The Audacity of Doing Nothing

I spent a few days recently in the company of some money managers with a total of about $2 trillion to invest, precisely the sort of folks whose confidence the government is currently trying to win.  How did they feel about all of the rule and policy changes coming out of Washington and the new more muscular government? Terrified.

The “real money” investors didn’t want to invest alongside the government.  Their concern is that if things go south, the government will take 100% of the value left in the bank or whatever and leave private investors, including recent ones, with nothing.   This is precisely what happened to recent investors in Fannie Mae.

The “real money” investors didn’t want to see judges modifying contracts, e.g., bankruptcy judges resetting mortgage payments at a lower level and reducing the principal owed.  As far as they were concerned, a central tenet of the U.S. Constitution is that people are free to make contracts.  Given how mortgages are split up among investors, a foreclosure is greatly preferable to these folks than a modification.  In a foreclosure the most senior investors get what they expected, i.e., their money back.  The holders of the most junior tranches, which carried a higher return and were known to be high risk, would get nothing.  This is also what they would have expected.  If mortgages are modified by government action, however, it is unclear how the obligations among the various private parties should be adjusted.

“What’s wrong with foreclosures?” some of these folks asked.  “The historical rate of home ownership is about 60 percent and we’re probably going to revert to that sooner or later so why slow things down?  How does it help the U.S. to have high housing prices?  Isn’t it better for housing to be affordable?  If we give a lot of money to people to prevent foreclosures in March, how is that fair people who were foreclosed on in January?”

Much of the justification for government intervention comes from the assertion that markets have failed.  One money manager scoffed at this idea.  “The markets are working fine, but they’re giving people answers that they don’t like, so people cry market failure.”  Stocks and bonds low?  That’s because investors are afraid of a prolonged depression and continued government interference.  House in a jobless region of Michigan worth almost nothing?  A place with 50% of its former jobs only needs 50% of its houses.  There are plenty of former steel towns where the price of a comfortable house stabilized at $20,000 decades ago and has barely moved since.

What did these guys want the government to do?  Nothing, basically.  “Back in the 19th Century, there were a lot of steep crashes, guys got wiped out, and the economy came back quickly.”  What’s different now?  The government is a lot bigger and more powerful.  Rich companies and people can put some of their wealth into lobbying and demand that the government prevent them from getting wiped out (or at least slow the process).

Barack Obama promised on Monday not to rest as long as this economic downturn persisted.  He promised to act decisively, change whatever had to be changed, spend whatever had to be spent.  This is precisely what worries the investors to whom I spoke.  They’d rather see the audacity of doing nothing.

61 thoughts on “The Audacity of Doing Nothing

  1. Wouldn’t doing nothing cause the downward spiral to continue to devastatingly low levels where high unemployment would cause even great restraint on spending, causing even more unemployment… increasing society burden of welfare and homelessness? And if it did continue to spiral downward, would the “real money” people actually put money into the market?

    PS: These are not rhetorical questions but serious questions I don’t know the answers to.

  2. philg… Your essay “one for the ages”…

    Education-wise, I’m a research analyst out of the USC School of Systems Mgmt (Peter Senge of MIT the “guru”). Our (USC/MIT) point is, “first impressions are almost always wrong”.

    The gov’t (first impression of “what needs to be done”) is “fixing banks”. Not the #1 problem (let the bad/stupid banks fail).

    More likely, the biggest (deadliest, “forthcoming”) failure will be the stock market. Why? Because that’s where the pensions (and 401K’s etc) are. “Losing homes” is trivial (nobody ever “normalized the data”… How many “failures” weren’t self-induced? Speculation-gone-wrong? 0-down “no personal loss” failures?).

    But when the pensions go, the #1 loss won’t be the pensioners, but an entire generation of well-educated, motivated job-seekers will die “stillborn” because “retiree” will be a “historical term, no longer in use”.

    When the reply to “Going to college?” is “Why bother?” then truly… America will have killed itself.

  3. This is exactly what Jim Rogers was saying recently. The markets would be fine, if we would simply allow the failed organizations to fail, and allow people to pay the consequences of their excesses.

    In his words, “Capitalism without bankruptcy is like Christianity without Hell — it doesn’t work otherwise.”

  4. sorry…it posted on accidental click…

    I would argue that the money managers you are working with have a far larger perspective on the economy, and while yes they do themselves have a level of personal risk, their ability to counter and prevent their losses is much greater and significant.

    I do not know if there would ever be a perfect plan for this situation. We are in this scenario due to several years of bad decision making on behalf of consumers, bankers and government. And while the consumers are to some degree to blame for this situation, they are now, and have always been, sheep. For the most part, the average consumer knows very little than what he learns from the television, radio, newspaper, online media, and the scuttlebutt in their community. I would ask this quesion, who controls all of these forms of media and who forms the national opinion. It is surely not the government, but rather the banks, corporations and other private interests which have an interest in educating the sheep on where to herd, what to eat, what to buy, etc.

    I think there has been a major failure of both corporate responsibility and consumer advocacy. We are treating this situation, as if in some ways the American consumer knew better. The fact of the matter is that they do not. They are misguided sheep, and many of the controlling interests behind the popular media have nothing to gain by educating the consumer on what would be best. I will admit, I cannot cast all businesses into the “bad” category, but I can say with confidence, there are many which have abused their power and influence only to prey on those who are pawns for their game.

    In short, I agree with your comments on the housing crisis. There are far too many communities where the price of a home has inflated far beyond that of they communities ability to successfully sustain such price increases. The result of this effect, albeit driven by market forces, has a debilitating effect which will last for generations. Our crisis, without deep and swift intervention will persist for decades, and the lasting effects will cripple not only consumers, but as well businesses.

    I believe the the pseudo-capitalistic system which has evolved in the United States. I feel that it needs to continue evolving in order to truly succeed. We have certain tenets, that only in the last 70 years have we truly began to uphold. The concept of government serving as a collective vehicle for our economy is not new, nor is it newly adopted. If we were to retreat from our beliefs in a strong nation of states, collectively defending and promoting for the betterment of our communities in need, we would in fact be retreating from the beliefs which lead to the foundation of this great nation.

