posted
Why would it have been bad for these two to collapse? If these mortgages can't be financed without government support, it means that the economy can't bear them. All they're doing is adding these risky loans to the national debt.
Clearly, the goal is to get everyone neck deep in debt. "Why?" isn't even the question. It should be, but it's not.
This is just disgusting.
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quote:Clearly, the goal is to get everyone neck deep in debt.
Well, no. It's to keep the rich people who've worked their way up the pyramid scheme by buying risky debt from plummeting downward.
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posted
Theoretically, AFAIK, the bailout helps owners and shareholders with assets in the US (possibly, world) banking system. On the other hand, it penalizes (or rather, shares the risk/penalty) spread out across the US taxpayer population.
These two are overlapping sets, the first is not wholly contained within the second.
In other words, those people in (first set - second set) may benefit without getting "neck deep in debt."
In other words, thank you Posts: 7593 | Registered: Sep 2006
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quote:But let's say that the Treasury did not support the debt of the mortgage agencies. The Chinese bought over $300 billion of that stuff and they were told that it is essentially riskless. The flow of capital from them and from other central banks, sovereign wealth funds, and plain old ordinary investors would shut down very quickly. The dollar would fall say 30-40 percent in a week, there would be payments system gridlock, margin calls at the clearinghouses would go unmet, and only a trading shutdown would stop the Dow from shedding half its value. Most of the U.S. banking system would be insolvent. Emergency Fed/Treasury action would recapitalize the FDIC but we would lose an independent central bank and setting the money supply would be a crapshoot. The rate of unemployment would climb into double digits and stay there. Many Americans would not have access to their savings. The future supply of foreign investment would be noticeably lower. The Federal government would lose its AAA rating and we would pay much more in borrowing costs. The deficit would skyrocket.
And I haven't even mentioned the credit default swaps market. Well, I have now.
That's from Marginal Revolution, and the author falls onto the libertarian/free market side of the debate among economists. There's tons of more good links here.
Edit: and, obviously, that's a worst case scenario. But it's plausible, and something along similar lines could easily happen to a lesser extent. I'm certainly not happy about this bailout, but arguing about it now is sort of like fighting over who left the gate to the pool open while the toddler drowns in the pool. Get the kid out of harm's way, and then take steps to make sure the fracking gate is never left open again.
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posted
So we're all agreed: deregulation of the derivatives market was a dumb idea?
(As a side note: I find myself agreeing much more strongly with the comments to that article, Jhai.)
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posted
The problem is that our economy is so interlinked that these things affect or are likely to affect most everyone.
Most of the people who own Fanny Mae and Freddy Mac aren't wealthy, they are middle class members of large pension funds. Most of them had little if any choice about joining the pension fund and little or no control over how their money was invested.
Then there is the other side to this, all the home loans. If Freddie and Fanny were simply allowed to go into bankruptcy, it would become even more difficult to get a new mortgage. That would result in an even sharper drop in housing prices, which would lead to even more foreclosures when people who had to move found they could no longer sell their house for what they owe, which would mean to even more lenders going bankrupt.
It would also have a severe impact on the building sector. That means a big increase in unemployment among carpenters, electricians, plumbers and contractors plus a big drop in demand for building materials so more unemployment in all those industries as well. Then there are ripple effects through the economy because the recently laid off contract won't be buying a new TV or car or iPod anytime soon.
All things considered, it will probably cost you, the American tax payer, less in the long run to bail our Freddie and Fanny than just to let them go under.
And what all this should be saying to you is that the republican/libertarian blind devotion to allowing the markets to regulate themselves simply can not work in a highly integrated economy. This is a repeat of what happened in the with Savings and Loan bail out under Reagan. And if the government chose to do nothing, it would be a repeat of the great depression. Under the guise of "liberty", Fanny and Freddy have been allowed to swing their fist in a way that was destined to hit the rest of us in the nose soon or later.
The thing that really pisses me off is that their are undoubtable a few very wealthy people who were culpable in the decisions that lead to this crisis and they have almost certainly gotten a lot richer out our expense. These people should be investigated and prosecuted to the fullest extent of the law. If it turns out that due to republican policies, everything they did was legal. They should be sued in the civil courts for every last penny they own. They should be left living on the streets and begging. If they by some chance ever again make more than a few dollars a day begging, that should go toward paying off their debt as well. These people deserve no mercy. But I don't have the slightest hope that will happen.
