<p>It’s an open question - politically, rationally, etc. - how we should deal with “too big to fail” institutions. Left to their devices, banks can grow by eating other banks and that creates systemic risk, plus gives them extraordinary leverage over the political process to the extent that becomes “too big to fail”. But what to do? The GOP’s position developed into “do nothing and say you’ll let them fail”. Is that real? If the risk is systemic, how does that actually protect ordinary taxpayers? The Democrats proposal was some form of tax on transactions (like on certain trades) that would fund a “bailout” program, much like the way banks fund deposit insurance. That would work for “ordinary” bailouts but not for banks so large they pose systemic risk. So there may be no political solution if we allow banks to get that big … and we can’t even know whether banks pose systemic risk, as we learned with AIG, because we don’t know the extent of balance sheet obligations laid off, insurance sold or bought on derivatives and other instruments, etc.</p>
<p>Soccerguy, Well… There are a lot of losers…the govt did not bail everybody out…the upper class and upper middle class were bailed out because those groups own the financial assets.
The middle class is doing worse and worse and the poor are still the poor.</p>
<p>I think it is great that you were with Americorp.</p>
<p>I am afraid to ask what you are studying in grad school, but I am going to ask anyway. What are you studying?</p>
<p>What I find interesting, though Lergnom, was that the last time there was a financial crises this big and systemic, the banks came together and helped to arrive at a solution separating out the deposit banks from the investment companies. The banks did this.</p>
<p>Lately I’ve just been thinking that people used to care about some things more than they cared about money. People really did sometimes do the right thing. Maybe I’m just getting old.</p>
<p>Lergnom, both proposals you mentioned stink. I am not trading that much anymore but the financial transaction tax is a bad idea and it is not going to raise the revenue. It is going to increase costs. It is a punitive measure. I dont see a lot of support for the tax in the US.</p>
<p>And letting the big banks blow is not going to happen either. The big banks are bigger than ever.</p>
<p>soccerguy, this part is purely anecdotal, but what I’ve personally seen of defaulted mortgages from the borrowers’ side also doesn’t fit the “government made us do it” scenario. </p>
<p>I live in an affluent suburb. Before the crash houses in my neighborhood sold for over $1MM. Since 2007 4 houses on my block were either foreclosed or short-sold. Each of those houses was owned by a couple with a six figure income, who either put next-to-nothing down when they bought or refinanced and took all of their down payment back out of the house. Each had a recent loan of well over $900K and each was underwater by well over $150K when the owners moved out.</p>
<p>These were the folks I saw getting the “no-doc” and 0% down payment loans. They could afford to buy homes; they could have afforded to keep the homes they bought, even though they were underwater, but they made an economically rational decision to default. And I know other professionals with similar economic resources who have done the same thing. So that, to me anyway, is the face of the “toxic” mortgage fiasco - not poor people buying houses they couldn’t afford because of some government policy, but educated, affluent people taking advantage of perfectly legal options offered to them.</p>
<p>I’m sure there were lots of poor people who “overbought” but I know lots of defaulters who simply don’t fit that profile.</p>
<p>Right, exactly, because they can afford to walk away from it, strategically.</p>
<p>But, there are those in the middle class who actually can’t afford to walk away from the place where they sunk all of their equity AND trash their credit score for 7 years following.</p>
<p>Clearly many of us are aware of the strategic default because we can afford to do so. But, those are not the individuals who concern me. Though some on the lower end of the 6 figure income DO concern me. There are far more people, just due to the demographics of the country, who cannot afford to walk away then those who can. And the ones who cannot afford to walk away could use some real protection, imho.</p>
<p>The banks were certainly given plenty.</p>
<p>Also, I live in an affluent suburb and I haven’t seen ANY foreclosures. Not one. I mean, if we’re just telling campfire stories.</p>
<p>If you went out to the new developments near Phoenix, Riverside, Stockton, Vegas, tacoma, Everett etc etc you will see FAR more numbers of lower-mid income folks that got in over their heads. That’s where most of the action was–not in older established areas because far fewer homes come for sale in those areas. Anecdotes are not data.</p>
<p>There are more poor people and middle class people than affluent people barrons.</p>
<p>But the bailouts helped the affluent.</p>
<p>The wealthy have recovered from the financial crisis.</p>
<p>The middle class hasn’t. </p>
<p>The poor are poor.</p>
<p>Those are facts.</p>
<p>
I have to think about what you said poetgrl. I do not agree with principal reduction. It is not fair to borrowers who played by the rules. </p>
<p>I feel every borrower who is having a problem paying their mortgage actually bought way more than they can afford. Probably took out a second mortgage to spend on some frivolous expenses. I will not be surprised if some overstated their income so they actually committed fraud.</p>
<p>I know someone who actually did that. Over borrowed. The couple took out a home equity loan to go around the world. They are ave middle class not earning more than 80k per year. I asked him why he took out the loan to go on vacation around the world and he said, Why not? We earned it! His home value rose therefore the couple deserved to take a fancy schmancy vacation. :rolleyes: They hosted monthly parties. FF to 2011 and they approach me and asked if its possible for my H and I to be straw buyers of their home. :rolleyes: I dont think this couple deserves principal reduction. If principal reduction is going to be implemented it should include every mortgage. Again, it is not fair to borrowers who played by the rules and didnt over leverage themselves.</p>