    There needs to be a concerted effort by everyone, in all roles within our nation, to not only debate what needs to be done; but more importantly to foster and participate in education for those who are misinformed or unaware. Without a focus on the sheep, the herd will never be strong, we will squander our resources and opportunities, and eventually continue on this path eventually walking off the cliff.

    I very much enjoy the dialogue and message you have created. I sincerely hope that others follow suit and the message continues to spread. The only way to get out of this mess it to better communicate, educate and act for what is best for the survival and success of these great United States of America.

    Paul Brisson

  5. Perhaps the investors to whom you spoke might want to take a moment, pull their heads out of their butts, and consider the inevitable social repercussions of allowing widespread housing foreclosures and allowing the banking system to fail.

    How likely is the country to actually “come back quickly” (or come back at all) after such a catastrophic event? What do they suppose the results will be of having tens of millions of people jobless, homeless, and/or in poverty? What do they suppose crime rates to be after such an event? How much social unrest do they predict? What type of government (if any) is likely to gain power after such a catastrophe?

    Man, smart people can sure be pretty stupid sometimes. Or I guess, more accurately, they can just be so self-centered that they completely miss the big picture.

  6. This is exactly the kind of mentality that creates angry mobs with torches and pitch forks. THE OVERWHELMING MAJORITY OF HOMEOWNERS are not speculators. We are victims of people like you that caused this housing bubble in the first place.

    Your money investors grew fat off the markets created by other greed driven money investors all the while causing the cost of housing to go through the roof. Folks like us plodded along for 20 years paying our bills and quietly upholding the status quo. Then when being filthy rich beyond any means necessary for any one lifetime to spend, your team decided to create derivative games to make even more money, you jacked up the price of our homes beyond reality, and in turn destroyed our credit markets entirely.

    I used equity to buy a new home and now that equity is gone, and I am upside down because of greedy unregulated, unrestricted asshats you call investors. You still got your money, I deserve my home. So you damn well bet I want relief. And I don’t give two shits if you ever invest another dime or make another dollar.

    You people think investing makes this world work. Your so completely blind to reality, and hopefully you will find these markets unacceptable permanently, take your marbles somewhere else, and leave these markets forever. What we need is extreme regulation of the markets.

    We need government controls on credit. No more 32% interest loans of any sort.

    We need government controls on banking. No more speculation of any sort for banks.

    We need 1% interest loans for homes and college students. Why are we allowing insane profits from loaning money. It should be outlawed.

    We need to kick greedy money lenders out of this country, you are the scourge of the 60% of us that take care of our business, and do not care for your kind of democracy.

    These people you describe have no concern for the misery they create and if they want sympathy they should look it up in the dictionary. It’s between shit and syphilis, where you will also find their pictures.

  7. Of course the money managers are of the mind to want more freedom than not. Does not this discipline, basically, work with abstractions without worrying about the ‘real’ influences of their gaming, generate exorbitant returns that are not sustainable (and probably not verifiable, except that we’re too lazy to do the necessary bookkeeping), collect pocket bulging rewards? Oh, that’s probably not fair, as these are mostly working folk.

    Gains, of a short-term nature, ought not payout until their veracity has been tested. Now, how do we do that in the environment fostered by the modern mechanisms,such as we see with the CBOE? Well, the necessary type of accounting seems to be missing. What the creative folk did (or were allowed to do) was to move things off the books for awhile? Well, there is still no method to account for a day’s trading; the necessity would be a world-wide summary (oh yes, at what point in time would that occur? – not saying that this will be easy – but, we need to do the work to firm up the foundation.).

    Look, if Madoff could game the system for so many years (that is, there was really no traceable effect of his supposed manipulations on the markets), since there really is no daily accounting, how much is this whole thing just a sham (house of cards, if you would)? And, hedge funds being allowed to have properties that reek badly (opaqueness, game-centric ontology, withdrawal restrictions, and much more) ought to tell us a lot.

    The shaking basis for such a crucial discipline is what ought to be giving the money managers fear. Why the hell has not finance put a more firm basis under itself? The scientists and mathematicians brought over to provide ‘natural’ insights haven’t made it any more of a science. No, in a sense, they’ve exacerbated the gaming problems.

    That the market cannot be without the government’s involvement is no more harder to understand than the existence of those black/white shirted overseers on the playing field. Too, that field was established with rules and by work. What analog of this applies to finance?

  8. Ok. I agree with this analysis from a purely economic point of view. My concern is different. What happens when unemployment hits 25%, and a significant number of people lose everything. Social unrest, correct? By allowing a purely market-driven correction, are we not inviting the rise of fascism in some countries, communism in others, militant islamism in still others. Let us not for a moment forget what the fallout really is when we let an unfettered market batter the the masses. Roosevelt, for all his faults, certainly understood this. All he had to do was look at the changes being wrought in Nazi Germany, and in Soviet Russia. Those in despair do not sit quietly by and allow the market to correct itself. Let us be at least cognizant of the full extent of the risks that confront us.

  9. I thought the real issue was that a large fraction of the population got screwed because of the acts of a much smaller sector of the economy (Wall Street banks, mortgage brokers, realtors). If these 3 were the only ones wiped out it would be OK, but we are now looking at a global crisis with even countries such as Iceland collapsing.

    If Joe Sixpack is in his fifties, has only a high-school degree and gets laid off because of lack of world aggregate demand caused by the culprits above, what is he to do? Is it fair that he pay the price? States are being forced to cut education funding so he now can’t even get to a good community college anymore.

  10. Economic stimulus packages are a way for the super rich to take money from everyone else by capitalizing on mob behavior. If a message that zombies were about to invade was repeated enough times by the AP, the mob would vote in a $5 trillion stimulus package to fight zombies. It would fund mortgages in Antarctica & refrigerators for eskimos.

  11. But most likely holders of $2 trillion in “investments” had some credit default swaps (insurance on debt, basically).

    Suppose you start a small company to sell earthquake insurance to people in California. You make a lot of money, more and more as the years go by with no earthquake. When the earthquake comes, you can’t pay the policy holders. Should the government bail you out? Is it just too bad for the policy holders? Is it fraud?

    The problem is that nobody wants to play by all of the rules. If we did, many of the people you’re talking about would be bankrupt. Some of them would be in jail.

