Economics Question ...

[Mako Koiwai]

Since I don't know much about these things ... why give money directly to the banks to save them instead of somehow giving it to the people who are about to lose their houses ... to then give to the banks. Seems like one would be taking care of two issues at the same time?

Obviously it might only be an interim solution for many of those ("wannabe") home owners, but it might help some of them bridge a relatively temporary financial problem ... like my Ex is experiencing.

I don't mean actually giving the money to those home owners that are going to face foreclosure, but somehow applying it to their mortgage accounts.

[George Schilling]

There are no good options for the mess were in. Letting people/institutions off the hook for debt incurred and poor decision making penalizes taxpayers who live responsibly and within their means. This whole mess sickens me. The one thing our government should do but hasn't is regulate the banking industry. Unfortunately, the boneheads we elect know nothing about economics beyond that of getting elected/re-elected. The crisis were in comes as no surprise, but legislators are too chicken sh#$ to act, unless of course a butterfly is endangered. The next crisis will be Mediare and then Social Security. Someone with just a basic understanding of math can see that. Look for the states and the fed to be crying next year as tax revenue drops well below projections. This crisis is only just begining.

[Jeff Shyu]

the only thing i'm sure about, with our economic problem right now, is that it's going to get much worse before it gets better.

[Tom Phillips]

Letting people/institutions off the hook for debt incurred and poor decision making penalizes taxpayers who live responsibly and within their means.

If the idiots running banks, (Imax, WaMu) insurance companies (AiG), etc, run the companies in the ground, and the investors aren't smart enough to give them the boot, then the company, investors, et al. should pay the consequences. It is not up to the rest of us to pay for their short comings, poor management. If they go under, they go under! I can guarantee if my company runs into trouble, the Feds aren't gonna pay my bills, bail me out, or take care of the investors (both of us).
They will just send me a bill for the taxes due.
Just my $0.02
Tom

[Larry Andrews]

The one thing our government should do but hasn't is regulate the banking industry. Unfortunately, the boneheads we elect know nothing about economics beyond that of getting elected/re-elected.

http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act" onclick="window.open(this.href);return false;

All preexisting regulations that could have prevented this mess were dismantled by Phil Gramm in 1999. Of course, that is the exact same Phil Gramm who is a lobbyist for UBS Bank/Securities and John McCain's chief economic adviser. The same guy who called Americans 'a bunch of whiners' for being upset about this situation. The same guy who just got a huge relief package for UBS during this weekend's negotiations with Bernanke/Paulson.

The government DID regulate the banking industry - in 1932. Those regulations were dismantled by the Republican Congress/Senate and Clinton signed the mess into law.

Tom P -> +1

[George Schilling]

The one thing our government should do but hasn't is regulate the banking industry. Unfortunately, the boneheads we elect know nothing about economics beyond that of getting elected/re-elected.

http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act" onclick="window.open(this.href);return false;

All preexisting regulations that could have prevented this mess were dismantled by Phil Gramm in 1999. Of course, that is the exact same Phil Gramm who is a lobbyist for UBS Bank/Securities and John McCain's chief economic adviser. The same guy who called Americans 'a bunch of whiners' for being upset about this situation. The same guy who just got a huge relief package for UBS during this weekend's negotiations with Bernanke/Paulson.

The government DID regulate the banking industry - in 1932. Those regulations were dismantled by the Republican Congress/Senate and Clinton signed the mess into law.

Tom P -> +1

Larry, you need to read the material you referenced. It confirms what we all know caused the credit crisis, the insistance on the part of the dems that lending institutions loan money to non-credit worthy borrowers to end the pracitce of so-called redlining. Read about the Community Redevelopement Act supported soley by the dems. This was the begining of the sub-prime market. Imagine if your business was loaning money and you were told that in order to stay in business, you would have to loan substantial sums to people you know are not likely to pay you back. That, in a nut shell, is what happened. Once again it's government regulation interfering with the free market causing the problem. Instead of insisting on a color blind society, dems continually insist that race be a factor. Like it or not, blacks and hispanics AS A GROUP are less credit worthy. It may not be polically correct to say so, but these are the facts. The push for multiculturalism pushes these groups further behind while asians and whites AS A GROUP move forward as their cultures are more likely to produce a greater percentage of people who are educated.

