I find the commentary interesting, useful as a guideline to Tanta's thought processes.
Besides, there is not such a clear divide between economics and politics. Those who believe there is, are typically either very young, or Libertarians.
Flame away.
The pain of the father when his son goes down for the last time will be great as well, but he's enough of a soiciopath that he'll get over it quickly and start lending @ LIBOR+800bp when his bereavement in St. Tropez comes to an end.
There is no way to bail out the borrowers without also bailing out the lenders. This process needs to run its course. It will be resolved by stupid borrowers going back to renting and stupid lenders writing off the loans. That's the moral and just outcome to this mess. This isn't life or death. It's just money.
Well, let me pick "socio-political" out of an unfortunate set of adjectival brackets and ask, for the sake of discussion: Isn't "moral hazard" an "economics" concept?
I'm not an economist, of course, but the idea of a moral hazard does seem to be getting some airplay in economic circles.
If rhetoric is so important, I think the term "saving" should be the first to be scrutinized. Exactly what is everyone wanting to save the homebuyer from? Certainly being forced to not overpay for an asset for the next 30 years seems like something many of us can live with.
With very few exceptions I think forcing people out of a house they can't afford may be the best thing for them.
It seems odd to complain that the wave of forclosures, caused by too many homes, would cause an epidemic of homelessness.
While forcing them out onto the streets will be a temporary, albeit unpleasant, experience. It's certainly likely to more shortlived than the the monthly inconvenience of paying for a mortgage they can barely afford over several more years. Ironically those already forced out may be the first in line to buy from those who tried to hang on but finally couldn't through financial exhaustion.
Tanta, I copied this paragraph awhile ago, (sorry no longer have the link.) I think it says it even better than RR:
"But the real job of the banker should be to judge the realism of the desire, not just its strength or existence. The structural role of finance in the home, the company, or the world economy is as a sort of super-ego, a reality principal. Social insurance for bankers has undermined the traditional virtues of banking prudence, skepticism, an eye for opportunity, understanding, and has replaced them by the sharp tactics we know fro Keith Talent - opportunism, carelessness, floolhardiness."
I think that another way of looking at it is, going forward, do we want Chuck Prince in charge, which is what we have now, or Barney Frank.
I want Barney Frank. I don't want Chuck Prince.
If the little guy gets a break with Barney, well, that's what a functional society is all about...and a functional family.
Because, after all, the father let the kid take the boat out. How does he escape that responsibility? He could have prevented the kid going out. Right?
I like Tanta too but I'm torn between saving the kid and kicking his dad's butt. I think I'll go with saving the kid from drowning, grounding him for 7-10 years and pressing neglect/abuse charges against the dad.
I agree with Yossarian. Politics and Economics are a marriage made in campaign financing. To claim it is not useful to inform the discussion on this board is to admit that your side of the debate is faltering.
There is enough blame to go around including average joe sixpack who got caught up in the real estate for riches mania, but let's be clear that these brand new speculators also included doctors, lawyers and other professionals which is why it was a mania. Everyone who jumped in was all in for better and for worse.
To those who played by the rules which would be the vast majority of the population who used common sense, had little debt, financed with a tradional 15 to 30 year mortgages with the traditional 28-36 % formula for your good borrowers and who lived within their families means, any bailout of Wall Street or those who gambled and lost on real estate speculation is moral hazard.
While I think that under normal circumstances, people who get into trouble should be helped, but this isn't one of them. Because they got entangled in a huge asset bubble. Rescuing them has the perverse effect of continuing a very unstable situation (overly high house prices, a correspondingly low affordability index) that, to put it bluntly, improperly values assets more than labor.
If you can figure a way to help "subprime" folks and also return house values back to, say, their 2002 prices, then I'm all ears. But I don't think that's possible.
Did Reich really say he saw this happen? Because there's no way it really happened. I don't want go all Ceci Connolly on Al Gore, but this is a weird anecdote to say you really saw, and that you're the one who got the lifeguard.
It seems possible that we all just use the term "moral hazard" to mean something different.
What I mean, at least, is a structure or set of arrangements that encourages excessive risk-taking by convincing the risk-taker that losses will be covered somewhere or failure not allowed.
Hence it doesn't make much sense to me to see people who don't recognize the risk or the potential bailouts to be acting under the influence of a moral hazard.
This is one side of a Pro-bailout vs Non-bailout argument and much like a Republican vs Democrat argument both side has their own agendas and neither side is likely to change their mind IMOP no mater what kind of drowning child red herring analogy is thrown out there. I don't much care other then I don't want my money to be the ones bailing out either side let them both drown.
BTW Robert Reich is a communist what do you expect him to say?
Whether Reich made up the anecdote or not, the point of it is that we don't tend to see children as acting under the influence of a moral hazard, precisely because they do not have the skills and experience to even know they're taking a real risk. On the other hand, they do tend to belive that daddy will help them in an emergency, and, well, they're supposed to believe that.
In other words, it's a classic example of how not to apply the concept of moral hazard.
If you have a problem with what the blogger writes, go somewhere else. Bloggers like these two brilliant people have become the most informed, interested, and interesting journalist that we have to read (and react to), mainly because they can stretch their minds into uncharted or risky places.
Bloggers should not threaten bloggess. And vice versa.
Tanta seems to think that taxpayers need to subsidize stupidity. I couldn't disagree more.
Nobody put a gun to these borrower's heads. Whether they were blinded by greed or just dumb as a post is irrelevant. They need to face the consequences of their actions.
Why penalize responsible, hard working taxpayers to subsidize greed or stupidity?
Shame on you Tanta. I thought you were smarting than this. I now think you're dumb as a post.
rich, I know you didn't know that I had just taken a sip of hot tea when I read your comment, so it isn't fair of me to blame you for another scalded "f" key.
Tanta seems to think that taxpayers need to subsidize stupidity
Well, there's more than one theory that says taxation is, in essence, subsidizing stupidity of one sort or another. I know I don't pay school taxes because the rest of you are born numerate.
I am reminded of my favorite Demotivator: "None of us is as dumb as all of us."
Having done quite a bit of sailing in my life let me put the story in a different perspective. Tipping over a small sail boat in a lake is not a life or death matter (most of the time), especially when you're wearing a life jacket. More than likely the kid would have spent some time in the water before drifting to shore. He would have come out of the a little cold, wet and tired but he would have learned something.
I think the best course of action is to do nothing. Sure there are going to be a lot of people that lose a lot of money but losing money is not a life or death matter, just like dumping a sail boat in a lake is not a life or death matter. I know there will be a lot of suffering due to the inevitable recession/depression that will come from doing nothing but America will be stronger for it in the long run. There are enough houses out there that all the current FB's need to do is swallow some pride and start moving in with one another or with other family members. The only thing the government should be thinking about at this point is not how to keep people in there over priced homes, they should be looking at how to make sure they have some sort of shelter and food.
One more thing, shelter doesn't have to be a 3500 sq ft McMansion, or even a 1100 sq ft apartment, it just needs to be a place to sleep and stay warm or cool. Just take a tour on a Navy ship if you want to see how much space is really required to provide shelter.
I support Tanta and disagree with her. Yes, there were some real victims of cruel lenders, but there were also a lot of people who knew what they were doing. I would argue most people who got liar loans knew they were liar loans.
And I think being foreclosed is not such a disaster for the borrower as much as it is for the lender. So a bail out is effectively a bail out of the lender.
There is no way to modify loans in the current mortgage market where most loans were sliced up into multiple tranches and now have multiple owners. Is the borrower supposed to contact the hedge fund who owns a pool of mortgages that in turn owns a 16% triple B rated component of the original mortgage?
The market will fix the problem efficiently and equitably if given the chance. Irresponsible lenders will be taking a huge loss and borrowers who can't afford their mortgages will go back to renting like they should have been doing all along.
The nation as a whole will hopefully learn a painful lesson in all of this and be better for it.
The market will fix the problem efficiently and equitably if given the chance.
Gotta call B.ravo S.ierra on that - the market MAY work things out efficiently if a sufficient set of conditions are met - but the market could give a rat's @ss about equitably.
Tanta, it's good you take the time to do posts of this kind. Certainly views of a different nature are common enough.
I cannot imagine policy, in this case, not being guided by intent - whether that should turn out to be punitive or otherwise - and any suggestion that upcoming decisions will take place in a vacuum is arrant nonsense. Whether this administration and the legislature choose to see it as such or not, what they choose to do or neglect to do has an ethical component.
The reminder is timely. I can't see this as separate from the main body of discussion here.
The problem with any tax financed bailout, is that it draws innocent third parties into a mess that ought only involve the actual borrowers and lenders. If Mozilo was out of line, and bailout only implied taking from him and giving to Joe, that would be one thing. Its the taking from random innocents with no stake in their transaction, to bail out either of them, that is so disgusting and inexcusable. As is taxing innocent third parties to pay lifeguards preventing shitty dads from drowning their children.
What is equitable is for the borrowers and lenders to bear the full brunt of the stupid decisions. That is exactly what will happen if the market is allowed to run its course.
I believe what goes around (liar loans) comes around. The poor liars, greedy folks, and politicians want it to keep going. Also, I think there might be an aroma of Moose shit in here today.
Remember often times claims of equality are nothing more than a tool to exploit. This is what is nagging (at me anyway) when I read treating borrowers as ignorant is akin to infantalizing them.
Plus, as Reich points out, the rich don't hesitate to claim they are ignorant (or incapable of doing lawn work); they just have the cash to hire experts to protect their interests.
What a genius idea. Maybe there should be like....I don't know....some really smart people blogging about this, keeping track of things, offering up useful stats and charts and stuff! I think it would help! What do you guys think? This guy Plosser is on it I'll tell you, a true visionary.
I agree with Kevin. This Reich guy with the obvious pinko socialist analogy can go use his own income to set-up a special trust fund to bail-out the buyers who were stupid enough to purchase with arm's at the top of a housing bubble. This drowning kid comparison tries to lure the mindless reader in to thinking that the poor homeowner's should and need to be saved. Homeowner's, the last time I checked, are heavily weighted towards grown adults. Nobody will be thrown out into the streets. There's something called renting an apartment folks.
Also, this term "moral hazard" is just way over-used lately.
All those that want bail-outs please stand up and pay out of your own pockets. The rest of us will put our own money in our SAVINGS accounts instead of buying plasma tv's and the biggest suv's you can find. Or should be blame circuit city and best buy for luring these poor people to buy something that they couldn't actually afford? It's called personal responsibility people, something which has been dwindling in the USA of late. Wall street and the banking industry should also be left to bail themselves out. No tax dollars. No new FED money.
In a rational market, a foreclosure is not a very big deal for the bank: We all know that houses slighty outpace inflation, so the bank REOs the house, sells it and is made whole again.
It's only when a bubble bursts that any kind of bailout is necessary at all. Everybody on this board has seen all this coming for years now: The bubble deniers, the happy talk from the NAR, the flipper hype in pop culture, then then first warnings, the layoffs, the skyrocketing forclosures, and now the bailout talk.
It has been as clear as day to me (and everyone here) and I am not an economist: I could have bought a house anytime in the last four years, but I haven't because I could see the writing on the walls, and anyone with a lick of sense should have seen it too.
This isn't a "national crisis." It's is a whole lot of little crises that just have to run their course. Nobody "bailed out" any of my friends after the tech bust. Nobody bailed out anybody who lost their job to off-shoring: why should the bubble-mania buyers get special consideration?
There is no way to modify loans in the current mortgage market where most loans were sliced up into multiple tranches and now have multiple owners. Is the borrower supposed to contact the hedge fund who owns a pool of mortgages
Yes, there is a way. Five regulatory agencies headed by the Federal Reserve just published a regulatory policy statement that said so. The SEC has said so. The IRS has said so. It's getting harder and harder to maintain the opposite.
The borrower merely has to contact the sevicer. The servicer might have to get investor permission, but honey, that's one of the things servicers do to justify getting paid a servicing fee! I'm afraid this is beginning to sound just a bit over the top to me. Oh, no, we servicers actually have to work hard for our income? Bitch, ain't it. Surely we don't want to create an environment in which servicers are rewarded for not working very hard . . .
And frankly between "we as a nation will be better for it" and "man cannot be protected from himself" my head is spinning. Either we are innately greedy and will never be anything but, or we are going to learn from this and never be irrational again, cross our hearts.
I still think a huge national economy is harder to "behavior model" than a little kid in a boat. That suggests to me some caution in predicting what we will or will not "learn."
I seem to recall lots of people predicting years ago that we'd never fight another war on foreign soil in the name of geopolitics. Here we are.
Maybe we need to change the story a bit to make it more realistic. Maybe the dad said to the kid "Look at this geat sailboat. Why don't you take it out on the water and sail it? You know you want to. You won't have any problems, it's real easy to run. And if you have any problems, you can just bring it back in and we can replace it with a bigger one."
If I had someone come up to me and asks to borrow a large sum of money and I knew that person to have trouble holding down a job and had trouble paying what he already owed, I would be crazy to take that risk even though he said he would pay me back double what he borrowed. How is that any different than the lenders? I'm the one who is going to be out the money and I'm the one who should be smart enough to not take such a great risk.
"All those that want bail-outs please stand up and pay out of your own pockets. The rest of us will put our own money in our SAVINGS accounts"
Dream on. We live in a society where the politians will decide where you will put your money. So if you don't want to go the bail out route, you better send contributions to similarly minded politicians. Either way, its a pipe dream to think you can control where your money is going to end up.
I also believe that one is responsible for their own actions and I also believe in teaching a person to fish and not giving them the damn fish so if that make me a scrooge so be it I've been called a hell of a lot worse then that.
These posts seem to be aimed at some unknown straw men, those that "demonize debtors" as you put it previously.
Is there really anyone here who doesn't feel that borrowers should have been protected by stronger regulation of lenders? I guess there may be, but I suppose there may some holocaust deniers amongst us too, and even people who kick puppies.
stormymonday, I don't actually hear borrowers pleading to be bailed out, either.
I do hear from time to time that borrowers are pleading to be given the opportunity to pay their debts. Some actually don't want to "walk away" because they consider that immoral deadbeat behavior, violation of the social contract that says if you agreed to borrow the money then you pay it back. A borrower looking for a forbearance or mod or something is trying to do the right thing, in his or her own eyes.
Yet suddenly some people think it's "better for them" if they reneg on the debt and lose the house, and this "better for them" (economically) gets conflated with "doing the right thing."
I, personally, would never have predicted that a bunch of conservatives would be arguing that people should just give up paying off debts. I would have predicted that the conservative approach would have been to prefer workouts to foreclosure. So hell, I'm just totally puzzled.
Would the father have acted the same way if there was no lifeguard or anyone else around. Probably not. He simply wouln't have let his son sail!
He used the others around him to do his job. Now the son knows that his dad will never do anything for him but that the rest of the world will support his risk taking.
Owning a house is not part of what I consider the social safety net. Having a roof over ones head should be. Owning that roof, no.
Reich's argument is more than a little hollow. The Fed providing liquidity is a good thing. The only threat of another Great Depression is the Fed allowing a massive deflation in the money supply due to the currency-deposit ration dropping and the Fed not acting. That's what happened in the 1930s. Whether the Feds liquidity actions create moral hazard, I really don't care because we would all be much worse off without them.
I also fail to see why foreclosure is such a tragic outcome when the buyer put little or no money down. Not getting necessary medical care: tragic. Getting foreclosed when one put zero down: not so much.
actually, i would say that the lenders who would generally have been considered to be the 'leaders' in terms of pushing risky loans and bad underwriting would be the least likely to have thought they would be bailed out...i would say that they were relying on bond investors (who knew less than them) to take the risk from them...and of course you can say the RAs could push risky deals all day b/c they don't take the risk...
Many are overlooking the basic issue that the bubble resulted in valuations far beyond the standard metrics. Bailouts that cushion the reprice are not societally equitable to first time home buyers or buyers that need/desire a larger/more valuable home.