  12. Lessons from the great depression show that doing nothing has serious downsides. While yes we did come back from the great depression we were young nation who had plenty of cheap labor, and the only nation that could produce steel after WW II. Steel was our secret ingredient to US domination. Without it we wouldn’t be the nation we are today. The rest of the world had been obliterated. In that environment we couldn’t fail.

    Now that situation looks much different. If we head into a great depression like period what major opportunity will come along to pull us out? I doubt rebuilding of our bridges and infrastructure will do that. Rebuilding our infrastructure, while it will create jobs, creates exactly zero exports. The only way to boost our economy is to have exports because that will pull in more money into our borders. All of that is real important if we do find ourselves in a great depression.

    Maybe rebuilding our infrastructure can create jobs and overt disaster, but if we fail to over disaster the melt down of the markets could come. And I agree as soon as we stop going to college we’re done for. It’s like Toynbee said civilizations fail because the creative minority doesn’t see the value in creating anymore.

    I do wonder if we would just let the financial sector fail, and fail fast if we’d survive. My mother-in-law has worked in banking for 30+ years, and her bank could care less about the problem. They are perfectly healthy. How many other smaller banks around the country are in the same position? Banks that played it safe and didn’t over leverage themselves? If we didn’t save Citibank, Bank of America, etc could those healthier banks stabilize the industry? How much of this bailout crap is a couple of powerful insiders manipulating the system to stay alive by using fear? Henry Paulson and the Bush administration fell for it. I wonder if just selling off those good assets to healthier institutions would overt this problem faster.

  13. MR: “And if it did continue to spiral downward, would the “real money” people actually put money into the market?”

    “Real money” people invest money when they believe the rewards outweigh the risks. Investors’ biggest fear is uncertainty so as long as the government dominates the markets, they won’t risk their money. In my opinion, most money will stay on the sidelines until a more fiscally conservative Congress and/or President is elected in 2010 or 2012.

  14. MR, no, that’s never happened in history. There’s no such thing as a “downward market spiral” that results in mass porverty and starvation. It’s never happened and never will happen because it doesn’t exist. What does happen is that bubbles burst–in other words, “fictional” growth (growth based on overconsumption) retreats. It often takes other stuff with it, but once it’s eradicated, the worst is behind you and things start growing again. It’s like a forest fire, which clears away decay and brush. Seems traumatic, but without it, the new seedlings aren’t ever going to spring up and renew the forest.

    The “downward spiral” that happens occurs because of governments, not because of markets. As things get worse, the government declares the need to grab more power and a bigger share of the nation’s remaining wealth, pushing things down even farther.

  15. The Boomer generation is older, invested, and demands stability. That means the government has to DO SOMETHING. This is what’s driving things now. Not economic, social.

  16. This is truly amazing. Of course the guys with al the money want nothing to happen! Of course they don’t want change! They already have all the money!!!

    Au*dac”i*ty\, n. 1. Daring spirit, resolution, or confidence; venturesomeness.

    The freedom and audacity necessary in the commerce of men. –Tatler.

    2. Reckless daring; presumptuous impudence; — implying a contempt of law or moral restraints.

  17. Agreed with the opinions expressed. The popping of the largest credit bubble in history will not kill us. Wasting public resources trying to fight it will, particularly as those public resources suck the life out of private markets–either by sucking money directly or by creating a game with ever-changing rules the causes private capital to flee.

    Our current course of action is as irrational as spending trillions trying to *stop* a hurricane.

    Paul makes a very good point.

    Pension and insurance company failures will be catastrophic if they materialize. Both are tied to the stock market.

  18. Sorry to be contrary, but…
    One of the commonalities I am noticing in different sectors of the financial crisis is that their investments were sold as being risk free. Home purchases and refinances because the real estate market had not had a substantial contraction in value nationwide since WWI. The CDOs constructed from them that through some mathematical wizardry paid more than the underlying mortgages yet were rated AAA by credit agencies. The financial institutions willing to issue CDSs against AAA rated corporate bonds. The institutional investors who threw trillions into a financial sector that seemingly generated profits out of the ether.
    All of these investors were victims of their own greed and credulity, but humans are profoundly averse of such simple and diminishing truths. The obversion I think that will be much more widely drawn is that investors of every class of sophistication and experience lost massively, and if we let them all fail, we might ruin billions of investors’ faith in the regularity of markets. (This seems to me to be consonant with Taleb’s theory of “Black Swans”, that authoritative agencies and indices erred catastrophically -> our current agencies and indices cannot avert catastrophic error, because the markets are elementally stochastic.) This would be a generational disruption, . Investments of every sort could evaporate, depressing economic activity for a decade.
    I have to admit, I do not think that extrapolation described above is valid, and protecting any failed investment increases moral hazard. Nonetheless, if we don’t, I think that we will witness an ongoing and massive migration of capital from the markets. This will hugely depress the value of the securities involved- lousy for those investors who remain. On the other hand, it would be good, very good, for “some money managers with a total of about $2 trillion to invest” because leviathan profits will be available when the markets bottom out.
    I agree with the principles animating your position, but what are the consequences from the audacity of doing nothing?

  19. Angry Home Owner,

    If you are not a speculator, why do you care that your equity in your home has been wiped out? You still have the home to live in, right? If you have to move, find somebody to rent it. If you can’t find somebody to rent it for what you’re paying for the mortgage, you overpaid for the house and you likely did that because you had an expectation that you could get your equity back in the future. That is, to a certain extent, speculation. Houses are not banks. If you wanted no equity risk you could have rented for your entire life.

  20. Charlie

    Lessons from the great depression show that doing nothing has serious downsides. While yes we did come back from the great depression we were young nation who had plenty of cheap labor, and the only nation that could produce steel after WW II. —

    Charlie, teach yourself history first before you describe it to others. Herbert Hoover was a frenzy of “do something” after the stock market crash. Roosevelt was a frenzy of activity in his 100 days. The depression was a result of misguided government activity.. just as the lost decade of Japan was a result of misguided stimulative spending.

    Ahh what’s the use. You learned it bass ackward in grade school.

  21. Angry Home Owner said: “I used equity to buy a new home and now that equity is gone, and I am upside down because of greedy unregulated, unrestricted asshats you call investors.”