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quote:Most of the people who own Fanny Mae and Freddy Mac aren't wealthy, they are middle class members of large pension funds.
The immediate shareholders of Fanny and Freddy aren't the problem. It's the people (and banks) who have used Mac paper to back other debts that are the problem. "We" don't want them to go under.
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posted
Tom: that depends on what we mean by deregulation.
In fact, this problem is almost entirely due to the gov't intervention in the charters of the FMs.
Rabbit: free market principles generally work better in a highly integrated economy. The issues mostly arise when the gov't creates perverse incentives to do stupid stuff, such as by giving the FMs the charters to purchase all mortgages above a certain quality, creating an incentive to never bundle them with lower-quality mortgages, which bundling would have led to much less vulnerability (as security cash flows would not have been predicated on such bad paper).
Posts: 15770 | Registered: Dec 2001
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quote:Originally posted by Jhai: I'm certainly not happy about this bailout, but arguing about it now is sort of like fighting over who left the gate to the pool open while the toddler drowns in the pool. Get the kid out of harm's way, and then take steps to make sure the fracking gate is never left open again.
Or "In hindsight, scuba diving was not a good idea. That said, surfacing instantly from a depth of five hundred feet is also not a good idea."
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posted
The closer one gets to a singularity, the more the rules fall apart. This works for the rules of nature and the rules of economics.
The problem with Libertarian ideas as we've seen practiced is that they believe that Government's role in keeping property rights sacred means a hand's off approach. But part of the rights of property means making sure the scales are balanced in the shop. In other words, that oversight and regulation are required to make sure that company A is not violating my property rights by cheating.
Posts: 1941 | Registered: Feb 2003
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quote:Most of the people who own Fanny Mae and Freddy Mac aren't wealthy, they are middle class members of large pension funds.
The immediate shareholders of Fanny and Freddy aren't the problem. It's the people (and banks) who have used Mac paper to back other debts that are the problem. "We" don't want them to go under.
The people and banks aren't the problem either. The problem is that Freddie and Fanny are large enough that their collapse affects sectors of the economy and millions of people that have little to do with the bad decision made by these lenders.
Posts: 12591 | Registered: Jan 2000
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quote:The problem is that Freddie and Fanny are large enough that their collapse affects sectors of the economy and millions of people that have little to do with the bad decision made by these lenders.
In all honesty, I don't think the decision was as motivated by a desire to keep the economy afloat in the short term as it was to keep a handful of individuals solvent.
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posted
Here's my question: Is this bail out a long-term solution or are we trying to put a band aid on a serious wound? In all honest, I don't see how housing prices can stay as high as they are now. They've been soaring up higher than inflation for years now and I've never been convinced that the economy could sustain that, bad loans or no.
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posted
This is probably a very stupid question. I will say that upfront. Here goes anyway.
When a lending institution fails, it is because more people than anticipated default on their loans, right? So the holders of that debt get into trouble. It seems like in government bailouts, the government puts lots on money into the top of the pyramid. Wouldn't it keep the lending institutions from collapsing if the government addressed the bottom of the pyramid? Instead of a big influx of money at the top of the pyramid, a big influx in smaller bites to help keep people from defaulting - pay off bits of loans.
Posts: 11187 | Registered: Sep 2005
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posted
Three problems with that, Kate: 1) You're directly paying the loans of people who've chosen not to pay their loans. How do you rationalize not paying the loans of people who have responsibly paid their loans? 2) There's a time lag between the payment and the "trickle-up" that may wind up being too much for any given institution to float. 3) And finally, the cost of identifying and then making hundreds of thousands of small payments is potentially much higher than the cost of making a couple huge ones.
(IMO, the "stimulus check" we received earlier in the year was in part a "too little, too late" attempt to do exactly what you suggest.)
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posted
If you put money into the bottom of the pyramid, there's an even larger moral hazard problem. Also, a lot more money would be required. This is because the problem is not the value of the assets so much as it is the cash stock and flow. More people being able to make mortgage payments on time only somewhat alleviates the cash flow problem, and does almost nothing for the cash stock problem.
