact that people with ARM's can't pay once the adjustment goes into effect. By refinancing those mortgages and stopping the tidal wave of foreclosures the market can stabilize. It is the lack of stability and the ongoing foreclosures that have driven everyone's values down so dramatically. The bankers are so greedy and shortsighted that they refuse to renegotiate terms so their customers can pay. They want to try and squeeze every penny they can out of them until they can no longer pay. It's just that they can't pay already so that's a pretty stupid course of action on their part. Adding insult to injury they've also stopped making additional loans so people who could otherwise refinance can't get the money! Bottom line though is that the government could provide mortgage loans directly to people as it did in the depression and come out of it with a profit after having rescued millions of homeowners, restabilized the market for homes, and freed up lots of income for spending. It would be far more beneficial than the stupid things they've done thus far which have had no positive effect, cost a fortune and will never be repaid.
For people like yourself whose homes are paid for or for those who aren't in financial straights, the benefit would come as a result of the market stabilizing and thus values will begin to rise again albeit more slowly and steadily instead of in bubble fashion.
January 14, 2009 2:34 AM | Reply | Permalink
The bankers are so greedy and shortsighted that they refuse to renegotiate terms so their customers can pay. They want to try and squeeze every penny they can out of them until they can no longer pay. It's just that they can't pay already so that's a pretty stupid course of action on their part.
Actaully I was under the impression that the bankers are refusing to renegotiate terms not because of their stupid greediness, but because of the fact that they have no idea who owns the mortgage and therefore who it is that should be renegotiated with. In other wors, the stupid shortsighteness and greed occurred when they sold the mortgages to hedge funds and whatever, and now no one knows who to contact to see about reducing terms.
January 15, 2009 8:34 AM | Reply | Permalink
I don't know, oleeb.
Did the crisis rob us of the value of our homes. Of course not!
It "robbed" us of a chimerical, bubble-inflated "value" -- the difference between the historically proven value (3-3.5 times gross annual household earnings) and the "prices" obtaining during the bubble -- a bubblicious "value" none of us had the right to rely upon when making financial decisions. After all we wouldn't call it a bubble if the prices represented reasonable value, would we.
And the idea that the government can simply issue mortgages and doing so will save distressed homeowners is not quite true.
If the mortgages the government grants are to be rationally based and sound -- that is, somewhere between 80-95% of the present value of the distressed properties -- then, they won't solve the problem. The mortgage principal will be inadequate to pay off the first and frequently, second and sometimes third mortgages on the properties which are underwater. The government wouldn't just be issuing mortgages; it would be giving the banks (which you despise) a windfall.
The current situation is quite unlike that obtaining in the 1930s when mortgage principal to value ratios were regularly around 50%. Then, most properties could fall 50% before they approached being underwater. The problem in the '30s was that the standard short term mortgages were coming due and the banks refused to roll them over (they needed all the current capital they could get their hands on).
Note: For those still stuck in last years debate about the effect of ARMs' interest rate adjustments, they should reconsider. With the interest rates which are the basis of the adjustments currently so low, mortgage interest rate adjustments don't seem likely to cause mortgagors problems.
January 14, 2009 5:23 AM | Reply | Permalink
a bubblicious "value"
Calling for a serious price support program--you may recall that I have spoken to you in the past of my cousin Marvin.
I believe he could be a useful consultant for the government agency charged with supporting housing prices now that supply so drastically overhangs demand.
Marvin is an expert at *reduction of the housing supply.
*they burn surplus crops, don't they?
January 14, 2009 4:17 PM | Reply | Permalink
There is something I have never understood, and maybe someone here can explain it to me:
I have been under the impression that part of what caused the hysteria and collapse of the banks and credit markets was that once home foreclosures began, banks and others holding financial instruments made up of bits and pieces of thousands of mortgages no longer could tell if those instruments were wholesome or fatally riddles with insolvent homeowers. And suddenly, faith in the solvency of banks was gone.
Paulson said: "I'll buy up all those dodgy instruments." But why? Wouldn't it have been more directly effective to announce that as of today, any home foreclosure immediately was going to be handled by the Federal government. First thing? We (the taxpayer) pay off the mortgage, in full, to the lender. Okay, so now we own the house -- but we've done that before (in the S&L resolution) -- and we've also stopped the free fall of home values, as well as shored up faith in all those "dodgy" instruments. Now they're golden again, with the full faith and credit of Uncle Sam.
So how do we deal with the home "owners" who are sitting in foreclosed houses? Probably in a variety of ways. Some people should be sent packing (house flippers, etc.) Some should just get reduced payments for neighborhood stability. Some restrictions should be put on profit taking, etc. etc. The Federal government can look at people's tax returns going back to the year the house was bought. People who were credit-worthy but who lost their jobs should get a break.
Maybe politically this would be unacceptable, but is there a financial reason not to do it?