    The difference between me and you is that I didn’t use equity to buy a home. I actually made a down payment on a modest house that I could afford, and a fixed mortgage, not an adjustable one. If you would have done the same thing, and had not taken the equity out of your house, you would not be in trouble. Unfortunately, you got greedy. Welcome to the real world!

  22. The reason the Royal Family (governement) wants to keep home prices from falling futher, is for property tax income and other tax income. The lower prices fall, the less tax income for government salaries and pentions. You cannot have city workers retiring at 50 years of age with $150,000 pensions for life with full medical, etc. if you don’t have lots of money in property taxes coming in. Notice how they are not helping renters. Government is trying to keep prices up on houses, so people have to pay more in taxes.

  23. Angry Home Owner
    You are the speculator -investor you so vehimately detest. You took the equity which you had accumulated and “invested” in a new property and in so doing helped drive the price of real estate up. Your expected accumulation of more equity didn’t pan out and you are now upside down. Unwilling to admitt that your investment was ill timed as you were late to the bubble party. Now you talk about misery – a misery self inflicted and the result of not educating yourself about your investment before making that investment. Your hindsight would be a lot sharper if you would look in the mirror for a while.

  24. As the government is already hell bent on subsidizing the stupid and greedy, we might as well try to make it the right way. I would say, the most simple solution would be to write down the principal to the current market value (CMV) and create an IOU to the bank for the difference between the CMV and the Mortgage balance in favor of the Lender/s, which would be payable with interest if and when the home sells above the CMV and will be extinguished on the sale of the home. If the home sells for less than the CMV, the IOU will be a total loss for the Lender. If the home sells for more than CMV+IOU, the Homeowner keeps the balance above the CMV+IOU. If the home sells for more than CMV but less than CMV+IOU, then the value above CMV will go towards paying off the IOU. These IOU’s can be securitized and traded providing liquidity to the Lenders, although I am not aware if anyone would be willing to buy these crappy ‘Assets’ for anything more than 5% of their value.

  25. Financial Expert, in Massachusetts, property value has nothing to do with the amount of property tax levied. The levy can be and usually is raised by 2.5% every year. This levy is paid by the citizens of the municipality via an assessment of the value of property owned. Generally, every citizen is in the same boat regarding the increase or decrease of property values. Once property values are set for a particular year, the tax rate is adjusted to maintain the levy. Barring some abnormality with your property, your property tax will increase, even if the value of your home decreases.

    Don’t feel bad, over the past 20 years many people have attributed rising property taxes to rising home values while local politicians, who know better, silently smile.

  26. This is exactly what I have been saying on my blog for a year. The banks need to clear their balance sheets, naturally. Any intervention will only make things worse. In 1998 when the home price appreciation curve was decoupled from the income growth curve, by Bill Clinton’s expansion of the CRA, an unnatural situation began unfolding. Now we’re facing the correction of that unnatural situation. The best fix, the ONLY fix is to allow the natural market forces and mechanisms do what they do.

    We have spent a decade holding back the economic tides. Just like the tides of the ocean, you can only hold them back for so long and then you have take what they give you. Its unfortunate that the people who took the short cut are going to have to pay the price, but that is the nature of the tides.

  27. Consider the following:

    1. Our financial/tax structure at the governmental level is simply not sustainable on the terms of the last 50 years. Read “Running on Empty” by Pete Peterson. This unsustainable structure is mirrored by the over consumption at the individual level. Neither “action” nor inaction can change the underlying reality of the expected future cash flow demands of the society compared to the sources of cash. WE ARE BROKE.
    2. There must be a “paradigm shift”. We are at WAR. The enemy consists of the following:
    a. Our own lies.
    b. Our unreasonable expectations.
    c. Our personal greed (especially as amplified and expressed through the political process).
    d. The psychological need to justify ourselves and blame others.
    3. To win the war we will have casualties. Those casualties will include older citizens who will work longer/retire later/die with less that desired medical care. Another casualty will be the lavish lifestyles and material gains that exceeded our productivity output. Another casualty will be the sophistry that passes for education/leadership.
    4. We need to remember the following:
    a. All suffering is relative. (Read: “Mans Search for Meaning” by Viktor Frankl.)
    b. We can pick and choose among “facts” to continue our justification of the unsustainable. Example: I have read many references to the depression but almost no one has mentioned that from 1929 to 1932 the federal reserve contracted the money supply by 1/3. We certainly have not done that and yet we continue to discuss our alternatives by comparison to the 30’s. Is that a wise/useful/complete discussion? NO. And yet we do it.
    c. There is a diminished marginal utility of material wealth. (Do 5 bathrooms make you 5 times better off if you have to pay taxes, maintenance and utilities on each while only using one at a time?)
    d. National wealth is given by the ability to generate future cash flows not by the balance sheet numbers regarding historical cost of assets.
    e. Words and spending by government can nibble at the margins of the immediate social impacts of our problems but will not change the underlying reality. We need drastic fundamental reallocation of our spending at all levels and we need to suck it up and save. We must declare war on a system that has misallocated our capital and continues to squander our cash at every level. Continuing to reward folly will simply dig a deeper hole.

  28. The gov’t should ENCOURAGE a faster rate of foreclosure. However, if the current occupant could pay a lower mortgage, it would be cheaper and quicker for the bank to re-sell the home to the same person at a lower price. No broken contracts, most people stay in their homes, junior tranches get wiped out. The economy will still sink because the problems have spread everywhere now.

  29. This recession was caused by overvalued assets.

    The audacity of doing nothing allows the market to correct itself.

    Sure, hopes and dreams will be shattered — but illusions always are, and we’re all stronger for it.

  30. It’s more than a coincidence that the first government-managed recession in history soon became the Great Depression. Business cycles, as painful as they are, sort themselves out eventually. With government as mediator, they become patronage events.

    “As far as they were concerned, a central tenet of the U.S. Constitution is that people are free to make contracts.” This is why people, like my friend from Indonesia, open their factories here….or did. This is what Hayek meant by the rule of law, and now it’s gone.

