Like so many others, I am groping in the dark to some degree on the financial mess and the proposed bailout. The unknown variable, really, is how much letting those who acted wrongly suffer the consequences of their actions will affect those who did not act wrongly. In other words, if we let the banks crash because they chose poorly, how badly will it hurt those who did not make poor decisions? Because seeing the wicked punished is emotionally satisfying and it might deter such foolishness in the future. But, if that means that the non-wicked end up losing jobs, houses, the ability to feed their children, etc., it simply isn’t worth the cost.
I don’t think I agree with the editorial in the Evansville Courier Press which seems to base its objection to the recent bailout proposal on an almost dogmatic faith in the “free market.” I put “free market” in scare quotes, because, though it’s a term I and others use quite a bit, I’m not sure of its precise definition. Is government intervention permissible in a “free market” in the form of courts and police being used to enforce contracts? If so, what other forms of government intervention are permissible in the market such that it still remains “free?” Regulation of currency? Laws permitting individuals to escape liability through use of the corporate form? Laws permitting individuals and corporations to escape liability through bankruptcy?
Whatever the precise parameters of the free market, I am of the opinion that it is a tool for us to use, not a God to be worshiped. As folks often say of our Constitution: It’s not a suicide pact. Our Founders designed the Constitution with a system of checks and balances that have done a remarkable job of keeping the system confined within certain parameters, preventing the energy of the system from moving to one extreme or another. Similarly, I think we benefit when the energies of the market are prevented from moving to one extreme or another. Allowing the market to put us through a series of booms and crashes doesn’t strike me as making the best use out of this great engine.
The market is a good tool for allocating resources of goods, services, and labor to those areas where they are most useful. I think that harnessing the energies of this tool requires some constraints — engines need to be constrained to generate and regulate the pressure necessary to move the pistons most efficiently.
At this point, I’m simply putting forth some general principles. But, I think those principles are sound enough to at least make us skeptical when our representatives or opinion makers start edging toward slavish devotion to the market and “free market principles” rather than recognizing that the market is for our benefit, not vice versa. There are many potential entirely pragmatic reasons to oppose the bailout: it may do more harm than good; it cost’s more than it’s worth; etc. But let’s not regard the market as somehow sacrosanct.
‘Free market’ is always assumed to include any gimmick that enhances profit and excludes anything that raises salaries or gives benefits.
‘Free market’ needs cheap labor, big targeted tax cuts at the top end,and if the ‘free market’moves off-shore for cheap labor it’s only because they were forced to do so by ‘liberal’ pressure at home.
‘Free market’ never has had a mandate other than profitability,and there is no mandate or even suggestion as to where the produced wealth goes.
So a pragmatic approach,such as the one outlined above, is what would effectively return this country back to traditional Americian values .We need to think on our feet instead of demogoguing belief.
Andrea Mitchell gave us account today on ‘Morning Joe'(MSNBC)of Newt Gingrich railing againt the bailout on the House floor because it was pure ‘socialism'(only reason given).She also added that Obama was at a dinner Saturday night with the Black Caucus but the entire Caucus subsequently voted against the bailout( and why didn’t Obama have influence on their vote? Assuming Black on Black influence..).
Fox news is currently on a vendetta against ACORN( a voter registering advocacy group for mainly minorties) blaming poor people for tanking the economy by siphoning off too much money for risky mortages.They see ACORN as a liberal conspiracy,and we should expect more liberal-type corruption.
There seem to be only two official working points of view: the liberal one and the conservative one,and it seems to me that it all dates back to about the Newt Gingrich era.We’ve all been more partisan ever since.
This blog allows pretty much everyone to say what they want,and for that we should all be thankful.
I don’t understand how any proposed fix or do-nothing plan can now help the homeowner/innocents. If market value for homes continue to spiral down – as will be the case regardless of whether the Fed buys the bad debt at who knows what ‘yet to be determine value’ OR follows through with a no-nothing approach – any homeowner with equity built-up (the innocents) with lose big time as home market values continue down. At this point, isn’t the issue the basic supply v demand problem?