I'm just curious. I've not understood why an approach like this wasn't taken. I'm not very well educated in these things.
January 13, 2009 12:13 PM | Reply | Permalink
Your suggestion is for the guvmint to pay off the FULL face value of the mortgage?
That takes the banks, lenders, and securitizers off the hook at what amounts to top of the bubble prices in many many cases, and at well over the real market value of the property (the mortgage fraction) in all cases. That's just an ouright violation of the Constitution as I understand it.
January 14, 2009 12:02 AM | Reply | Permalink
Which article of the constitution do you think it violates?
January 14, 2009 5:11 AM | Reply | Permalink
I'm back with the question of the moral consequences of these bailouts -- corporate and individual:
Ultimately, the great strength of this economy is the belief that the game is not rigged, that we can all get ahead if only we try harder. The destruction of that belief could be an awful consequence of this desperate shoveling of money. Amar Bhidé, Professor of Business, Columbia University
January 13, 2009 2:34 PM | Reply | Permalink
Or to put it somewhat differently for the past decade consumers have bought into the fiction that they don't have to save or live within their incomes and now they're being told it wasn't a fiction, at all.
"All prodigals shall be made whole." So saith the United States Government and all its teat-sucking, rent-seeking, politician-buying defenders.
January 13, 2009 2:41 PM | Reply | Permalink
As usual, Ellen, succinct and to the point. Thanks for your contributions here.
January 13, 2009 3:00 PM | Reply | Permalink
Moral hazard's a big question all along. No one's been proposing solutions devoid of it. So the real question is how do we make this better? Outside of that if we're picking the lesser of moral hazards... I'm thinkin' maybe the individuals may, just may be less culpable than the corps.
January 13, 2009 2:46 PM | Reply | Permalink
Frankly, I'm more concerned with general problems in moral philosophy -- see, Adam Smith and Adam Ferguson -- than I am with the particular problems of the insurance, financial, and real estate industries (see, "moral hazard").
January 13, 2009 3:23 PM | Reply | Permalink
Check. We may have all ready fallen through the looking glass in that regard.
January 13, 2009 3:31 PM | Reply | Permalink
Hey Miguelito. Seems to me that the phrase "moral hazard" soars in popularity during certain times... and though in should perhaps be more widely discussed & applied, its sharp end seems to magnetically track toward only a subset of the relevant actions, organizations & people.
As though Government & the Corporation themselves aren't creatures built around moral hazard - fictions that slide consequences onto others. "Externalizing machines" perhaps. Limited liability, immortal lives, management/board protections... the ability to print money, tax... sigh.
i.e. Not so much that the game is rigged across players or teams, but that the game is itself... a rig.
Just grumpin'....!
January 13, 2009 4:38 PM | Reply | Permalink
No doubt, a case could be easily made to broaden the target, (industries), of the definition and throw gov't into the mix as well. Limited liability indeed. Don't forget to read the small print. Problem is it seems the small print in the TARP may have been written with invisible ink.
January 13, 2009 5:19 PM | Reply | Permalink
Limited liability indeed
There is a trope going around that the shit really began to go wild after Goldman changed from a partnership (with each general partner's ass on the hook for the whole) to a corporation.
It doesn't speak well for the product of our B-schools, that only fear of personal loss will keep their "animal spirits" in check...
January 14, 2009 3:59 PM | Reply | Permalink
Who is the Dean Baker?? What an idiot!!! Homeowners don't get foreclosed on!! If you own something, how in the name of God can it be foreclosed on? Just because you get a mortgage on a property and begin paying it off doesn't mean you own it! You've got to pay for it before you own it.
If a mortgage holder owes $30,000 more than the house being bought, this fools solution is:
"why don't we just offer to hand the $30,000 to the homeowner."
You're talking about people who were bad credit risks to start with. Putting $30,000 in taxpayer money into someone's hands like that?? Man, you talk about beer parties!!!! What a homeaux!!
January 13, 2009 4:32 PM | Reply | Permalink
Are you Renaye's brother by any chance?
January 13, 2009 5:21 PM | Reply | Permalink
Bailouts and additional deficit government spending can only make the economic situation worse.
When an individual, corporation, or government is in economic trouble, the answer is not to go on a spending spree or print more money, it is to reduce spending, increase income, or do both.
The US government is proceeding on a course which is the opposite of good sense, it is increasing spending while decreasing income - a sure recipe for disaster.
January 13, 2009 4:42 PM | Reply | Permalink
"...additional deficit government spending can only make the economic situation worse."
No.
January 13, 2009 8:20 PM | Reply | Permalink
icKx:
Thank you for your reasoned response.
My reasoning goes like this:
Increasing the national debt by trillions of dollars (as proposed by President Elect Obama) will increase the amount of interest needed to pay for that national debt by billions of dollars. At even 1%, the interest alone on the USA's national debt is $10 Billion dollars per year per $1 Trillion dollars of debt.