  31. Those same skittish investors had no problem investing in exotic derivatives when the returns looked too good to be true. They had no problems looking the other way when all the completely misaligned fundamentals in the “free” market pointed to the truth that it was being manipulated to an extreme degree. But NOW, we can’t trust government to monkey around with a market that has monkeyed around with everyone and pilfered trillions of dollars. This has been done with essentially fraudulent instruments and coordinated price-fixing in the form of mass speculation controlled by very few people.

    There is not a shred of integrity left in what was once the market. It has failed irretrievably as an organizing ethic for society. It is not self-regulating. It allowed massive theft and fraud and now it wants what? “It” is an expression of society, and hopefully democracy in which greed is definitely NOT good. What we have here is a bunch of economic libertarians that don’t want to believe that their central motivating ideology has failed and are anointing themselves as the new saviors and experts and pointing the finger of blame everywhere else.

    I’ve had it. We’ve paid you trillions to ruin the market. Now we need a new organizing principle going forward. Even without this greed-driven mess, the market and its growth-at-all-costs is at odds with environmental reality and would need to adjust to a non-material basis of value in order for us to survive as a species. We need creative and smart people starting to work on making the transition. I’ve offered a few suggestions on another post. I wish more people would.

    Zeus Yiamouyiannis

  32. To clarify, lest there be suspicion I’m simply a romantic socialist or something: Despite my rather purposeful and strident criticism of the present market system. I believe a new market ideal has a real place going forward and strengthening democracy. Local currency, farmers’ markets, internet global citizenship, social entrepreneurialism all show great promise in taking us where we need to go, but these rely on “quality of life” (globally and locally) as the indicator of value and not maximized, individualized profit at all costs.

  33. AngryHomeOwner wrote: “THE OVERWHELMING MAJORITY OF HOMEOWNERS are not speculators. We are victims of people like you that caused this housing bubble in the first place.”

    I fail to understand how you are the “victim” of anything. If you (and the other so-called “victims”) bought your home before the bubble, then its value is still greater than the price at which you purchased it, so what’s the problem? If, on the other hand, you bought your home during the bubble or pulled out equity during the bubble such that you are now underwater on your mortgage, then why do you have anyone to blame but yourself? A home is an investment. Did you have a legal guarantee that its value would never drop? No, you did not. You are the “victim” of the fact that you made a poor decision to buy.

    And I should add that the bubble bursting was foreseeable. I, for one, saw it coming, and refused to buy my first home during the bubble. Others did the same. The real victim would be I, if my tax money goes toward nullifying your mistake.

  34. Alex (#19),

    Thank you. A voice of sanity. The historically high foreclosure rates can be very closely linked to behavior that would be properly termed speculative. Speculation is more than the buying of multiple properties for quick and profitable resale. Any transaction that relies on asset value appreciation (without further investment) to make economic sense is a speculation. Properties purchased with ARMs, where the buyer cannot afford the forecasted reset is a speculation. Interest-only and negative amortization loans are almost entirely speculative as the borrower, in almost all cases, is relying on expected price appreciation to shift into a more standard loan. People walking away from affordable mortgages on properties whose values have left them upside down are exhibiting speculative behavior (i.e. losing interest once the chance of profit is minimized). The increasing ferocity of this recession is increasing the frequency of non-speculative debt problems – usually lose of jobs or health problems – but the big ramp-up of foreclosures through last year was coming exactly in areas that had very high utilization of speculative credit products.

    Speculators are simply people who engage in speculative transactions. Angry Home Owner (#6) if very probably a speculator, based on the analysis provided by Alex. I do not want to bail-out speculators. Beyond that, as mortgages are non-recourse loans, the rationale for bailing out non-speculators is pretty thin, too.

  35. There also seems to be a humungous lack of understand of what this article is saying amongst the commenters. If you look at the current situation, equity in many financial institutions has been crushed…not yet totally extinguished, but getting there. Bondholders have, to a surprisingly large extent, managed to avoid the haircut so far. Bondholders like it that way. Nearly all variants of the bailouts are designed to keep debtholders out of the barber’s chair. What the article is mainly about is saying that the absurd bailouts designed to protect bank debtholders makes it very hard for cash investors to put their money to productive purposes. People: bank bondholders are, in aggregate, the wealthiest folks around the world. Here you have an article in which many serious investors are saying “Let’s not use public resources to defend private contract debt” and you have people rambling on and on about how evil these investors must be. Good Lord!

  36. I can not say if doing nothing is the best course of action but I sincerely believe that this is the fair thing to do. Intervening in the markets after they have turned sour is like changing the rules of the game at half time because our team is not winning! I happen to be playing for the opposing team: as much I would like to own a house in sunny CA I never got to buy one, I rent and I save to buy one, eventually. It was really scary and tempting to buy a house during the last 10 years or so. Scary, because you had a feeling you are missing the train and you are left behind forever, that you would never be able to save enough in your lifetime to purchase a house. Temping, because everybody around you was buying like there is no tomorrow and the easy loans available. Call me old-fashioned but I would like only a modest home with as little as possible debt on it or ideally no mortgage at all. I would like to own the house outright, so I am saving and saving… I would like to see the house prices come down significantly in California, that will be fair for me. I do not support any government funding to banks or “homeowners”. The banks did pretty well for themselves the last decade, shareholders and execs, why give them now more? Nobody has made the banks do these loans and trade their derivatives, they did it because they have chosen to do so for profit, not as a charity or compassion for the homeless. The “homeowners” “bought” overpriced houses, some cashed on the “equity” to live lavishly, while idiots like me counted their pennies. Why “homeowners” should get assistance in any form, what about the rest, what about me? I would want then too a zero-down-negative-ARM and let everybody chip in.

    You are not a homeowner if you have a lien on your house, simple as that. This is what buying a house really is, you own it fair and square. And even if it happens that you overpaid for it, it is all yours, no one will take it from you. It’s a place to live not accumulate wealth: you do not build or store value in your car, fridge or oven (unless you are a gold bug and have a stash hidden inside), why house should be different, it amortizes and needs maintenance. People have started thinking that houses build value because the property values in general have not come down significantly since the Big Depression? Detour: technically speaking everybody rents, even those without mortgage payments rent, this “rent” is called property tax. Try not paying this “rent” and you’ll find out who really owns your house… But I can live with that.

