Banks off the hook on Mortgages; We get the Bill
The New York Times has another editorial demanding that the current bill be passed immediately. This must be the tenth editorial with this sentiment over the last few months, with none of them indicating the negatives to this bill.
Let me explain my view of why this is so wrong, in so many ways.
The Times ignores the fact that many of the people who are now facing foreclosure were complicit in driving prices to unsustainable levels. Sure, some were duped, and if they were fraudulently mislead, there should be civil and criminal actions against the perpetrators.
Those who are being foreclosed for equity loans, were not scammed. They did get their checks to spend as they saw fit. With this bill, those who did not irresponsibly buy into a bubble, or use their home as an ATM that they could never pay back, are now being forced to underwrite these new, taxpayer backed mortgages.
This foreclosure Bailout Bill will ultimately benefit the Banks who gave the mortgage loans, with the homeowner acting as the conduit for their bailout. The banks will not reduce their original principle 15% (as the bill requires) for a home near this price; but only to homes at or below it. Thus, the banks will limit their loss, in spite of their responsibility for participating in the the very bubble that has caused this current crisis.
In many areas now being hit, prices had appreciated over a hundred percent in five years. Even if the program works as hoped, it will result in home prices not fully returning to what they would have been had there been no bubble, based on historically appreciation. This bubble has made homes unaffordable to working people, and maintaining it at greater than market levels will price many working people out of the housing market, perhaps permanently.
If a bank does give this new 85% loan on a house at or below this value, the house's value could continue to drop, something acknowledged even by the bills advocates. If this occurs, as is likely since there are other houses below the value of the new mortgage, the owners will still walk away from their mortgages. But with this bill, it will not be the banks who take the hit, but you and me.
In many ways this bill will accelerate the real estate decline. The mortgagor will have little incentive to maximize the price he gets since this new mortgage is guaranteed by the U.S. taxpayers. Or perhaps there will be a call for a new lower principle bailout, so those who rolled the dice in this bubble will get even more subsidies.
This Bill, goes beyond perpetuating a moral hazard, that is, fostering the belief that an individual's financial mistakes will be made up by government. It is downright immoral even if it works as planned, as those who refused to gamble, those of us who were financially responsible, are becoming the underwriters of the both the institutional lender and the intemperate borrower.
And if the plan, with it's intrinsic injustices still doesn't stem the tide, a massive cost is added to our national deficit, speeding dollar's decline and the inevitable inflation that may be catastrophic.
As an illustration of just how corrupt this bill is, John McCain, on April 14th when he was a conservative, was absolutely against this bill. Then someone explained to him how this would bail out his constituency, the financiers of the country, so on April 15th with no explanation he became a supporter of this bill.
Politicians of both parties seem to love it, since it sounds so generous, and they know how few people really pay attention to the actual costs, and dangers of it. Sure, losing one's home is traumatic, and there are many hapless people who got caught up in this who deserve sympathy, but the current bill is a fix that will ultimately harm us all.
Share your opinion in the poll (if it's connected to this essay), and I welcome your comments.
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Addendum and query....
This was posted on the lobster shift at dailykos, with a poll that I attempted to reproduce here, but can't get it affixed to this diary.
I happened to write an abbreviated comment to the Times with the same sentiment as this essay, and they selected it as one of ten "editor's choice" comments to appear on the online edition.
I've written a half dozen or so essays on dailykos and here, and I find it amazing that there is always about 4 to 1 against this bill. This is among liberals, Democrats, the party that is pushing this in congress. I would say that Republicans would even be more opposed.
Yet, this is about to pass congress by a large majority. What does this say about Ralph Naders contention that we really only have one party, the corporatist party with differences in tone rather than substance.
Of course the Iraq war is the one main exception, along with abortion and a few other social issues; but with Obama now announcing his full throated endorsement of governement-Faith Based cooperation, another difference has been eliminated.
This bill could be a major fiscal disaster, perhaps the final straw in the BananaRepublicazation of a once great country.
And yet a discussion on the actual consequences, just isn't happening in the public arena.
Yes, it sucks.
But it is a sticky problem caused by moral hazard...meaning that things were done to get people to behave in a way that they wouldn't otherwise and the results are negative and become a widespread problem.
Government has a history of bailing out large scale bad behavior...behavior often wrought by their own doing. That had and will continue to have an effect on the way things work.
Trust me, we will learn the wrong lessons from this and it will happen again in the future.
bailouts
My rule of politics: if it benefits the banks and the middle class, it's going to become law.
(This probably deserves to be a "fifth" rule, or so)
In my expert opinion, you should do what I tell you to do.
