Bacon's Rebellion

Democracy Thrives in Sunlight

MORE NON-THINKING

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by

James A. Bacon
in

Following the “WHAT ARE THEY THINKING” post At 11:58 AM, Groveton commented…

“The problems currently facing the United States will, sometime within in the next 20 years, precipitate a crisis.

Today’s WaPo has a story by David Hilzenrath under the headline “Mortgages With No Money Down Still Available: Fannie, Freddie Programs Fly in Face of Foreclosures.”

I would say sooner rather than later Groveton.

Groveton also asked:

“So, what differentiates a crisis from a national calamity? The willingness and ability to change.”

Too many are in the League of Tiger Riders to admit the need to change.

Further, Tiger Riders expect that if they fail that they will get a Bear S. bailout.

More on Grovetons several contributions to the WHAT ARE THEY THINKING post soon.

EMR

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  1. Rodger Provo Avatar
    Rodger Provo

    EMR and Others:

    The problem facing our country today is that our business culture
    is not about creating new products
    and value for our economy and our
    workforce.

    It is more about how to make money
    off of speculation which created
    the:

    a) savings and loans failures
    b) dot-com bust
    c) housing crisis
    d) now the oil crisis.

    The country is ill served by those
    who pursue such strategies – our
    federal government is failing the
    country by not providing more
    leadership relative to such issues.

  2. Anonymous Avatar
    Anonymous

    Rodger – I agree wholeheartedly. Speculation has become the favored business strategy of too many in the business world. Add Tysons Corner to your list. Neither the Democrats nor the Republicans have the b__s to stand up to them.

    Meanwhile, the debate is how do we raise taxes on everyone else.

    TMT

  3. Anonymous Avatar
    Anonymous

    Wait a minute. The dot com bust?

    How many dot com’s are out there today, functioning successfully, after starting up on venture capital money?

    Are they worth more or less today than all the money ever lost on dot coms?

    Same question for housing. How many people are in houses today, that are still worth far more than they originally cost? Where did the money to build them vome from?

    Speculators.

    OK, so some greedy people got burned. Some innocent people got sucked into othe backdraft. Some people have houses or dotcom stocks that were once worth a lot more – on paper – but they weren’t really for sale, so no loss occurred.

    Sorry, I don’t buy this speculator demonization. These guys provide necessary liquidity to the market. they take huge risks, but they have to be right more often than wrong to stay in business.

    If you think the speculators are making a killing, hey, you can buy copper futures contracts for pennies on the dollar, if you have the b___s.

    Let’s face it, making and consuming things has become a no-no. We have too much of everything, already, and THAT is what causes the “busts” .

    RH

  4. Larry Gross Avatar
    Larry Gross

    I strongly agree with Rodger also.

    I’m not sure what the balance should be between the interests of business and the interests of citizens..

    so folks say they are the same…

    but I think it is pretty clear with the examples that Rodger provided that speculation and predatory practices do not always benefit citizens.

    It burns me up that we bailed out the Savings & Loans and now we’re bailing out Bear Stearns and others.

  5. Rodger Provo Avatar
    Rodger Provo

    RH, TMT, EMR, Larry Gross and Others –

    There is a trend line with dot.com,
    housing and oil stocks that has
    seen money flood those markets
    in hopes of cashing in on a boom
    that did not last, as has taken
    place with the dot-com bust and
    the housing crisis.

    Yesterday, there was testimony on
    the Hill about the current bubble
    in the oil industry values that
    will bust.

    There has been 7,000 houses fall
    into foreclosure in Prince William
    County.

    The region has more homes, retail space and industrial-office space than what it needs because of the
    speculative forces in the market.

    We would be better off if our funds
    were applied to building better
    schools, roads, rail lines, ports,
    new emerging industries and an improved health care system.

  6. E M Risse Avatar
    E M Risse

    Rodger and Larry:

    You will not get any argument here on the points you make.

    TMT:

    Unless there is Fundamentally Different station-area settlement patterns you are right about Tysons Corner too.