<p>But I will think about what you said.</p>
<p>Krililies, I am going to think about what you said.</p>
<p>
Can I add “too big to jail”?</p>
<p>KR-- I agree, principle reduction should have been applied to all mortgages below a certain level. Or all levels if you want.</p>
<p>But, I think, given the FED and Maiden Lane, and the fact that all those bad assets were taken off the bank balance sheets, the least that could have been done is to extend the same courtesy to the middle class taxpayers in the country.</p>
<p>Look, I’m not at all a fan of government interventions, but they already intervened with trillions of dollars in corporate welfare for the TBTJ’s. Why not the law abiding guy who bought a house during the bubble they encouraged and helped to create?</p>
<p>I could be wrong. Maybe two wrongs don’t make a right. But, just from the standpoint of the health of the US economy, I think putting more money into the hands of the middle class would have been more beneficial than putting more money into the banks, who failed to lend and just used it to create profits, not even jobs.</p>
<p>I’ve lately become somewhat of a believer in what is sometimes called “financial repression”, meaning regulation of the size and extent of the financial industry (not other meanings that are now being tossed around). History suggests that tighter regulation focuses the financial industry better on things that actually make money over the longer term rather than the short run. In other words, they exist to make money so they will and the trick is to get them to make that money so it doesn’t blow up every few years. If you go through the decades after WWII and the emergence of modern finance, you see a pattern in which the financial industry has created a series of bubbles - and not all here because US banks lost their shirts lending to S.America in the 70’s. I have no idea what the contours of “financial repression” would be or how it would coordinate globally but I think it should be part of the discussion.</p>
<p>As to lending, I hate the idea that borrowers are the ones responsible. Lenders have the money. They are the ones who decide whether to take that credit risk. They are the ones charged in the entire lending system with evaluating risk. This becomes more true as you move down the economic ladder and less true as you reach the top; the richest are, as with all investments, charged with greater knowledge and power in transactions. </p>
<p>The idea that borrowers bear all the moral responsibility is strange. It’s also a negation of thousands of years of thinking about interest: we think of usury as excessive rates but all Western religions have spent a lot of time thinking about and sometimes condemning lending at any interest. (This is today the issue in Islamic banking.) Lending at interest has always had a tinge of extraction in it: you charge not what you could but what you can, meaning you extract the maximum rate not the minimum, and that implies a religiously unequal relationship of power which all Western religions have struggled with. I find it odd so many people can suddenly say, “Blame the borrowers”, when all religious history is “Blame the lenders.” If you understand the reasons behind the moral discussions of lending, you see a lot of what went on here: predatory practices of unequal power taking advantage of greater knowledge, etc. The religious conception is rooted in a utopian notion of equality, which is why non-usury banking - like Islamic banking - takes the form of profit sharing (which is then manipulated to be equivalent to interest because actual profit-sharing doesn’t work). The religious ideal has been a form of joint venture, while lending at interest has been the mark of unequal extraction.</p>
<p>Instead of principal reduction, just make sure homeowners can refinance. If that doesn’t work, relax lending standards so homebuyers can buy homes.</p>
<p>The risk of lower home prices is lower now than in 2007. When rents are comparable to homeownership, the risk of home prices declining is lower. So let people buy homes. </p>
<p>Right now private equity firms are buying up homes. Potential homebuyers are paying sizable rent and giving private equity firms nice cash flows that cover the costs of home ownership. Yet, the potential homebuyers can’t qualify for mortgages because standards were raised to high. So private equity firms prosper. Potential homebuyers who really
can afford to buy the homes are out.</p>
<p>Standards should be raised when there is a frothy market and lowered in a crushed market, but the opposite occurs.</p>
<p>It is stupid.</p>
<p>The crisis happened because banks were FORCED to bend their policies and give out loans to un-qualified individuals. This is known fact by now. The banks had policies that have developed over decades, that were sound business practices. When gov. sticks its nose into where it does not belong, expect the bad things…along with the fact that what actually needs to be address by the gov., the aspects of our lives that government was created to take care of, they get NEGLECTED, UNDERFUNDED, because the focus is on the wrong thing. But the focus is correct by the gov. Gov. is in a business of buying the votes for current members, providing housing is a sure way to buy more votes as well as giving citizenship to illegals is another sure way, so why not?</p>
<p>Life is very uncertain. It is nice to have people we can count on…</p>
<p>dstark, LOL !! You take those comments much calmer than I do. I’m far more inclined to respond that some people don’t have a freakin clue.</p>
<p>Hayden…lol.</p>
<p>
I won’t be as tactful as dstark or hayden. </p>
<p>MiamiDAP, that might be “known fact” to you, but in the real world, it’s not an “actual” fact. I’ve written about this from my personal in-depth examination of one of the lenders who initiated those loans (which was not actually a “bank,” by the way, as was the case in many of the toxic loans.) It’s been studied to a fare-thee-well by numerous individuals and institutions. It’s simply not true.</p>
<p>When you rely on “known facts” which are actually not true, you’re in danger of forming opinions which will not suit you well in the real world.</p>
<p>There was no sole cause but it certainly contributed to the overheating of the market.</p>