Just say
thank you to the cult of deregulation for this mess.
God forbid we should bother with enforcing a law that says a lender should verify a buyers income before handing out a loan. That so very yesterday, so anti-free market.
The dirty little secret is that Mr. 1% Interest Rates, Alan Greenspan and his Randian minions enabled this credit bubble to 'grow' the economy artificially so they could have their beautiful war without raising taxes.
The whole thing stinks, and there are no easy answers as inflation looms large on the horizon.
I'm only half stupid
God forbid we should bother
Is there also a law that makes people verify if a bank is actually a bank before putting money in said bank?
In our society, people are rewarded for pretending to be certain about things they're clearly not certain about. -- Sam Harris,
FDIC
Why do you think so many folks keep wads of money buried in a coffee can in the back yard.
I'm only half stupid
Coffee cans and the "soldiers" flag, I digress
Because they are the same people who do not realize that the soldiers that fought to preserve the status quo of the Old South, were de facto defenders of classifying people as property?
In our society, people are rewarded for pretending to be certain about things they're clearly not certain about. -- Sam Harris,
so which is it?
is it deregulation or artificially low interest rates?
Sounds like you know it's latter (again) but just gotta cram other things into it (again) for that sense of ideological satisfaction.
BTW (again), whatever "Randian" is or means, inflating the money supply and continually cutting interest rates and maintaining cheap credit have nothing at all to do with it...in fact, it can be argued that it's antithetical to "Randian". (again)
Keep in mind also (again) that even the most liberal of liberal economists and economic journalists with any sense of up or down in monetary policy would hardly use the word "Randian" when describing Mr. 1% Interest Rate's performance at the Fed. In fact, I don't think there is a word for it besides "irresponsible" or "short-sighted" or "meglo-maniacal".
Finally (again), actions speak louder than words. When a perverted priest preaches chastity and then molests an altar boy, chastity is not blame.
which is it?
It's immoral hazard.
It was naive in the extreme to think that humans would not be subject to immoral hazard of wanting something for nothing, when homeowners, ratings agencies, bank regulators, hedge fund managers, and the whiz kids of the investment world would be honest when offered free money, or the pot of gold at the end of the rainbow, with the promise of living happily every after in your eternally appreciating dream home, or highly leveraged investment vehicle, while speculators invested your unpaid home loans around the globe.
If you go on the assumption that the markets are always right, then what we learn is that trusting that all humans with large sums of cash (credit) to be honest and moral in a scheme that equates credit as hard investment capital is a mistake that can literally have global repercussions.
The adjective Randian refers to those that fear that the world will turn to honoring communism if there is even a breath of regulation that interferes with capital investments. If only Iraq could be a capitalist haven the muslims will stop bothering us.
It is not surprising that there are a few perverted priests, and it is not surprising that some would claim to be holier than thou, to speak for God while pretending to own the mantle of absolute purity holding up their own chastity as the direct line to heaven's gates, while engaging in high moral crimes.
What is surprising is how many people knew what was going on, enabling and colluding in the molestation (of children and the markets) with their silence.
I'm only half stupid
What's "immoral hazard"?
Upthread, I was talking about Moral Hazard
....which actually IS something relevant here.
This applies 100% accurately and appropriately to what has happened.
In fact, as it pertains to finance:
Notice: Lax standards are not the moral hazard. The underlying arrangements and mindsets created from them produce a moral hazard in behavior. "regulation", generically speaking, is not the issue. In fact, many regulations can shift burden in a way that encourages moral hazard.
Seen most broadly, the moral hazards in finance came from outside influence on behavior.
Your second paragraph is totally off the mark. If that's what you learned, then you learned nothing. Handling other people's money does not create the moral hazard. The rules that govern the consequences of it and the mindset of how it would be handled in case of problems CAN and often DO encourage moral hazard.
Your idea of Randian is not only wrong but completely irrelevant to the issue at hand.
And you the butchering of the logic in my priest analogy didn't help either.
BTW (again), there's a different between lawless free-for-alls and free-market. Free markets have teeth and punish mercilously for such mistakes. In that context, the moral hazard problems we're talking about would proabably have been avoided....add in the ridiculously low interest rates that would never have happend with a more involuntary and totally market-produced rate system and you start to see a lot of these avoided before their inception.
Immoral hazard
is individuals that insist on putting pure free market fundamentalism on the same pedastal that priests insist on putting chastity, while neglecting the reality of our animalistic human nature. It is only the rare exception that can live by these absolutist standards. The immoral hazard is not recogniizing human behavior, often takes the road of least resistance.