    Back to government intervention: It is unfair to me because it attempts to preserve the house prices artificially high, something that the markets reject. It prevents me from buying a house that I can afford, and by afford I mean save and buy with cash, not “affordable” 50 years mortgage installments and be enslaved for life! This is what people used to do long time ago and still do in other parts of the world; they save and then buy staff. I would have not minded if all this mortgage and bank meddling was done through private funds; this would have been true market at work. But to use taxpayers money, my money, to give to greedy banks and irresponsible people who “bought” houses at astronomical prices without ever thinking of paying them off if unfair to me. That’s it! And I don’t care if the world around me collapses or we have another revolution, so be it. I will be out with a pitchfork and the fats cats will be hanging from the light poles on the streets, both main and wall…

    Sorry for the rant everybody, but this government “help” is getting to me from time to time.

    Disclosures: Male, 40 years old, married, computer programmer, FICO: 810, 250K savings, and still saving…

  37. I’m in a similar predicament to angry homeowner, but with some key differences:

    I fully recognize that I’ve made what is hopefully the most colossal financial mistake I’ll ever make, by purchasing a first home in 2005, with a 7-year ARM (interest, only, of course), 5% down, and paid a price that the rental income on said property would not even come close to covering. However, I did not ‘over-buy’; the payments are affordable by conventional criteria as my wife and I are both employed (for now!!), “DINKs” as they say. I have paid down very little mortgage principal. Given how things have gone, this was a very smart move. Instead, we saved money (good), and did some extensive repairs to the house (we lose); if the bank takes back their collateral, they get the property in better condition than when we bought it, despite what I now in hindsight see was a downright fraudulent appraisal that ignored serious defects, which was used to originate the loan.

    I could go on whining about it, but it was a mistake. Now I’ve got to own up to that. It has taken quite a while to work past the anger and emotion involved about how the transaction went down, those who made certain suggestions or recommendations to me that flew in the face of conventional wisdom, etc. — but I’m over that now. Its now a business decision, as they say. (Sorry, I started whining there for a moment).

    The question for myself, angry home owner above, and countless other citizens is what to do going forward. I have no doubt that our collective choices will shape the future financial picture of this country, but in true American capitalist fashion, I will only look out for myself in getting out of this mess. To that end, I have to decide whether to keep the house, for how long, and to develop a plan of action should either my wife or I lose income. We have adequate cash savings, but using that to keep paying the mortgage in this climate seems like a poor choice. I want to illustrate what many people are facing to frame this in a realistic perspective:

    Here are the inputs to the decision that I’m facing:
    – What legal liability to do I have should I turn in the keys to the bank?
    Answer: none. I live in California, never re-fi’d, had my loan “modified”, or “took money out” of the house. I have no equity. I have no obligation. My purchase money mortgages are protected under the California anti-deficiency statute. This is of importance since I have some other assets and wish to keep them! I
    – What tax liability do I have if I engage in a foreclosure or short sale?
    Answer: I’m meeting with a CPA to figure that out today!
    – What is a credit score “worth” in dollars?
    Answer: This is difficult to quantify, but for someone whose total net worth is 200-300K (incl retirement accounts), its probably worth far less than the ~180K underwater I estimate my house is worth.
    – What is the medium-term inflationary pressure that the country will face after the economic measures currently being put into play?
    Answer: This is pure “crystal ball”, but its worth studying and perhaps making some speculation on various scenarios. The prospect of future inflationary pressure should be something on the minds of people in my predicament. If I am prevented from using credit for the next 7 years and interest rates go up, and the value of a dollar has gone down, I’ll have done myself a great disservice by walking away from the house. On the other hand, unless employment stabilizes, and median wages make a real increase, I should not stay in my home.
    – Can I get a loan to buy another home (i.e. as a rental) should prices stabilize sufficiently where rent will cover a mortgage? This might be a good way to re-build a credit score should I give my first house back to the bank.

    Say what you will about the decision I face and the moral aspects of it. I’m past that! I’ll be careful to follow the law in the moves I make to get out of this situation. Many folks will say “but what about the contract you signed when you took out the loan?” Indeed, what about it? There is a deed-of-trust that states that the loan is secured by property. If I lose the house, the bank will get the property in substantially better condition than when I acquired it, in addition to my pittance of a down payment. This, however, should have been quantified by the bank when they set my interest rate which, while inexpensive in the grand scheme of things, was above what US Treasury bills were of the era, indicating that they were taking on additional risk.

    And with that, we are back to Phil’s original thesis… what about that risk? Who took it, and shouldn’t they accept that? If the government puts into place a broader program (note, I have no plans of filing for bankruptcy protection) to re-negotiate loans, I might not be interested unless substantial principal write-downs are put into place, as re-financing would expose me to additional liability per the CA law I mentioned above.

  38. Doing nothing is politically unfeasable, especially when part of the cause of this problem is poor regulation of the financial markets by our government.

    Spending on infrastructure at this time is a good investment in our country because infrastructure spending has been lacking over the past four decades and it will put unemployed workers to work.

    Our country’s future ecomonic prosperity is dependant on leaving the consumption based model and returning to wealth creation, creation of tangible and intangible goods. Until that point, hard times will continue for us.

  39. Eric’s lambasting of the comments isn’t entirely correct. Many people were led into speculation without knowing that this was so; this is probably what investors fear (but big bad government is an easy whipping boy).

    Okay, many were dumb; hey, professionals were led by the nose, too. Anger is a natural response to being mislead. So, who is smart enough to have the answer here?

    Minsky, out of Harvard, had a good notion that is being resurrected.

    In Minsky’s terms, some who thought that they were hedging were actually speculating. As well, we have seen some ponzi schemes come to light. There are more just waiting to see the light of day.

    My challenge to the finance guys (and the smarties): show me that hedge funds are not actually ponzi in nature. They reek to high heavens. Yet, because the client class is the super rich, that makes it okay?

    And, accumulation of wealth is really not a measure that stands up through time. Lets get real here and do it right.

