[awm]

As to who "should" pay for this problem... there seem to be four potential victims...

(1) The homeowners. If I've paid off some portion of my mortgage and then get foreclosed on, I've lost some equity in the house and thus lost money.
(2) The banks. If they're forced to modify the terms of the loan to be more favorable, or if they foreclose but can't recoup the value of the loan by selling the house.
(3) Investors/insurers. In many cases the investors have bought housing-backed securities, which may now be worthless due to the problems above.
(4) Taxpayers. If the federal government decides to bail out some group above, either by raising taxes or (more likely) increasing the deficit.

In my view the issue is really who took the risks, and who was potentially deceived. For example, suppose I'm a home owner. It's possible that I bought some ridiculous house that I couldn't afford (hoping that the housing prices would continue to rise). If I did this knowingly, then I think I have to bear the cost when my investment goes bad. However, it's also possible that my bank tricked me into such a loan by giving deceptive statistics, in which case the bank deserves at least a share of the costs. When the banks sold the mortgage-securities, someone should've rated the risk... generally there are companies that do this, and a lot of them did a very bad job... perhaps those companies should pay some of the cost. The issue is that a lot of this can only be sorted out in court (who negotiated in bad faith?) and in many cases the person who wins the court case is the one with the most money and/or political leverage, and not the one who actually "got screwed." It also tends to take a long time.

For this reason, and because the economy as a whole can suffer from this entire mess, it might be necessary for the federal government to step in. I'd hope this is done as much as possible in the form of loans (so that the government might get much of its money back) and/or in the form of encouraging banks to modify loan agreements rather than foreclose. Fortunately we've been doing quite a bit of that.

[kenberg]

Modifying loans: How is that going, and why, since I understand it is not very prevalent, not going better?

Simple minded me: suppose a mortgage is for 400K. When I speak of the bank recovering 250K on foreclosure I am figuring costs, including time since in this sort of business environment time really is money. It would seem likely that a negotiated short sale, while not bringing in 400, could well do better than 250. Same for a negotiated reduction in the amount.

Less simple minded: Yes, I know about the general concept of moral hazard.

Still:

It's been a real botch up. In the early stages I would hear on NPR of this poor soul who innocently bough a 500K house on a trucker's salary, didn't understand that adjustable mortgage meant adjustable, and now is losing his house. He should know better. Sure as hell the bank should have known better. But other times some guy made a completely reasonable purchase and now finds himself taking a new job at lesser salary. This guy I want to help.

But it's tough to sort all of this out and I would hope a little realism would help. Starting point: There is no way in hell the bank is getting its 400K back. So let's make a deal.

In terms of "should", I claim innocence. I didn't borrow it, I didn't lend it. But that is not the whole story. It's a national catastrophe and we need to somehow deal with it.

[mike777]

I really hate using the word victim here.

As for who should take the loss, easy the owners should bear the hit.
-----------

If you want to view the employee or taxpayer or customer or suppliers as the same as owners that is another discussion.

---


The problem Bp and many other companies have is that they lose focus(easy to do) not that companies focus on the bottom line.

[kenberg]

Sorting out who might be victims, who might be charlatans,etc always depend at least in part on worldviews. It is seldom my first choice for approaching a problem. But "should" is also a tricky word, again depending on worldviews.

If, and it's a big if, consequences of actions can be foreseen, then that often trumps other considerations. The bail-outs are a case in point. Anger at large bonuses to execs at companies receiving large bail-outs is of course a natural reaction. Fair enough. And there is a lot to criticize about policies that led to the need for bail-outs. Still, we are where we are and we must decide to what extent the government should intervene as the foreclosure mess works its way through. My use of "should" here is intended as "What will be the consequences of intervention or non-intervention?" I start with my number X because it seems to me to be important. Can the system withstand a loss of this magnitude without help? If it can, then doing nothing is apt to be best. Someone loses a house to foreclosure, someone gains a house at a more affordable price. A bank folds, another opens. If that's the way it would go then by all means let nature take its course. It is not at all clear to me that the consequences of doing nothing will be only to the directly affected parties.

This "what are the broad consequences" approach is important to me. I fully approve of helping the unfortunate whether the misfortune is a hurricane or a lost job. But in the discussion of bail-outs I think that neither sympathy nor anger is the right starting point. Consequences are the basic issue. Your professional life, am I right about this(?), gives you a much closer day-to-day involvement in banking. In your view, what would be the consequences of no bail-outs, no government help in writing down loans, in short, if the government minds its own business and lets the chips fall where they may? If it is viable, it may well be best. Is it really viable?

[mike777]

Banks are heavily heavily regulated. Perhapsthat is why so manylawyers run banks. See Bank of America today....citi, yesterday...etc. Despite all that government regulation...chaos happened.


Banks were bailed out by Bush and by all politicians because they were told the banking system was going to crash and the world would end....to put it in harsh words.