Also, honestly a lot of people in houses beyond their means shouldn't be making payments; that's just dropping money off a cliff, what with how house prices are going and are going to be going for a while. Helping them make payments is an actively counterproductive move.
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1) I suppose they could rationalize it the same way that the rationalize bailing out people who got very rich speculating.
2 & 3) I suppose what I had in mind was something along the lines of the stimulus package except more direct. Give the lenders some billions of dollars which is some percentage of the money that people owe then. So the people who owe then get some percentage knocked off what they owe.
Fugu, better they should lose their homes and be on the street?
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posted
Staying in a house they could never afford in the first place and living in a cardboard box under the freeway are not the only two options.
They could always rent a less expensive home. Or, if they act quickly, sell, even at a loss, and buy a less expensive home.
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quote:1) I suppose they could rationalize it the same way that the rationalize bailing out people who got very rich speculating.
No, it's too hard. You don't know any of the rich speculators they're bailing out. You might know a couple people down the street who're now getting a handful of free mortgage payments that you aren't.
quote:Fugu, better they should lose their homes and be on the street?
I don't imagine most of these foreclosures are producing homeless; these people can still afford rent.
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posted
Also it's worth adding, that the high demand for rent from all of these foreclosures is driving rent prices up. This makes things even more difficult.
I don't think there's any quick fix to this issue. Bailing out Fannie Mae and Freddie Mac may relieve the issues for a while, but unless the two companies follow through on their promises to change the way things are done, we're just going to keep having the same problems.
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posted
Then rent some place that is smaller. No one has a right to a lifestyle they never could afford in the first place.
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quote:Originally posted by katharina: Then rent some place that is smaller. No one has a right to a lifestyle they never could afford in the first place.
I could not rent cheaper then the mortgage for my house. If I for some reason stopped being able to afford my mortgage, I would be on the street. Well, actually, if that ever happened, my brother (who might own more houses then McCain) would just buy the house off me and let me live there until I was doing better, so I don't actually have to worry. But I imagine most people in my financial situation don't have well off family who will take care of them.
ETA- my area has maximum occupancy laws so I would have to rent a 2 bedroom. My friend in a different state has to have a 3 bedroom because she has a boy and a girl and the rules in her city (possibly state) require separate rooms for each gender of child. So, going smaller is not always an option.
posted
Yes, I'm talking about people who took out mortgages for far more than they could afford, not just anyone with a house. And I think it is perfectly reasonable for someone to take a credit hit after taking out an unaffordable mortgage.
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quote:Then rent some place that is smaller. No one has a right to a lifestyle they never could afford in the first place.
Oh I'm sitting comfortably in a one bedroom that's broadly feasible, thank you. It was the cheapest one I could afford that wasn't a slum (and mine barely squeaks past the definition IMO.) So I would counter that no one should have to live in a slum so that Property Management Companies and Mortgage Speculators can line their pockets.
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posted
It makes sense for such people to take a hit, too. However, not providing a cash infusion to the FMs doesn't make them (whoever they are) take any more of a hit. Not to mention that you haven't proposed not giving a cash infusion, just shifting the rules of it.
Of course, many companies and the people at them involved in the current situation have taken huge hits over the past year or so. Heck, just recently a number of companies took multi-billion dollar baths when over-speculating on oil, with good numbers of corporate execs losing jobs and significant reputation, at a time when people aren't doing much hiring of financial executives.
Posts: 15770 | Registered: Dec 2001
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quote:So I would counter that no one should have to live in a slum so that Property Management Companies and Mortgage Speculators can line their pockets.
A counter implies that someone held such a position prior to you saying it.
Posts: 15770 | Registered: Dec 2001
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quote:But with a major blow to their credit score. Making renting more difficult.
Or they could move to a different neighborhood. It seems to me to be the case that there are some extraordinary cheap rents available, on good-sized property, if you don't mind living around black people. _______
On a different note, I haven't heard about any criminal investigations for the Fannie Mae or Freddie Mac executives. It seems to me that too many people made too much money over inflated speculations for this to fall without accounting or reporting fraud. What's going on there?