    It always comes down to stettlement patterns, they drive Mass OverConsumption more than any other single force in contemporary society.

    Savings and Loan, Energy Consumption, even the Dot Coms.

    Since 1973 “inovation” has made life faster and more open to speculation but not better or safer and citizens are not happier. It is somewhat healthier but only for those near the top of the Ziggurat. In addition, having more people live longer is not the biggest problem facing humans.

    See “A New Metric for Citizen Well Being” at db4.dev.baconsrebellion.com

    EMR

  7. Anonymous Avatar
    Anonymous

    “speculation and predatory practices do not always benefit citizens.”

    OK look at the value of the stock market over the last 100 years. It doesn’t ALWAYS go up. If that’s what you mean, then you are correct.

    Speculation and predatory practices are not intended to benefit citizens, they are intended to benefit the speculators.

    But in the end, those contracts have to be closed out, and they get closed out at the price at which actual goods are delivered. Real goods with real buyers paying what they think are fair prices to get them.

    There would be a lot less goods available without the liquidity provided by speculators, and that benefits citizens, generally, but not always.

    Yes. Bailing out Bear Stearns is Distasteful, but it is done to break up the shck wave and keep the damage from spreading more generally to the citizens. Blame the regulators for that, not the speculators.

    RH

  8. Anonymous Avatar
    Anonymous

    There has been 7,000 houses fall
    into foreclosure in Prince William
    County.

    Are you telling me there are 7000 homes in PW that no one wants?

    No. I didn’t think so.

    I personally know two people who just bought foreclosures, one of them was my tenant. I suppose that now makes her a speculator.

    When a market takes a sudden upward correction we all pat each other on the back and say how smart we are.

    When it goes down we blame the speculators.

    RH

  9. Larry Gross Avatar
    Larry Gross

    (excerpts):

    How HUD Mortgage Policy Fed The Crisis

    Subprime Loans Labeled ‘Affordable’

    In 2004, as regulators warned that subprime lenders were saddling borrowers with mortgages they could not afford, the U.S. Department of Housing and Urban Development helped fuel more of that risky lending.

    For Wall Street, high profits could be made from securities backed by subprime loans. Fannie and Freddie targeted the least-risky loans. Still, their purchases provided more cash for a larger subprime market.

    “That was a huge, huge mistake,” said Patricia McCoy, who teaches securities law at the University of Connecticut. “That just pumped more capital into a very unregulated market that has turned out to be a disaster.”

    “They chose not to put the brakes on this dangerous lending when they could have,” Fishbein said.

    http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626_3.html?hpid=topnews

    sounds a lot like the excuses we heard after the Savings & Loan debacle also.

    We’ve got folks who are using the government to subsidize markets ..so they can create ‘opportunities” to make money… at the expense of those who ultimately are victimized…

    Anytime the government subsidizes something.. this is often the outcome…

  10. Anonymous Avatar
    Anonymous

    So, is it the speculators or the regulators?

    RH

  11. Larry Gross Avatar
    Larry Gross

    It’s the speculators given the job of regulation when the guy they donate money to get elected.

    get it?

    You give money to the candidate.

    He gets elected and gives you the job of regulating the same people as you represent?

    Groveton -this is your job – dang it.

    For EVERY Regulator, we need to have their bio and the last 4 jobs they held…and how much money they donated to campaigns and/or what role they played in the campaign.

    We got a pretty good whiff of this stench when the media started to uncover the “day jobs” of some of McCains campaign staff.

    I’d like to see for BOTH Candidates a complete list of such folks… BEFORE we vote on either.

  12. Anonymous Avatar
    Anonymous

    So what you want is a guarantee that the regulator knows nothing about his job?

    And on the other side of the revolving door, that industry cannot hire anyone that knows the regs?

    RH

  13. Anonymous Avatar
    Anonymous

    “Fannie and Freddie targeted the least-risky loans. Still, their purchases provided more cash for a larger subprime market.”