I suggest a foreclosed homeowner tax waiver for debt forgiveness. As I stated before, it's ultimately the MBS (or related) buyer that created this mess. If you couldn't see this disaster coming, you shouldn't be managing serious money.
What we need now is transparency. This mark to model/mark to theory paper needs to be disclosed NOW. Everyone needs to factor in RE valuation reversion to the mean. I have yet to see anyone model this. I suppose it's too scary and unbelievable. It reminds me of the prevalent thinking in the late 90s that equities appreciate significantly every year.
I'll ask this question (again) just how will these mods work for stated income mortgagees who cannot produce Schedule C's verifying their employment.
Well, they don't work for those people. Those people get foreclosed.
The interagency policy we just looked at made that as plain as plain: if you're doing a mod you have to verify capacity. If you can't do that, you foreclose.
I am perfectly willing to believe that 95% of troubled borrowers won't qualify for mod or won't ask for one or don't want one. I have no problems whatsoever with that. I have never advocated forcing people to take a mod, which I think is illegal. If you cannot make at least the same payment a prime borrower would make, you can't have a loan, and we know that a lot of these people couldn't handle the loan if they got 3% interest over 50 years. Those you foreclose.
But if 5% can be helped, then make modifications available to them. As long as you're willing to use the right standards and process, why not? Why should we not allow any mods at all because most people don't qualify for them?
My father always told me if you lend someone money consider it a gift, and hope you get it back. This does not apply to Wall Street! Why should my tax dollars go to help any of these folks? No one helped me when I lost a small fortune in Worldcom & Enron. I learned a hell of a lesson. Thank goodness capital losses can be offset with capital gains. All this talk about a bail out really, really pisses me off.
actually, i would say that the lenders who would generally have been considered to be the 'leaders' in terms of pushing risky loans and bad underwriting would be the least likely to have thought they would be bailed out...
That's certainly interesting. I have a tendency to think that the NEWs and AHMs were thinking that if they didn't offer risky loans, CFC and WAMU and Wells Fargo's subprime division would eat their lunch. The NEWs and AHMs blew up first after the "race to the bottom" because they were least-well-capitalized.
The question becomes what the "too big to fail" players thought they were up to.
Nevertheless, if "moral hazard" wasn't in play on the lender's side, then why would we think it was in play on the borrowers' side? I tend to think that Mozilo is more firmly convinced he will be bailed out by the Federal government than Joe Blow Homeowner is.
As far as bondholders? Never heard of a class of people who more fervently believe that Fed action will bail them out.
The problem with you is, you're not paid to do this. Otherwise, you would know how to keep the system intact without injecting your whiny socio-polemical screeds and humanistic mumbo-jambo into a rational discussion of how best to serve your betters. After all, who really shoulders the risks in a system like ours, some ignorant homebuyer, or master of the universe "bond" holders? The first can only lose their own house, but the second can lose everybody their houses. When it comes to morality and hazards, it's like my grandmother always told me:
Build a man a fire, and he'll be warm for the night. Set a man on fire, and he's warm the rest of his life.
The problem Tanta, is that the vast majority of those who bought homes they couldn't afford were doing it because they were SPECULATING!!! They won't admit to that, but that is the only way you can justify someone buying a house that 10 times their annual income.
I would like to inject a note of reality into this Punch 'N Judy play. But first:
Average Joe - ROTFL.
SLC Bear - Please tell me you are not a parent?
Now for reality: There is a place for one type of bailout. That is for people who did not overbuy but are caught in the overall situation. There are and will be quite a few. It may not be clear to non-mortgage types who have not done their Tanta-assigned reading, but those who have lower-balance loans are often the most unprofitable from the servicer's POV, and also the likliest to cause little loss upon foreclosure. Some servicers seem to make a habit of jerking around low-balance borrowers even in great times. So yes, there is a place for some government monitoring and assistance for such folks, and it is no moral hazard at all. If you are an unlucky conservative buyer who plopped 20% down and got a fixed 30 year with a reasonable DTI, in some areas, you are still totally up the creek without a paddle if one of life's mishaps happens. The fools around you have created a mess.
I have written it before and I will do it now again: the speculators and the overbuyers will not be bailed out because they can't be bailed out. Every state fund that has been set up to try has already found that out for themselves. They are toast regardless. Any debates about bailouts are really discussing people similar to my description above.
You can't give a onetime gift of a few forgiven payments and rescue any borrower but a borrower who is experiencing temporary bad personal luck. If the loan is structurally unsound, in this environment it will not be saved.
I AM concerned that some borrowers will be foreclosed on when they wouldn't have in times past. That is a moral hazard, although it is an opposite moral hazard to the one everyone seems to fear. IT IS A REAL POSSIBILITY. Costs to service a loan are fixed, and the revenue per loan is based on the interest. So low-balance, low LTV, low APR loans are the likliest to get foreclosed on. That's reality.
CR Reader - believe me, this is exactly the same stuff that's being discussed by "economists" in the press. Do you really think that Tanta somehow got off the reservation by wanting to make sure that the discussion is based on real-world conditions?
In the real world, borrowers who have never missed a payment get foreclosed on. Their payments are misapplied, their payments are not credited, etc. It's not infrequent either. Years ago, the Chief (my better half) had to go to court to get his mortgager to credit six months worth of payments. Two years ago one of my brothers started getting jerked around by GMAC the moment his mortgage balance dropped below $100,000. Neither of these, btw, were subprime. Neither were delinquent. But I can assure you that those late charges, etc, made the loans much more profitable.
It is quite common for borrowers with low balance loans to get yanked around by certain servicers. I would say it happens
Geez, Jwm, why in the world would normal people want to speculate on an increase in home prices? How could it be that they no longer had a desire to put a roof over their heads by the many honest opportunities afforded them in the marketplace of working hard and paying their way through life, like we all did? They must have woken up one year, and decided that, for some reason, they were likely to better survive by trying to get something for nothing. I wonder what could have given them such a ridiculous idea, when everything around them could only have taught them that there is no such thing as a free lunch.
Perhaps dotcommunist has been fluoridating the water supply...
That's certainly interesting. I have a tendency to think that the NEWs and AHMs were thinking that if they didn't offer risky loans, CFC and WAMU and Wells Fargo's subprime division would eat their lunch. The NEWs and AHMs blew up first after the "race to the bottom" because they were least-well-capitalized.
i guess it depends who you believe...i thought the party line of the 'too-big-to-fails' was that they just had to follow the NEWs and AHMs to the bottom to avoid losing salespeople, too much business, etc...they often claim that if the NEWs and AHMs hadn't started doing it, they never would have gotten involved, which i agree is unlikely.
i completely agree that mozillo believes he will be bailed out by the gov't...you could maybe even make the argument that NEW and AHM were trying to get TBTF before the house of cards collapsed...
As far as bondholders? Never heard of a class of people who more fervently believe that Fed action will bail them out.
Once upon a time, I'd have said no, equity investors think Congress is going to bail them out, not the Federal Reserve (i.e., they get theirs with legislation favoring corporations, not strictly monetary policy).
But these days, post-Cramer? You're right. It's equity investors.
of course that doesn't mean that wasn't NEW and AHM's thinking, that the big boys would eat their lunch. whatever their thinking was, though, it was clearly first rate!
A few points about Reich's comments infantilizing borrowers.
First, Reich is an ideologue. OF COURSE he would say the government should "do something," and somehow in spite of his years of experience in DC he still believes that congress fixes problems more often than they worsen them. That kind of blindness is what it means to be an ideologue.
Second. A major problem with his analogy is the fact that borrowers are not infants. Lenders and bondholders definitely aren't infants either. They do not need to be protected from their own decisions.
Third. Having congress fix this sort of assumes that congress is both more competent and more benevolent than the people who actually have a direct stake in the problem. Now, if you think of congress as benevolent, it's probably too late to argue with you but suffice it to say that every once in a while I've researched the way politics works and I believe politicians are motivated by self-interest just like the rest of us. As for competence, at least when it comes to financial matters, I shouldn't even need to say anything more there either!
Fourth. Not that anyone raised it, but I'm not very sympathetic to the idea that borrowers (or holders of CDOs) simply didn't get around to researching whether or not their decisions were financially sound. When it comes to homeowners, as most of us know, the purchase of a home is usually the biggest purchase we ever make. Whether one takes a $40,000 or $400,000 loan, you can be sure the borrower considers the loan to be a huge part of his financial condition. Anyone who truly doesn't bother examining the risk of that loan kind of deserves the consequences - which, let's not forget, end in the EXTINGUISHMENT OF THE LOAN in the case of foreclosure!
I'm not glad that we've arrived at the point we're at, but it doesn't make it better to compound one mistake with another. Instead we should fix the mistake that got us here in the first place. It isn't every day that the entire USA experiences a nationwide real estate bubble. I don't believe these things "just happen" sometimes. It's a very preventable condition. Let's make sure there's no next time. Part of the way to do that is to make sure lenders -- and even poor little infant borrowers -- know there will be no bailout.
This is purely anecdotal on my part, but my impression is that the stated income loans and those in need of a mod go hat in hand. My rationale being that for people who walk the W-2, it's just a little too much cognitive dissonance to pull an income figure out of the air for the mortgage broker. So there really is no reason not to offer mods as it will probably be to a relatively small part of the FB pool. And Tanta is right, this isn't a gov't bail out and, as such, there's no reason not to make a serious effort in this regard.
I think the resentment that you see in here (and everywhere really) stems from people biting their tongues at dinner parties thinking that, well, if Dick (pun intended) goes under it's not my problem to contend with. And now it is, and that pisses them off.
...and if that was their thinking, it still doesn't mean they thought they would be saved, so the question is whether the TBTFs would have gone there anyways, b/c they're the ones with the moral hazard....
Moral hazard is a topic that arises in information economics. Because information can be very costly to acquire, and can be hidden or witheld from some parties to an interaction, both law and politics are very naturally involved in questions concerning information and markets.
From Wikipedia, with my emphasis:
Information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This creates an imbalance in power in transactions which can sometimes cause the transactions to go awry. Examples of this problem are Adverse selection and Moral hazard.
Applying this concept to the question of who should be considered for a remedy or "bailout" makes it clear that even the assessments of what material information was witheld and by whom are liable to be affected by politics, even though a complete picture might make it clear to one and all that some parties' concealments caused a lot more social damageif only because they were replicated over millions of instances- than other parties'. Maybe that's just my politics talking.
Remember the Loves? They were our borrowers from the other day who bought a $59,000 house in Pittsburgh, and couldn't get Countrywide to work with them when their note rate is a whopping 12.125%. I think we can pretty much guarantee that that house wasn't 10x the Loves' incomes.
Someone did some digging and came up with information suggesting that the seller of the home to the Loves bought it 7 months previously for $10,000. Perhaps really really extensive renovations got made, but it also appears that the assessed valuation is around $32,000.
I can't not have more contempt for Countrywide and the property seller and the Loves' realtor than I have for the Loves. Call it a personality defect on my part.
We don't talk much about the sellers of these properties.
Given that certain lenders have already forseen and taken advantage of the paternalistic attitude (ex. oh, Fannie Mae/Freddie Mac will buy these unsound loans? Well lets make lots of those then. Who cares what happens to the borrower or taxpayer as long as I get my cut when the deal goes down), it pretty much already proves the system is already too paternalistic and prone to abuse.
It's time to pull back on the paternalistic attitude, not do it one further.
And, somehow, I think if Tanta had approved my own loan at her day job, then I claimed ignorance, it seem unlikely to be forgiven ...
You could also argue that both Reich and Tanta have refashioned the moral of the story to suit their own views.
To me, the point of the story is that people are free to make their own decisions, and that is how it should be. Those people should also be educated as to the risks of the decisions before they make them. But once they've had that education, they must be free to make their own decisions and the consequences the come with them.
borrowers who can't afford their mortgages will go back to renting like they should have been doing all along
As a quasi-Georgist/geolibertarian, I disagree with this "let them rent!" sentiment. The problem is over-extension, not buying per-se.
These skeevy loan products pushed prices above affordability, as the market was chasing the age-old speculative premium of holding real-estate.
Removing the inflationary loan products is a first step [check!], now what to do with the people who priced themselves above the highwater mark in now-unaffordable loans.
As Ashleight Brilliant once said: "I don't have a solution but I certainly admire the problem."
As a renter who is saving for a down payment and will buy later this decade, I say let the market work its magic and let this be a learning experience for everyone.
"Tanta seems to think that taxpayers need to subsidize stupidity. I couldn't disagree more.
Nobody put a gun to these borrower's heads. Whether they were blinded by greed or just dumb as a post is irrelevant. They need to face the consequences of their actions."
Tanta is an artist. You, my friend, would be lucky to find work as a house painter. You'd be hired to paint a house and end up painting the whole neighborhood.
One of Tanta's points overall is that there are many people out there suffering from this situation. Some were greedy fools and some were dupes. Some were blindsided by medical or job difficulties. It's not productive to lump them all together.
Her point, as I take it, is that we need to get some visibility on the ground by way of some hard-nosed, tough-love but fair-minded loan officers who sit across the table and work with people on a case by case basis. She has never advocated a carte blance bailout that I recollect.
What she does oppose with vigor is simple-minded pap like your statements.
Stupid, I worked for a bank. We got everything from "how can I be overdrawn if I still have checks left" to "but how can my rate go up? I have one of those ARM things."
I have never in all my years been involved in a truly "forgiven" loan. I've seen a lot of workouts in my time, almost none of which ever involved a principal reduction. I am generally never in favor of principal reductions unless there's evidence that the borrower financed inappropriate fees.
I bang my head over "mod" = "forgiveness" = "bailout." I still believe that "mod" = "workout."
And I'm sure that at least one loan I signed off on over the years got worked out. I have yet to meet an underwriter who hasn't had at least one loan failure. Besides the fact that we aren't perfect, you're not taking enough risk if you never approve a loan that goes south.
Oh, surely someone will be willing to argue that Chapter 11 is a "bailout" . . .,/i>
Chapter 11? Limited liability is a bailout. It's a floor on losses with no ceiling on gains. All of these free market/can't have any bailouts/Oh, God, the Moral Hazard people seem to not recognize that a certain level of society provided insurance is an essential part of our capitalist system.
Look, it's perfectly possible to argue that any particular bailout is a bad idea. In a lot of cases, I'd even agree with you. If you think that the thing to do is argue against all bailouts as a matter of principle, you had better go back and check your assumptions, because 99.99% will find a glaring contradiction in there.
Now, if you think that limited liability is a bad idea, and everyone should be responsible for all debts from their investments, then I salute you for your consistency. I think that you're nucking futs, but you are at least consistent.
I bang my head over "mod" = "forgiveness" = "bailout." I still believe that "mod" = "workout."
Tanta,
I think part of the problem is that instead of taking a particular position, you speak in broad, moralistic, and often condescending, ways about the subject.
I think it would be more interesting all around if you just made straightforward proposal of what you have in mind, and ease up on the condemnations.
The market will fix the problem efficiently and equitably if given the chance. Irresponsible lenders will be taking a huge loss and borrowers who can't afford their mortgages will go back to renting like they should have been doing all along.
My view goes something like this... the loan originator (or lender) should have practiced due diligence. Seeing as how so many people were after that all mighty commission (on god knows how many layers), there was some incentive to ignore things that should been big red lights. So we wind up with certain people who were allowed to sign up for loans that they should have not been allowed to sign up for, and now face an uncertain future.
One possible solution: Anyone who has suitable cash flow, should be allowed to stay in the dwelling for one year based on a signed lease (in exchange for clearing title and walking away from the mortgage). Meanwhile that gives whomever holds the note time to execute a mark-to-market strategy. At the end of the one year lease agreement, the original buyers can then see if they qualify for a new mortgage based on the new market price and based upon more conventional lending requirements.
