Re: The Simple Solution to the Whole Mortgage/Housing Mess

On Dec 30, 6:26 am, Alan Lichtenstein <a...@xxxxxxxxx> wrote:
mg wrote:
On Dec 29, 1:18 pm, Alan Lichtenstein <a...@xxxxxxxxx> wrote:

Islander wrote:

mg wrote:

On Dec 29, 12:38 am, El Castor <No_...@xxxxxxxx> wrote:

On Sun, 28 Dec 2008 18:40:26 -0800 (PST), mg <mgkel...@xxxxxxxxx>
wrote:

On Dec 28, 2:20 pm, El Castor <No_...@xxxxxxxx> wrote:

On Sun, 28 Dec 2008 08:56:36 -0800 (PST), mg <mgkel...@xxxxxxxxx>
wrote:

On Dec 27, 9:48 pm, El Castor <No_...@xxxxxxxx> wrote:

On Tue, 23 Dec 2008 18:59:32 -0800 (PST), mg <mgkel...@xxxxxxxxx>
wrote:

It occurs to me that for months now all we've been hearing about is
one scheme after the other to fix the mortgage mess. How about
if the
taxpayers buy the bad loans? How about if the taxpayers bail out
this
company or that company? Between the Federal Reserve and the
Treasury
Department, I think I've heard numbers of about $3 trillion
spent so
far.
The only idea you don't hear on TV is the walk-away idea. From
what I
gather, all people really need to do is walk away from the
house. It
would undoubtedly be a good idea to contact a lawyer and, of
course,
contact the current owner of the mortgage before you go, but
basically
all they have to do is walk away. Right? Even better yet, the
homeowners could form an organization and establish a Walk-Away
Week.
That would give lenders some incentive to change the terms of the
mortgages if they wanted to.
There would obviously be a lot of banks go bankrupt, but what the
hell, that's what businesses are supposed to do when they take
risks
and roll the dice. Then, of course, when the banks go bankrupt, the
government could take over the bank get it running normally
again and
sell it by issuing stock, etc., and perhaps make a big profit in
the
process.
There's no doubt that the irresponsible bankers would quickly point
out the importance of homeowners to act responsibly. I imagine
some of
them would even conjure up a morality argument. The reality,
though,
is that our economy operates in a capitalistic, free-enterprise
system
and not a system that requires morality to make it work. If
companies
and individuals were required to operate based on someone's else's
idea of morality, we would have all gone bankrupt a long time ago.
It is true that when a person walks away from a mortgage they get a
black mark on their credit rating. However, that just means you
need
to save up more money before you buy your next house and besides
with
a lot of people doing it, I wouldn't be surprised if lots of
lenders
might forgive that black mark pretty quickly, anyway.

You think they aren't walking away right now? That is exactly what's
happening. If you owed $400,000 on a $275,000 house, capable or not,
would you be making the payments? In California, and I suppose in
most
other states, a purchase money loan is made without recourse against
the borrower. The house is the collateral. The owner can't be sued.
All they have to lose is their credit rating.

So, we keep going back to the question of why we couldn't let the
relatively few insolvent banks, and AIG, for instance, go bankrupt
and
replace them with something else, if necessary. I don't think there
are very many people who really understand what happened with this
bailout. I certainly don't, but I keep thinking we might have been
taken in by one of the biggest scams in history.

You could be right, although I doubt it. You probably think the Big 3
bailout was the greatest thing since sliced bread. Right? As Obama
would say, knowing whether you are right or wrong is probably out of
your pay grade, and mine too.

I oppose all of the bailouts, but when you are being blackmailed what
do you do?

I'm humble enough to admit that I just don't know. In 1930 the
government responded to the impending depression with the Smoot Hawley
Tariff Act and a whopping tax increase on the rich. What do you think?
Did that do the trick? I guess we won't know about the bailouts until
it's time for hindsight, which as we all know is 20/20.

The problem I see is that Congress (and the public) never get a
multiple choice option, like plan A, plan B, or plan C, for example.
It's always a choice between do it my way and do it now or it's
Armageddon. In the case of the bank bailouts, I don't think there's
any doubt the government had to pump liquidity into the system and
provide a stimulus, but was there more than one way to do it? Paulson
basically submitted a 2-page proposal, as I recall, which said give me
a blank check and Congress did.

It was the same situation with Social Security in which we were told
that we have to switch to private accounts or it was Armageddon. In
that case, the public rejected the argument.

Iraq was basically the same thing. The initial authorization required
a blank check and when our troops were poised close to the Iraq
border, we were told, as I recall, that we had to invade now before
summer arrived or it would be to hot and to late. Congress and the
American people were never given the the plan C option which was to
wait and let the UN inspectors finish their job.

I tend to agree and am sensing an increasing amount of frustration.  I'm
certainly feeling frustration at the inability to explain the financial
crisis in terms that the average person can understand.  I suspect
intentional obfuscation.