They had to make a decision in real time with imperfect information. 2 years later the debate goes on...was it the best or at least semibest decision to make....

[cloa513]

mike777, on 2010-October-29, 20:00, said:

Banks are heavily heavily regulated. Perhapsthat is why so manylawyers run banks. See Bank of America today....citi, yesterday...etc. Despite all that government regulation...chaos happened.


Banks were bailed out by Bush and by all politicians because they were told the banking system was going to crash and the world would end....to put it in harsh words.


They had to make a decision in real time with imperfect information. 2 years later the debate goes on...was it the best or at least semibest decision to make....

Banks are barely regulated- maybe a lot of laws, rules but not applied. Why do you think they (America) have got away with massive poor assessments of loans and then poor consideration of foreclosures. Rules are worth anything without enforcement.

[mike777]

you raise a great point.




That is kind of the bottom line again....if I own a bank and it makes tons of bad loans....well i guess I should not be a VICTIM, you need to bail me out.

It is not my fault...blame the government for lack of enforcement.

[kenberg]

OK, but let me try a different bottom line:

There are more than a few people standing for election on Tuesday on a platform that the bail-outs were a horrible mistake and certainly they would not have voted for them and certainly they would not support any further action to rescue banks.
You see this as a reason to vote for this candidate?

My own view: The bail-outs, as near as I can understand it, were needed and were as successful as we could expect in a situation that needed action pretty much immediately. With our now enlarged time-frame I expect better planning in the future but my guess is there needs to be further bailing. I may be un- happy about it, but, to use my favorite quote from W.C. Fields, sometimes you just have to take the bull by the tail and face the situation.

[mike777]

If option one is the world is going to end, food riots, society breaks down worldwide or option two you flood the banking system with money....well at least we have a choice.

[PassedOut]

kenberg, on 2010-October-30, 05:24, said:

There are more than a few people standing for election on Tuesday on a platform that the bail-outs were a horrible mistake and certainly they would not have voted for them and certainly they would not support any further action to rescue banks.
You see this as a reason to vote for this candidate?

My own view: The bail-outs, as near as I can understand it, were needed and were as successful as we could expect in a situation that needed action pretty much immediately. With our now enlarged time-frame I expect better planning in the future but my guess is there needs to be further bailing. I may be unhappy about it, but, to use my favorite quote from W.C. Fields, sometimes you just have to take the bull by the tail and face the situation.

Paul Krugman discussed the effect of debt on job creation yesterday in the NYT: Mugged by the Moralizers

Quote

The key thing to bear in mind is that for the world as a whole, spending equals income. If one group of people — those with excessive debts — is forced to cut spending to pay down its debts, one of two things must happen: either someone else must spend more, or world income will fall.

Yet those parts of the private sector not burdened by high levels of debt see little reason to increase spending. Corporations are flush with cash — but why expand when so much of the capacity they already have is sitting idle? Consumers who didn’t overborrow can get loans at low rates — but that incentive to spend is more than outweighed by worries about a weak job market. Nobody in the private sector is willing to fill the hole created by the debt overhang.

So what should we be doing? First, governments should be spending while the private sector won’t, so that debtors can pay down their debts without perpetuating a global slump. Second, governments should be promoting widespread debt relief: reducing obligations to levels the debtors can handle is the fastest way to eliminate that debt overhang.

We clearly need to solve our jobs problem, but I don't hear many candidates discussing how they plan to accomplish this in a clearly stated, specific way. Must be that only simplistic sound bytes get votes these days.

[mgoetze]

Right, governments should spend more money, because they clearly don't belong to that group with excessive debt. After all, they can always print more money! Isn't it wonderful!

...or maybe Mr. Krugman's "sound byte" is also a bit simplistic.

[Gerben42]

Quote

there seem to be four potential victims...

(1) The homeowners. If I've paid off some portion of my mortgage and then get foreclosed on, I've lost some equity in the house and thus lost money.
(2) The banks. If they're forced to modify the terms of the loan to be more favorable, or if they foreclose but can't recoup the value of the loan by selling the house.
(3) Investors/insurers. In many cases the investors have bought housing-backed securities, which may now be worthless due to the problems above.
(4) Taxpayers. If the federal government decides to bail out some group above, either by raising taxes or (more likely) increasing the deficit.

My view.

1. The homeowners are not the victims. They were part of the problem as they bought a house they couldn't afford. Okay they were told they could afford it, and sure that's why they might feel like victims, but there's nothing wrong by thinking for yourself. There seems to be a difference that Americans are more likely to pay for things on credit than Europeans do. Perhaps more people should go for getting the money togehter first, then spending it. Sorry if this offends you but that's how I feel.

2. The banks. They are really not the victims. They sold mortgages to people who couldn't pay them, yet included in their greed possible gains in property value. In most European countries, say you borrow $200,000 to finance a $250,000 property. Then the loan defaults and the property gets sold for only $150,000. Now the debtor still owes the bank $50,000! Apparently US banks voluntarily let this part go to take part in property value increase. Bad idea.