IMHO, Freddie and Fannie should have never been. Just another attempt at government trying to manipulate a market. Government medling never works for long if at all, and now were paying the price.

[Steve Collins]

George,
Earlier in the thread, someone using your login surprised me when they wrote:

The one thing our government should do but hasn't is regulate the banking industry.

That seems somewhat at odds with your more recent post. Did I miss something?

steve

[George Schilling]

George,
Earlier in the thread, someone using your login surprised me when they wrote:

The one thing our government should do but hasn't is regulate the banking industry.

That seems somewhat at odds with your more recent post. Did I miss something?

steve

Yes, I would prefer the government not be involved, but since they insist on manipulating financial markets, they certainly owe it to taxpayers to monitor their transgressions. Additionally, the government has been negligent in protecting the public by not prosecuting fraud in the financial industry.

The problem with fannie and freddie is not new and were it not for these entities, those sub-prime loans would have never been made. The dems have been against reforming fannie and freddie as it would take money away from the inner city. Chuck Shummer admitted as such on one of the morning talk shows today by his deafening silence when the charge was leveled.

[Bob Beamesderfer]

So the end of discriminatory lending practices lead to the sub-prime mess. That's a huge and faulty jump in logic.

[John Coffey]

IMHO and FWIW...

I think the real cause of our current banking/credit crisis is that the financial instruments created (CDOs, CDSs, etc.) were so complex and so intertwined that no one really knew what was happening or what the real risk was. Its almost like Long Term Capital but on a much grander scale. These financial whiz kids out think themselves and create Frankensteins in the "lab" that grow out of control in the real world. The mad scientists of the 21st century are the PhDs of the financial world.

I don't think the "lack" of regulation or the "looser" lending standards were the fundamental problem. I don't think the borrower or the loan officers are significant causes of the problem (the overall default rate on the CDOs is still below 3%). In any of those cases, if the risks were properly evaluated then the securities (and their associated risk) could have been properly priced. When Alt-A paper somehow gets a AAA or AA rating its obvious that the controlling security is not well understood.

[Mako Koiwai]

Any opinions on my original thread starting question ... thanks ...

[John Coffey]

I don't mean actually giving the money to those home owners that are going to face foreclosure, but somehow applying it to their mortgage accounts.

The issue has gone beyond specific mortgages. The securities derived from home mortgages (Collateralized Debt Obligations - CDOs) have been revalued and the credit rating of those CDOs has been significantly downgraded by the rating organizations. It doesn't matter if homeowners pay their mortgages on time (the vast majority do and still are). What's happened is that enough data has accumulated regarding the downside risk of these securities that their true value is clear to everyone in the market.

These CDOs were typically sold in three traunches with ratings from AAA to BB as way to spread out the Alt-A risk. With this new data those CDOs are all pretty much rated as BB to B- which means they have gone from good to junk. As a result, investors holding CDOs on margin faced margin calls and have to come up with capital to cover the calls. That's essentially what happened with Freddie and Fannie. The US repeatedly made an implicit guarantee regarding the securities and stock issues by these two pseudo-governmental agencies. When the underlying value of the CDOs they issued/held was downgraded, the foreign holders of Freddie and Fannie securities made a margin call against the US Treasury.

[George Schilling]

Since I don't know much about these things ... why give money directly to the banks to save them instead of somehow giving it to the people who are about to lose their houses ... to then give to the banks. Seems like one would be taking care of two issues at the same time?

Obviously it might only be an interim solution for many of those ("wannabe") home owners, but it might help some of them bridge a relatively temporary financial problem ... like my Ex is experiencing.

I don't mean actually giving the money to those home owners that are going to face foreclosure, but somehow applying it to their mortgage accounts.

If we do that Mako, where does it stop? Does the government help the guy that's losing his car....or TV set. What about the guy that owns multiple properties and was speculating. Shouldn't we all be responsible for ourselves and the decisions we make. That is the only way we can live in a free society. These bailouts are BS. They only help the irresponsible at the expense of the responsible.

As far as your ex, home values will drop. When they get to the point she can afford a home, she can get back in. Or, since the lending companies don't want the property, another stategy she might try wouild be to stop making payments and make an offer to purchase the home before the final foreclosure. This saves the lender time and money. I know of several instances where this stategy has worked. If she got stuck with a sub-prime loan, she may want to investigate different loan options before signing in the future.