Meanwhile as the dairist notes, those of us who do not believe in the purity of free market fundamentalism, are asked that our wealth be redistributed to rescue the fools who let this get so completely out of hand with their clever accounting tricks. Even more irksome is we had to listen to these fools tell us how fabulous 'the make wealth on credit plan' was and how horrible it was for capital investment and the country at large to pay taxes during a time of war.
I'm only half stupid
Is "Immoral Hazard" your term then?
I've never heard it before and it makes no sense as you describe it. At all.
(Again) Who's talking in absolutes? The arguments you make address your OWN misconceptions of what think you are rebuking....but little else.
YOU see pedestals. YOU see fundamentalism. I and most see neither. Taken properly, one would only see honest efforts at pragmatism and understanding the issue for what it really is. BEYOND THAT, then it is a question of agreeing with or seeing the proper points of importance as being otherwise.
(Again), like I've said in the past many times, the problem here isn't even one of ideology, it's simple concrete logic vs. vague notions. The points I make against your posts can actually come from anyone...liberal, conservative, libertarian, socialist and communist....because it's not about ideology...it's analytical. The difference is that most liberals probably won't bother to address you on these matters because they are not inclined to do so for the simple reason that they generally agree with your general view...logical errors and mistakes ASIDE.
(And AGAIN) your last paragraph seems to flicker intermittently with correct notions that are consistent with the unvarnished truth that no POV can change. Yet, your envelope it in ideological veneer, in which the ultimate critic is not at all consistent with what the issue is. Whatever the problems are...and they are many....vague, inaccurate notions of "market fundamentalism" are not even in play. There's nothing "fundamental" about what caused this or what the policy response has been. In fact, DEVIATIONS from fundamental tenets of responsible Fed policy and moral hazards in responsibility wrought by misuse of power are where the many compounded problems are rooted.
Yes those deviations are the problem
that is exactly what I have been saying.
If folks would only stop deviating...... from the pure principles.... but guess what they ALWAYS do. Always. That is why such things as ethical guidelines need to be brought into the picture as a whole.
I'm only half stupid
Well then,
OK. that's cool. fine with me. But then let's be clear what exactly we are criticizing.
It's one thing to genuinely disagree, it's another to talk past eachother because differing defintions and a skewed focus.
And keep in mind that deviations from fundamental principles when crafting policy is more destructive than actors in the economy doing it. When rules are made with ignorance to these "pure principles", the deviations in behavior become much frequent and cause many problems. But when the rules are mindful of these principles, the deviations in behavior not only become far less frequent...but also much, much painful for the actor that does it.
This is what I'm getting at with "Moral Hazard".
Silly.
God forbid we should bother with enforcing a law that says a lender should verify a buyers income before handing out a loan. That so very yesterday, so anti-free market.
Why would you bother enforcing such a law, Missy? I ask as one intimately involved in the process of loan originations, and somebody who was pushing for stricter verifications at his place of employ. In the end, the idea enforces itself. The clowns who originated vast quantities of alt-A paper on the mortgage side have and are paying for it with their heads (financially speaking), and any backstop that Congress passes is unlikely to change that in any big way. (I'm willing to put my money where my mouth is on this; my real-money account is structured very much like my SC account.)
So why would you enforce a law to prevent people from blowing their own money? Or, on the outside chance some bright young fellow like myself comes up with a way to originate safely without having to verify income, enforce a law that adds no value? Either way, it makes no sense.
What you need is a decent level of transparency and a quid pro quo for Federal insurance. If an institution wants a Fed backstop, it needs to follow Fed rules (just as if I want homeowners or auto insurance, I am prohibited from taking certain actions with my home or car that the insurer sees as too risky.) If an institution wants to take greater risks, it should be allowed to do so with the express understanding that no bailouts for account or equity holders will be had.
We need more bright young fellas like yourself.
I won't go into my usual rant....... :)
IF an instituion wants to take greater risk it should be allowed to do so with the express understanding that no bailouts for account or equity holders will be had.
Reality check: that is not what happened. See JP Morgan & Bear Sterns. Do you have any idea how much money the feds are putting in to save the liquidity and overnight lending capacity of some credit institutions.
Isn't it true that some lenders just accepted someone's word on income for a loan. And isn't it true that the ratings guys just said fine, we will look the other way cause we are going to spread the risk so far and wide that it won't matter?
I'm only half stupid
Incorrect, madam.