With the current national debt of over 10 Trillion dollars, at 1% interest, the cost of servicing that debt is in excess of $100 Billion dollars per year. At 10% it is 1 Trillion per year.
Obama's statement of adding at least $1 Trillion per year for each year in his 4 year term as president, will only increase those interest payments.
If you think the US government can borrow money forever at anywhere near a 1% rate, you are really smoking something illegal.
The other side of this coin is, the interest payments must come out of any budget before any tax money can be used for current governmental expenses.
A simple mathametical projection will tell you that this ponzi scheme (using future tax revenues to pay off current creditors while continuing to spend more than is earned (taxes)) will soon collapse from its own weight. It won't be long before all tax revenue is needed to service the national debt and none will be left for governmental operations.
January 13, 2009 10:31 PM | Reply | Permalink
Johann, You understand the problem of open-ended borrowing. But the current situation is not intended as long term, and the main point the economists in favor of massive spending have is that the economy is leveraged. This means that when economic activity drops, it drops even further as people stop spending. That drives businesses out of business, homeowners out of homes, debtors deeper into real debt, and so on in what is sometimes called a "deflationary spiral".
If you have a better way to beat the spiral than to have government spending temporarily replace private spending as a short-term cushion, speak up! Krugman might need to hear about it.
January 14, 2009 12:16 AM | Reply | Permalink
eds:
Your "temporary" spending in this case has been identified by Obama as taking several years with over a Trillion dollars of deficit spending each year.
Sounds like the same economic theory that controlled the last eight years and got the USA into this mess. Not "Change we can believe in".
When does the USA pay the piper? That bill will come due one way or the other whether the USA wants it to or not. Either in the form of increased taxes or in inflation which is politically more acceptable, but hurts the poor and middle classes much more than it affects the 5% of the US population which is already considered wealthy.
January 14, 2009 8:19 AM | Reply | Permalink
"Sounds like the same economic theory that controlled the last eight years and got the USA into this mess."
The economic theory of the last eight years was drive the country into debt fighting an imperial war and occupying foreign lands while simultaneously borrowing money from China to give huge tax breaks to the wealthiest Americans.
What about that and an economic stimulus to keep people employed in a deep recession are in any way, the same?
January 14, 2009 11:04 AM | Reply | Permalink
"What about that and an economic stimulus to keep people employed in a deep recession are in any way, the same?"
I have yet to see any "economic stimulus package" designed with any chance of keeping people employed. The $350 Billion allocated for the Tarp bailout was designed to go to, and has ended up in the pockets of the same people who enriched themselves by floating bad mortgages during the last ten years - many of them foreigners with no love for America.
The remaining $350 Billion would be better spent by giving $1,100 to each and every American leaving almost $20 Billion for "Administrative expenses".
I would be very interested in seeing just who the major owners of these bailed out financial institutions really are - the people, not the corporations they own and control.
January 14, 2009 3:15 PM | Reply | Permalink
Agreed, your assessment of the TARP program is dead on. However, I'm talking about Obama's seperate economic stimulus plan. No, we don't know all the details but additional government spending can in fact keep people employed if it's the right spending, as Dean has pointed out.
Take the steel manufacturers for example: with the construction slowdown the industry is really struggling to keep the lights on. Workers are being laid off and plants are in jeopardy of closing. The same goes for our hard-hit lumber industry. Obviously Obama's plan will have to be much broader reaching than just these two industries but they are perfect examples of situations in which the government can successfully generate demand to replace private sector investment and help keep the economy from going into total free-fall.
A balanced budget is a worthy goal and should be addressed, but having it balanced won't matter if we're all in a bread line.
January 14, 2009 4:18 PM | Reply | Permalink
Considering the fiasco of the first $350 Billion for bailouts and the Congressional negotiations currently going on over the uses for the second $350 Billion, it is difficult to see how spending $700 Billion will have any effect at all in getting the US economy back on track. So far, it has only served as a windfall for corporate interests.
January 14, 2009 7:05 PM | Reply | Permalink
[I don't believe Johann is paying attention or for real.]
January 14, 2009 9:52 PM | Reply | Permalink
I await your anti-spiral solution. You are free to proclaim your ignorance ad nauseam, but I'm not required to school you ad nauseam.
January 14, 2009 9:54 PM | Reply | Permalink
eds:
Your continued belief that the USA, or any individual can spend themselves out of debt is astounding. Excessive spending, and massive borrowing to support that spending is what has caused this economic crisis in the first place.
The way to correct a problem is first to identify what the problem is, then take steps to eliminate the causes of the problem - in this case, excessive spending on the part of both government and individuals.
It may be unpleasant, but sooner or later, bills have to be paid, or defaulted.
I just hope that the American republic survives this crisis.
Historical examples of this type of crisis are Rome and Germany. Neither republic survived. Both evolved into dictatorships. The German Republic evolved into Nazi Germany the results of which we are all familiar.