  40. Write on author! I am part of the do nothing coalition, perhaps the political party should be restarted…oh yeah! The libertarians have had such a mantra all along. Angry Homeowner, you say kick out the speculators, well Warren Buffet paid $30K cash for his first house and still lives in it, so who would get kicked out first, you or him. I am buying homes in Phoenix for $15K on a credit card and giving owner financing to “subprime buyer” for $60K at %10 interest. I know that sounds indecent but if banks aren’t lending someone needs to take their place at the local usurer. Government will make this worse, I only hope I am retired in New Zeland when Ayn Rand’s vision comes to pass.

  41. As a long-term and long time renter who is indebted to no one, is not the recipient of any bailout whatsoever, and who owns everything she has, I would like to comment on “Angry Homeowner” above:

    More likely than not, “Angry Homeowner” used the equity in his/her residence to purchase another home for speculative purposes as “Eric” proposes. Otherwise, being upside-down would make no difference, wouldn’t be an issue or concern. I wonder if “Angry Homeowner” has already taken out a HELOC on the spec house and is in a huge amount of debt. I suppose we renters are going to have to pay for “Angry Homeowner”‘s irresponsibility?

    This sort of thing goes on all the time in college towns: where parents purchase a home (using the equity in their existing home) for their student, who then goes out and recruits rent paying room-mates from among their friends to cut the cost of the parents’ mortgage on that place. Then, 4-5 years later after the student has graduated or left college, the parent sells the home at a large profit and uses those funds to pay off their student’s fees, tuition, loans, car, etc. So essentially, that student went to college for free.

    This sort of behavior is what has not only skewed the market and defined a reasonable home price based on local wages, but also priced university staff, professionals, educators, and private and public workers from being able to not only purchase a home, but pay affordable rents. Ex: during the housing run-up in California, rents went up astronomically – my rent in Irvine went up $100/mo for 4 years straight (I moved out eventually) – my rent went from $1400/mo to $1800/mo.

    Now just think if MILLIONS of people did this – well, you now have a looming financial collapse (because this Ponzi scheme can only go on for so long) on the horizon that threatens everyone’s financial wellbeing from children in kindergarten (loss of teacher = classroom of 42), to the elderly (loss of pension and adult children who are out-of-work).

    Selfishness hurts everybody.

  42. The original author is exactly spot-on.

    I’m an investor. I have been reduced to being a DAYTRADER because of this nonsense. I cannot hold a position overnight because every time I do, the government comes in, changes the rules, and I lose hundreds of thousands of dollars.

    I evaluate companies based on their fundamentals and my view of the economy. I prefer to buy “long” but will go short.

    I have been repeatedly hammered by rule changes that come out of nowhere, making calls that are correct unprofitable or even big losers.

    There are millions of individuals like me, and thouands of professionals. We simply will not put our capital back to work in the markets where we must dedicate it for any length of time until and unless the rules stop changing. We have lost too many times as a consequence not of being wrong (a risk that all invstors take) but as a direct consequence of the government screwing around and even lying to us or breaking the law.

    I really don’t care what the rules are – just so long as I know what they are, and that they will remain the same.

    See The Market Ticker for more.

  43. Many great and insightful comments! To those of you who are convinced that government intervention in the markets is necessary, I must ask the question; what if the stimulus does not ‘stimulate’ the economy? I personally think the economic issues are beyond the scope of the government to repair. And I also think that the government “intervention” in the markets is what brought us to this point (on the verge of national insolvency). There must be winners and losers, in the market place. It is Government’s attempts to wipe away economic consequences that has fostered this mistaken idea, popular with today’s citizenry, that somehow Government can defy the economic laws of gravity. Take a look at Medicare/Medicaid/Social Security/Fannie Mae/Freddie Mac/Ginnie Mae to see the kinds of market distortions caused by Government intervention-

    Medicare/Medicaid=someone else is responsible for my medical care
    Social Security=I really do not have to save for retirement because I have SS!
    Fannie Mae/Freddie Mac/Ginnie Mae: don’t worry; the Government will not let these Agencies fail……

    We have created several generations of citizens that believe that someone else will take care of them. How is this any different than Socialism/Communism? To me they all end at the same conclusion; economic failure.

    The good news is this fact: the United States has passed through these types of periods before. It does not have to mean the end of the Nation; but it does likely spell the end of our current political and economic practices (which are actually quite far from free-market, Representative Democratic practices). We have all the ills of Socialism (unsustainable social contracts, where government is expected to provide an unlimited level of prosperity) and all the problems associated with corrupted Capitalism (where industry and large private wealth holders can convince the Government to intervene on their behalf to prevent the normal economic consequences of bad decisions, and wealth transfers).

    The reality is that the economic tidle wave that is washing over us may, in fact, save us from ourselves!!!

  44. When I read so many comment such as those posted on this board, I am completely disgusted by the perception of entitlement that so many people have in this country.

    There are many people who were reckless leading up to the bursting of the bubble. That is what causes a mania and this one was the largest ever. Then there were other people who did not act recklessly by modern standards but who were still living above their means or not sufficiently beneath them. The fact is that many homeowners are virtual debt slaves whether they know it or not. It was the mania that pushed prices to the prior levels, but these people still made the bad economic decision to overpay for a ridiculously valued asset or one they could not afford under adverse circumstances. Even aside from the negative statistical data, I cannot tell you how many anecdotal reports I have read of people who bought a home at an outsized multiple to what they could afford yet had no assets or savings and made a pittance of a down payment. Its a lot of them. The question I always have for these people is, what were you thinking? Many or most were incompetent financial idiots and deserve to suffer the consequences of their incompetent financial stupidity. But in any event, the taxpayer (meaning someone else who had nothing to do with their decision) owes them nothing.

    Ridiculous porposals such as those last year in the Bush administration and now under Obama will only make things worse. Those who made mistakes (whether homeowners, investors or banks) want a free lunch at someone else’s expense and the populist demagogues are gong to give it to them in one form or another.

    Whatever the exact course of action, I can guarantee you that it will not ultimately be free. Congress might force “cramdowns” but anyone who thinks that investors are going to stand by and get fleeced and then subsequently provide mortgage financing as existed before or anywhere near it is a complete fool. Maybe domestic investors will be stupid enough to do it but I can guarantee you that if foreigners such as the Chinese or the Japanese get the shaft, they will either invest less in the US mortgage market or not at all.