3. They were victims, as they got sold stuff that had good ratings but shouldn't have. In fact they were tricked by the rating agencies.

4. They were really the biggest victims. They wanted no part in all of this yet have to pay.

[mgoetze]

Gerben42, on 2010-November-01, 11:08, said:

2. The banks. They are really not the victims. They sold mortgages to people who couldn't pay them, yet included in their greed possible gains in property value. In most European countries, say you borrow $200,000 to finance a $250,000 property. Then the loan defaults and the property gets sold for only $150,000. Now the debtor still owes the bank $50,000! Apparently US banks voluntarily let this part go to take part in property value increase. Bad idea.

No, that's due to US law. So the taxpayers are obviously not the victims because they elected the government which made this law.

Gerben42, on 2010-November-01, 11:08, said:

3. They were victims, as they got sold stuff that had good ratings but shouldn't have. In fact they were tricked by the rating agencies.

So you're saying you expect a normal individual with no education in finance (I'm afraid that's a worldwide norm) to think for themselves rather than believe the people telling them they can afford their debts, but professional institutional investors with in-house risk analysts get to rely on what the rating agencies are telling them? Come on, you can't be serious!

[PassedOut]

mgoetze, on 2010-November-01, 11:03, said:

Right, governments should spend more money, because they clearly don't belong to that group with excessive debt. After all, they can always print more money! Isn't it wonderful!

...or maybe Mr. Krugman's "sound byte" is also a bit simplistic.

Government debt should indeed be reduced during good times, as Professor Krugman has often noted. That was done most recently during the Clinton years, over the unanimous opposition of Clinton's opponents. An important reason for chopping down the federal debt is to give freer rein to government spending during bad times like these. But, with two unpaid-for wars, a large (previously) unfunded new drug entitlement, and poorly thought out tax cuts, that was not done during the Bush years.

The deficit from the first Obama fiscal year was less than that from the last Bush fiscal year, and Obama has taken strong measures to reduce the projected deficit in the future. However, Obama's deficit reduction at this point works against job creation, so the tension between those goals must be resolved. That's what I'd like to see candidates, not just Professor Krugman, discuss.

It's not just the Bush tax cuts that are due to expire. One-third of the Obama stimulus was in tax cuts that are also due to expire next year. Like all responsible voters, I would like to see every one of those tax cuts expire to chop away at the federal debt. But the question is how to do that without also depressing job growth. I'd like to see one honest politician explain that.

[Gerben42]

Quote

So you're saying you expect a normal individual with no education in finance (I'm afraid that's a worldwide norm) to think for themselves rather than believe the people telling them they can afford their debts, but professional institutional investors with in-house risk analysts get to rely on what the rating agencies are telling them? Come on, you can't be serious!

With the investors I mean the normal individual who lost their money by investing their pension in some fund that was rated AAA+++ super duper by a rating agency that hadn't disappointed anyone for decades, but who had no realistic chance of checking what was in the package. If you are a professional investor and you burnt your hands, better buy a good lotion as you are not getting any from me.
On the other hand, if you want to by a house while on a rather low income, you can imagine missing payments is a real danger.

[kenberg]

Recall the old adage:

There's no free rain. Ah, now rein.


I will attempt a more serious reply later.

[PassedOut]

kenberg, on 2010-November-01, 12:27, said:

Recall the old adage:
There's no free rain.
I will attempt a more serious reply later.

A good editor is always appreciated!

[kenberg]

I imagine that the home buyers who got burned span a wide length of responsibility. There will always be folks who truly have unexpected major misfortunes and others who simply can't seem to grasp, or make sure that they do not grasp, the concept of not spending more than you have. It's easy to identify extreme cases, in the middle it's tougher.

I was listening again today about how consumers just are not spending. A lot of folks who still have their heads above water look around at others and have a "There but for the grace" moment. They are now thinking maybe they do not really need that second or third, or even first, flat screen tv. They may not be relapsing to enthusiastic buyer mode anytime soon. I'm thinking that maybe businesses that make things that people actually need will thrive in the recovery, others may not do so well.

Of course this may all just be my misunderstanding. Recently in the Washington Post Charles Murray explained, http://www.washingto...0102202873.html, that since I do not follow NASCAR I am hopelessly out of touch with real people. Real people such as himself, I suppose.

[blackshoe]

PassedOut, on 2010-November-01, 12:00, said:

I'd like to see one honest politician explain that.

Heh. I'd like to see one honest politician.

[mike777]

blackshoe, on 2010-November-01, 19:15, said:

Heh. I'd like to see one honest politician.

I am from Chicago.....so I could care less about an honest politician or one that never lies.


Lets get an effective one that can focus on a climate to create private jobs.


I aint looking for a saint.