This is not a perfect solution. It spreads the pain between the buyer (loss of any equity they might have had) and the note holder (loss of market value on the asset). It does not inflect any obvious pain on the folks that originated a poor loan (which is unfortunate, but thats how the ball bounces sometimes). It does provide for a softer landing than just kicking the borrowers out and inflating the REO listings.
Sometimes there isn't a perfect solution, just the lesser of the evils.
Bob, what does that have to do with what you italicized?
Simply that I don't think anyone is saying "mod" = "forgiveness" = "bailout." But since Tanta isn't posting so much an idea as a sermon, it's pretty easy to misinterpret what the idea is behind it. I'm not defending the juvenilia that was posted above, but I think Tanta presents things in a way that assuage her feelings of moral superiority, as opposed to facilitating discussion.
I would think a closer analogy is if the kid is playing with matches in a, oh let's say, one of San Diego's tinderbox suburbs. We're not able to say where the problems are localized and where our self-interests lie.
The Reich analogy is more expository of our own "socio-political" views.
And I'd love to add a few words about "free speech" but I've been warned: Don't Feed the Trolls.
Mama,
Great post as usual. Power to the blogesses. I would only add that the Federal agencies are very sensitive to race issues in regards to banking/housing/lending, etc.
They have plenary powers in regards to enforcement and use an army of in-house lawyers to enforce law.
They send armies of examiners around the nation and into the banks to conduct regular CRA compliance examinations.
Minority owned banks have their own special laws which protect them from being closed as rapidly as other peer group banks.
Attached is the FDIC's latest press release dated 9/5/2007 listing banks examined for CRA Compliance. Race and current federal & state law complicates these matters in ways that people do not fully understand.
I respect you immensely. But, for the love of all that is blue and green, separate the forest from the trees here. A valid judgment on this issue requires looking at BOTH the borrowe, and the bank/lender. We can't just focus on the borrower, who will admittedly generate sympathy.
Only the hardest of hearts would want the borrower - or, more particuarly, the borrower who truly was defrauded - to bear the pain of being the victim of true fraud. And, I think that is really the ultimate point both you and Reich are making. I'm against a bailout, but not above helping my fellow neighbor.
But - and you allude to this, but don't connect the dots all the way - there was a party to the underlying loan transaction who agreed to take on the risk here (insert whatever risk you want - interest rate risk, default risk, collateral risk, et al). Namely, the lender (and any of its cohorts in the secondary market who bought the sliced and diced products that came out of same).
I have no problem helping out true victims. I have a huge problem providing tax dollars to parties whose risk modeling was, well, wrong. They took the risk, profited handsomely for a time from doing so, and they must now be allowed to bear the consequences of their (wrong) decisions. Privatizing the profit, but socializing the risk, is fundamentally unfair.
I would argue that very few of us would complain about government assistance for the aggrieved borrower if any help was conditioned on the borrower producing both 2 years of tax returns and his or her loan app - if they matched, they get help and a big hug. If they do not match, they get prosecuted for loan fraud or tax evasion - and no hug.
But, my fear is that the gov'ment will foist a plan that really acts to limit the lenders' loss severity in the name of helping your fellow neighbor. And, I fear many people will fall for it - heck, I'm afraid my gentle Tanta has!
As a closing matter, I still fail to see why I should pay someone else's mortgage. It isn't like they won't have a place to live - they just won't be able to live in their current abode. It is only money, and is not the end of the world.
And, oddly enough, by letting home prices drift down to a point of equilibrium, the very group of people most pinched by recent and coming events will reap the most benefit - as housing will, for a certain class of shut out homeowners who were probably the most victimized by the mortgage game, become affordable again.
I don't wanna provide my tax dollars to [insert economic loser]...but I smugly ignore the half trillion that goes to the economic winners - namely advanced tech industry funneled through the Pentagon. No welfare queens do I support - I take the moral high ground.
What's funny is this discussion is so evocative of the dialogue in the late 20s and early 30s. Mellon and those of his ilk were arguing that the right and proper thing to do was to allow the pain to work itself out. On the other side were all the folks experiencing the pain. I think Mellon had the better part of the economics but the worst part of the politics. He not only was ruined, but his political point of view was in exile for 40 years.
If this thing is as big of a disaster as is being predicted here, someone is going to get on the "right side" of the politics. Think about it, you have Florida, Michigan, and Ohio among the seven states most affected by this. All of which have been "Battleground" states in presidential elections, two of which have decided the last two presidential elections.
I rather suspect by this time next year the candidates will be falling over each other to promise more for bailouts.
Bob, your the guy who walks into a meeting of my highly functional staff, takes an underhanded swipe at someone's soft spot and then sits there smugly when the chaos erupts.
The whole "moral hazard" argument is getting tiring. The real moral hazard in the entire episode is on the underwriting side, where the "adults" were supposed to be the responsible ones.
Most of the more reasonable bailout proposals target "owner occupied" houses, which kind of rules out speculators.
There will be plenty of opportunities for those waiting for prices to plunge. Perhaps a bit of enlightened self interest in providing the normal liquidity mechanisms (foreclosure, short sales etc)is in order. The alternative may be a lot of abandoned houses, occupied by squatters or stripped bare.
--
Thanks, Tanta. As an ex-Republicon, I have come to respect Mr. Reich.
As good Americans we are supposed to know about the Moral Hazard, talk about it from time-to-time, and even have a vague understanding of what it means, BUT we should absolutely do nothing about it.
What better way to give crooks a carte blanche! And, girl, have they charged trillions or what!!
A system of
America is coming down and coming down big, people. Crooks have done the dirty deed.
"But if 5% can be helped, then make modifications available to them. As long as you're willing to use the right standards and process, why not? Why should we not allow any mods at all because most people don't qualify for them?"
Sounds fair enough as long as the bond holder and the lenders are the ones eating the losses, however I doubt if that is what Reich had in mind and even with a modification it would seem to me if the other 95% couldn't be modified the 5% that can be will wish they had walked also as home prices plunge.
These crooks will be sipping Mai Tais in Macao. They are set for life and they know where the future is -- China. Screw Americans for all they are worth and then to the next new destination. The American Century is past.
IMHO, what is needed is a class-
action suit against lenders who
encouraged abusive practices (in-
sufficient disclosure, etc) by their
employees. In some cases, it should
be possible to document, given
a real discovery process, actions at
corporate level that cannot be blamed
on a few reckless subordinates.
I believe there is a school of thought that concludes that many of the social policies of the Fed and Gov't were designed around insuring that 'Food lines' never occur in America again...
Personally, I like being lectured to by Tanta as I have not had the luxury of suffering through her experiences or being able to absorb all of her business acumen.
Her philosphical bent makes me ask myself "Am I judging this issue too simplistically? Maybe reality is more complicated?" That is what I love about this blog. It makes me question my principles on matters I have no biblical knolwedge of.
Tanta puts meat on an abstract construct, if you have walked in those shoes you can choose to reject that moral construct via postings. As most of us have not, all you can do is entertain her moral notions as the ticket price for the acumen/experience piece of the package. Does not mean you can't push back, but why would we want to change the formula for one of the best financial blogs ever because of your moral certitude?
Most of us are intrigued enough to user her "on the ground" wisdom to question our own morals. The success of the CR enterprise lies in that formula, it presses the serotonin buttons in 4 or 5 parts of the brain, not just 1.
Tricky this one. I'm not sure a paternal analogy is accurate here.
Let's say you're a lender competing in the mktplace. You have 100 other folks willing to entertain your client. You see some red flags with your borrower's situation, but they really, really, really want that house. If you rain on their parade with prudent caution, they will just skip down the street to the next lender that will whisper the sweet nothings in their ear that they want to hear. If you want to fund the loan and make a living, whaddya gonna do?
A child doesn't have 10 parents to choose from (each more catering than the next) when they are pining and wheedling for that new pony.
Many (or most) borrowers may have been innocent ignoramuses about the consequences.
In my experience though, this is not the case; they knew exactly what they were doing, had stars ($$) in their eyes, and damned be the consequences. Being a "quantum particle" homebuyer comes to mind (Owner Occ status on 5 properties simultaneously).
I don't accept the "poor victim" borrower in most cases.
They took their chances, they should face the consequnences of their actions.
I'm as much in the mood to laugh at stupid buyers and punish greedy lenders as anyone I know. But, in the final analysis, the government should do what is in the best interests of the country as a whole.
I think that can happen without letting lenders and stupid buyers off scot-free, but the reality is likely to be that pragmatism is going to outrank justice.
I don't see how the anecdote about the father and child and the sailboat is relevant to the issue of mortgage bailouts. There are no parent/child relationships involved in the mortgage mess. Government is not our daddy and those who attempt to make it our daddy are foolish. These lenders and borrowers are not innocent, naive children. They are adults who made bad financial decisions. A father refusing to help a drowning child has no parallel in a government staying out of the financial foolishness of borrowers and lenders who get involved in unwise loans. Fathers and children are not like government and citizens, except to collectivists.
In a story on foreclosures my local paper featured a fellow whose home payments are going up significantly because his ARM is resetting. "I didn't know I had an adjustable rate mortgage," he said. We are supposed to feel sorry for someone so ill-informed about financial matters that he enters into a contract for multi-hundred-thousands of dollars of debt without understanding something as simple as the fact that his interest rate will change? What's more, the article stated that he would be ineligible for the current bailout plans because he had less than 3% equity in the house. We are supposed to care that this fellow, who has less than a few thousand dollars of equity at stake, is going to lose a house he had no business buying in the first place?
How was he able to get the loan in the first place? Because of the moral hazard introduced by government guaranteeing such loans. And now people propose more government programs bailing out borrowers like that?
There will be no escaping the Darwinian reality of the free market, in any case. The same mentality that turns government into a daddy figure guaranteeing loans for all the naive "children" who want loans they can't afford in an honest market has turned government into a daddy figure in most other aspects of our lives, and will destroy our currency and our financial system. The refusal to expect adults to take full responsibility for their financial decisions only means that eventually all of us will be damaged or destroyed financially. There is no free lunch, and there is no way to get away from the free market.
I will also point out that when these people were congratulating themselves on their big paper gains in the RE market, no one was proposing taxing them to give me a cut of their winnings. But now that they're going to suffer the entirely natural, forseeable, and just penalties for their greed and foolishness, I am expected to pony up my share of taxpayer dollars to bail them out? WTF?
Good thing the government provided me with help as a toddler, I never had to fall down and bump my head... but now I'm free to crawl forever, never looking up to see what possibilities life holds....
My god we are all dead in the end. I dont believe the purpose of life is to avoid failure or to prevent human potential by limiting risk. Everyone should have the freedom to fail or succeed. We are all better off for it.
If you feel you need to help someone there are plenty of orphans and widows. But the guy living in the house he should never have bought because someone made a stupid loan? Theyve both earned what they deserve given their ability to fail or succeed. Leave em be.
I may be a little late to this party.. but I'll throw my log on the fire..
CFC, Greenepoint, AHM, and the other lenders aren't people. There is no pain that they will feel.. teh Tanman has made hundreds of millions of dollars selling stock options over the years.. bailout o no bailout, he'll still be stinky rich. All the laid off employees and the defaulting borrowers? Well, they won't be doing so well. Some will deserve the pain and others will not.
The only entities or people on the structural end who can be "punished" for this (by forcing massive foreclosures) are the investors who allowed their money to be used to purchase all these fancily packaged revenue streams.
All the hedge fund managers pumping money into mortgage based derivatives are already wealthy from all the fees they collected. In fact, I'd guess that anyone who made millions during this "boom" will not suffer one bit unless they are criminally prosecuted (I won't be holding my breath).
Anyhoo, I don't see what's so "bailout-y" about allowing qualified borrowers to get mods/workouts. Tanta may be getting a little exhausted explaining over and over that a workout has nothing to do with giving your holy tax dollars to coked up condo flippers. As for the stated income types.. being a renter isn't so bad. I welcome you to the fold.
Tanta says: I bang my head over "mod" = "forgiveness" = "bailout." I still believe that "mod" = "workout."
If New NPV is less than Old NPV then "mod" = "forgiveness" = "bailout."
While we are on the subject of mods what about taxpayers suddenly finding themselves paying double even triple on their property taxes through no fault of their own?
You do chase this particular theme, doncha Tanta ? I admire you for it. I too continuously revisit this issue all the time ever since I set my mind to "NO bailout" a while back.My post will be long so please skip if it bores.
The confusion for me is between personal charity, caring and compassionate behaviour and my acceptance, reluctantly ,of the capitalist model for human action( cf Mises).
In the current housing issue I do not personally know of a single family who face default. But in 1983, when Maggie Thatcher was selling off council ( project) housing, a friend from my commie days overstretched, bought the flat they lived in and then cdn't make payments. Of course I helped out to the tune of 1000 pounds with the proviso that I was paid back in 1 year. I didn't really expect to be paid back( no interest of course ) but actually I WAS paid back.
Recently, when in Turkey, the tourist bus to the Ephesus site just casually stopped at a carpet making demonstration centre ( yeah right!). My friend of 40 years was going to buy a silk carpet of $8000 for her husband( who wasn't there with us and you can guess what the real issues are here ) - I watched in horror and then moved hard and persuasively to prevent her from doing so. When talking about this yesterday I said to my wife - "you know if she was buying a $200 killim I would have let her - even if it was really only worth $80 - but $8000 - c'mon ! I reckon quantity matters. She doesn't agree.. she thinks that thinking is inconsistent - I don't - quantity matters.
So...
For a really fruitful debate we need concretization IMO. Real verified stories ( I'm suspicious of that Love story) - real data on amount of bailout, on the form it takes, what the victims stand to lose and so on.
I'm being asked to sign a blank check on these bailouts I reckon. I don't know who, how much, when, why where.
And not being told that is the nature of political debates of course. And we all know what a bunch a lying, thieving, self-serving bunch of toads they are.
I offered personal stories to illustrate the type of real data I require before I support bailouts. I'm not some heartless shit - but I'm deeply suspicious of anything that any self-serving politician suggests - The first thought is - Just say No !
Save the kid? I don't know... the temptation is, of course, to cast it all in your own perspective.
Did you know the father or the kid? Their history? Has this little game gone on before... like maybe every week or two? Was the kid truly in trouble or just trying to turn the old man's crank?
You may judge correctly by your light but totally misread the relationship and the situation.
And, if you ever think of a good way to save the 'deserving' from their 'mistakes' while letting the undeserving burn in hell, please let us know. I haven't yet seen even a halfway believable suggestion anywhere on how that could be done.
I wonder what level of sophistication the public debate will sustain in what will likely be an election year of economic crisis. I also wonder if our debate is simply academic, if the containment spreads so wide as to clearly damage our standard of living.
In a serious crisis, there will be incredible pressure to monetize debts. The housing sector may be only the first point of pain. One of the apparatchiks of Zimbabwe recently said something to the effect of "we print money so that our people may eat." The public must understand the concept of moral hazard as a counterweight to the seduction of the bailout.
There have been a number of right wingers who have criticized Robert Reich as an ideologue. I am very angry about the ideologues of the right who created this mess in the first place be relaxing all standards. The casino society enabled by right-wing ideologues will naturally be followed by the caretaker society of the left.
Help me out here. What is the financial risk to a subprime, Option ARM borrower who obtained 100% financing? It appears to me that his worst case hardship is moving back to rental housing comparable to the house he is living in only with a lower payment, after pocketing several months of rent savings while living in his home during foreclosure.
Inconvenience I see. Financial hardship I do not. What am I missing?
Tanta: "... Hence it doesn't make much sense to me to see people who don't recognize the risk or the potential bailouts to be acting under the influence of a moral hazard."
If memory serves, all conversations I had with home "owners" or home "owner"ship advocates that went into the areas of ARM reset, job loss/financial hardship, real estate busts, etc., featured appeals to moral hazards or at best waving the risk away -- the government will always prop up the 70% home "owning" voters, when you have negative equity you can walk away, you will move on/refi before the rate resets, in this high-demand market (SF bay area) you can always sell the house ...