January 14, 2009 10:35 PM | Reply | Permalink
Again, I await your better solution with specifics (re spiral which you don't dispute).
"Your continued belief that the USA, or any individual can spend themselves out of debt is astounding. "
The ostensible purpose of the current spending "recovery" plan is not to get out of debt, but to go farther into debt in the short run to reduce the impact of the crunch on real people and to begin to improve specific "infrastructure" areas for increased future productivity (or decreased operating costs etc). Please attack real issues if you reply.
January 15, 2009 12:40 AM | Reply | Permalink
No time to read prior comments, but two points on Dean's good article.
1) Competition. If we just cannot bring ourselves to let some market forces work themselves out re mortgages, give the lenders (banks) some competition. This could be Dean's notion of letting the homeowner compete with the bank, or it could be something more subtle.
2) Change the rules. I've called for this for months now, and agree it's low cost to the taxpayer (at least up front) and government. Make default reconciliation (foreclosure, bankruptcy, whatever) expeditable and force the powerful in each contract to take losses too.
January 13, 2009 5:23 PM | Reply | Permalink
A question here - is the goal to help prevent foreclosure, or is the goal to try to maintain the bubble housing prices?
If the goal of the government is to try to shore up the investments of those who invested in mortgage instruments, then directly helping people to stay in their homes will not acomplish the government's goals unless it makes certain that they stay in their homes in a way that maintains the inflated house value.
If the goal is to bail out homeowners, then Dean Baker's suggestions make sense (or at least they are better than what is going on now). However, if the government doesn't care about homeowners but cares about keeping house values high in order to prevent the collapse of overleveraged hedge funds, then allowing people to rent the houses they live in probably will not accomplish that goal.
Why the government is doing what it does is not terribly mysterious once you realize what their actual goals are (protecting speculation, not protecting home ownership).
January 13, 2009 5:32 PM | Reply | Permalink
Glaivester,
But aren't the "bubble prices" the prices many of today's middle and working class mortgage-holders paid for their home, and haven't some older homeowners been counting on a high-house value when factoring what they need for retirement savings?
It seems to me that a very wide swath of people -- how about we say voters? -- have a critical stake in maintaining home prices, or at least not letting them plummet, and that also has an impact on neighborhoods, schools -- the whole American dream.
I'm not pushing anything here. Ultimately, I assume people just want the economy to work, and avoid a hideous Depression, etc. But I've never been able to see how letting foreclosures run out their course like wildfire would be good for most Americans at all income levels.
January 13, 2009 6:06 PM | Reply | Permalink
I'm strongly against propping up housing prices at this point, certainly against trying to inflate current market prices to what they were.
For every trade there are at least two parties.
Counting on the resale value of your house is not something the government should generally underwrite; having a place to live is arguably not something the Feds should pay for either (but clearly some programs such as Section 8 exist).
And no, it's not that case that a large fraction ("wide swath") of homeowners bought their first home in 2004-2006. "Many" may be millions, but then a million is only 1% of 100 million. What about those who don't yet own, why should government make it more expensive to buy now or in the future?
Let people rent or downscale, or let them sue (with government support maybe) if they are victims of fraud etc.
January 13, 2009 11:48 PM | Reply | Permalink
eds,
Your larger points may be correct by I do think 2 years is too short a window for the housing bubble. I realize regional real estate markets differ, but the one I knew best -- mega-metropolitan New York City -- housing prices began to zoom upwards as of about 1998 and were immune to the burst of the dot.com bubble. Certainly by 2000, the course was set.
There have been times when I've been reading up on who has been most caught up in the housing foreclosures, the credit "unworthies" who never should have been buying houses with no money down, etc., and I think: "Look, people deliberately went out and destoyed government-housing programs and touted the 'ownership' society. So what we got under the table, by default, because the need was there, was a housing program financed by greedy bankers. Fine. Let's take it. The bill's come due. Let's pay it. Quit bellyaching, and help these people stay in these homes so that whole towns don't go sliding under because of vacant properties and a glut of home sales."
But I mean, I know I'm only talking to myself.
January 14, 2009 5:10 AM | Reply | Permalink
Who should pay? I don't see why the taxpayer should pay, even tho' I believe that Bush's policies and programs were criminally responsible (in a political sense).
If a large fraction of homes in a town were speculative vehicles, the town is simply screwed if it counted on property or local sales tax revenues. Maybe the "good" owners should buy up the empty houses and put them to good use. Local programs to facilitate home purchases do exist, for instance a First Time Homebuyer equity share. Cities like Oakland, CA have offered that for years.
But unless you go after the previous owner who got out during the bubble, and try to recover THAT money, I don't see giving Fed. money to homeowners or lenders here.
January 14, 2009 10:14 PM | Reply | Permalink
eds,
I don't advocate spending federal tax dollars because I think some party is owed money. I advocate spending tax dollars because it appears money is needed to stabilize the economy and prevent social problems and the feds are the only one with enough to supply money in the quantities needed.