    I keep trying to tell you, what goes around comes around.

    This sounds a lot like the NOVA road taxes situation. The taxes NOVA residents will pay for the least risky most profitable roads still provide more cash for the larger subprime road market in the rest of the state.

    RH

  14. Anonymous Avatar
    Anonymous

    Let’s be clear.

    Bear Stearns didn’t get bailed out. They got liquidated. Top managers lost jobs. $170 a share went to $2.

    The people that got bailed out wer the ones holding secondary risk positions. This was like triggering a small avalanche to prevent a big one, Starting a backfire to prevent a major breakout.

    Bear Stearns investors got Hammered.

    RH

  15. Larry Gross Avatar
    Larry Gross

    “So what you want is a guarantee that the regulator knows nothing about his job?”

    Nope.

    But what we want is full disclosure of all of his/her previous and EXISTING relationships with the community he is to regulate.

  16. Larry Gross Avatar
    Larry Gross

    let’s DO be CLEAR:

    “The U.S. treasury secretary, Henry Paulson, defended on Sunday the Federal Reserve’s decision to help rescue Bear Stearns, the teetering Wall Street investment bank.”

    The Fed, using a procedure from the Depression era of the 1930s, raced to the aid of Bear Stearns on Friday alongside JPMorgan Chase.

    http://www.iht.com/articles/2008/03/16/business/paulson.php

    facts bro…. facts..

    Bear Stearns investors got rescued from being totally wiped out – which is what they deserved..

    is this your idea of the winners paying the losers?

  17. Anonymous Avatar
    Anonymous

    Regardless of what Paulson said, how do you figure Bear Stearns got rescued?

    Friday night, the Fed tried to rescue Bear Stearns with a loan, but that effort failed. I think your clip was written before the dust settled.

    Bear Sterns got sold, at fire sale prices. But the buyer got indemnified against Bear Sterns losses by the Fed.

    It was therefore, the buyer and the secondary insurors who got bailed out, in the end, not Bear Stearns.

    Bear Sterns stock went from around $170 to around $2. What do you call wiped out? The sale price was about equal to the value of the Bear Stearns office real estate, although it was later negotiated upwards as result of a lawsuit. In this case the winner was the buyer of Bear Stearns and they did pay part of the losers costs, as a result of this suit.

    Bear Sterns investors didn’t deserve to be wiped out, if Bear Stearns did not fully disclose the risk they were undertaking. If you have a leaky basement, you are required to disclose that prior to sale, to prevent assumed property rights from being stolen. But that doesn’t mean the government has an obligation to step in and fix your basement, after the fact.

    The fed used our money to bail out others. Looked at that way this is clearly wrong.

    But, if the fed spent $10 of our money to protect us from $1000 in damages, what then? If that is the case then WE are the winners, and we should gladly pay $10 to the losers to prevent a known and expectedloss of $1000.

    RH

  18. Larry Gross Avatar
    Larry Gross

    why are we at risk for $1000 to start with?

  19. Anonymous Avatar
    Anonymous

    Panic, mostly.
    Greed, quite a bit.
    Fed laxity, some.

    The situation is what it is, how we got here matters not at this point. The fact remains, if you have a foreclosed home on your block, it affects you. Should the government sit on its hand, or do what it can to help – at this point.

    Would it have been better to prevent the problem sooner?

    Maybe, but frankly, I doubt it. A lot of people have lost homes, but a lot more got homes that they wouldn’t have under stricter rules.

    Even the foreclosures are a boon. My long term tenent now has a home of her own, having bought a foreclosure.

    Suppose the rules (on home buying) had been much stricter. More people would be living in rentals, and rentals are owned by investors and speculators. How would that have improved things, lessened greed or risk?

    What the fed did with Bear Stearns was Avalanche control, but it was the buyer of Bear Stearns that got the protection.