Dear Tanta, you will find this interesting:
Wall Street Journal Weekend Edition, Page B4.
"FED NOMINEE'S FIRM OFFERED RISKY LOANS" by Damian Paletta
"Capital One Financial Corp executive Larry Klane, nominated by President Bush for a seat on the Federal Reserve Board, overseas a company unit that originated the risky types of mortages regulators are trying to curtail.
Capital One Home Loans, a unit of Mr. Klane's Global Financial Services division, made some loans that brought total mortgage debt to 125% of the home's value. The loans.....strip the equity out of a house, making it difficult for some to avoid foreclosuire if they miss payments.
The company, like others originated "2/28 s" and "3/27s".....
....at his confirmation hearing before the Senate Banking Committee Aug 2, Mr. Klane said he would put his "full energy" into making sure the Fed has used "all of the arrows in the regulatory quiver to protect consumers" with respect to mortgage practices......
Tennis_8: Mr. Klane said he would put his "full energy" into making sure the Fed has used "all of the arrows in the regulatory quiver to protect consumers" with respect to mortgage practices......
No mention of how well he intends to aim while firing though...
Dick Cheney is helping Mr. Klane fire thank you very much. Dick will then make a comment about the economy. Get out of the line of fire or you will get peppered pretty well. What else can happen in Texas?
I think what we really need is centralized personal responsibility. That and a lot of free lunches. I'm really disappointed that there are no safety-net/moral-hazard metaphors. I go away for awhile and suddenly all the sizzle is gone? The only reason to hang around here is to get snarky about our collective self destruction. Maybe pop-off a few jokes that are ridiculous enough so that somebody stops and thinks about something, anything. But a serious debate about moral hazard and safety nets? I'd rather talk about how many licks it takes to get to the center of a tootsie pop. Safety net becomes moral hazard at the same point sharing becomes a tragedy of the commons. Where can I spend my money so that children don't grow up to be the assholes that cause a tragedy of the commons?
Back to snarky, did I hear Tanta say something about Mozilo's mission? HaloScan.com - Comments
As mentioned above - for dramatic effect - there seems to be a bit of embellishment in RR's anecdote. Were the child truly drowning, why would he walk over to the father and delicately tell him his son is drowning, and then, once again, walk down the beach in search of a lifeguard. Most people truly concerned with drowning children tend to act with a bit more haste.
More importantly, however, the story omits the most significant detail - not only for the potentially endangered child, but for the analogous borrower as well. You see, RR forgot to mention the identity of the father. It was none other than Sir Hasselhoff. Yeah, that's right, Daddy Dave, and like Uncle Ben, Daddy Dave's apparent nonchalance was just that, a display. A projection of calm and control. Because if things actually did get too choppy, he was willing and able to put his banana-sling in action to alleviate the potential for long-term harm.
But that's why Daddy Dave is the most important part of the anecdote. The boy cannot stay a child forever. He must learn, but not so quickly as to kill curiosity. Its a difficult balancing act, one that Im glad I dont have to orchestrate. But at the end of the day, you can rest assured that the big boys will take care of themselves.
Thank you Tanta. Once again you have summed up the situation more clearly and concisely than anywhere else I have seen.
All too many people who take that "abuse the system" tack, simply don't have the cohonnes to say upfront that they simply don't care.
Also, to those who say there can be no bailout of the hoodwinked "buyers" w/o bailing out the lenders, you are wrong.
It's not even hard or costly.
A little legislation that would allow any "subprime" borrower (for a home they live in, sorry flippers) to walk away without a black mark on their financial history from the housing transaction would pretty much do the trick.
They would indeed suffer for their folly as they have to find a new place to live. I doubt many would look upon moving and giving up on a dream as a good thing. Also, it would tag the perpetrators (lenders) with the cost of cleaning up their mess. They don't want those houses, but someone does... at the right price.
An attractive aspect of Leamer's policy prescription (that the Fed targets house prices) is that it protects J6P and the real economy from J6P's ignorance (or greed, take your pick) while allowing financial assets (which are for grown-ups) to gyrate as they will.
(Of course it's too late for that to help with the current crisis -- but mostly it's too late for anything to help with the current crisis; and to me it seems that the important thing is to develop a new regulatory framework to minimize problems a decade from now when the Great Crash of 2008 is ancient history.)
I do not write about moral hazard often because the regulatory agencies (see below) do an adequate job of covering this important issue. It is available on-line to anybody who reads english and is not easily bored.
Unfortunately, moral hazard is not and has never been widely understood by the public. This could turn out to be a blessing or a curse.
Unfortunately, most computational economic tools do not provide means for facilitating the knowledge extraction or system validations.
In speaking to bankers in New York City in 1938, FDIC Chairman Leo Crowley said: "Deposit insurance came into existence because more than $3.5 billion of depositors' funds were dissipated during the years between 1865 and 1933. No banking system with the weaknesses this record indicates can expect to maintain the confidence of bank depositors."
Congress, he said, had two choices to restore public confidence:
FDIC deposit insurance or nationalizing the banking system.
The lawmakers opted to support private enterprise, he stressed, not to eliminate it.
This time around our problems could get so out of hand that Congress does in fact vote on nationalizing the banking system. I do not think it will happen but I do think it may be considered along the way.
We learn much from your posts and hope you will provide computational economic tools for us to consider in the future. I also plan on having more fabulous fun along the CR path.
You wonder why the country's in such a state, then you remember that our schools don't teach kids to analyze and think -just to regurgitate fact-bites.
Then you see proof of this pounded out on the keyboards of this board. Save all vitriol for the individual buyer--who likely had a good dose of fear as motivation for buying ('buy now or you'll be priced out forever!') rather than greed-- spare none for the banks -who have no excuse but greed for running this scam.
Banks are going to laugh all the way to the uh..bank..if this tactic of using their hapless buyers to shield their own misdeeds works.
The presumptions of the 'no bailout' screamers are staggering - do you really think someone 'walking' from their home with a blown-out credit rating and a potential lifetime debt burden is going to be able to afford to rent? Maybe on the taxpayer dime they will. And do you think compelling a lender to make sure these folks don't become social costs is a moral hazard? Your 'no bailout' policy will accomplish exactly the opposite.
If you want to take a 'no bailout' position you have to stop scattering buckshot (yes you might hit some guilty people, but you'll kill a bunch of innocents too, and make a mess we all have to pay to clean up). You have to aim the policy where it will do some good - between the lenders' eyes. Everything else is just a useless distraction.
I guess all the arguments proceeds from how the economy should be treated: either as an abstract science ( = individuals have no meaning ) or as human interactions ( = morality, compassion, empathy......).
Trying to reach a compromise between those two diametrically opposed is the drama of modern life.
But one thing is for certain, no missionary will have 500 million dollar as compensation in life. So CFC is not a missionary and should be punished.
The simplest social solution to the whole moral issue is following:
The goverment should mandate that any individual credit damage caused by subprime crisis should be erased:
lenders are not allowed to abuse the credit information during this period because they are also repsonsible for the mess.
You do not need to be Nostradamus to know what is going to happen.
To echo the old English Music Hall song -
'It is the rich that get the pleasure and the poor that get the blame
It will be socialist crony capitalism with endless bailouts for the US kleptocractic elite and the harsh discipline of the free market for the masses. Same as it ever was.
If we really want to do something for the poor, it would be for Congress to change the law on bankruptcy back to the old, more lenient, pre-Bush system.
This ridiculous child drowning analogy and talk of moral hazard aside. . . neither lender nor borrower deserve help.
As for borrower, it is about personal responsibility. These people made a choice to go into debt to buy a home, many people did not. If they "lose" a home that they DIDN'T OWN in the first place (no equity), so be it. Millions of people chose NOT to leverage up to buy a home and have been priced out of home ownership. If we support real estate prices through bailouts of subprime borrowers these people get punished.
Either way someone gets hurt, I say people who did not buy homes are more deserving . . . let the mortgage defaults begin!!!!
Paul D, that would be me in the most deserving category, but you see, I don't live on a rocky isle or a barren alien planet, I live in a neighborhood. That means that if foreclosures and defaults bloom around me, I lose -in property value, in quality of life, in safety, in social costs.
If my hapless neighbors get to stay in their depreciating houses, the market will still correct. The lender will be punished and so will the borrower -- less in debt but probably unable to buy or sell for years -- but at least they won't be reducing my 'hood to a squatterville.
In your scenario, you are hurting me, the prudent party in all this, and not doing anything to ensure the bad loans lenders passed off come back to haunt them.
Do I smell greed in this lack of mercy for homeowners? The kind just as irredeemable as the Tan Man's? I think some of you are kind of like reverse-flippers here - you are investors who want the market to burn to the bottom so you can get your superbargains -- neighborhoods, and all homeowners (wise and foolish) be damned.
Don't use me as your cloak of legitimacy for this argument.
From a comment above: "This ridiculous child drowning analogy [ . . . ]" shows how clever and misleading RRs analogy is.
This is not the first time RR has set up and knocked down a seemingly parallel strawman and equated anyone who would oppose his (tax-funded) solution [sic] to, in this case, a heartless oaf who would let his own son drown just to teach him a lesson.
Sheesh!
Only ndup caught this misdirection, for if RR ever believed that lad to be in an immediate life-threatening situation then his own actions were also irresponsible in the extreme.
Does anyone (including RR) actually believe that father would have let his son drown (and that boat sink)?
This is not about "moral hazard," it's about "metaphor hazard."
Any discussion of moral hazard would seem lacking without considering the mix of foreclosure laws and 0% down purchase money loans.
With is mix, borrowers are already protected from the risk of loss-- they just walk away from the house. In California, they most likely won't even have to pay tax on forgiveness of indebtedness income. Every 0% purchase money borrower had a giant put option on their house that only costs them their credit rating.
Is there really anyone here who doesn't feel that borrowers should have been protected by stronger regulation of lenders?
I think that can happen without letting lenders and stupid buyers off scot-free, but the reality is likely to be that pragmatism is going to outrank justice.
The buyers are already protected by regulation. The buyers are alreay getting off scott-free. The foreclosure laws already do this.
0% down/purchase money buyer only have a call option on the house. Their money is NOT at risk.
It is the lenders who are getting shafted with the return of overpriced real estate. The lenders had the benefit of the information asymmetry. Why bother to bail them out?
To equivilate, or liken these two unfolding scenerios to each other is an extememely over simplified stretch, by any means. Yet, I have frequently found, to "sell the conclusion of choice", one must also "conjure, create and capture".
Your real estate became very over-priced, a bubble valuation. Is it wrong to come back down to a more economically justifiable price?!?! . . . a valuation that should have been applied in the first place but for the bubble. Your equity will still be above water. Who is being greedy here?
YOU ARE ARGUING THAT REAL ESTATE PRICES SHOULD NEVER DECLINE! You must be joking.
Then all future young homebuyers will be priced out, unless you anticipate some epic rise in wages? Besides, if your 'hood has many foreclosures, eventually prices will settle at a level they SHOULD HAVE BEEN in the first place. NOT the bubble valuation you now desire.
Next, let's protect all those gamblers who go to Vegas and lose money? What a shame for those poor people. They didn't understand the odds correctly.
Tanta - Your analogies are somewhat over the top. While it may be true that most subprime borrowers don't know about FOMC, I'll bet good money that many of the borrowers know that there is the possibility of govt bailout. And if they don't know now, they will within the next year. That is a moral hazard.
Reich goes even further than you with the assertion that "many of the poor borrowers didn't know they couldn't afford the loans". There is very little question in my mind that many (probably most) of them knew they couldn't afford it. Did they understand the nuances? No, probably not. But they knew their payment would go up sizably in 2 years and they had trouble on the teaser.
to go back to the child analogy, obviously you do not want to let the child drown. But neither do you want to be known to be hovering 10 feet off his stern waiting to dive in.
The US govt forcing (not just encouraging servicers) someone (note holder proxy or servicer) to make a rational decision about when it is cheaper to foreclose on an individual homeowner and when it is reasonable to rengotiate loan terms seems reasonable middle ground.
PS None of this is to say that some of the lenders should not be spending some time in a small little cell - for bait and switch, for selling loans that were knowingly unservicable. It's just that it takes two to tango.
PaulD, reread me - prices are going to correct whether neighborhoods collapse or not. Credit tightening assures this.
Which means the homeowners who got taken will be punished enough for years to come - pushing neighborhoods into more decline than they can bear on top of that punishes me too. And you too.
clearly the answer is we should only save the kid from drowning if it minimizes the losses to the deal...
I am increasingly troubled by your cliched socio-political screeds, which detract from the informative economic commentary CR writes.
I liked the site much better when it was just him blogging.
I find the commentary interesting, useful as a guideline to Tanta's thought processes.
Besides, there is not such a clear divide between economics and politics. Those who believe there is, are typically either very young, or Libertarians.
Flame away.
The pain of the father when his son goes down for the last time will be great as well, but he's enough of a soiciopath that he'll get over it quickly and start lending @ LIBOR+800bp when his bereavement in St. Tropez comes to an end.
There is no way to bail out the borrowers without also bailing out the lenders. This process needs to run its course. It will be resolved by stupid borrowers going back to renting and stupid lenders writing off the loans. That's the moral and just outcome to this mess. This isn't life or death. It's just money.
cliched socio-political screeds
Well, let me pick "socio-political" out of an unfortunate set of adjectival brackets and ask, for the sake of discussion: Isn't "moral hazard" an "economics" concept?
I'm not an economist, of course, but the idea of a moral hazard does seem to be getting some airplay in economic circles.
If rhetoric is so important, I think the term "saving" should be the first to be scrutinized. Exactly what is everyone wanting to save the homebuyer from? Certainly being forced to not overpay for an asset for the next 30 years seems like something many of us can live with.
With very few exceptions I think forcing people out of a house they can't afford may be the best thing for them.
It seems odd to complain that the wave of forclosures, caused by too many homes, would cause an epidemic of homelessness.
While forcing them out onto the streets will be a temporary, albeit unpleasant, experience. It's certainly likely to more shortlived than the the monthly inconvenience of paying for a mortgage they can barely afford over several more years. Ironically those already forced out may be the first in line to buy from those who tried to hang on but finally couldn't through financial exhaustion.
Tanta, I for one am pleased that you are troubling to the cliched socio-political folks.
Tanta, I copied this paragraph awhile ago, (sorry no longer have the link.) I think it says it even better than RR:
"But the real job of the banker should be to judge the realism of the desire, not just its strength or existence. The structural role of finance in the home, the company, or the world economy is as a sort of super-ego, a reality principal. Social insurance for bankers has undermined the traditional virtues of banking prudence, skepticism, an eye for opportunity, understanding, and has replaced them by the sharp tactics we know fro Keith Talent - opportunism, carelessness, floolhardiness."
I think that another way of looking at it is, going forward, do we want Chuck Prince in charge, which is what we have now, or Barney Frank.
I want Barney Frank. I don't want Chuck Prince.
If the little guy gets a break with Barney, well, that's what a functional society is all about...and a functional family.
Because, after all, the father let the kid take the boat out. How does he escape that responsibility? He could have prevented the kid going out. Right?
I like Tanta too but I'm torn between saving the kid and kicking his dad's butt. I think I'll go with saving the kid from drowning, grounding him for 7-10 years and pressing neglect/abuse charges against the dad.
I agree with Yossarian. Politics and Economics are a marriage made in campaign financing. To claim it is not useful to inform the discussion on this board is to admit that your side of the debate is faltering.
There is enough blame to go around including average joe sixpack who got caught up in the real estate for riches mania, but let's be clear that these brand new speculators also included doctors, lawyers and other professionals which is why it was a mania. Everyone who jumped in was all in for better and for worse.
To those who played by the rules which would be the vast majority of the population who used common sense, had little debt, financed with a tradional 15 to 30 year mortgages with the traditional 28-36 % formula for your good borrowers and who lived within their families means, any bailout of Wall Street or those who gambled and lost on real estate speculation is moral hazard.