Both as to my relative brightness and the situation at BSC. Baseless flattery will get you nowhere. :^)
To expand, Dimon just pulled off one of the nicest heists in living memory, as a look at the Fed minutes related to the "bailout" will attest. As to the guys that got BSC into such a liquidity trap, they have for the most part been wiped out. Even Jimmie Cayne has seen his otherwise Forbes-level of wealth slashed down to a few MM. Not exactly a breadline, I'll grant you, but BSC is not a shining example of "moral hazard", enticing the greedy with thoughts of profitable risk taking. You'd have to be retarded to want to follow that example, at least on Bear's side.
Likewise for most of the other banks and non-bank lenders. I've been making money shorting the hell out of them, and their executive teams can hardly, at the moment, be accused of living the high life at the Fed's expense. A bunch of them f*ed up, and they're very clearly paying a price for it.
Isn't it true that some lenders just accepted someone's word on income for a loan.
Yes, specifically with regards to the paper I called "alt-A". It was originally intended as a product for the self-employed, who can otherwise be expected to have some difficulty in proving their income as opposed to their revenue. This eventually evolved into NINJA loans, though. (No Income, No Job or Assets). "Liar loans", if you will.
And isn't it true that the ratings guys just said fine, we will look the other way cause we are going to spread the risk so far and wide that it won't matter?
Not exactly. You can't diversify away systemic risks. If it had been clear that some class of paper (i.e. NINJAs) had historically performed poorly, there'd be no way to lessen that risk. The most you can do is tranche it so that somebody buys earlier loss exposure and somebody buys theoretically safer later loss exposure. The underlying problem here was that the paper actually performed well for a while. This, arguably, was a feedback effect of the bubble itself. Loans in earlier vintages that got into trouble would have little difficulty selling out for a profit or getting a re-fi into a new vintage, thereby masking the bad performance by "punting" it forward. The ratings agencies did screw up, by taking that situation as a steady-state instead of a temporary abberation.
Edit: Of course, some of the BSC alumni are suffering more than others.
:^)
Thank God
(oops the header copied from a previous post: now fixed)
for now..... ;-/ but you will soon learn that I am never wrong.
Do you remember that day, I think it was MLK Day when some guy at the foreign bank, tried to get rid of all of his fake trades and the market went down like 300 points in one day.
Crazy stuff is happening, like IPO's are down 49%. Is it possible that folks are not trusting the venerable stock market and looking elsewhere for investment capital.
Meanwhile while gold, copper and other hard commodities are way up the companies associated with these commodities are way down. It seems like folks are becoming allergic to the stock market.
It's pretty interesting stuff.
I'm only half stupid
so what?
In general, I'm indifferent to this policy, though if I was in Congress I would probably be supporting any amendment that makes it less generous.
The people who made the mistakes (took the risks) need to be burned. I have a feeling that many of them already have been burned, so I'm not too worried about a moral hazard. However, there is still the possibility that this bailout will shift the risk of loss such that this high-risk behavior on the part of financiers is expected to be profitable, when it may not have expected profit without the bailout.
As I understand it, there are two reasons for this bailout;
I suspect that our society would pay a cost if several of our financial institutions collapsed (insufficient financial services for a period of time)-- however, if they aren't stable on their own, then much of the apparent benefit of these institutions is illusionary, and the cost of maintaining them in the long-run is probably much higher than the short term cost of the disruption that would follow their collapse.
As for the homeowners, I hate to see people evicted, but it seems like this policy would only help people who took out loans that were bigger than they could afford (people who lost their job or had an illness will probably be unable to pay even with the refinancing). I don't have much pity for these people--they'll have to swallow their pride and rent again.
So I don't really see what problem this bill is attempting to solve.
In my expert opinion, you should do what I tell you to do.
the local tax
base from property taxes has been badly hurt.
Less police, less money for schools, blighted neighborhoods devaluing property etc.
I'm only half stupid
nice idea, but bad reason
This is an enticing idea, but it doesn't provide good motivation for this bailout:
In my expert opinion, you should do what I tell you to do.
Philosophically,
I agree with everything you've said.
Now, having said that, government is going to do something because that's what government does. They key is for them to offer up solutions which limit the moral hazard (no matter what happens, there's going to be some.)
So how do you do that? I don't know about the specific solution offered up by my friend at "Accrued Interest", but he's thinking about it in the correct terms...."We want everyone involved to be saying (sarcastically) to themselves 'This is some rescue!'"
Of Course....
These were homeowners in name only, since often they risked nothing, and they did participate in the balloon expanding.
This is the moment for radical change, but what we are getting is anodyne sloganeering by both parties. Maybe it will get the incumbents through another election cycle.
Good contribution. Thanks