[George Schilling]

So the end of discriminatory lending practices lead to the sub-prime mess. That's a huge and faulty jump in logic.

Bob, I can see that you've never owned a business. The fact is that a business is interested in profits, not the color of one's skin. I don't care what the color or race or religion or political affiliation (or any of the other stuff the left cares about) of my customer is as long as they can pay the bill.

To get someone to give you money, you need to have shown you are credit worthy. The folks that determine this don't care about skin color or any of the other things either. They just want to know if you pay your bills. So if this is discrimination to you Bob, so be it.

But Iknow one thing, if I didn't discriminate by insisting my customers be able to pay the bill, I wouldn't be in business today. That is of course unless I had government guaranteeing payment ala fannie and freddie, then I wouldn't much care. And if I had the government telling me that I had to find and do work for more people who are not able to pay keep this gravey train rolling, you bet I would. And that, in a nut shell, is what happened in the mortgage industry. I can assure you Bob, that if government had not meddled in the process, this mess would have been avoided.

[John Coffey]

I can assure you Bob, that if government had not meddled in the process, this mess would have been avoided.

And I disagree for the reasons I stated above. The borrowers and lenders are really secondary to the problems right now although "they" are easy targets. The investment risks for the securitized mortgages (CDOs) were not understood so the market could not properly price them. Since these CDOs turned out to be high risk investments, capitalization requirements needed to be much higher. The market adjustment to this new capitalization reality is why Lehman, AIG, Bear Stearns, and the US Treasury is having to come up with buttloads of money.

The mortgage default rate is not overly significant in and of itself. What it has done is shine a big spotlight on CDOs and now people realize that these securities are NOT triple A rated investments.

[George Schilling]

I can assure you Bob, that if government had not meddled in the process, this mess would have been avoided.

And I disagree for the reasons I stated above. The borrowers and lenders are really secondary to the problems right now although "they" are easy targets. The investment risks for the securitized mortgages (CDOs) were not understood so the market could not properly price them. Since these CDOs turned out to be high risk investments, capitalization requirements needed to be much higher. The market adjustment to this new capitalization reality is why Lehman, AIG, Bear Stearns, and the US Treasury is having to come up with buttloads of money.

The mortgage default rate is not overly significant in and of itself. What it has done is shine a big spotlight on CDOs and now people realize that these securities are NOT triple A rated investments.

John what you're saying is true. I'm looking at the bigger picture. Before government meddling, property could be valued by the law of supply and demand. But think of how many ways government has affected real estate values by creating incentives to own real estate. Then on top of this, the government passes the Community Reinvestment Act compelling lenders to make these bad loans. Traditional capitol reserves percentages would have been fine had the price of real estate not skyrocketed fueled by these bad loans that were encouraged by government. That's all I'm saying. When government tries to "fix" one problem, it ALWAYS leads to another. If you look at most of the major issues of the day, how many have not been CAUSED by government itself? Not very many.

[George Schilling]

I haven't read this yet, but I will later. John Lott is a straight thinking independent economist whom I greatly admire.

johnrlott.blogspot.com/2008/02/explanation-behind-sub-prime-mortgage.html - 31k -

[Giovanni Jaramillo]

Ron Paul agrees with you George:

http://www.cnn.com/2008/POLITICS/09/23/ ... index.html

[Bob Beamesderfer]

So the end of discriminatory lending practices lead to the sub-prime mess. That's a huge and faulty jump in logic.

Bob, I can see that you've never owned a business. The fact is that a business is interested in profits, not the color of one's skin. I don't care what the color or race or religion or political affiliation (or any of the other stuff the left cares about) of my customer is as long as they can pay the bill.

To get someone to give you money, you need to have shown you are credit worthy. The folks that determine this don't care about skin color or any of the other things either. They just want to know if you pay your bills. So if this is discrimination to you Bob, so be it.