Or, and by the way, for assholes who don't want to read Tanta's posts, it's really simple.
Go to the bottom of the post and check who the post is by. If it says "Tanta", don't read it.
If that isn't understandable, just say so and I'll make it simpler.
While I think that under normal circumstances, people who get into trouble should be helped, but this isn't one of them. Because they got entangled in a huge asset bubble. Rescuing them has the perverse effect of continuing a very unstable situation (overly high house prices, a correspondingly low affordability index) that, to put it bluntly, improperly values assets more than labor.
If you can figure a way to help "subprime" folks and also return house values back to, say, their 2002 prices, then I'm all ears. But I don't think that's possible.
Did Reich really say he saw this happen? Because there's no way it really happened. I don't want go all Ceci Connolly on Al Gore, but this is a weird anecdote to say you really saw, and that you're the one who got the lifeguard.
Tanta's point, of course, is excellent.
It seems possible that we all just use the term "moral hazard" to mean something different.
What I mean, at least, is a structure or set of arrangements that encourages excessive risk-taking by convincing the risk-taker that losses will be covered somewhere or failure not allowed.
Hence it doesn't make much sense to me to see people who don't recognize the risk or the potential bailouts to be acting under the influence of a moral hazard.
This is one side of a Pro-bailout vs Non-bailout argument and much like a Republican vs Democrat argument both side has their own agendas and neither side is likely to change their mind IMOP no mater what kind of drowning child red herring analogy is thrown out there. I don't much care other then I don't want my money to be the ones bailing out either side let them both drown.
BTW Robert Reich is a communist what do you expect him to say?
Whether Reich made up the anecdote or not, the point of it is that we don't tend to see children as acting under the influence of a moral hazard, precisely because they do not have the skills and experience to even know they're taking a real risk. On the other hand, they do tend to belive that daddy will help them in an emergency, and, well, they're supposed to believe that.
In other words, it's a classic example of how not to apply the concept of moral hazard.
Kevin said,
"...let them both drown."
..and decrease the surplus population...LMAO
Kevin = Kevin Ebeneezer Scrooge
CR Reader,
If you have a problem with what the blogger writes, go somewhere else. Bloggers like these two brilliant people have become the most informed, interested, and interesting journalist that we have to read (and react to), mainly because they can stretch their minds into uncharted or risky places.
Bloggers should not threaten bloggess. And vice versa.
Tanta seems to think that taxpayers need to subsidize stupidity. I couldn't disagree more.
Nobody put a gun to these borrower's heads. Whether they were blinded by greed or just dumb as a post is irrelevant. They need to face the consequences of their actions.
Why penalize responsible, hard working taxpayers to subsidize greed or stupidity?
Shame on you Tanta. I thought you were smarting than this. I now think you're dumb as a post.
Bloggers should not threaten bloggess
rich, I know you didn't know that I had just taken a sip of hot tea when I read your comment, so it isn't fair of me to blame you for another scalded "f" key.
But lord above do I love "blogees."
Bailouts and moral hazard for for the other guy.
Prudent action by the central bank to help me is good economical action for the country, because of the other guy's misbehavior.
Tanta seems to think that taxpayers need to subsidize stupidity
Well, there's more than one theory that says taxation is, in essence, subsidizing stupidity of one sort or another. I know I don't pay school taxes because the rest of you are born numerate.
I am reminded of my favorite Demotivator: "None of us is as dumb as all of us."
Meetings
Having done quite a bit of sailing in my life let me put the story in a different perspective. Tipping over a small sail boat in a lake is not a life or death matter (most of the time), especially when you're wearing a life jacket. More than likely the kid would have spent some time in the water before drifting to shore. He would have come out of the a little cold, wet and tired but he would have learned something.
I think the best course of action is to do nothing. Sure there are going to be a lot of people that lose a lot of money but losing money is not a life or death matter, just like dumping a sail boat in a lake is not a life or death matter. I know there will be a lot of suffering due to the inevitable recession/depression that will come from doing nothing but America will be stronger for it in the long run. There are enough houses out there that all the current FB's need to do is swallow some pride and start moving in with one another or with other family members. The only thing the government should be thinking about at this point is not how to keep people in there over priced homes, they should be looking at how to make sure they have some sort of shelter and food.
One more thing, shelter doesn't have to be a 3500 sq ft McMansion, or even a 1100 sq ft apartment, it just needs to be a place to sleep and stay warm or cool. Just take a tour on a Navy ship if you want to see how much space is really required to provide shelter.
And furthermore, history teaches, you can never protect man from himself.
Greed is a very real human emotion and I say emotion because it transcends simply being greedy, as it goes to the soul of what that person is.
These manias always end badly, and someone will win and someone will lose as they always must. Greed in the end must also be paid.
Or, and by the way, for assholes who don't want to read Tanta's posts, it's really simple.
Go to the bottom of the post and check who the post is by. If it says "Tanta", don't read it.
If that isn't understandable, just say so and I'll make it simpler.
arbogast | Homepage | 09.08.07 - 5:07 pm | #
Someone expressed an opinion, and you attack that poster? Freedom of expression advocate I suppose?
I support Tanta and disagree with her. Yes, there were some real victims of cruel lenders, but there were also a lot of people who knew what they were doing. I would argue most people who got liar loans knew they were liar loans.
And I think being foreclosed is not such a disaster for the borrower as much as it is for the lender. So a bail out is effectively a bail out of the lender.
So a bail out is effectively a bail out of the lender
Of course. And lenders knew that. That is a classic example of the "moral hazard."
Nonetheless, it's also why I prefer modifications to government-subsidized refinances. Let the lenders take the loss.
There is no way to modify loans in the current mortgage market where most loans were sliced up into multiple tranches and now have multiple owners. Is the borrower supposed to contact the hedge fund who owns a pool of mortgages that in turn owns a 16% triple B rated component of the original mortgage?
The market will fix the problem efficiently and equitably if given the chance. Irresponsible lenders will be taking a huge loss and borrowers who can't afford their mortgages will go back to renting like they should have been doing all along.
The nation as a whole will hopefully learn a painful lesson in all of this and be better for it.
The market will fix the problem efficiently and equitably if given the chance.
Gotta call B.ravo S.ierra on that - the market MAY work things out efficiently if a sufficient set of conditions are met - but the market could give a rat's @ss about equitably.
Tanta, it's good you take the time to do posts of this kind. Certainly views of a different nature are common enough.
I cannot imagine policy, in this case, not being guided by intent - whether that should turn out to be punitive or otherwise - and any suggestion that upcoming decisions will take place in a vacuum is arrant nonsense. Whether this administration and the legislature choose to see it as such or not, what they choose to do or neglect to do has an ethical component.
The reminder is timely. I can't see this as separate from the main body of discussion here.
The problem with any tax financed bailout, is that it draws innocent third parties into a mess that ought only involve the actual borrowers and lenders. If Mozilo was out of line, and bailout only implied taking from him and giving to Joe, that would be one thing. Its the taking from random innocents with no stake in their transaction, to bail out either of them, that is so disgusting and inexcusable. As is taxing innocent third parties to pay lifeguards preventing shitty dads from drowning their children.
What is equitable is for the borrowers and lenders to bear the full brunt of the stupid decisions. That is exactly what will happen if the market is allowed to run its course.
Of course. And lenders knew that. That is a classic example of the "moral hazard."
obviously you can't lump all lenders together, i doubt NEW or AHM thought they would be bailed out or saved from failure...
I believe what goes around (liar loans) comes around. The poor liars, greedy folks, and politicians want it to keep going. Also, I think there might be an aroma of Moose shit in here today.
Remember often times claims of equality are nothing more than a tool to exploit. This is what is nagging (at me anyway) when I read treating borrowers as ignorant is akin to infantalizing them.
Plus, as Reich points out, the rich don't hesitate to claim they are ignorant (or incapable of doing lawn work); they just have the cash to hire experts to protect their interests.
"UPDATE 1-Fed's Plosser-US housing sector warrants monitoring"
UPDATE 1-Fed's Plosser-US housing sector warrants monitoring
| Reuters
What a genius idea. Maybe there should be like....I don't know....some really smart people blogging about this, keeping track of things, offering up useful stats and charts and stuff! I think it would help! What do you guys think? This guy Plosser is on it I'll tell you, a true visionary.
I agree with Kevin. This Reich guy with the obvious pinko socialist analogy can go use his own income to set-up a special trust fund to bail-out the buyers who were stupid enough to purchase with arm's at the top of a housing bubble. This drowning kid comparison tries to lure the mindless reader in to thinking that the poor homeowner's should and need to be saved. Homeowner's, the last time I checked, are heavily weighted towards grown adults. Nobody will be thrown out into the streets. There's something called renting an apartment folks.
Also, this term "moral hazard" is just way over-used lately.
All those that want bail-outs please stand up and pay out of your own pockets. The rest of us will put our own money in our SAVINGS accounts instead of buying plasma tv's and the biggest suv's you can find. Or should be blame circuit city and best buy for luring these poor people to buy something that they couldn't actually afford? It's called personal responsibility people, something which has been dwindling in the USA of late. Wall street and the banking industry should also be left to bail themselves out. No tax dollars. No new FED money.
Nutter
In a rational market, a foreclosure is not a very big deal for the bank: We all know that houses slighty outpace inflation, so the bank REOs the house, sells it and is made whole again.
It's only when a bubble bursts that any kind of bailout is necessary at all. Everybody on this board has seen all this coming for years now: The bubble deniers, the happy talk from the NAR, the flipper hype in pop culture, then then first warnings, the layoffs, the skyrocketing forclosures, and now the bailout talk.
It has been as clear as day to me (and everyone here) and I am not an economist: I could have bought a house anytime in the last four years, but I haven't because I could see the writing on the walls, and anyone with a lick of sense should have seen it too.
This isn't a "national crisis." It's is a whole lot of little crises that just have to run their course. Nobody "bailed out" any of my friends after the tech bust. Nobody bailed out anybody who lost their job to off-shoring: why should the bubble-mania buyers get special consideration?
NO BAILOUT.
There is no way to modify loans in the current mortgage market where most loans were sliced up into multiple tranches and now have multiple owners. Is the borrower supposed to contact the hedge fund who owns a pool of mortgages
Yes, there is a way. Five regulatory agencies headed by the Federal Reserve just published a regulatory policy statement that said so. The SEC has said so. The IRS has said so. It's getting harder and harder to maintain the opposite.
The borrower merely has to contact the sevicer. The servicer might have to get investor permission, but honey, that's one of the things servicers do to justify getting paid a servicing fee! I'm afraid this is beginning to sound just a bit over the top to me. Oh, no, we servicers actually have to work hard for our income? Bitch, ain't it. Surely we don't want to create an environment in which servicers are rewarded for not working very hard . . .
And frankly between "we as a nation will be better for it" and "man cannot be protected from himself" my head is spinning. Either we are innately greedy and will never be anything but, or we are going to learn from this and never be irrational again, cross our hearts.
I still think a huge national economy is harder to "behavior model" than a little kid in a boat. That suggests to me some caution in predicting what we will or will not "learn."
I seem to recall lots of people predicting years ago that we'd never fight another war on foreign soil in the name of geopolitics. Here we are.
Maybe we need to change the story a bit to make it more realistic. Maybe the dad said to the kid "Look at this geat sailboat. Why don't you take it out on the water and sail it? You know you want to. You won't have any problems, it's real easy to run. And if you have any problems, you can just bring it back in and we can replace it with a bigger one."
If I had someone come up to me and asks to borrow a large sum of money and I knew that person to have trouble holding down a job and had trouble paying what he already owed, I would be crazy to take that risk even though he said he would pay me back double what he borrowed. How is that any different than the lenders? I'm the one who is going to be out the money and I'm the one who should be smart enough to not take such a great risk.
i doubt NEW or AHM thought they would be bailed out or saved from failure
Oh, surely someone will be willing to argue that Chapter 11 is a "bailout" . . .
Does anyone have any hard data on the number of "young sons in sail boats" versus the specu-vestors?
I'm all for bailing out the young sailor (probably a small portion of the bubble), but let's let the flippers fry.
So hat's off to Tanta or the Barney Franks that can draft a focused bailout program that can sort this out.
"All those that want bail-outs please stand up and pay out of your own pockets. The rest of us will put our own money in our SAVINGS accounts"
Dream on. We live in a society where the politians will decide where you will put your money. So if you don't want to go the bail out route, you better send contributions to similarly minded politicians. Either way, its a pipe dream to think you can control where your money is going to end up.
So far I have not heard too many ordinary mortgage borrowers pleading to be bailed out. All the squealing is coming from Wall Street.
Kevin = Kevin Ebeneezer Scrooge
I also believe that one is responsible for their own actions and I also believe in teaching a person to fish and not giving them the damn fish so if that make me a scrooge so be it I've been called a hell of a lot worse then that.
Tanta,
These posts seem to be aimed at some unknown straw men, those that "demonize debtors" as you put it previously.
Is there really anyone here who doesn't feel that borrowers should have been protected by stronger regulation of lenders? I guess there may be, but I suppose there may some holocaust deniers amongst us too, and even people who kick puppies.
I'll ask this question (again) just how will these mods work for stated income mortgagees who cannot produce Schedule C's verifying their employment.
Frankly I'm not willing to pay both these people's share of income taxes and then bail them out.
stormymonday, I don't actually hear borrowers pleading to be bailed out, either.
I do hear from time to time that borrowers are pleading to be given the opportunity to pay their debts. Some actually don't want to "walk away" because they consider that immoral deadbeat behavior, violation of the social contract that says if you agreed to borrow the money then you pay it back. A borrower looking for a forbearance or mod or something is trying to do the right thing, in his or her own eyes.
Yet suddenly some people think it's "better for them" if they reneg on the debt and lose the house, and this "better for them" (economically) gets conflated with "doing the right thing."
I, personally, would never have predicted that a bunch of conservatives would be arguing that people should just give up paying off debts. I would have predicted that the conservative approach would have been to prefer workouts to foreclosure. So hell, I'm just totally puzzled.
I mean verifying their income. Obviously if they were employed, etc.
Would the father have acted the same way if there was no lifeguard or anyone else around. Probably not. He simply wouln't have let his son sail!
He used the others around him to do his job. Now the son knows that his dad will never do anything for him but that the rest of the world will support his risk taking.
Owning a house is not part of what I consider the social safety net. Having a roof over ones head should be. Owning that roof, no.
Reich's argument is more than a little hollow. The Fed providing liquidity is a good thing. The only threat of another Great Depression is the Fed allowing a massive deflation in the money supply due to the currency-deposit ration dropping and the Fed not acting. That's what happened in the 1930s. Whether the Feds liquidity actions create moral hazard, I really don't care because we would all be much worse off without them.
I also fail to see why foreclosure is such a tragic outcome when the buyer put little or no money down. Not getting necessary medical care: tragic. Getting foreclosed when one put zero down: not so much.
actually, i would say that the lenders who would generally have been considered to be the 'leaders' in terms of pushing risky loans and bad underwriting would be the least likely to have thought they would be bailed out...i would say that they were relying on bond investors (who knew less than them) to take the risk from them...and of course you can say the RAs could push risky deals all day b/c they don't take the risk...
Many are overlooking the basic issue that the bubble resulted in valuations far beyond the standard metrics. Bailouts that cushion the reprice are not societally equitable to first time home buyers or buyers that need/desire a larger/more valuable home.
I suggest a foreclosed homeowner tax waiver for debt forgiveness. As I stated before, it's ultimately the MBS (or related) buyer that created this mess. If you couldn't see this disaster coming, you shouldn't be managing serious money.
What we need now is transparency. This mark to model/mark to theory paper needs to be disclosed NOW. Everyone needs to factor in RE valuation reversion to the mean. I have yet to see anyone model this. I suppose it's too scary and unbelievable. It reminds me of the prevalent thinking in the late 90s that equities appreciate significantly every year.