Note to Lou…the Black Caucus did not vote in a bloc. They were split pretty much down the middle. Everyone is looking for someone to blame for their side not prevailing. And the cable news people are the worst at stirring the pot for ratings.
The ones that I get a kick out of are the financial wizards on the business networks. They are all ranting about the end of the world as we know it. Then when these geniuses actually interview Wall Street investors who really know something, they are matter-of-fact about it. The market goes up, the market goes down. Percentage-wise yesterday was not as bad as 17 other declines in history. Was it bad? Yes. Will it rebound? Of course. Smart investors know they can make a killing off these cycles.
Oh and I called my Main Street Banker this morning about a car loan. No prob. That is what they do. My ATM card seems to be working. My deposits up to $100K are still insured. I am not sure about my credit card as I have a little liquididty probelm of my own.
I am concerned that I saw a fierce bee and feverish bird in the garden this morning.
Tom,
Yes, a couple black Congressmen were interviewed who voted for the bailout.But I’ve always been confused whether the Black Caucus includes every elected legislator just because they’re black, or if it is an invitation-only type membership.
I’d like to see more attention paid to a couple of questions:
1. Since a big part of this seems to be Congress jacking around with mortgage underwriting standards for political purposes for at least 30 years (with the noblest of intentions, of course – pity how it worked out) – are they planning to stop doing that?
2. What the heck is up with GSE’s (government sponsored entities) making political contributions at all, let alone to politicians who are supposed to be exercising oversight of them?
The black caucus members that I saw interviewed said that the lack of bankruptcy protection included was what caused them to vote no – they felt it was crucial for protecting “main street.”
RE: Causation seems to be Congress jacking around with mortgage underwriting standards — I think the jury’s out on that question.
Again, I’m not pretending to be an expert and it depends which sort of jacking around you’re referring to. I have seen complaints, mostly in the right wing blogosphere, about loans going to shiftless poor people. That seemed to go along with the writers’ preferred ideology a little too neatly and, therefore, raises my suspicions about its accuracy.
Adjustable Rate Mortgages; inaccurate appraisals; unfounded assumptions about future property value increases; unchecked real estate development and speculation; and bundling mortgages into opaque, poorly understood, and poorly regulated financial instruments all seemed to mesh together to add to this toxic mix.
We have gotten what we deserved.
For over a year now, Americans have been “hanging out” just waiting for GWB’s term to end, under the assumption that the war is lousy, but that come January of 2009, the new president would, through some miracle, fix all that is wrong and life would be good, a chicken in every pot and life would be beautiful. Possibly we would all lose ten pounds overnight.
This is what we get for complacency.
Doug – maybe this is the academic in me, but I cannot find it in myself to afix all that much blame (some, not a lot) to the “shiftless poor people” with silly mortgages. No one held a gun to the heads of the bankers. They gave the loans. Naturally, none of the bankers will suffer the consequences.
Yeah, I’m pretty sure there was no “jacking around” that said:
Lenders shall not verify the income of those they lend to.
Lenders will not verify the assets of those they lend to.
The USA hereby declares that all home values will increase at 5% per year.
Those are the bad mistakes these places made, and the government had nothing to do with it. They didn’t have enough regulation to prevent them from making those mistakes, so they should not be bailing them out from making those mistakes.
lemming –
I get the impression that some pretty strong regulatory ‘guns’ were held to the heads of mortgage lenders.
These were along the lines of:
“Well, if you insist on your own evaluation of lending risk, I guess we can’t approve any of those mergers or acquisitions you want to do.”
“Oh, and we’re really listening hard to complaints against you – especially from people who want you to fund their sub-prime lending activities, from which the complainers will make some big bucks as well as political points.”
“On the bright side, we’ve got these neat GSE’s where you can dump the risky loans – and we won’t admit the public is on the hook to make it good if anything bad happens.”
