Bankruptcy or Bailout? You decide...

[FreaqyFrequency]

That is some of the saddest humor I have ever seen.

People in government need to learn that when government acts irresponsibly, the people do not pay for it.

 

[fenderx55]

That is some of the saddest humor I have ever seen.

People in government need to learn that when government acts irresponsibly, the people do not pay for it.

But it wasn't the government directly. As you can see in the nifty cartoons posted above (those were seriously helpful), this is the fault of i-banks. The government can be blamed insofar as there was little to no regulation of this (at least this is my understanding).

 

[jkritchey]

Well from what I gather: This money is going to bailout Shanghai, London, Australia & Germany. Once this passes (and it will sooner or later) they'll have the money in days and the US will be saddled with the debt Here's a direct quote from a Dem. "Hundreds of billions of dollars are going to bail out Foreign Investors. They know it, they demanded it, and the bill has been carefully written to make sure that can happen." - Brad Sherman , D-California.
The Bill says:
(9) TROUBLED ASSETS.—The term ‘‘troubled assets’’ means—
(A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability;
and (B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.
Note carefully - there is no "Made in the USA" requirement, and nothing prohibits a non-US institution from "selling" a security to a US bank, which then immediately resells it to the TARP. Nor is there any provision to prevent Secretary Paulson from defining any other financial asset as "promoting financial market stability", and while he must notify Congress, they cannot block his purchase.

I don't think this is a good idea.

I'm sorry, but that looks like a smokescreen to me.

 

[bassrique]

But it wasn't the government directly. As you can see in the nifty cartoons posted above (those were seriously helpful), this is the fault of i-banks. The government can be blamed insofar as there was little to no regulation of this (at least this is my understanding).

The government can be blamed for the root of the problem. Through various means, and for the sake of "affordable housing", the government created an artificial lending environment by encouraging and sometimes even forcing lenders to write loans to people with little or no money down, with little or no money for closing costs, with poor employment histories, with poor debt ratios, lousy FICOs....... and so on..... and so on.

It all worked for a long time. People that had no business borrowing 100K+ were happy while the suits were rolling in the dough. Then, like all bubbles, the thing burst.

When this thing finally shakes out, we're going to have to go back to the old lending "rules". You're going to need at the very least 5% down, a healthy FICO, a solid employment history, a decent enough salary to cover the payment and you won't be able to be up to your eyeballs in credit card debt or other financial obligations. ARMs will not be common.

Disturbing the natural order of things over years is what started this.

 

[jkritchey]

Going further back, I think you can look at our Income Tax Policy and the Mortgage Interest Deduction. Because of deductible Mortgage interest, you've never really made it in this country financially unless you own real estate (IMHO). That's one of the reasons people go into a high amount of mortgage debt. Your 600 sf bathroom is deductible!

 

[Fuzzbass]

I'm not a fan of a bailout, but my opinion based on the analyses I've been reading is that doing nothing will likely have far worse consequences for the US economy.

 

[Geddyfleaharris]

I heard on CNN the other day that a journalist asked a person with the Treasurey Department how they came up with the $700 billion figure. The response was that there were no facts or figures to back up the $700 billion; they just wanted to pick a number that was big enough to look like it would help.

Yay! Way to think things out in a logical manner!

 

[fenderx55]

I hate numbers.

 

[hbarcat]

The government can be blamed for the root of the problem. Through various means, and for the sake of "affordable housing", the government created an artificial lending environment by encouraging and sometimes even forcing lenders to write loans to people with little or no money down, with little or no money for closing costs, with poor employment histories, with poor debt ratios, lousy FICOs....... and so on..... and so on.

It all worked for a long time. People that had no business borrowing 100K+ were happy while the suits were rolling in the dough. Then, like all bubbles, the thing burst.

When this thing finally shakes out, we're going to have to go back to the old lending "rules". You're going to need at the very least 5% down, a healthy FICO, a solid employment history, a decent enough salary to cover the payment and you won't be able to be up to your eyeballs in credit card debt or other financial obligations. ARMs will not be common.

Disturbing the natural order of things over years is what started this.

That just about sums it up.


Wiki's take on government's role in this debacle.

http://en.wikipedia.org/wiki/Community_Reinvestment_Act

 

[seventhson]

here's what we can expect from a bailout....

Link Removed

 

[GregC]

The government can be blamed for the root of the problem. Through various means, and for the sake of "affordable housing", the government created an artificial lending environment by encouraging and sometimes even forcing lenders to write loans to people with little or no money down, with little or no money for closing costs, with poor employment histories, with poor debt ratios, lousy FICOs....... and so on..... and so on.

It all worked for a long time. People that had no business borrowing 100K+ were happy while the suits were rolling in the dough. Then, like all bubbles, the thing burst.

When this thing finally shakes out, we're going to have to go back to the old lending "rules". You're going to need at the very least 5% down, a healthy FICO, a solid employment history, a decent enough salary to cover the payment and you won't be able to be up to your eyeballs in credit card debt or other financial obligations. ARMs will not be common.

Disturbing the natural order of things over years is what started this.

I disagree. Oh, I'm sure there was some of that. But a lot of banks CHOSE to make very risky loans to boost their bottom lines, and loan officers wanted to make more in commissions. You'd think they'd know better--but then, the banking industry tends to blow itself up every 15-20 years. (Also note that the same phenomenon is starting to happen in other countries, and each has its own set of regulations or lack thereof.)