I'll ask this question (again) just how will these mods work for stated income mortgagees who cannot produce Schedule C's verifying their employment.
Well, they don't work for those people. Those people get foreclosed.
The interagency policy we just looked at made that as plain as plain: if you're doing a mod you have to verify capacity. If you can't do that, you foreclose.
I am perfectly willing to believe that 95% of troubled borrowers won't qualify for mod or won't ask for one or don't want one. I have no problems whatsoever with that. I have never advocated forcing people to take a mod, which I think is illegal. If you cannot make at least the same payment a prime borrower would make, you can't have a loan, and we know that a lot of these people couldn't handle the loan if they got 3% interest over 50 years. Those you foreclose.
But if 5% can be helped, then make modifications available to them. As long as you're willing to use the right standards and process, why not? Why should we not allow any mods at all because most people don't qualify for them?
My father always told me if you lend someone money consider it a gift, and hope you get it back. This does not apply to Wall Street! Why should my tax dollars go to help any of these folks? No one helped me when I lost a small fortune in Worldcom & Enron. I learned a hell of a lesson. Thank goodness capital losses can be offset with capital gains. All this talk about a bail out really, really pisses me off.
actually, i would say that the lenders who would generally have been considered to be the 'leaders' in terms of pushing risky loans and bad underwriting would be the least likely to have thought they would be bailed out...
That's certainly interesting. I have a tendency to think that the NEWs and AHMs were thinking that if they didn't offer risky loans, CFC and WAMU and Wells Fargo's subprime division would eat their lunch. The NEWs and AHMs blew up first after the "race to the bottom" because they were least-well-capitalized.
The question becomes what the "too big to fail" players thought they were up to.
Nevertheless, if "moral hazard" wasn't in play on the lender's side, then why would we think it was in play on the borrowers' side? I tend to think that Mozilo is more firmly convinced he will be bailed out by the Federal government than Joe Blow Homeowner is.
As far as bondholders? Never heard of a class of people who more fervently believe that Fed action will bail them out.
Yeah, if Blozilla fell off his yacht I'd probably throw him a life ring, then charge him for it. Mouth to to mouth resuscitation? Big bucks.
i actually don't believe, btw, that the RAs were intentionally rating deals in a way just to allow volume to keep coming in the door.
Topher,
Don't forget your losses were the result of criminal behavior.
Tanta,
The problem with you is, you're not paid to do this. Otherwise, you would know how to keep the system intact without injecting your whiny socio-polemical screeds and humanistic mumbo-jambo into a rational discussion of how best to serve your betters. After all, who really shoulders the risks in a system like ours, some ignorant homebuyer, or master of the universe "bond" holders? The first can only lose their own house, but the second can lose everybody their houses. When it comes to morality and hazards, it's like my grandmother always told me:
Build a man a fire, and he'll be warm for the night. Set a man on fire, and he's warm the rest of his life.
The problem Tanta, is that the vast majority of those who bought homes they couldn't afford were doing it because they were SPECULATING!!! They won't admit to that, but that is the only way you can justify someone buying a house that 10 times their annual income.
Oh, ratefink, that's a classic. I would like to have met your grandmother.
My grandmother always told me:
If you back your ass up to a buzz saw, of course you're not going to know which tooth got you.
Poor people are sharks!
I would like to inject a note of reality into this Punch 'N Judy play. But first:
Average Joe - ROTFL.
SLC Bear - Please tell me you are not a parent?
Now for reality: There is a place for one type of bailout. That is for people who did not overbuy but are caught in the overall situation. There are and will be quite a few. It may not be clear to non-mortgage types who have not done their Tanta-assigned reading, but those who have lower-balance loans are often the most unprofitable from the servicer's POV, and also the likliest to cause little loss upon foreclosure. Some servicers seem to make a habit of jerking around low-balance borrowers even in great times. So yes, there is a place for some government monitoring and assistance for such folks, and it is no moral hazard at all. If you are an unlucky conservative buyer who plopped 20% down and got a fixed 30 year with a reasonable DTI, in some areas, you are still totally up the creek without a paddle if one of life's mishaps happens. The fools around you have created a mess.
I have written it before and I will do it now again: the speculators and the overbuyers will not be bailed out because they can't be bailed out. Every state fund that has been set up to try has already found that out for themselves. They are toast regardless. Any debates about bailouts are really discussing people similar to my description above.
You can't give a onetime gift of a few forgiven payments and rescue any borrower but a borrower who is experiencing temporary bad personal luck. If the loan is structurally unsound, in this environment it will not be saved.
I AM concerned that some borrowers will be foreclosed on when they wouldn't have in times past. That is a moral hazard, although it is an opposite moral hazard to the one everyone seems to fear. IT IS A REAL POSSIBILITY. Costs to service a loan are fixed, and the revenue per loan is based on the interest. So low-balance, low LTV, low APR loans are the likliest to get foreclosed on. That's reality.
CR Reader - believe me, this is exactly the same stuff that's being discussed by "economists" in the press. Do you really think that Tanta somehow got off the reservation by wanting to make sure that the discussion is based on real-world conditions?
In the real world, borrowers who have never missed a payment get foreclosed on. Their payments are misapplied, their payments are not credited, etc. It's not infrequent either. Years ago, the Chief (my better half) had to go to court to get his mortgager to credit six months worth of payments. Two years ago one of my brothers started getting jerked around by GMAC the moment his mortgage balance dropped below $100,000. Neither of these, btw, were subprime. Neither were delinquent. But I can assure you that those late charges, etc, made the loans much more profitable.
It is quite common for borrowers with low balance loans to get yanked around by certain servicers. I would say it happens
Geez, Jwm, why in the world would normal people want to speculate on an increase in home prices? How could it be that they no longer had a desire to put a roof over their heads by the many honest opportunities afforded them in the marketplace of working hard and paying their way through life, like we all did? They must have woken up one year, and decided that, for some reason, they were likely to better survive by trying to get something for nothing. I wonder what could have given them such a ridiculous idea, when everything around them could only have taught them that there is no such thing as a free lunch.
Perhaps dotcommunist has been fluoridating the water supply...
That's certainly interesting. I have a tendency to think that the NEWs and AHMs were thinking that if they didn't offer risky loans, CFC and WAMU and Wells Fargo's subprime division would eat their lunch. The NEWs and AHMs blew up first after the "race to the bottom" because they were least-well-capitalized.
i guess it depends who you believe...i thought the party line of the 'too-big-to-fails' was that they just had to follow the NEWs and AHMs to the bottom to avoid losing salespeople, too much business, etc...they often claim that if the NEWs and AHMs hadn't started doing it, they never would have gotten involved, which i agree is unlikely.
i completely agree that mozillo believes he will be bailed out by the gov't...you could maybe even make the argument that NEW and AHM were trying to get TBTF before the house of cards collapsed...
As far as bondholders? Never heard of a class of people who more fervently believe that Fed action will bail them out.
equity investors?
equity investors?
Once upon a time, I'd have said no, equity investors think Congress is going to bail them out, not the Federal Reserve (i.e., they get theirs with legislation favoring corporations, not strictly monetary policy).
But these days, post-Cramer? You're right. It's equity investors.
of course that doesn't mean that wasn't NEW and AHM's thinking, that the big boys would eat their lunch. whatever their thinking was, though, it was clearly first rate!
A few points about Reich's comments infantilizing borrowers.
First, Reich is an ideologue. OF COURSE he would say the government should "do something," and somehow in spite of his years of experience in DC he still believes that congress fixes problems more often than they worsen them. That kind of blindness is what it means to be an ideologue.
Second. A major problem with his analogy is the fact that borrowers are not infants. Lenders and bondholders definitely aren't infants either. They do not need to be protected from their own decisions.
Third. Having congress fix this sort of assumes that congress is both more competent and more benevolent than the people who actually have a direct stake in the problem. Now, if you think of congress as benevolent, it's probably too late to argue with you but suffice it to say that every once in a while I've researched the way politics works and I believe politicians are motivated by self-interest just like the rest of us. As for competence, at least when it comes to financial matters, I shouldn't even need to say anything more there either!
Fourth. Not that anyone raised it, but I'm not very sympathetic to the idea that borrowers (or holders of CDOs) simply didn't get around to researching whether or not their decisions were financially sound. When it comes to homeowners, as most of us know, the purchase of a home is usually the biggest purchase we ever make. Whether one takes a $40,000 or $400,000 loan, you can be sure the borrower considers the loan to be a huge part of his financial condition. Anyone who truly doesn't bother examining the risk of that loan kind of deserves the consequences - which, let's not forget, end in the EXTINGUISHMENT OF THE LOAN in the case of foreclosure!
I'm not glad that we've arrived at the point we're at, but it doesn't make it better to compound one mistake with another. Instead we should fix the mistake that got us here in the first place. It isn't every day that the entire USA experiences a nationwide real estate bubble. I don't believe these things "just happen" sometimes. It's a very preventable condition. Let's make sure there's no next time. Part of the way to do that is to make sure lenders -- and even poor little infant borrowers -- know there will be no bailout.
This is purely anecdotal on my part, but my impression is that the stated income loans and those in need of a mod go hat in hand. My rationale being that for people who walk the W-2, it's just a little too much cognitive dissonance to pull an income figure out of the air for the mortgage broker. So there really is no reason not to offer mods as it will probably be to a relatively small part of the FB pool. And Tanta is right, this isn't a gov't bail out and, as such, there's no reason not to make a serious effort in this regard.
I think the resentment that you see in here (and everywhere really) stems from people biting their tongues at dinner parties thinking that, well, if Dick (pun intended) goes under it's not my problem to contend with. And now it is, and that pisses them off.
...and if that was their thinking, it still doesn't mean they thought they would be saved, so the question is whether the TBTFs would have gone there anyways, b/c they're the ones with the moral hazard....
Moral hazard is a topic that arises in information economics
. Because information can be very costly to acquire, and can be hidden or witheld from some parties to an interaction, both law and politics are very naturally involved in questions concerning information and markets.
From Wikipedia, with my emphasis:
Applying this concept to the question of who should be considered for a remedy or "bailout" makes it clear that even the assessments of what material information was witheld and by whom are liable to be affected by politics, even though a complete picture might make it clear to one and all that some parties' concealments caused a lot more social damageif only because they were replicated over millions of instances- than other parties'. Maybe that's just my politics talking.
Remember the Loves? They were our borrowers from the other day who bought a $59,000 house in Pittsburgh, and couldn't get Countrywide to work with them when their note rate is a whopping 12.125%. I think we can pretty much guarantee that that house wasn't 10x the Loves' incomes.
Someone did some digging and came up with information suggesting that the seller of the home to the Loves bought it 7 months previously for $10,000. Perhaps really really extensive renovations got made, but it also appears that the assessed valuation is around $32,000.
I can't not have more contempt for Countrywide and the property seller and the Loves' realtor than I have for the Loves. Call it a personality defect on my part.
We don't talk much about the sellers of these properties.
Given that certain lenders have already forseen and taken advantage of the paternalistic attitude (ex. oh, Fannie Mae/Freddie Mac will buy these unsound loans? Well lets make lots of those then. Who cares what happens to the borrower or taxpayer as long as I get my cut when the deal goes down), it pretty much already proves the system is already too paternalistic and prone to abuse.
It's time to pull back on the paternalistic attitude, not do it one further.
And, somehow, I think if Tanta had approved my own loan at her day job, then I claimed ignorance, it seem unlikely to be forgiven ...
You could also argue that both Reich and Tanta have refashioned the moral of the story to suit their own views.
To me, the point of the story is that people are free to make their own decisions, and that is how it should be. Those people should also be educated as to the risks of the decisions before they make them. But once they've had that education, they must be free to make their own decisions and the consequences the come with them.
borrowers who can't afford their mortgages will go back to renting like they should have been doing all along
As a quasi-Georgist/geolibertarian, I disagree with this "let them rent!" sentiment. The problem is over-extension, not buying per-se.
These skeevy loan products pushed prices above affordability, as the market was chasing the age-old speculative premium of holding real-estate.
Removing the inflationary loan products is a first step [check!], now what to do with the people who priced themselves above the highwater mark in now-unaffordable loans.
As Ashleight Brilliant once said: "I don't have a solution but I certainly admire the problem."
As a renter who is saving for a down payment and will buy later this decade, I say let the market work its magic and let this be a learning experience for everyone.
"Tanta seems to think that taxpayers need to subsidize stupidity. I couldn't disagree more.
Nobody put a gun to these borrower's heads. Whether they were blinded by greed or just dumb as a post is irrelevant. They need to face the consequences of their actions."
Tanta is an artist. You, my friend, would be lucky to find work as a house painter. You'd be hired to paint a house and end up painting the whole neighborhood.
One of Tanta's points overall is that there are many people out there suffering from this situation. Some were greedy fools and some were dupes. Some were blindsided by medical or job difficulties. It's not productive to lump them all together.
Her point, as I take it, is that we need to get some visibility on the ground by way of some hard-nosed, tough-love but fair-minded loan officers who sit across the table and work with people on a case by case basis. She has never advocated a carte blance bailout that I recollect.
What she does oppose with vigor is simple-minded pap like your statements.
Stupid, I worked for a bank. We got everything from "how can I be overdrawn if I still have checks left" to "but how can my rate go up? I have one of those ARM things."
I have never in all my years been involved in a truly "forgiven" loan. I've seen a lot of workouts in my time, almost none of which ever involved a principal reduction. I am generally never in favor of principal reductions unless there's evidence that the borrower financed inappropriate fees.
I bang my head over "mod" = "forgiveness" = "bailout." I still believe that "mod" = "workout."
And I'm sure that at least one loan I signed off on over the years got worked out. I have yet to meet an underwriter who hasn't had at least one loan failure. Besides the fact that we aren't perfect, you're not taking enough risk if you never approve a loan that goes south.
What she does oppose with vigor is simple-minded pap like your statements.
I'm all for artistry, just don't come around during tax-time looking for money from me to bail out these gambling idiots or sob-story hard-luck cases.
whoa! what happened to the front page???
Oh, surely someone will be willing to argue that Chapter 11 is a "bailout" . . .,/i>
Chapter 11? Limited liability is a bailout. It's a floor on losses with no ceiling on gains. All of these free market/can't have any bailouts/Oh, God, the Moral Hazard people seem to not recognize that a certain level of society provided insurance is an essential part of our capitalist system.
Look, it's perfectly possible to argue that any particular bailout is a bad idea. In a lot of cases, I'd even agree with you. If you think that the thing to do is argue against all bailouts as a matter of principle, you had better go back and check your assumptions, because 99.99% will find a glaring contradiction in there.
Now, if you think that limited liability is a bad idea, and everyone should be responsible for all debts from their investments, then I salute you for your consistency. I think that you're nucking futs, but you are at least consistent.
I bang my head over "mod" = "forgiveness" = "bailout." I still believe that "mod" = "workout."
Tanta,
I think part of the problem is that instead of taking a particular position, you speak in broad, moralistic, and often condescending, ways about the subject.
I think it would be more interesting all around if you just made straightforward proposal of what you have in mind, and ease up on the condemnations.
Bob, what does that have to do with what you italicized?
The market will fix the problem efficiently and equitably if given the chance. Irresponsible lenders will be taking a huge loss and borrowers who can't afford their mortgages will go back to renting like they should have been doing all along.
My view goes something like this... the loan originator (or lender) should have practiced due diligence. Seeing as how so many people were after that all mighty commission (on god knows how many layers), there was some incentive to ignore things that should been big red lights. So we wind up with certain people who were allowed to sign up for loans that they should have not been allowed to sign up for, and now face an uncertain future.
One possible solution: Anyone who has suitable cash flow, should be allowed to stay in the dwelling for one year based on a signed lease (in exchange for clearing title and walking away from the mortgage). Meanwhile that gives whomever holds the note time to execute a mark-to-market strategy. At the end of the one year lease agreement, the original buyers can then see if they qualify for a new mortgage based on the new market price and based upon more conventional lending requirements.