I do think some communities will use the type of program you're talking about in order to avoid neighborhoods with houses abandoned and vacant that attract decay and crime.
January 15, 2009 5:45 AM | Reply | Permalink
The Feds don't have any money. They can borrow it or they can have the Federal Reserve "print" more of it. The former is problematic, the latter is theft.
January 15, 2009 7:27 PM | Reply | Permalink
I've enjoyed the conversation but I don't have the moral outlook on this as you do, whether it comes to printing money or making "gifts" to people. I am aware that some things are problematic, but if "theft" isn't problematic, and would actually stimulate wealth creation, I'm probably all for it.
January 15, 2009 9:29 PM | Reply | Permalink
In my view, theft is worse than problematic.
I don't have a problem with private parties making gifts. I do have a problem with public money being gifted to private parties on this scale.
Thanks to you too for the chat.
January 16, 2009 4:18 AM | Reply | Permalink
But aren't the "bubble prices" the prices many of today's middle and working class mortgage-holders paid for their home, and haven't some older homeowners been counting on a high-house value when factoring what they need for retirement savings?
Perhaps. And perhaps they are screwed because of it. But then so be it. We cannot keep the bubble inflated without causing more of the problem that got us into this mess, and likely trying to keep it inflated will just inflate the price of everything else, allowing people to keep the dollar value of their homes, but losing the actual value anyway because everything is more expensive.
Remember, I am not advocating massive foreclosure here - I am advocating trying to delay or prevent foreclosure, at least short term, but without the added goal of maintaining the bubble prices.
It seems to me that a very wide swath of people -- how about we say voters? -- have a critical stake in maintaining home prices, or at least not letting them plummet, and that also has an impact on neighborhoods, schools -- the whole American dream.
A lot of people, but not everyone. People who cannot afford their mortgage and/or who have little or no equity in their homes will not be terribly hurt by a program that allows them to keep or rent their homes but that lets home prices fall. People who bought their houses before the bubble or early on in the bubble and who held onto them will be okay.
I'm not pushing anything here. Ultimately, I assume people just want the economy to work, and avoid a hideous Depression, etc. But I've never been able to see how letting foreclosures run out their course like wildfire would be good for most Americans at all income levels.
I'm not talking about letting foreclosures run their course. I am talking about avoiding foreclosures in ways that still allow housing prices to fall.
January 15, 2009 8:29 AM | Reply | Permalink
Thanks, glaivester. I think we're actually very close. I'm not really advocating maintaining bubble prices. What I was fearing is that a crash that meant thousands of homes dumped on the market, letting them sit vacant and decay, and scaring potential buyers out of the market until all the dust settle would destroy home price values far beyond merely letting the bubble pop, and cause additional social grief.
Mainly I'm looking for a way to keep homeowners in their homes even as their home price falls. And while I don't want to "reward" banks by making good on their losses, I don't mind cushioning the blow in some way if that means they are more ready to be lenders or function in ways that keeps things healthy.
I'll probably go pick over Robert Reich's article now to see what he's recommending.
January 15, 2009 12:23 PM | Reply | Permalink
I also followed the link to read Dean Baker's recommendations for helping homeowner's by letting them rent indefinitely. But in most suburban towns I know of, renters -- and more importantly landlords -- are viewed as a threat. There is the widespread belief that landlords don't maintain houses, and neither do renters. Neighbors fear that rented property drags down the neighborhood and home values.
I'm not saying it's true, but I am saying that I would expect the same kind of resistance from home owners to having houses rented as we now see from people who think helping strapped mortgage holders is unfair to paid-up mortgage holders.
January 13, 2009 6:28 PM | Reply | Permalink
Buonasera,
then maybe this policy can help educate a large number of people across the country that rental property can be kept up too. If the boys and girls who designed housing policy understood this, we would probably have much sounder policy.
January 13, 2009 6:40 PM | Reply | Permalink
Thanks for replying. It's hard to know how much people are willing to entertain new possibilities in the face of crisis. If it gets bad enough, people will be screaming "Do anything!" and be willing to try anything, take any medicine. We may have already reached that point. But when I lived in the suburbs (I no longer do) I realized in a way I had before why the book "Everything I Ever Needed to Know I Learned in Kindergarten" had become a top-seller. People really were convinced they knew everything. Especially when it came to "right" and "wrong." It was a "no-brainer." And renters were treated like second class citizens, not pillars of the community.
I don't feel too badly about asking questions about ways to solve the financial crisis by directly helping homeowners because it looks everybody who would otherwise laugh at my dumb questions doesn't know what to do. So I'm wondering why we (the taxpayers) can't just pay off the banks when homeowners default -- and we could rent the property to the homeowners, right? We'd have to create local offices to ensure housing maintenence, etc., but those would be jobs, too.