Of course, consumers had a role as well, reaching for much more expensive houses than they could really afford and happily signing up for loans without proof of income or taking out interest-only mortgages, or using their houses as credit cards.

Aside from writing dicey mortgages, banks made increasing use of derivatives such as credit default swaps (the regulation of those was greatly loosened by Congress), taking on more leverage to increase their profits. And everybody decided that housing prices only go up.:scowl:

Government (from both sides of the political aisle), businesses and consumers all contributed to this mess, IMO.

 

[seventhson]

Senior Harvard economics lecturer advocates bankruptcy over bailout...

http://www.cnn.com/2008/POLITICS/09/29/miron.bailout/index.html?iref=mpstoryview

write your congressman here

[Invalid or Expired Link Removed]

Tell him/her you are strongly opposed to the bailout.

 

[GregC]

Perhaps.

The problem is that the people who are universally praising the bailout as the only hope for avoiding a catastrphic meltdown are mostly pundits, editors, and economics reporters. I haven't read much positive from serious economists.

Here's a letter from a long list of economists supporting the plan.

http://blogs.wsj.com/economics/2008/10/01/dueling-economists-experts-voice-support-for-bailout-bill/

 

[GregC]

Senior Harvard economics lecturer advocates bankruptcy over bailout...

http://www.cnn.com/2008/POLITICS/09/29/miron.bailout/index.html?iref=mpstoryview

That's the editorial in the OP.

 

[bassrique]

I disagree. Oh, I'm sure there was some of that. But a lot of banks CHOSE to make very risky loans to boost their bottom lines, and loan officers wanted to make more in commissions. You'd think they'd know better--but then, the banking industry tends to blow itself up every 15-20 years. (Also note that the same phenomenon is starting to happen in other countries, and each has its own set of regulations or lack thereof.)

Of course, consumers had a role as well, reaching for much more expensive houses than they could really afford and happily signing up for loans without proof of income or taking out interest-only mortgages, or using their houses as credit cards.

Aside from writing dicey mortgages, banks made increasing use of derivatives such as credit default swaps (the regulation of those was greatly loosened by Congress), taking on more leverage to increase their profits. And everybody decided that housing prices only go up.:scowl:

Government (from both sides of the political aisle), businesses and consumers all contributed to this mess, IMO.

But a lot of banks CHOSE to make very risky loans to boost their bottom lines

If they were lending their own money, these high risk loans would not have happened as much. The government created an atmosphere that was detached from reality.

Again, the government had Fannie and Freddie buying just about any sh-tty loan that could be written, so the marketplace was distorted.

Simply put, few sane businesspeople would lend a substantial amount of money to a person with little or no money down, little or no money for closing costs, poor employment histories and poor debt ratios plus a garbage FICO.

If logical lending practices were followed for the last 20 years, we wouldn't be where we are at today.

 

[jkritchey]

If they were lending their own money, these high risk loans would not have happened as much. The government created an atmosphere that was detached from reality.

Again, the government had Fannie and Freddie buying just about any sh-tty loan that could be written, so the marketplace was distorted.

Simply put, few sane businesspeople would lend a substantial amount of money to a person with little or no money down, little or no money for closing costs, poor employment histories and poor debt ratios plus a garbage FICO.

If logical lending practices were followed for the last 20 years, we wouldn't be where we are at today.

Just to point out that it was the buinesspeople that started the process, not Freddie and Fannie. So, yes, 'sane businesspeople' were lending substantial amounts of money...etc. etc.

There was no intervention, IMHO, because the practice was propping up the economy. Freddie and Fannie got into the game late because they were losing market share, and had goals to meet.

 

[seventhson]

That just about sums it up.

*The Community Reinvestment Act does not & never has:*

1) Required lenders to provide mortgages with no down payment.
2) Changed the traditional loan-to-value requirement from 80% to 120%.
3) Required mortgage lenders & RE agents to use the same corrupt appraisers repeatedly.
4) Required banks to develop easily manipulated automated underwriting systems that emphasize speed at the expense of accuracy to process the most loans possible.
5) Required banks to teach their employees how to game these AU systems to get “iffy” lenders into mortgages.
6) Required S&P, Moody’s, & Fitch to rate securities they had (or could) not analyze as AAA.
7) Required banks to do piggy-back loans: First mortgage plus a HELOC for the down payment.
8) Required lenders to concentrate their efforts in the markets of Phoenix AZ, Las Vegas NV, San Diego CA, & Miami FL; where the biggest decreases in housing are now occurring.
9) Required lenders to not verify credit scores, assets, & income.
10) Required banks & fund managers to load up on hard-to-value, thinly-traded securities.
11) Required banks to make “interest only” loans & “negative amortization” loans.
12) Required that loans be made to anyone without a reasonable expectation that the loan would be paid back.

**All of these measures were taken by brokers/lenders/banks of their own accord.

Not to mention it's been around since 1977 and that there were absolutely no problems with it until asset inflation of the 2000s and the swapping of derivatives.

In the same wiki article, we see this...

In 2008, Traiger and Hinckley, a law firm that counsels financial services entities on CRA compliance, conducted a study of loans made by institutions covered under the CRA. The study found that CRA regulated institutions were less likely to make subprime loans, and when they did the interest rates were lower. CRA banks were also half as likely to resell the loans to other parties.[28]

The true culprit is the Commodities Futures Modernization Act of 2000. There is a clause at the end of the act that states very clearly that credit default swaps are NOT to be regulated. This allowed the packaging of bad paper into mortgage backed securities.