This is not a perfect solution. It spreads the pain between the buyer (loss of any equity they might have had) and the note holder (loss of market value on the asset). It does not inflect any obvious pain on the folks that originated a poor loan (which is unfortunate, but thats how the ball bounces sometimes). It does provide for a softer landing than just kicking the borrowers out and inflating the REO listings.
Sometimes there isn't a perfect solution, just the lesser of the evils.
Our economic system summed up in a ditty:
The poor complain; they always do, But that's just idle chatter.
Our system brings rewards to all,
At least to all who matter.
Bob, what does that have to do with what you italicized?
Simply that I don't think anyone is saying "mod" = "forgiveness" = "bailout." But since Tanta isn't posting so much an idea as a sermon, it's pretty easy to misinterpret what the idea is behind it. I'm not defending the juvenilia that was posted above, but I think Tanta presents things in a way that assuage her feelings of moral superiority, as opposed to facilitating discussion.
The problems with analogies,...
I would think a closer analogy is if the kid is playing with matches in a, oh let's say, one of San Diego's tinderbox suburbs. We're not able to say where the problems are localized and where our self-interests lie.
The Reich analogy is more expository of our own "socio-political" views.
And I'd love to add a few words about "free speech" but I've been warned: Don't Feed the Trolls.
Mama,
Great post as usual. Power to the blogesses. I would only add that the Federal agencies are very sensitive to race issues in regards to banking/housing/lending, etc.
They have plenary powers in regards to enforcement and use an army of in-house lawyers to enforce law.
They send armies of examiners around the nation and into the banks to conduct regular CRA compliance examinations.
Minority owned banks have their own special laws which protect them from being closed as rapidly as other peer group banks.
Attached is the FDIC's latest press release dated 9/5/2007 listing banks examined for CRA Compliance. Race and current federal & state law complicates these matters in ways that people do not fully understand.
Tanta -
I respect you immensely. But, for the love of all that is blue and green, separate the forest from the trees here. A valid judgment on this issue requires looking at BOTH the borrowe, and the bank/lender. We can't just focus on the borrower, who will admittedly generate sympathy.
Only the hardest of hearts would want the borrower - or, more particuarly, the borrower who truly was defrauded - to bear the pain of being the victim of true fraud. And, I think that is really the ultimate point both you and Reich are making. I'm against a bailout, but not above helping my fellow neighbor.
But - and you allude to this, but don't connect the dots all the way - there was a party to the underlying loan transaction who agreed to take on the risk here (insert whatever risk you want - interest rate risk, default risk, collateral risk, et al). Namely, the lender (and any of its cohorts in the secondary market who bought the sliced and diced products that came out of same).
I have no problem helping out true victims. I have a huge problem providing tax dollars to parties whose risk modeling was, well, wrong. They took the risk, profited handsomely for a time from doing so, and they must now be allowed to bear the consequences of their (wrong) decisions. Privatizing the profit, but socializing the risk, is fundamentally unfair.
I would argue that very few of us would complain about government assistance for the aggrieved borrower if any help was conditioned on the borrower producing both 2 years of tax returns and his or her loan app - if they matched, they get help and a big hug. If they do not match, they get prosecuted for loan fraud or tax evasion - and no hug.
But, my fear is that the gov'ment will foist a plan that really acts to limit the lenders' loss severity in the name of helping your fellow neighbor. And, I fear many people will fall for it - heck, I'm afraid my gentle Tanta has!
As a closing matter, I still fail to see why I should pay someone else's mortgage. It isn't like they won't have a place to live - they just won't be able to live in their current abode. It is only money, and is not the end of the world.
And, oddly enough, by letting home prices drift down to a point of equilibrium, the very group of people most pinched by recent and coming events will reap the most benefit - as housing will, for a certain class of shut out homeowners who were probably the most victimized by the mortgage game, become affordable again.
FDIC.gov
FDIC Issues List of Banks Examined for CRA Compliance Sept. 5, 2007
FDIC: Press Releases - PR-76-2007 9/5/2007
Don't forget your losses were the result of criminal behavior.
Allen C | 09.08.07 - 6:13 pm | #
Well I believe alot of the losses to come will be from criminal behavior on behalf of lenders and borrowers. Let them both rot in hell, I say.
I don't wanna provide my tax dollars to [insert economic loser]...but I smugly ignore the half trillion that goes to the economic winners - namely advanced tech industry funneled through the Pentagon. No welfare queens do I support - I take the moral high ground.
What's funny is this discussion is so evocative of the dialogue in the late 20s and early 30s. Mellon and those of his ilk were arguing that the right and proper thing to do was to allow the pain to work itself out. On the other side were all the folks experiencing the pain. I think Mellon had the better part of the economics but the worst part of the politics. He not only was ruined, but his political point of view was in exile for 40 years.
If this thing is as big of a disaster as is being predicted here, someone is going to get on the "right side" of the politics. Think about it, you have Florida, Michigan, and Ohio among the seven states most affected by this. All of which have been "Battleground" states in presidential elections, two of which have decided the last two presidential elections.
I rather suspect by this time next year the candidates will be falling over each other to promise more for bailouts.
Bob, your the guy who walks into a meeting of my highly functional staff, takes an underhanded swipe at someone's soft spot and then sits there smugly when the chaos erupts.
The whole "moral hazard" argument is getting tiring. The real moral hazard in the entire episode is on the underwriting side, where the "adults" were supposed to be the responsible ones.
Most of the more reasonable bailout proposals target "owner occupied" houses, which kind of rules out speculators.
There will be plenty of opportunities for those waiting for prices to plunge. Perhaps a bit of enlightened self interest in providing the normal liquidity mechanisms (foreclosure, short sales etc)is in order. The alternative may be a lot of abandoned houses, occupied by squatters or stripped bare.
--
Thanks, Tanta. As an ex-Republicon, I have come to respect Mr. Reich.
As good Americans we are supposed to know about the Moral Hazard, talk about it from time-to-time, and even have a vague understanding of what it means, BUT we should absolutely do nothing about it.
What better way to give crooks a carte blanche! And, girl, have they charged trillions or what!!
A system of
America is coming down and coming down big, people. Crooks have done the dirty deed.
Jas
"But if 5% can be helped, then make modifications available to them. As long as you're willing to use the right standards and process, why not? Why should we not allow any mods at all because most people don't qualify for them?"
Sounds fair enough as long as the bond holder and the lenders are the ones eating the losses, however I doubt if that is what Reich had in mind and even with a modification it would seem to me if the other 95% couldn't be modified the 5% that can be will wish they had walked also as home prices plunge.
--
"Let them both rot in hell, I say."
These crooks will be sipping Mai Tais in Macao. They are set for life and they know where the future is -- China. Screw Americans for all they are worth and then to the next new destination. The American Century is past.
Jas
I liked the site much better when it was just him blogging.
CR reader | 09.08.07 - 4:52 pm |
easily rectified- just read CR's post
see tanta? skip it, come back later
IMHO, what is needed is a class-
action suit against lenders who
encouraged abusive practices (in-
sufficient disclosure, etc) by their
employees. In some cases, it should
be possible to document, given
a real discovery process, actions at
corporate level that cannot be blamed
on a few reckless subordinates.
I don't think this would constitute
a "bail-out".
I believe there is a school of thought that concludes that many of the social policies of the Fed and Gov't were designed around insuring that 'Food lines' never occur in America again...
Personally, I like being lectured to by Tanta as I have not had the luxury of suffering through her experiences or being able to absorb all of her business acumen.
Her philosphical bent makes me ask myself "Am I judging this issue too simplistically? Maybe reality is more complicated?" That is what I love about this blog. It makes me question my principles on matters I have no biblical knolwedge of.
Tanta puts meat on an abstract construct, if you have walked in those shoes you can choose to reject that moral construct via postings. As most of us have not, all you can do is entertain her moral notions as the ticket price for the acumen/experience piece of the package. Does not mean you can't push back, but why would we want to change the formula for one of the best financial blogs ever because of your moral certitude?
Most of us are intrigued enough to user her "on the ground" wisdom to question our own morals. The success of the CR enterprise lies in that formula, it presses the serotonin buttons in 4 or 5 parts of the brain, not just 1.
and ease up on the condemnations.
Bob_in_MA | 09.08.07 - 7:20 pm | #
Simpleto
Clyde,
Agreed, But some buttons pressed here are not located in blogger brains.
Excluding Tanta of course.
Tricky this one. I'm not sure a paternal analogy is accurate here.
Let's say you're a lender competing in the mktplace. You have 100 other folks willing to entertain your client. You see some red flags with your borrower's situation, but they really, really, really want that house. If you rain on their parade with prudent caution, they will just skip down the street to the next lender that will whisper the sweet nothings in their ear that they want to hear. If you want to fund the loan and make a living, whaddya gonna do?
A child doesn't have 10 parents to choose from (each more catering than the next) when they are pining and wheedling for that new pony.
Many (or most) borrowers may have been innocent ignoramuses about the consequences.
In my experience though, this is not the case; they knew exactly what they were doing, had stars ($$) in their eyes, and damned be the consequences. Being a "quantum particle" homebuyer comes to mind (Owner Occ status on 5 properties simultaneously).
I don't accept the "poor victim" borrower in most cases.
They took their chances, they should face the consequnences of their actions.
NO BAILOUT.
"how can I be overdrawn if I still have checks left
Clearly, that needs to be sent to Jeff Foxworthy....Pronto
I'm as much in the mood to laugh at stupid buyers and punish greedy lenders as anyone I know. But, in the final analysis, the government should do what is in the best interests of the country as a whole.
I think that can happen without letting lenders and stupid buyers off scot-free, but the reality is likely to be that pragmatism is going to outrank justice.
I don't see how the anecdote about the father and child and the sailboat is relevant to the issue of mortgage bailouts. There are no parent/child relationships involved in the mortgage mess. Government is not our daddy and those who attempt to make it our daddy are foolish. These lenders and borrowers are not innocent, naive children. They are adults who made bad financial decisions. A father refusing to help a drowning child has no parallel in a government staying out of the financial foolishness of borrowers and lenders who get involved in unwise loans. Fathers and children are not like government and citizens, except to collectivists.
In a story on foreclosures my local paper featured a fellow whose home payments are going up significantly because his ARM is resetting. "I didn't know I had an adjustable rate mortgage," he said. We are supposed to feel sorry for someone so ill-informed about financial matters that he enters into a contract for multi-hundred-thousands of dollars of debt without understanding something as simple as the fact that his interest rate will change? What's more, the article stated that he would be ineligible for the current bailout plans because he had less than 3% equity in the house. We are supposed to care that this fellow, who has less than a few thousand dollars of equity at stake, is going to lose a house he had no business buying in the first place?
How was he able to get the loan in the first place? Because of the moral hazard introduced by government guaranteeing such loans. And now people propose more government programs bailing out borrowers like that?
There will be no escaping the Darwinian reality of the free market, in any case. The same mentality that turns government into a daddy figure guaranteeing loans for all the naive "children" who want loans they can't afford in an honest market has turned government into a daddy figure in most other aspects of our lives, and will destroy our currency and our financial system. The refusal to expect adults to take full responsibility for their financial decisions only means that eventually all of us will be damaged or destroyed financially. There is no free lunch, and there is no way to get away from the free market.
I will also point out that when these people were congratulating themselves on their big paper gains in the RE market, no one was proposing taxing them to give me a cut of their winnings. But now that they're going to suffer the entirely natural, forseeable, and just penalties for their greed and foolishness, I am expected to pony up my share of taxpayer dollars to bail them out? WTF?
If you want to fund the loan and make a living, whaddya gonna do?
Go somewhere where you don't have to extort your morals to make a living.
Good thing the government provided me with help as a toddler, I never had to fall down and bump my head... but now I'm free to crawl forever, never looking up to see what possibilities life holds....
My god we are all dead in the end. I dont believe the purpose of life is to avoid failure or to prevent human potential by limiting risk. Everyone should have the freedom to fail or succeed. We are all better off for it.
If you feel you need to help someone there are plenty of orphans and widows. But the guy living in the house he should never have bought because someone made a stupid loan? Theyve both earned what they deserve given their ability to fail or succeed. Leave em be.
What does the FED do with the interest/fees recieved when completing REPO's?
What does the FED do with the interest/fees recieved when completing REPO's?
they buy donuts for the lunch room.
I may be a little late to this party.. but I'll throw my log on the fire..
CFC, Greenepoint, AHM, and the other lenders aren't people. There is no pain that they will feel.. teh Tanman has made hundreds of millions of dollars selling stock options over the years.. bailout o no bailout, he'll still be stinky rich. All the laid off employees and the defaulting borrowers? Well, they won't be doing so well. Some will deserve the pain and others will not.
The only entities or people on the structural end who can be "punished" for this (by forcing massive foreclosures) are the investors who allowed their money to be used to purchase all these fancily packaged revenue streams.
All the hedge fund managers pumping money into mortgage based derivatives are already wealthy from all the fees they collected. In fact, I'd guess that anyone who made millions during this "boom" will not suffer one bit unless they are criminally prosecuted (I won't be holding my breath).
Anyhoo, I don't see what's so "bailout-y" about allowing qualified borrowers to get mods/workouts. Tanta may be getting a little exhausted explaining over and over that a workout has nothing to do with giving your holy tax dollars to coked up condo flippers. As for the stated income types.. being a renter isn't so bad. I welcome you to the fold.
Tanta says: I bang my head over "mod" = "forgiveness" = "bailout." I still believe that "mod" = "workout."
If New NPV is less than Old NPV then "mod" = "forgiveness" = "bailout."
While we are on the subject of mods what about taxpayers suddenly finding themselves paying double even triple on their property taxes through no fault of their own?
finding themselves paying double even triple on their property taxes through no fault of their own?
What if they voted for the creatin that raised there taxes?
Krispy Kreme or Dunkin donuts?
Coffee too?
Or would that be reaching into the treasury pockets?
You do chase this particular theme, doncha Tanta ? I admire you for it. I too continuously revisit this issue all the time ever since I set my mind to "NO bailout" a while back.My post will be long so please skip if it bores.
The confusion for me is between personal charity, caring and compassionate behaviour and my acceptance, reluctantly ,of the capitalist model for human action( cf Mises).
In the current housing issue I do not personally know of a single family who face default. But in 1983, when Maggie Thatcher was selling off council ( project) housing, a friend from my commie days overstretched, bought the flat they lived in and then cdn't make payments. Of course I helped out to the tune of 1000 pounds with the proviso that I was paid back in 1 year. I didn't really expect to be paid back( no interest of course ) but actually I WAS paid back.
Recently, when in Turkey, the tourist bus to the Ephesus site just casually stopped at a carpet making demonstration centre ( yeah right!). My friend of 40 years was going to buy a silk carpet of $8000 for her husband( who wasn't there with us and you can guess what the real issues are here ) - I watched in horror and then moved hard and persuasively to prevent her from doing so. When talking about this yesterday I said to my wife - "you know if she was buying a $200 killim I would have let her - even if it was really only worth $80 - but $8000 - c'mon ! I reckon quantity matters. She doesn't agree.. she thinks that thinking is inconsistent - I don't - quantity matters.
So...
For a really fruitful debate we need concretization IMO. Real verified stories ( I'm suspicious of that Love story) - real data on amount of bailout, on the form it takes, what the victims stand to lose and so on.
I'm being asked to sign a blank check on these bailouts I reckon. I don't know who, how much, when, why where.
And not being told that is the nature of political debates of course. And we all know what a bunch a lying, thieving, self-serving bunch of toads they are.
I offered personal stories to illustrate the type of real data I require before I support bailouts. I'm not some heartless shit - but I'm deeply suspicious of anything that any self-serving politician suggests - The first thought is - Just say No !
-K
Bernanke: Okay, who ate the last jelly-filled? You guys know those are my favorite!
Hoening: Not me, I'm a chocolate glaze man.
Rosengren: I just eat the bagels, you know that.