Even if we didn't want to pay off banks that surely knew they were making lousy loans, we could put the money in escrow until the honest ones proved they acted in good faith, and the bums get nothing.
But like I don't know anything. Me and Henry Paulson! But unlike him, I'm not about to *insist* we all do things that are bad ideas.
January 13, 2009 6:55 PM | Reply | Permalink
"So I'm wondering why we (the taxpayers) can't just pay off the banks when homeowners default"
Buying the house at current market value is one thing, paying off the mortgage (at a price way over current market value) is another.
My main problem with TARP #1 (not counting its fascist aspects) was that I didn't see how the Treasury could accurately value "toxic assets" so as to 'buy' them. Now the Fed is sounding like it's starting to do this or something similar. What complicates the picture is that many MBS instruments toxic or not had CDO and CDS instruments riding on them (side bets).
I'm strongly against government or taxpayer money going to the gambling side of those deals.
January 14, 2009 12:38 AM | Reply | Permalink
Thanks for replying eds, but the difference between the current market value and the face value of the mortgage in most cases is not gonna be that great. And it guarantees (eliminates, really) the so-called "toxic" hidden debt.
I agree with you that it was a puzzle that TARP was going to assign some value to debt nobody knew the value of because some percentage of the debt was worthless but it was too mixed up with the wholesome debt to be separated out. But isn't it the case that the "toxic" mortgages were sooner or later going to pop out into sight as home foreclosures -- and if we made a guarantee to snatch them up as soon as the foreclosure papers were filed, people holding the debt were relieved of worry, and we the taxpayers could sort out the individual isolated cases without dragging down the whole market?
January 14, 2009 5:03 AM | Reply | Permalink
. . . the difference between the current market value and the face value of the mortgage in most cases is not gonna be that great.
Not true, and especially not true when the subject is the distressed mortgages making up the toxic MBSs and their associated CDOs and other derivatives (eds' examples). Those mortgages date from 2005-2007 and those that are under water are way underwater.
January 14, 2009 11:25 AM | Reply | Permalink
Ellen,
I'll understand you better if you can help me along with hypothetical numbers.
I've been thinking that in metropolitan New York, the people who go loans to buy with no-money down and no credit worthiness were people in the $300K home market. And that those houses are now worth about $215. Am I way off?
January 14, 2009 12:22 PM | Reply | Permalink
No, and possibly you're being overly conservative/pessimistic with respect to the New York metropolitan area.
Nevertheless, the banks and vulture investors have been pricing these MBSs realistically for the past year. Why are you bound and determined to give them a huge windfall?
January 14, 2009 12:58 PM | Reply | Permalink
I'm not "bound and determined" to anything! I don't think I understand the issues. I certainly don't know what "MBS" is. I will say I don't care who gets a windfall if it avoids a situation where we huge unemployment, social dislocation, etc.
So maybe we could start by you telling me what MBS is.
January 14, 2009 1:27 PM | Reply | Permalink
Wait! I got it!
It's a "mortgage-backed security" right?
January 14, 2009 1:28 PM | Reply | Permalink
And let me just add:
I'm not advocating buying "troubled assets" if you thought I was. I'm advocating something different (but am quite willing to be shown why it wouldn't have the benefit I think it would).
January 14, 2009 1:58 PM | Reply | Permalink
Well, your plan may not call for buying "troubled assets," directly, but --
By buying out the distressed mortgages -- and not requiring investors to take a haircut -- you're converting those "troubled assets" into not-troubled assets. What's the diff?
January 14, 2009 8:38 PM | Reply | Permalink
Well, I think you could structure the taking of the distressed mortgages that punished the reckless or the fraudulent -- but first let me explain what I *thought* I heard Paulson proposing, and then explain what I thought would be more productive:
I thought I heard Paulson saying that if Banco Bilko was using a pile of toxically infected MBS paper as the capital base for its bank, then we were going to buy that toxically infected paper -- at what price?
I'm saying: Why should we buy that paper? Why don't we tell everybody that when the toxic mortgages appear, we will buy them. That way, the credit markets don't have to worry about hidden infection, and banks are re-capitalized. (Is that the word I want?)
Based on your seeming objection, Ellen, how about if I say: When the toxic mortgages appear, Uncle Sam is going to put their full face value into escrow, and look at the conditions of the loan. If Banco Bilko lent Sterling Citizen an approriate loan, but Sterling Citizen has lost his job, Uncle Sam will pay Banco Bilko the full face value and work out a payment plan with Sterling Citizen. If Banco Bilko lent Flaky Flimster a fradulent loan, we won't release the money from escrow, and what we do with Flaky Flimster and the house depends on what is in the best interest of the taxpayer.
But my main interest in proposing is that I gather there are 80 percent solvent home mortgages out there and I want to identify the bad ones, drag them out of the risk pool, and deal with them as best benefits everybody's stake in a functioning economy.
Where am I going wrong?