“So, do you want to board the gravy train, or spend your life dealing with hostile regulators? It’s up to you, of course…”
A major problem has been that banks sell their mortgages, rather than keeping them in-house. Ever call your bank for a question about your mortgage? They’ll tell you to call Everhome, or whoever else they sold it to.
So, in the past, a bank had an interest in making sure it was making smart loans.
Once they started selling the mortgages and collecting their fee and ridding themselves of the liability, standards loosened.
I find all this black/white talk interesting. most of the houses I see for sale, or foreclosure listings, are nicer houses than the one I own. Everyone had to have their McMansion in the former corn field on the edge of town (the one that looks huge until you turn the corner and discover what you thought was the “East Wing” was a garage with friggin’ curtains in the windows). Everyone needed the two-story windows in the entry hall, the professional-grade refrigerator, etc. And we could all have it, with no money down. Woo hoo.
All this talk about ACORN and the black caucus cracks me up. I wish someone would actually quantify it, but I still would guess that most of the bad money is white people who got in over their heads. Look at places like the Inland Empire area of California where whole communities of homes were built and have never been occupied. Each one of those homes ends up being a quarter of a million dollars of bad paper for some bank. Compare to the inner city, where you can find a fixer-upper for under forty grand. Minorities are, by nature, less in number, and their homes are cheaper.
A lot of the white folks bought $200,000 houses, saw them “appreciate” by $100,000, and cashed out that “equity”. So then they owe $300,000 but of course they already spent the $100k they cashed out, and no one’s buying. So the bank eats it.
There were plenty of people buying homes in the last two decades using traditional mortgage financing. You know, – real cash down payments, adequate income levels, reliable credit histories — that will lose real equity (not teh “equityâ€) they have invested in their reasonably sized homes. That will happen because there is an over-supply of homes and a huge under-supply of qualified buyers forcing home prices below purchase price.
Income inequality bites, lack of health-care reform bites, decades of policy that serve only big business and the WEALTHY bites, deregulation bites …
If you lose real equity in your home, it’s a bad thing. But presumably you’re using that home to live in. If you need to live somewhere else, you can sell at deflated prices and buy elsewhere at prices that are also deflated. It’s bad for you if you decide that now is when you would like to cash out and live in an apartment. It’s also bad if you want to borrow against the value of the home. But otherwise, drops in home prices most adversely affect those who were flipping them, or bought beyond their means.
I think there are types of mortgages which adjust their terms based on the reduction of value in the home price. But, yeah, if you’ve got a 30-year fixed on a home you’re going to live in; to some extent, you’re insulated on that end. (No help for you if your job disappears or people have to pay you in chickens or whatever.)
One potential annoyance is that the mortgage insurance will potentially hang around a little longer since its elimination hinges on percentage of the loan to the total assessed value of the home. Incidentally, anyone know how payments from PMI policies playing into this whole thing?
I would guess PMI issuers probably don’t have enough cash on hand to cover the policies they sold.
Share price for the PMI Group was $50/share in the middle of last year. Yesterday you could have picked up a share for $1.20. Within a few hours you could have sold that share for $3.35. Just like putting a big chunk o’ cash on black and spinning the wheel.
No happiness in the mortgage insurance business.
Right, true equity isn’t lost until the property is sold or lost… until then, it’s just an unrealized loss. However, your re-purchasing scenario would only be accurate if the value of the new house you purchase elsewhere was deflated at the same rate as the value of the old house you sell. Many different situations could keep that ideal from happening.
Yes, however the same relative issues (location, supply vs. demand) would also be in effect during a strong market, more or less.
PMI is for suckers. Nowadays they give you a second loan for the 20% down payment (at a higher interest rate, of course) so that you don’t have to pay the PMI required only when you borrow more than 80%. Of course this just adds to the amount of ‘negative equity’ in the house. But that doesn’t matter because housing values go up 10% a year. Right?