Poole: under his breath Greenspan never complained about the donuts...
Moskow: points at Bernanke Hey! I can see the white dust on your beard! You ate it!
everyone stares at Bernanke, who shrugs and laughs akwardly
Bernanke: Okay...now did somebody say something about some sort of problem in the credit markets?
Save the kid? I don't know... the temptation is, of course, to cast it all in your own perspective.
Did you know the father or the kid? Their history? Has this little game gone on before... like maybe every week or two? Was the kid truly in trouble or just trying to turn the old man's crank?
You may judge correctly by your light but totally misread the relationship and the situation.
And, if you ever think of a good way to save the 'deserving' from their 'mistakes' while letting the undeserving burn in hell, please let us know. I haven't yet seen even a halfway believable suggestion anywhere on how that could be done.
"PEOPLE ARE SMART"
I wonder what level of sophistication the public debate will sustain in what will likely be an election year of economic crisis. I also wonder if our debate is simply academic, if the containment spreads so wide as to clearly damage our standard of living.
In a serious crisis, there will be incredible pressure to monetize debts. The housing sector may be only the first point of pain. One of the apparatchiks of Zimbabwe recently said something to the effect of "we print money so that our people may eat." The public must understand the concept of moral hazard as a counterweight to the seduction of the bailout.
There have been a number of right wingers who have criticized Robert Reich as an ideologue. I am very angry about the ideologues of the right who created this mess in the first place be relaxing all standards. The casino society enabled by right-wing ideologues will naturally be followed by the caretaker society of the left.
No bailout, please.
Help me out here. What is the financial risk to a subprime, Option ARM borrower who obtained 100% financing? It appears to me that his worst case hardship is moving back to rental housing comparable to the house he is living in only with a lower payment, after pocketing several months of rent savings while living in his home during foreclosure.
Inconvenience I see. Financial hardship I do not. What am I missing?
Tanta - you bad, you been pulling wings off flies again? LOL.
Tanta: "... Hence it doesn't make much sense to me to see people who don't recognize the risk or the potential bailouts to be acting under the influence of a moral hazard."
If memory serves, all conversations I had with home "owners" or home "owner"ship advocates that went into the areas of ARM reset, job loss/financial hardship, real estate busts, etc., featured appeals to moral hazards or at best waving the risk away -- the government will always prop up the 70% home "owning" voters, when you have negative equity you can walk away, you will move on/refi before the rate resets, in this high-demand market (SF bay area) you can always sell the house ...
Dear Tanta, you will find this interesting:
Wall Street Journal Weekend Edition, Page B4.
"FED NOMINEE'S FIRM OFFERED RISKY LOANS" by Damian Paletta
"Capital One Financial Corp executive Larry Klane, nominated by President Bush for a seat on the Federal Reserve Board, overseas a company unit that originated the risky types of mortages regulators are trying to curtail.
Capital One Home Loans, a unit of Mr. Klane's Global Financial Services division, made some loans that brought total mortgage debt to 125% of the home's value. The loans.....strip the equity out of a house, making it difficult for some to avoid foreclosuire if they miss payments.
The company, like others originated "2/28 s" and "3/27s".....
....at his confirmation hearing before the Senate Banking Committee Aug 2, Mr. Klane said he would put his "full energy" into making sure the Fed has used "all of the arrows in the regulatory quiver to protect consumers" with respect to mortgage practices......
Tennis_8: Mr. Klane said he would put his "full energy" into making sure the Fed has used "all of the arrows in the regulatory quiver to protect consumers" with respect to mortgage practices......
No mention of how well he intends to aim while firing though...
dr strangemoney
Dick Cheney is helping Mr. Klane fire thank you very much. Dick will then make a comment about the economy. Get out of the line of fire or you will get peppered pretty well. What else can happen in Texas?
YouTube
- Broadcast Yourself.
I think what we really need is centralized personal responsibility. That and a lot of free lunches. I'm really disappointed that there are no safety-net/moral-hazard metaphors. I go away for awhile and suddenly all the sizzle is gone? The only reason to hang around here is to get snarky about our collective self destruction. Maybe pop-off a few jokes that are ridiculous enough so that somebody stops and thinks about something, anything. But a serious debate about moral hazard and safety nets? I'd rather talk about how many licks it takes to get to the center of a tootsie pop. Safety net becomes moral hazard at the same point sharing becomes a tragedy of the commons. Where can I spend my money so that children don't grow up to be the assholes that cause a tragedy of the commons?
Back to snarky, did I hear Tanta say something about Mozilo's mission?
HaloScan.com - Comments
As mentioned above - for dramatic effect - there seems to be a bit of embellishment in RR's anecdote. Were the child truly drowning, why would he walk over to the father and delicately tell him his son is drowning, and then, once again, walk down the beach in search of a lifeguard. Most people truly concerned with drowning children tend to act with a bit more haste.
More importantly, however, the story omits the most significant detail - not only for the potentially endangered child, but for the analogous borrower as well. You see, RR forgot to mention the identity of the father. It was none other than Sir Hasselhoff. Yeah, that's right, Daddy Dave, and like Uncle Ben, Daddy Dave's apparent nonchalance was just that, a display. A projection of calm and control. Because if things actually did get too choppy, he was willing and able to put his banana-sling in action to alleviate the potential for long-term harm.
But that's why Daddy Dave is the most important part of the anecdote. The boy cannot stay a child forever. He must learn, but not so quickly as to kill curiosity. Its a difficult balancing act, one that Im glad I dont have to orchestrate. But at the end of the day, you can rest assured that the big boys will take care of themselves.
Thank you Tanta. Once again you have summed up the situation more clearly and concisely than anywhere else I have seen.
All too many people who take that "abuse the system" tack, simply don't have the cohonnes to say upfront that they simply don't care.
Also, to those who say there can be no bailout of the hoodwinked "buyers" w/o bailing out the lenders, you are wrong.
It's not even hard or costly.
A little legislation that would allow any "subprime" borrower (for a home they live in, sorry flippers) to walk away without a black mark on their financial history from the housing transaction would pretty much do the trick.
They would indeed suffer for their folly as they have to find a new place to live. I doubt many would look upon moving and giving up on a dream as a good thing. Also, it would tag the perpetrators (lenders) with the cost of cleaning up their mess. They don't want those houses, but someone does... at the right price.
My apologies for the redundancy. I would say Allen C.'s post pretty much spelled out what I suggest 9 hours later.
But I hope more people realize that there can be a legislative remedy w/o soaking the taxpayers.
An attractive aspect of Leamer's policy prescription (that the Fed targets house prices) is that it protects J6P and the real economy from J6P's ignorance (or greed, take your pick) while allowing financial assets (which are for grown-ups) to gyrate as they will.
(Of course it's too late for that to help with the current crisis -- but mostly it's too late for anything to help with the current crisis; and to me it seems that the important thing is to develop a new regulatory framework to minimize problems a decade from now when the Great Crash of 2008 is ancient history.)
rigtsal
Exactly! We will definitely see a HUGE new regulatory framework being born as a result of these failures.
That is what I've been preaching to this bunch of mostly cordial elites.
Tanta can be a little bitchy but we love her.
Doctor,
I do not write about moral hazard often because the regulatory agencies (see below) do an adequate job of covering this important issue. It is available on-line to anybody who reads english and is not easily bored.
Unfortunately, moral hazard is not and has never been widely understood by the public. This could turn out to be a blessing or a curse.
Unfortunately, most computational economic tools do not provide means for facilitating the knowledge extraction or system validations.
In speaking to bankers in New York City in 1938, FDIC Chairman Leo Crowley said: "Deposit insurance came into existence because more than $3.5 billion of depositors' funds were dissipated during the years between 1865 and 1933. No banking system with the weaknesses this record indicates can expect to maintain the confidence of bank depositors."
Congress, he said, had two choices to restore public confidence:
FDIC deposit insurance or nationalizing the banking system.
The lawmakers opted to support private enterprise, he stressed, not to eliminate it.
This time around our problems could get so out of hand that Congress does in fact vote on nationalizing the banking system. I do not think it will happen but I do think it may be considered along the way.
We learn much from your posts and hope you will provide computational economic tools for us to consider in the future. I also plan on having more fabulous fun along the CR path.
Buckle your seat belt doc!
FDIC (search: moral hazard links)
FDIC: Search Results:
moral hazard
Financial Times 9/8/2007
The party's over when the music stops
FT.com / UK - The party's over when the music stops
You wonder why the country's in such a state, then you remember that our schools don't teach kids to analyze and think -just to regurgitate fact-bites.
Then you see proof of this pounded out on the keyboards of this board. Save all vitriol for the individual buyer--who likely had a good dose of fear as motivation for buying ('buy now or you'll be priced out forever!') rather than greed-- spare none for the banks -who have no excuse but greed for running this scam.
Banks are going to laugh all the way to the uh..bank..if this tactic of using their hapless buyers to shield their own misdeeds works.
The presumptions of the 'no bailout' screamers are staggering - do you really think someone 'walking' from their home with a blown-out credit rating and a potential lifetime debt burden is going to be able to afford to rent? Maybe on the taxpayer dime they will. And do you think compelling a lender to make sure these folks don't become social costs is a moral hazard? Your 'no bailout' policy will accomplish exactly the opposite.
If you want to take a 'no bailout' position you have to stop scattering buckshot (yes you might hit some guilty people, but you'll kill a bunch of innocents too, and make a mess we all have to pay to clean up). You have to aim the policy where it will do some good - between the lenders' eyes. Everything else is just a useless distraction.
I guess all the arguments proceeds from how the economy should be treated: either as an abstract science ( = individuals have no meaning ) or as human interactions ( = morality, compassion, empathy......).
Trying to reach a compromise between those two diametrically opposed is the drama of modern life.
But one thing is for certain, no missionary will have 500 million dollar as compensation in life. So CFC is not a missionary and should be punished.
The simplest social solution to the whole moral issue is following:
The goverment should mandate that any individual credit damage caused by subprime crisis should be erased:
lenders are not allowed to abuse the credit information during this period because they are also repsonsible for the mess.
Would that be fair to all participants?
You do not need to be Nostradamus to know what is going to happen.
To echo the old English Music Hall song -
'It is the rich that get the pleasure and the poor that get the blame
It will be socialist crony capitalism with endless bailouts for the US kleptocractic elite and the harsh discipline of the free market for the masses. Same as it ever was.
If we really want to do something for the poor, it would be for Congress to change the law on bankruptcy back to the old, more lenient, pre-Bush system.
This ridiculous child drowning analogy and talk of moral hazard aside. . . neither lender nor borrower deserve help.
As for borrower, it is about personal responsibility. These people made a choice to go into debt to buy a home, many people did not. If they "lose" a home that they DIDN'T OWN in the first place (no equity), so be it. Millions of people chose NOT to leverage up to buy a home and have been priced out of home ownership. If we support real estate prices through bailouts of subprime borrowers these people get punished.
Either way someone gets hurt, I say people who did not buy homes are more deserving . . . let the mortgage defaults begin!!!!
Paul D, that would be me in the most deserving category, but you see, I don't live on a rocky isle or a barren alien planet, I live in a neighborhood. That means that if foreclosures and defaults bloom around me, I lose -in property value, in quality of life, in safety, in social costs.
If my hapless neighbors get to stay in their depreciating houses, the market will still correct. The lender will be punished and so will the borrower -- less in debt but probably unable to buy or sell for years -- but at least they won't be reducing my 'hood to a squatterville.
In your scenario, you are hurting me, the prudent party in all this, and not doing anything to ensure the bad loans lenders passed off come back to haunt them.
Do I smell greed in this lack of mercy for homeowners? The kind just as irredeemable as the Tan Man's? I think some of you are kind of like reverse-flippers here - you are investors who want the market to burn to the bottom so you can get your superbargains -- neighborhoods, and all homeowners (wise and foolish) be damned.
Don't use me as your cloak of legitimacy for this argument.
From a comment above: "This ridiculous child drowning analogy [ . . . ]" shows how clever and misleading RRs analogy is.
This is not the first time RR has set up and knocked down a seemingly parallel strawman and equated anyone who would oppose his (tax-funded) solution [sic] to, in this case, a heartless oaf who would let his own son drown just to teach him a lesson.
Sheesh!
Only ndup caught this misdirection, for if RR ever believed that lad to be in an immediate life-threatening situation then his own actions were also irresponsible in the extreme.
Does anyone (including RR) actually believe that father would have let his son drown (and that boat sink)?
This is not about "moral hazard," it's about "metaphor hazard."
Best regards,
re : Alo
Way to go ! I love the passionate way that argument was stated. Its not my position but - way to go.
-K
Any discussion of moral hazard would seem lacking without considering the mix of foreclosure laws and 0% down purchase money loans.
With is mix, borrowers are already protected from the risk of loss-- they just walk away from the house. In California, they most likely won't even have to pay tax on forgiveness of indebtedness income. Every 0% purchase money borrower had a giant put option on their house that only costs them their credit rating.
Is there really anyone here who doesn't feel that borrowers should have been protected by stronger regulation of lenders?
I think that can happen without letting lenders and stupid buyers off scot-free, but the reality is likely to be that pragmatism is going to outrank justice.
The buyers are already protected by regulation. The buyers are alreay getting off scott-free. The foreclosure laws already do this.
0% down/purchase money buyer only have a call option on the house. Their money is NOT at risk.
It is the lenders who are getting shafted with the return of overpriced real estate. The lenders had the benefit of the information asymmetry. Why bother to bail them out?
To equivilate, or liken these two unfolding scenerios to each other is an extememely over simplified stretch, by any means. Yet, I have frequently found, to "sell the conclusion of choice", one must also "conjure, create and capture".
Alo,
Your real estate became very over-priced, a bubble valuation. Is it wrong to come back down to a more economically justifiable price?!?! . . . a valuation that should have been applied in the first place but for the bubble. Your equity will still be above water. Who is being greedy here?
YOU ARE ARGUING THAT REAL ESTATE PRICES SHOULD NEVER DECLINE! You must be joking.
Then all future young homebuyers will be priced out, unless you anticipate some epic rise in wages? Besides, if your 'hood has many foreclosures, eventually prices will settle at a level they SHOULD HAVE BEEN in the first place. NOT the bubble valuation you now desire.
Next, let's protect all those gamblers who go to Vegas and lose money? What a shame for those poor people. They didn't understand the odds correctly.
Tanta - Your analogies are somewhat over the top. While it may be true that most subprime borrowers don't know about FOMC, I'll bet good money that many of the borrowers know that there is the possibility of govt bailout. And if they don't know now, they will within the next year. That is a moral hazard.
Reich goes even further than you with the assertion that "many of the poor borrowers didn't know they couldn't afford the loans". There is very little question in my mind that many (probably most) of them knew they couldn't afford it. Did they understand the nuances? No, probably not. But they knew their payment would go up sizably in 2 years and they had trouble on the teaser.
to go back to the child analogy, obviously you do not want to let the child drown. But neither do you want to be known to be hovering 10 feet off his stern waiting to dive in.
The US govt forcing (not just encouraging servicers) someone (note holder proxy or servicer) to make a rational decision about when it is cheaper to foreclose on an individual homeowner and when it is reasonable to rengotiate loan terms seems reasonable middle ground.
PS None of this is to say that some of the lenders should not be spending some time in a small little cell - for bait and switch, for selling loans that were knowingly unservicable. It's just that it takes two to tango.
Clark
"Bloggers should not threaten bloggess"
Shouldn't Blogess be capitalized? And probably have a "the" in front of it.
As for the father, he knew the lifeguard would bail his son out. He is a dick anyway for not sailing with his son.
PaulD, reread me - prices are going to correct whether neighborhoods collapse or not. Credit tightening assures this.
Which means the homeowners who got taken will be punished enough for years to come - pushing neighborhoods into more decline than they can bear on top of that punishes me too. And you too.
Govt == father
Citizen == child
Foreclosure == Filicide
Interesting world view.
Cheers,
prat