January 14, 2009 9:45 PM | Reply | Permalink
When I say the mortgages will "appear," I mean when a foreclosure proceeding starts, we require the foreclosing party to notify the Feds.
January 14, 2009 9:46 PM | Reply | Permalink
I don't know about "toxic hidden debt", could you write more clearly?
20% underwater is quite a lot even though it's a lot less than 100% of the nominal old price of the property. And paying that to the bank/lenders is again just a gift of taxpayer money to private parties. Expediting default/foreclosure/bankruptcies makes sense to me, in terms of helping bring liquidity back to the market.
If government could help find angel investors to pay half the underwater amount in exchange for equity, and for the bank/lender to eat the other half in exchange for avoiding the typical costs, while the homeowner who speculated also takes a proportional bath (loss of equity or similar) you might get me interested.
January 14, 2009 9:49 PM | Reply | Permalink
Sorry for the unclear writing! I'm not sure I can write more clearly because until last September, I led a life of not knowing anything at all about any of this -- and I still might not know. Nobody should feel obliged to help my education. I only ask because I'm trying to keep learning.
What I meant by "toxic hidden debt" is that I thought the problem that TARP was originally meant to address was debt instruments backed by combined pieces of mortgages, so complex that no one knew how to separate out which pieces belongs to mortgages going into default, and therefore the whole instrument was infected with some valueless stock, some intstruments more than others, but which were better, which were worse, no one could tell --- so potential buyers of these instruments refused to buy them, or cashed them in, so they became as worthless as tulip bulbs, and all the banks that were using them as their capital base collapsed.
I hope that's clear. What I'm not sure is whether it's accurate.
What I'm saying is: Why not go straight to the source of the problem? When a house goes into foreclosure, the Fed gov't gets a telegram and we snatch up the mortgage, pull it out of the pool so buyers of financial paper backed by mortgages can be confident that the paper has a guarantee.
Yes, we would ourselves be the angels. I agree that it would be good to find ways to not pay the full face value of the mortgage if the market value of the house is much lower. As for the homeowner, whatever we pay for the house we would try tore-sell it to the resident owner -- I would prefer under conditions that were not punitive to people who honestly intended to keep up the mortgages payments, while keeping in mind that occupied houses and ownership in general may be a very good social investment ("broken windows" theories anyone?).
Is that unaffordable? Immoral? Bad for the economy in the long run (meaning, it will in the end so destroy markets, everybody's house will be worthless, or the economy as a whole will collapse)?
When John McCain said in the last gasp dying days of his campaign he would buy up mortgages in default, I don't think anybody but me heard him, and I wondered if he might actually have had the right approach.
January 15, 2009 6:01 AM | Reply | Permalink
Typo alert! I meant to write:
"As for the homeowner, whatever we pay for the house we would try to re-sell it to the resident owner..."
January 15, 2009 6:05 AM | Reply | Permalink
Again, it depends on the price paid.
Yes, CDS and CDOs made MBS asset valuations complex and complicated.
My main beef: No government money going to cover side bets (derivatives). No gifts of taxpayer money to homeowners, bankers, brokers, or other private parties or corporations.
January 15, 2009 7:36 PM | Reply | Permalink
Would it help if we all understood that the economy has been shattered, and cannot ever be put back together as what it used to be? Perhaps it is time to acknowledge the magnitude of what we face, and start figuring out what the new economy should be like.
After doing that it would be a lot easier to make decisions like how the TARP funds can best be used. That would be in a way that speeds the transition to the new economy.
I can't see any way to resurrect the old real estate economy. If I have a $300,000 property that serves as my home, that $300,000 is gone forever. Now I just have a place that is my home, but its value is currently unknown. I am hurt by thinking of that, but isn't that the reality we all really face?
January 14, 2009 1:06 AM | Reply | Permalink
That doesn't help me at all (assuming "shattered"), the metaphor doesn't mean anything to me. Can you describe the "new economy" in any detail beyond "it's not the old economy"?
Real property retains real value, but the bubble may well have flushed out a lot of imaginary value. That doesn't make your home property of unknown value, and if you put it on the market you might find out what price you could get for it should you decide to go homeless!
January 14, 2009 1:53 AM | Reply | Permalink
For many years now we have been in the dream land that "capitol appreciation" is the goal to shoot for. So, we bought stocks, knowing that the corporations were paying no dividends. That left the value of the stock as whatever the next fool was willing to pay. We bought our houses, sure that next year they would be worth more than we paid, no matter how much we paid, so we gave no thought at all to what rent could be obtained from that house - again looking for the next fool to come along an pay more for the house. That was our economy, in a nutshell.
That version of an economy is now dead, as far as I can see. The new economy seems likely to be based on real values - an investment pays dividends, and the dividend divided by the price is the return on the investment. Houses are worth what they can generate in rental income. Corporations are worth what their profits say they are worth.