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quote:Originally posted by kmbboots: But not to take a hit if you were at the top of the pyramid?
My understanding is that the shareholders of the FMs are going to take a hit, and a major one. I could be wrong. Who else should be punished?
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quote:Originally posted by fugu13: Yes, I'm talking about people who took out mortgages for far more than they could afford, not just anyone with a house. And I think it is perfectly reasonable for someone to take a credit hit after taking out an unaffordable mortgage.
It's not quite that simple. One factor people are over looking is that these lending policies were a major contributor to high inflation in the housing market. At least in some parts of the country, low interest rates on loans were nearly perfectly counter balanced by the rising prices. So without these policies, some people at least could have bought the same exact house for a lower price but a higher fixed interest rate which resulted in nearly the same monthy mortgage payment they had initially with their artificially low variable rate mortgage.
I know this doesn't apply to everyone out there, but there are at least some people defaulting on their mortgages who would have been able to afford their house if sub-prime lending hadn't driven housing prices so high. How do you separate these people from those who were buying McMansions that would never have been within their means?
Consider my personal situation. My husband and I sold our place in Utah this spring. If we had sold 9 months earlier at the peak, would could reasonably have expected 16% so you could conclude that I've already lost a bundle through no fault of my own. But on the other hand, if we had sold 4 years earlier, we could only reasonably have expected to get about 65% of our sales price. So did I make money or loose money because of sub-prime lending? I don't really know.
I guess the only way to really answer that question is to find a parallel universe where the only difference is that this sub-prime lending debacle never happened and see how much the parallel me was able to get selling the house.
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Well, honestly, I think the people who used Mac paper to prop up their own derivatives trading -- who are the people really being propped up, keep in mind -- could stand to suffer a bit.
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posted
Well, I'm not an expert on this sort of thing. But as I understand it, the Treasury is putting in money that will dilute the current stock, and will also make it less senior. So it depends on the degree of dilution and the value of the seniority, which I don't know and am unqualified to calculate, respectively. Also note that current stockholders are apparently losing their dividends; again, I don't know what this was worth, but it seems it ought to be a nice chunk of change.
Reading a bit more, it seems that the Treasury is going to put in enough money to maintain a positive net worth of FM. So, suppose the total share price needs to be 100 for that to happen, it starts at 100 today, and it drops to 80. Then the government puts in 20 to gain, presumably, one-fifth of the shares. The remaining four-fifth are now worth 64 dollars, for a loss of 16 on top of the 20 they dropped by in the first place, and then you have to account for the loss of dividends and seniority. So it's in the same ballpark as the government input, but then again I may have made completely wrong assumptions on how much the government will own after its cash infusion, and who knows what the value of that seniority and whatnot is? Not me. So, intuitively I would say that yes, stockholder losses are roughly equal to government infusions, but I could be wrong. Fugu might know a better way to analyse it.
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Well, honestly, I think the people who used Mac paper to prop up their own derivatives trading -- who are the people really being propped up, keep in mind -- could stand to suffer a bit.
Isn't this basically a subset of the stockholders?
Posts: 10645 | Registered: Jul 2004
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quote:Originally posted by fugu13: Yes, I'm talking about people who took out mortgages for far more than they could afford, not just anyone with a house. And I think it is perfectly reasonable for someone to take a credit hit after taking out an unaffordable mortgage.
It's not quite that simple. One factor people are over looking is that these lending policies were a major contributor to high inflation in the housing market. At least in some parts of the country, low interest rates on loans were nearly perfectly counter balanced by the rising prices. So without these policies, some people at least could have bought the same exact house for a lower price but a higher fixed interest rate which resulted in nearly the same monthy mortgage payment they had initially with their artificially low variable rate mortgage.
I know this doesn't apply to everyone out there, but there are at least some people defaulting on their mortgages who would have been able to afford their house if sub-prime lending hadn't driven housing prices so high. How do you separate these people from those who were buying McMansions that would never have been within their means?
Consider my personal situation. My husband and I sold our place in Utah this spring. If we had sold 9 months earlier at the peak, would could reasonably have expected 16% so you could conclude that I've already lost a bundle through no fault of my own. But on the other hand, if we had sold 4 years earlier, we could only reasonably have expected to get about 65% of our sales price. So did I make money or loose money because of sub-prime lending? I don't really know.