But Iknow one thing, if I didn't discriminate by insisting my customers be able to pay the bill, I wouldn't be in business today. That is of course unless I had government guaranteeing payment ala fannie and freddie, then I wouldn't much care. And if I had the government telling me that I had to find and do work for more people who are not able to pay keep this gravey train rolling, you bet I would. And that, in a nut shell, is what happened in the mortgage industry. I can assure you Bob, that if government had not meddled in the process, this mess would have been avoided.

George, back in the 1960s, redlining was prevalent. It was done without regard to whether someone who lived in an area could pay back a loan or not, and affected home and business loans. Apartments were a different matter, especially in the Midwest and East, but that's different issue.

As for a business being interested in profits and not color of skin, that might be true today, but it was not true in many places in this country 30, 40 and 50 years ago. Trying to paint that in some "liberal vs. conservative" thought process is a red herring. Pretending that conservatives have not discriminated is beneath your intelligence, George. If that's the little dream world you have from living in SoCal all these years, I hate to break it to you, but there are people and businesses in this country to this day that discriminate and a good deal of them would describe themselves as conservative. There are far fewer of them, but they exist. The practice of redlining discriminated not based on ability to pay, which I NEVER said was discrimination, it did so based on the predominant skin color of a neighborhood's residents.

Where in the 1977 law does it obligate a lender to sign on with an un-creditworthy customer? It doesn't and hasn't. Trying to peg the credit crisis of today on a law passed 31 years ago is a lame argument. As for Fannie and Freddie, those institutions have been around for more than 40 years. They used to be more tightly regulated, but that was changed under the guise that they should operate more freely. Problem with that is they still only faced stunted risk until it was mismanaged so poorly that the bailout was needed. Fannie and Freddie aren't simply mortgage lenders; they loan money to banks, municipalities and educational institutions. If they had failed, the repercussions would have last decades and been felt worldwide. An economic downturn unlike any before it would have resulted, despite all the safeguards, circuit breakers and controls instituted since the each of the previous market crashes.

The mortgage industry and credit markets haven't operated in a little regulated vacuum. There was plenty of rope out there with which to hang themselves. For example: Once upon a time, brokerage houses and investment banks were owned by and run by partners. Those people brought in the business and when they made decisions, they risked not only the firm's assets but some their own as well. Today, these entities raise capital in markets and executives and partners risk very little if anything. The head of Lehman won't be giving back any of his salary from 2005-07 when business was good despite being in charge while the company foundered. Sure, he's no longer in his job, but with several million dollars as a salve for his wounds. Now, had these companies not adopted some of the practices they've used over the past decades there are many, many businesses and jobs that would not have been created. But somewhere in the past DECADE, and not because of the law passed in '77, the leaders of these "too big to fail" businesses got reckless and too greedy. Some of them should fail. Lehman is essentially no more as soon as the assets are sold off. The name might live on, but why anyone would want it escapes me. Merrill is being acquired by BofA and the rest all have applied to become depository banks, which will put them in a much more regulated arena than before. They've basically gone to Bernanke and said, "Please, Ben, make us your regulatory bitches so we can continue in business and more reckless executives can have golden parachutes."

As for the government's "meddling" in the process, had there not been programs to assist home buyers the past half century, the standard of living in this country and likely success of your very own business would be much different. Guess the higher standard of living and concurrent demand for services was the intended consequence you'd rather live without. But if only the free market was at work, ie, no GI Bill, no HUD, no Freddie or Fannie, there is no proof that America would be a nation of homeowners. One of the economic principals you're ignoring is that not only does the money flow to the sectors that attract it in a free market, the sectors that want to thrive chase that money in a way that ensures they can get a piece. If people couldn't afford homes, they wouldn't have been built. Builders would have gone with duplexes or townhouses, something priced for the market that existed. A lot more Americans would be in apartments.

[Bob Beamesderfer]

Ron Paul agrees with you George:

http://www.cnn.com/2008/POLITICS/09/23/ ... index.html

Same Cato/Heritage crap he always says barely backed up by untruths and twisted facts.

[George Schilling]

Ron Paul agrees with you George:

http://www.cnn.com/2008/POLITICS/09/23/ ... index.html

Thanks Gio. Ron Paul is obviously a very, very, very smart man.

And Bob, I just don't know what to say. I realize a racial bias existed in this country in the past, but have you noticed that that is pretty much behind us. Last I looked, Obama appeared to be black and Palin is a woman. Back in the days you cited we had a black mayor here in Los Angeles, elected primarily by whites. Are there any liberals out there who'll admit that racial discrimination is behind us.

