Sep. 22nd, 2008 09:52
Is Congress crazy?
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cosProblem: A lot of banks, insurance companies, and other financial institutions are in trouble, and if a bunch of them fail the economy will suffer severely. They're in trouble through a chain of stuff that starts with a lot more mortgages failing than were expected, and a bad housing market. When someone can't make their mortgage payments they may be forced to sell the house, but in a bad housing market, their house may not be worth enough anymore to pay off the mortgage by selling it, so they can't do that. Glossing over a lot of the stuff in between, and ignoring for a moment the legal changes that let this happen, that's basically where the problem begins at the moment, yes?
Now, assuming that we decide that we can't afford to let all these financial institutions fail, and assuming we decide it's worth spending several hundred billion dollars on it right now - rather than argue the merit of those two points, let's take them as a given - assuming all of that... why would Congress even consider using that money to bail out the financial institutions directly?????
We could take the same money and spend it on bailing out homeowners who can't make their mortgage payments.
We could get more bang for the buck at first pass because we wouldn't have to buy all of the "bad" debt, only enough to make it possible for each homeowner to keep on paying, perhaps with lower payments over a longer period of time. Banks would be stronger simply because all this debt would no longer be poised to fail, and confidence in the banks would recover as soon as the plan was passed, even before actual homeownwers were bailed out, because people would know that a lot of these loans would no longer fail completely, because they'd qualify for the bailout plan. Not only would we save banks, but we'd save jobs, neighborhoods, and families. By preventing mass dislocation of people we'd be saving lots of other pieces of the economy at no extra cost.
I've heard some arguments against the "moral hazard" of bailing out people who took risks that didn't work out... every single one of those arguments applies to a much greater extent to bailing out financial institutions who took vast amounts of irresponsible risk, who risked not just themselves but everyone around them, who were paid to understand finance and to know better than to do this, who lobbied for laws to make it easier for them to do this...
In what bizarre reality does it make any sense to even consider bailing out the financial institutions instead of the homeowners in trouble?
I'm going to call my members of the House and Senate and I hope you call yours.
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Now, assuming that we decide that we can't afford to let all these financial institutions fail, and assuming we decide it's worth spending several hundred billion dollars on it right now - rather than argue the merit of those two points, let's take them as a given - assuming all of that... why would Congress even consider using that money to bail out the financial institutions directly?????
We could take the same money and spend it on bailing out homeowners who can't make their mortgage payments.
We could get more bang for the buck at first pass because we wouldn't have to buy all of the "bad" debt, only enough to make it possible for each homeowner to keep on paying, perhaps with lower payments over a longer period of time. Banks would be stronger simply because all this debt would no longer be poised to fail, and confidence in the banks would recover as soon as the plan was passed, even before actual homeownwers were bailed out, because people would know that a lot of these loans would no longer fail completely, because they'd qualify for the bailout plan. Not only would we save banks, but we'd save jobs, neighborhoods, and families. By preventing mass dislocation of people we'd be saving lots of other pieces of the economy at no extra cost.
I've heard some arguments against the "moral hazard" of bailing out people who took risks that didn't work out... every single one of those arguments applies to a much greater extent to bailing out financial institutions who took vast amounts of irresponsible risk, who risked not just themselves but everyone around them, who were paid to understand finance and to know better than to do this, who lobbied for laws to make it easier for them to do this...
In what bizarre reality does it make any sense to even consider bailing out the financial institutions instead of the homeowners in trouble?
I'm going to call my members of the House and Senate and I hope you call yours.
[ Also on dailykos - if you have an account there, please recommend. ]
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Re: middle ground
The effective value of your house drops by 5% pretty much the instant you buy it - since Realtor commissions come out of the sale price, not out of the buyer. How much attention do you have to not be paying to miss something that basic?
I agree that your second group (bad thing happened) is much larger than your first group (people knowingly taking on bad risk), but I think my middle group is the largest.
What exactly is the difference? If the change in circumstances is "something bad happens" then they go in that second group. If they've got a payment they can't carry indefinitely, because they gambled on an ever-rising market... well, if they'd gambled on the stock market rising eternally too, would you bail out their 401K's?
Re: middle ground
The only people that's relevant to are condo-flippers, in which case I think we're all united in our lack of sympathy for them.
Most people don't expect a house (which they intend to live in) to go down in price over the time horizon in which they expect to keep it.
well, if they'd gambled on the stock market rising eternally too, would you bail out their 401K's?
Please explain how a mortgage instrument (typical holding time: 7 years) and an investment instrument (typical holding time: 35+ years) have anything to do with each other.
Re: middle ground
I'd say that the conversion of the former into the latter is rather close to the heart of the current problem. To wit, the idea that mortgages could be bundled, sold, re-sold, and (mis)valued en bloc as though they were investment-grade securities is pretty directly associated with the current mess.
As to the intermediate point in this thread: it will also be necessary to find and somehow qualify a third class of current mortgage holders: those who were simply flat-out lied to. There are good and well-documented stories in reputable press that I believe of people whose "current income" and other numbers on mortgage applications were fraudulent or otherwise manipulated to get larger mortgages. Some of the buyers were no doubt complicit in this fraud (either through omission or comission). It's unclear to me how we'd figure that out and to what degree we'd bail out this class of people.
And finally, as to the original point cos is making: the bailout of large financial institutions is only VERY indirectly related to the mortgage crisis. It's much more directly related to a business infrastructure in which people and companies must borrow vast sums to operate. This includes entities ranging from investment banks that borrow billions to pay for securities transactions that won't clear for 2-13 business days, all the way down to state-level institutions that borrow hundreds of millions of dollars every year so they can make student loans to kids going to college.
In this kind of infrastructure, the inability to borrow funds - at ANY interest rate - causes business to stop. The purpose of bailing out at the high end is to maintain the flow of credit that these businesses require in order to operate. The present situation is one in which the people who normally make such loans won't make them because they have little or no confidence of getting repaid.
Re: middle ground
Please explain how a mortgage instrument (typical holding time: 7 years) and an investment instrument (typical holding time: 35+ years) have anything to do with each other.
Because so far, the only logic I'm seeing as to why homeowners should be bailed out is because (due to the fall in house prices) they can't simply sell. If we're going to propose a bailout of homeowners because their asset lost value, I want to know why we don't propose the same for other classes of assets. I dunno about you, but the beating my house price has taken in the last year is less than the beating my 401K has taken in the last month.