Islander, the problem is relatively simple if one has some background
information.  if one doesn't then one can't possibly understand the
nature of the problem.  It's like trying to explain an abstract
scientific theory in simple terms.  It just can't be done, because the
nature of the beast is not simple.  I've explained the surface
manifestation of the problem in simple terms, even using a legitimate
analogy for you.  When one delves more deeply into the problem, other
variables become evident, which make the underlying nature of the
problem beyond the knowledge of the average citizen, so it becomes complex.

There's no obfuscation.  Nothing I've read or heard smacks of any
obfuscation or intent to obfuscate on the part of the Government.  You
properly point out the deficiencies in the legislation, but we all took
Paulson at his word, on which he has now backtracked.  Hopefully Obama's
people will put the TARP back on tract.  The nature of the problem,
however, is clear for those who have a modicum of understanding of the
systemic nature of the system.  Even Obama's people don't dispute the
nature.  For others, it is indeed beyond their ken to understand.
Unfortunately, that's the way it is.

Paulson got away with it because of the timing - exactly two weeks
before the election.  No time allowed for careful consideration.

What Paulson's motivation may have been is unknown.  He may very well
have been looking out for the interests of the banks first.  He may even
have been looking out and directing the TARP so that the system moves in
the direction which he believes( whatever that may be ) it should be
structured.  Or he may actually have thought that what he's doing is
indeed best.  We don't know.  But it really doesn't matter; the effect
is the same.

Regardless, the consensus of thought is that markets will begin to
improve by the end of the first quarter and second quarter, depending on
who you listen to, and the economy to begin to pick up at the end of
2009, when the credit resolutions trickle down through the economy to
Joe Sixpack.  In the end, we may wind up thanking that we had a Ben
Bernacke.  That remains to be seen.

In regards to the $350 billion given to Paulson for the banks, my
understanding was that the money was going to be used to buy toxic
assets. That was a terrible idea, I think.

Actually, no.  The fact that these toxic assets are still on banks'
balance sheets is what's clogging the financial system now, because the
reason for failure to lend still exists now as it has for the past year.
  The banks used the money to effectively acquire additional assets.
Had the money been used to purchase the toxic assets, the financial
system would be beginning to function again, instead of the projected
end of the first quarter, as is predicted now.

Now, Paulson likely measured the purchase of toxic assets against
allowing certain firms to go bankrupt and likely decided the removal of
toxic assets could wait.  I don't know.

  Europe, responded to the

crises with another approach, however. They bought equity in the
banks. It was at that point, I believe (not sure) that Paulson
switched his plan to do the same thing. If I'm not mistaken Paulson
bought preferred stock in the more stable financial companies. I'm not
sure if they bought common stock or preferred stock in Europe. Anyway,
if that's the case and Paulson bought stock in the companies, there's
a very good chance, the public will eventually get the money back,
maybe even make a profit.

That's exactly what the government did with AIG, and what it proposed as
collateral for the GM loan.  Regardless, if the problem is the unknown
value of the assets and that uncertainty is preventing loans, then the
only way to remove that uncertainty is to remove the asset.  What Europe
did cannot be used as a model, because their banks weren't as exposed as
ours.

The really big money, however, is evidently being spent by the Federal
Reserve. From what I've read their "balance ***" is getting close to
$3 trillion and I have read estimates that it could go to $6 trillion.
I read somewhere that it's even possible that it could go to $10
trillion. To put that amount in perspective, that is approximately
equal to the total national debt that this country has accumulated in
it's 232 years of existence. To put it another way, the auto bailout
of about $18 billion is only about two tenths of one percent of that
amount.

The FED is gambling that by printing money it can stop the deflation and
prevent another depression.  How they intend to dry up the excess money
supply when the economy improves, I don't believe they have a clue.
IMHO, they've traded one problem for another, or rather deferred one
problem into another.

My obvious questions are how much of all those trillions being spent
by the Fed is printed money or the "equivalent" of printed money and
what exactly are they doing with it and will we get it back?

-> Those are good questions, which I've also asked above.  My feeling
is
-> that we ought to take our medicine NOW, and move the economy to
-> returning manufacturing here NOW and then let the economy take care
of
-> itself.

I tend to agree. I'm afraid the cure might be worse than the disease.

I also wonder if we shouldn't be "thinking outside the box". The
following isn't meant to be an actual proposal, just an example of
thinking outside the box, but suppose we gave every household in the
U.S. $30,000 from the government. There might be no restrictions on
the money. Or perhaps, they might be required to see an independent
credit counselor before they spent the money. The restrictions could
depend upon an objective study that considers what's best for the
individual consumer and the economy. That would cost the government
about $3 trillion dollars. Or, say for instance, they did it as a loan
at some low interest rate, with a deferred payment. There are probably
a lot of different possibilities that could involve getting lots of
money directly to the consumer and skipping the middle man at a
smaller cost than what we are paying.



.