What can I say. As John Edwards would say, "we have two Americas". But that is where my agreement ends. In my opinion, we have one America thinks that government is the problem, the other thinks government is the answer. One side likes to discuss the issues and look at the facts, while the other likes to silence opposition and ends any discussion with a series of labels for those that disagree.

I'm just curious, what is it about the Ron Paul article you disagree with? You took the typical leftist position of dismissing the man instead of discussing the ideas.

[Larry Andrews]

I see America as having two kinds of people.

-A group using a belief that other Americans are the cause of their problems as justification for unacceptable behavior.
-A smaller group of responsible people that simply get the right things done.

I doubt that anyone can classify the entirety (or even the majority) of any political, racial, gender or sexual preference group as falling into either of those buckets - as long as they remain honest. Of course, personal biases often preclude many people from allowing themselves to be honest because dogma and desire take priority over fact and reason.

When you embrace imbecility as a virtue, it tends to leave you unprepared for reality

[John Coffey]

I also see American also as having two kinds of people. Male and Female (with some in transition). All other taxonomies reflect the bias of the person or institution doing the classification.

[Bob Beamesderfer]

Ron Paul agrees with you George:

http://www.cnn.com/2008/POLITICS/09/23/ ... index.html

Thanks Gio. Ron Paul is obviously a very, very, very smart man.

And Bob, I just don't know what to say. I realize a racial bias existed in this country in the past, but have you noticed that that is pretty much behind us. Last I looked, Obama appeared to be black and Palin is a woman. Back in the days you cited we had a black mayor here in Los Angeles, elected primarily by whites. Are there any liberals out there who'll admit that racial discrimination is behind us.

What can I say. As John Edwards would say, "we have two Americas". But that is where my agreement ends. In my opinion, we have one America thinks that government is the problem, the other thinks government is the answer. One side likes to discuss the issues and look at the facts, while the other likes to silence opposition and ends any discussion with a series of labels for those that disagree.

I'm just curious, what is it about the Ron Paul article you disagree with? You took the typical leftist position of dismissing the man instead of discussing the ideas.

Mostly racism is behind us, but to dismiss the need for the 1977 law to end discriminatory lending practices is naive.

George, you cannot label a dismissive response as "leftist." It is the stock and trade of Limbaugh, O'Reilly and Dobbs. Saying that liberals want to silence the opposition is nonsense. O'Reilly's favorite response to those who disagree with him is "Shut-up!" Dobbs calls all that don't agree with him is to call them "idiots." Dick Cheney takes it a step further. What better way to silence the opposition than to operate in secrecy? That is typical of the right-wing approach to governing. As for labels, all the popular neo-con commentators are expert at name-calling.

I stated my view of how certain programs created a larger demand for single-family homes than otherwise would have existed. Mr. Paul wants to make the specious argument that programs that have been around through several cycles of the economy are suddenly to blame for the credit crisis of today. It's the same tired Libertarian view that somehow an unfettered market place would have gotten us to where we are without any crises or fallout. That it would have even gotten us to the same place, or the more ludicrous idea that we'd be in economic nirvana, is all speculation on paper. Would we have the exact same problems? No, just different ones. But it's unlikely the percentage of Americans owning their own home would have ever been as high, not only today, but during any period during the past half century.

And from the part of my previous post you didn't acknowledge:

As for the government's "meddling" in the process, had there not been programs to assist home buyers the past half century, the standard of living in this country and likely success of your very own business would be much different. Guess the higher standard of living and concurrent demand for services was the intended consequence you'd rather live without. But if only the free market was at work, ie, no GI Bill, no HUD, no Freddie or Fannie, there is no proof that America would be a nation of homeowners. One of the economic principals you're ignoring is that not only does the money flow to the sectors that attract it in a free market, the sectors that want to thrive chase that money in a way that ensures they can get a piece. If people couldn't afford homes, they wouldn't have been built. Builders would have gone with duplexes or townhouses, something priced for the market that existed. A lot more Americans would be in apartments.

[Steve Ekstrand]

How did we get 30 to 1 leverage on mortgages? Pretty much the only question that needs answering.