I guess the only way to really answer that question is to find a parallel universe where the only difference is that this sub-prime lending debacle never happened and see how much the parallel me was able to get selling the house.
Rabbit, the problem with your reasoning here is that, whether or not poor lending practices were the cause of the recent rise in housing prices, these people still chose to take out loans on houses they couldn't afford. Yeah, it sucks if this was the reason they couldn't afford the houses, but that doesn't mean they should or will get a free pass for their mistakes in buying those houses. You need to make the right decision for the situation you find yourself in, not the decision for the situation you think you ought to be in, if other people hadn't screwed up. That's not the way the world works. (Or, if it is and I haven't heard, someone should tell my boss, since I should be on vacation rather than cleaning up the fires from other team members' mistakes.)
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posted
kmbboots: yeah, pretty much exactly as much as the gov't is putting in is being wiped out in the value of other shareholders, almost by definition.
Rabbit: that's the point, I don't intend to separate. The FMs get propped up, people who can afford to keep making the payments they agreed to make are fine, and people who can't afford to keep making payments find a way to make them or don't make them. Giving this latter group of people more money is subsidizing bad decision making, even if some of them are people who made reasonable decisions and had bad luck. They are why we have safety nets, such as bankruptcy and social programs (safety nets I would love to see considerably expanded).
edit: note that it is subsidizing bad decision making that doesn't need to be subsidized, of both the people who took out the loans and the people who issued them. This action probably subsidizes the bad behavior of some of the people involved in issuing them, but minimally (it has to do with the dilution of other debts), but I don't see a way around at least a bit of intervention. Of course, this intervention may end up going too far and result in a bigger problem than if we had just let them fail and be carved up at pennies on the dollar, but that's a future issue.
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posted
KoM: no, most of the people the FMs buy paper from are not particularly big (if at all) stockholders in the FMs.
There are definitely criminal investigations warranted into the practice of a number of mortgage lenders, including the FMs. The leaked memos alone that show numerous people were aware of the worthlessness of a lot of the paper they were issuing is evidence enough.
Posts: 15770 | Registered: Dec 2001
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quote:Originally posted by kmbboots: But not to take a hit if you were at the top of the pyramid?
My understanding is that the shareholders of the FMs are going to take a hit, and a major one. I could be wrong. Who else should be punished?
What do you mean by major? Are they losing as much as the government is putting in?
As I mentioned before, the shareholders are for the most part middle class people who just happen to have a pension fund that invested in these companies (or for that matter the companies who are propped up by Mac paper). They aren't the ones who are responsible for this mess. I just don't see why 65 years olds who just happen to have worked for a company whose pension fund bought Fanny and Freddie necessarily deserves to loose 25% of their pension because of this. I guess if you can show me that their pension fund has actually made that much on their Fanny and Freddie stocks, it would be fair but I sincerely doubt that's the case.
The people who really deserve to take a hit are the executives and board members who've been making multimillion dollar salaries. They are the ones who have been making these decisions and get rewarded for it.
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quote:They are why we have safety nets, such as bankruptcy and social programs (safety nets I would love to see considerably expanded).
In the name of blunting the negative aspects of risky behavior, while reaping the benefits of entreprenuerism. Aren't you worried that you are going to cause more bubbles? Or do you just figure that's it's worth it in the name of innovation.
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posted
I don't intend bankruptcy to be pleasant, just a feasible alternative that allows someone a substantial reset.
And there's a decent bit of evidence that minimally guaranteed supports introduces more structural inefficiencies and causes fewer bubbles. Europe has a number of cases of this. I think the moral arguments for such social programs outweigh the costs. And that isn't to say that I favor social programs that would make life comfortable for those who choose not to work.
Out of all the ways we've managed to cause bubbles, social programs are the least of my worries. Bubbles tend to be caused by perverse incentives that make it make sense for people to choose badly (in the sense of leading to an eventual bubble that collapses) based on artificial cost differentials (which might not be monetary; for instance, information).
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quote:Originally posted by The Rabbit: The people who really deserve to take a hit are the executives and board members who've been making multimillion dollar salaries. They are the ones who have been making these decisions and get rewarded for it.