I'm just not clear in my mind about how we arrive at the "reality based economy", forever now to be known as the RBE.
January 14, 2009 2:20 PM | Reply | Permalink
Well it wasn't my experience even if I lived through it.
"capitol appreciation"
cute typo or intentional pun?
Capital gains can be real. Mistaking market price appreciation of stock for real capital gains (reinvested profits in real production, for instance) seems to be a favorite pastime of many modern pundits who need to sensationalize to keep their parasitic paychecks.
January 14, 2009 9:43 PM | Reply | Permalink
Drkoop.com Inc., once a stock market darling worth more than $1 billion, has been sold in Bankruptcy Court for $186,000 to a Florida e-commerce company, Vitacost.com. LATimes 7/16/2002
Oh, and Dr. Koop was paid an additional $10,000 for the use of his name.
January 14, 2009 11:36 PM | Reply | Permalink
Tiptoe Through The Tulip Craze
January 15, 2009 12:33 AM | Reply | Permalink
I think it would be helpful in many respects for people to understand that what has and is happening is not just an economic "downturn" but a catastrophic collapse and thus we have to rethink every basic assumption we have been operating under since the end of World War II. All the problems we have been discussing but not dealing with for 50 years now either have to be dealt with or we can just kiss American economic prosperity goodbye. Trying to restore what we had will be a pointless and futile excercise.
January 14, 2009 2:40 AM | Reply | Permalink
Two basic assumptions that are totally wrong are:
1. That debt produces wealth. The only people that gain wealth through debt are the bankers who are floating those debts. The wealth they gain is taken directly from the people to whom they are loaning money. Debt does not increase wealth, it only transfers it from one person to another.
2. That printing money produces wealth. The only people who gain by the production of new money are those who have access to that new money. They are, in effect, stealing wealth from the people who have the original money. This is called inflation and results from having more money available to purchase the same amount of goods and/or services. The prices for those goods and services will increase in direct proportion to the amount of new money printed.
January 14, 2009 3:28 PM | Reply | Permalink
I don't know anyone who makes those assumptions.
Debt can leverage production, so in those case it is fair enough to say casually that debt produces wealth. If you need $100 to start widget farming but only have $50, borrowing $60 can make sense since your farm will be producing. And if you borrow $110, you can produce even more widgets thus leveraging your original $50's gross productivity by about 3x. You accumulate money from sales minus costs incl debt service costs. So in this sense the assumption would be right, not "totally wrong".
January 14, 2009 10:09 PM | Reply | Permalink
That lasts only as long as there is a continuing market for widgets. Then you are stuck with widgets that nobody wants and a debt you have no way to repay.
Leverage only works in an expanding market. The market in the USA is contracting, not expanding.
January 14, 2009 10:39 PM | Reply | Permalink
If your business plan was sound you paid off the debt before demand dried up. But even in a contracting economy people need the output of the widget farm.
"Two basic assumptions that are totally wrong are:"
Maybe you can come up with a legit criticism next time? The prior poster asserted that this is a significant catastrophe. Do you agree? Do the times call for bold actions? What?
January 15, 2009 1:19 AM | Reply | Permalink
All this reminds me of that moment in G. Bernard Shaw's Pygmalion (My Fair Lady) when Eliza Doolittle's father comes to see Henry Higgins, offering to sell him his daughter up front (having heard she's living in the house). Henry Higgins exclaims: "Good God, man! Have you no morals?" And Mr. Doolittle replies: "No, Guv'ner. I can't afford them."
Middle-class morals usually turn out to be unaffordable for most of us.
January 14, 2009 4:56 AM | Reply | Permalink
"Manners before morals." - Wilde
But that doesn't mean to throw the morality baby out with the bathwater!!
January 14, 2009 10:16 PM | Reply | Permalink
Wasn't a couple months ago the time for complaining about moral hazard? Or is that something that only affects the morals of little people, because Masters of the Universe have none in the first place?
January 14, 2009 2:47 PM | Reply | Permalink
There is an ungodly obsession among most these people with spending other people's money. Most overpowering sense of entitlement I've ever seen in one place.
January 15, 2009 9:51 AM | Reply | Permalink
trafik ceza sorgulama
This is highly informatics, crisp and clear. I think that Everything has been described in systematic manner so that reader could get maximum information and learn many things. This is one of the best blogs I have read.
araç sorgulama
March 14, 2011 6:39 PM | Reply | Permalink
bağkur borç sorgulama
With all the sites out there with information on them with a ton of junk it's nice to find a blog whose admin takes the time to create good material. TY for the good post.
sgk
March 19, 2011 11:22 AM | Reply | Permalink
emekli sandığı
I used to be very pleased to discover this site.I needed to we appreciate you this great read!! I definitely enjoying every amount of it and that i have you ever bookmarked to look at new belongings you post.
araç sorgulama
March 23, 2011 5:13 PM | Reply | Permalink