    RH

  20. Larry Gross Avatar
    Larry Gross

    I think this is fundamentally the same thing that happened in the Savings and Loan Debacle…

    … when the Fed .. changed it’s rules to say that it would insure more risky fiscal transactions…

    ..the Fanny May evidence is clear.

    they.. being run by the same folks who make money selling mortgages – decided that if more mortgages were available to folks that normally would not qualify for loans – that it would be a good thing…

    and of course the folks that sell mortgages were just fine with it as they make money selling mortgages.

    If the Feds had not insured this – it would never have happened the same way the Savings & Loan thing would not have if the Feds had refused to insure JUMBOS.

    This is the same old story.

    You get the foxes in charge of the henhouse.. and they figure out how to make more money by changing the rules that were meant to keep the government from insuring risky behavior in the first place.

    We would not care about the house on our block being foreclosed in the government was not caught up in it…

    this is what I keep telling you Ray – subsidies are wrong…they lead directly to abuses and bad policies to further protect them as they start to unravel.

  21. Anonymous Avatar
    Anonymous

    Regardless how we got here, this is the current problem to be solved.

    The foreclosure down the street MIGHT be because the owner deliberately bought more home than he can afford.

    He MIGHT be a speculator, and this isn’t even his home.

    But he also might have bought a perfectly reasonable home, for his condition, been sold a bill of goods by his mortgage broker.

    He might have bought a perfectly reasonable home, for his condition, then lost his job as a mortgage broker.

    He might have bought in, using an ARM figuring on a five year assignment to the Pentagon, and plans went south, independent of anything the government did.

    He might have made what would have been a reasonable decsion anytime in the last 15 years, yet managed to make it at the wrong time.

    There are a lot of people in trouble -right now – that normally would have qualified for loans. In some cases we have had changes that meant we needed to change the rules. We have more self-employed people that don’t get a regular paycheck.

    From the standpoint of making enough money, they may not be a risk, but from the standpoint of making it regularly, they would never get a loan. A guy sells christmas trees, but he gets paid, basically, once a year. Under the new rules, he could get a loan.

    Is that risky?

    There are a lot of perfectly good loans out there that got bundled into investment packages. Those packages were bought with leverage, on top of the underlying leverage on the homes. That secondary leverage can fail, spectacularly, irrespective of the true value of the underlying properties.

    I think that part of the problem came not from the people selling mortgages, but the people selling packages of mortgages. Those packages were in high demand (Here is whee the speculators show up).

    Fannie mae protected itself by bundling only the best mortgages, but that still meant that more other, unsubsidized and uninsured money was still available to fire up the housing market – inorder to provide packages of mortgage backed securities, whether or not the mortgages themselves were guaranteed.

    People who might have wanted to move up in a few years, were goaded into moving their plans forward, lest the skyrockeitng prices lock them out.

    Somewhere, underlying all of this, is the effect you point out – Excessive promotion of home ownership through guarantees to fannie mae and tax deductions on interest. I just don’t think that it is both necessary and sufficient to have caused ALL of what happened. There is plenty of balme to go around.

    To simply say they decided that if more mortgages were available to folks that normally would not qualify for loans – that it would be a good thing… is a gross oversimplification. Where were the interest deductions and loan guarantees in the dot com bust?

    I won’t argue that subsidies don’t have problems, but I would stop a long way from saying flatly that they are wrong, or they always lead to bad policies. We have too many examples of subsidies that did what they were supposed to do.

    Incentives do work. And disincentives in the form of taxes or fees also work, but we should recognize them for what they are – negative subsidies. So before we go off and call all subsidies bad……

    After all, we had had the mortgage interest deduction forever: why didn’t this happen before? Deming would tell us that whenever there is a failure, 90% of the time it is the SYSTEM that fails, not one component.

    ——————————-

    Suppose you made rentals subject to the BPOE tax: 20% of the gross, regardless of whether you make money on the rental.

    Rentals would dry up, and it would be a huge boost to the housing market. You think what happens at the end of that scenario would be any different?

    ——————————

    In the meantime, however it got this way, we still have to deal with what we have.

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