I would agree with that. I guess I assumed that the executives and board members would be the major stock holders. These are the people who I think should be relying on "safety nets" before the rest of us bail them out.
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posted
Here's an interesting article and chat by Steven Pearlstein.
quote:But not to take a hit if you were at the top of the pyramid?
The top of the "pyramid" has taken numerous hits. For example, Bear Sterns investors lost most of their value. The shareholders in the FMs have taken a serious hit, that might or might not be temporary. If it's not temporary, then the taxpayers will make money on the "bailout."
quote:I would agree with that. I guess I assumed that the executives and board members would be the major stock holders.
To the extent they are stock holders, they are losing money.
Posts: 26071 | Registered: Oct 2003
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quote:Originally posted by Jhai: Rabbit, the problem with your reasoning here is that, whether or not poor lending practices were the cause of the recent rise in housing prices, these people still chose to take out loans on houses they couldn't afford. Yeah, it sucks if this was the reason they couldn't afford the houses, but that doesn't mean they should or will get a free pass for their mistakes in buying those houses. You need to make the right decision for the situation you find yourself in, not the decision for the situation you think you ought to be in, if other people hadn't screwed up. That's not the way the world works. (Or, if it is and I haven't heard, someone should tell my boss, since I should be on vacation rather than cleaning up the fires from other team members' mistakes.)
What you are missing Jhai is that when all the sudden a million people make the same bad decision its evidence that something more is going on than just bad judgement. And as you so aptly noted in your own situation, there are always people who pay for the mistakes they had no part in.
20/20 hindsight is deceptive. Go back five years to a time when prices were skyrocketing and imagine you are a young person watching as prices increase 15% or more per year and realizing that if you wait 5 years to buy a house, the price will have doubled. You are offered a loan to buy a modest house with little or no down payment and an initially low interest rate. Do you choose to buy the house now, knowing that your interest rates and payments are likely to double in 5 years or do you wait knowing that the price of houses is likely to double in 5 years? The decision isn't nearly as clear as people are pretending. 5 years ago, I'd be willing to bet that even conservative financial councillors were telling people to buy the house, that this was a relatively safe bet, that even if they couldn't afford the higher payments in 5 years they could sell the house at a profit and be better off than if they just kept renting. Five years ago, people would have been telling you that a home was the safest investment on the market, that averaged over 5 years home prices never dropped. The decision isn't as clear cut as people are pretending. In fact, over the last 20 years I've watched many of my friends and acquaintances overextend themselves to buy their first home and nearly all of them have come out way ahead in the long run. While some people have always lost that kind of gamble, the numbers were always small enough to go largely unnoticed.
The big problem with your reasoning is first that it ignores the fact that this crisis is big enough to impact all home owners (and renters) not just those who made bad decisions. As I mentioned before, the market price of my home in Utah dropped 16% in 9 months despite the fact that I didn't have a sub-prime loan. And second most of the people who are loosing their homes in this crisis didn't make fundamentally worse decisions than 90% of the other Americans who bought houses in major urban areas in the past twenty years. We should bail them (or at least some of them) out because 1st it would hurt most homeowners to let so many houses be repossessed and 2nd most of these people weren't fools.
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quote:Originally posted by The Rabbit: The people who really deserve to take a hit are the executives and board members who've been making multimillion dollar salaries. They are the ones who have been making these decisions and get rewarded for it.
I would agree with that. I guess I assumed that the executives and board members would be the major stock holders. These are the people who I think should be relying on "safety nets" before the rest of us bail them out.
Executives and board members almost always receive part of their compensation in stock but only part. If this is like any of the other big corporate scandals, the executives and board are walking away filthy rich even though their stock is dropping.
Posts: 12591 | Registered: Jan 2000
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quote:And second most of the people who are loosing their homes in this crisis didn't make fundamentally worse decisions than 90% of the other Americans who bought houses in major urban areas in the past twenty years.
I'm not sure that's true. Before say, 1995, it was much harder (that is, it almost would have required fraud) to make decisions as bad as many of the ones leading up to this crisis.
Still, I am in favor of some form of assistance for some homeowners in trouble.
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