    And from an individual standpoint, I will say what I have said many times before. Given the growing contempt for private property rights in this country, the most logical course of action to anyone who has the means to do so is to leave the country, take your money with you and get a new passport. There are plenty of other options which do not involve paying the equivalent of a mob protection racket to throw your money down endless ratholes.

  45. I went to a house auction recently. There were about 400 people in a room bidding on about 200 properties in fast action professional auction style. These ranged from vacant lots in ghettos to new single family homes in “nice neighborhoods”. EVERY HOME SOLD. I was only there for about 45 minutes but I never saw a place sell for more than $75k (suburban Washington DC). The point is that there is a market for these “illiquid” assets. This is the fastest way to move the excess inventory and stabilize the wider housing market. Just because the investors, owners, and bond holders don’t want to admit the new reality and market price should not be a reason for us grant them license to write themselves a check on our backs. Many, many people made a stupid decision and overpaid for what was by 2006 a wildly inflated asset. Many people also made the decision NOT to make such a purchase either because they could not afford it because or they recognized it for what it was; a monster of a bubble that would bust and cause great pain. Some of us have been sitting on the sidelines waiting for prices to come back to the planet Earth before purchasing a home to live in. People thought of renters as “wasting” their money when in reality we turned out to be pretty smart by waiting longer and saving more. This recession will reach a bottom as soon as a big chunk of people understand that they lost BIG if the bought real estate in the last 10 years. They need to take the hit and we can all move on with life.

  46. I’m going to make this very simple.

    Did government forcing Fannie and Freddie to lower loan buying standards
    contribute to our situation today? Yes.

    Did Wall Street’s desire to make money without assessing the model risk of something went wrong? Yes.

    Did the average homeowner who bought a home overextend themselves in the last 5 years? Yes.

    I knew someone that could not afford a mortgage and the loan officer just told him to lie on the form.

    And for all those people that want to attack banks as being predatory lenders by manipulating people with fine print and terminology these prospective borrowers didn’t supposedly understand, I have a 3rd grade math lesson for you. Here it goes.

    Borrower: I want to by a home for $720,000. Can I afford it?

    Lender: I will charge you zero interest for the life of the loan. Can you pay the borrowed amount back at the very least?

    Borrower: Hmmm. Let me see $720,000 divided by 30 years is $24,000 per year. $24,000 divided by 12 is $2,000 per month. I only bring home $2,400 per month and I know my car payment is $350. Wow! That only leaves me $50 per month to live on. I probably can’t afford it.

    Bottom line is that everyone is to blame…and mostly it’s the borrower to blame. When I bought my home, I laid down 20%, had a great credit score, and bought a home that was well within my means. The inherent greed of people is what got us here, not the lenders or government. Everyone thought they were going to buy their home for $xxx,xxx and sell it for 20% more in a year. And then the music stopped and people are looked to blame everyone but themselves. Some people should just not be investors or homeowners. They are not capable enough to deal with the bad as well as the good.

  47. Angry Home Owner is an example of the horror of government intervention. Angry Home Owner used “equity” to buy another home. Angry Home Owner wants “relief.” The government has created the perception that certain classes of people who lose money speculating should receive government welfare. “Relief” is welfare. I am an avid supporter of welfare (government transfer payments) for the poor, homeless and children. But I am not a supporter of welfare for speculators.

    Angry Home Owner did not have to buy another house. Angry Home Owner could have just gone about his or her business. If Angry Home Owner’s home price rose 200% and then fell 40%, Angry Home Owner would still be ahead. But greedy middle class speculators don’t see it that way. They want their guaranteed GAINS.

    I bet Angry Home Owner doesn’t just want a way of getting out of his or her second “investment/speculation” home. He wants to have any losses compensated and those losses came out of outrageous gains from the home price bubble that gave him the equity that he gambled on the second house. If he lets the investment house go into foreclosure, he still has his first house. And if he bought it a long time ago, it probably still has equity in it, but if not, that’s tough. If Angry Home Owner went to Vegas and bet on blackjack and lost, or invested in ethanol in Brazil, or bought shares in a textile factory in Honduras, should the US government make sure that his losses are reimbursed with taxpayer money? Obviously not.

    The class of people being bailed out in this hugely fraudulent wealth transfer are two: (1) rich bankers, and (2) irate middle class and upper middle class speculators. Speculators include those who bought a primary residence that they couldn’t afford — e.g. someone making $100,000 a year buying a $700,000 or $800,000 house.

    Let’s talk about welfare for a minute. The tax burden in this country is borne more by the poor than is widely believed. Why? Because for twenty five years the Social Security “payroll tax” which is a tax on every dollar earned up to about $100,000 a year and ZERO after that is not exactly used for Social Security. That tax was hiked to nosebleed heights in the 1980s by one Greenspan Commission that wanted to use it as a slush fund to enable Reagan tax cuts for the wealthy. The surplus collected from the Social Security tax goes straight into the general tax fund of the United States of America. People working at the Dairy Queen pay a lot of payroll tax for Social Security. Investment bankers pay only on the first $100,000 in income and ZERO after that. The amount pilfered from the Social Security Trust Fund in tax collection overages stolen from America’s poor to fund tax cuts for the rich is so far about $3 trillion. I expect that our esteemed government will devise some ruse to explain why that money can’t be repaid because it would have to be repaid from income taxes and rich folk won’t tolerate that.

    So now that we understand a bit about how poor folks contribute to the tax base, let’s talk about welfare. Welfare is good in moderation. Welfare is about making sure people have enough to eat and a place to rest. It’s not about driving a Bentley and having a nice townhome. Welfare is to avoid an army of homeless and hungry. Every year more than 200 people die of exposure in San Francisco. They die of a combination of starvation and exposure to cold. There are an estimated six million homeless in the United States, and I think that estimate is grossly too low. One in five American children lives in poverty. Children should not be punished for the poverty of their parents in a rich country like ours.

    Now I don’t think taxpayer money should provide lavish food and accommodations for the poor. It should be utilitarian, and not even necessarily private. But it should be clean, safe and adequate. If the rich don’t think this is fair or appropriate, they should start spending their money on security like gates, guns, body guards and armored cars. Because when the disparity of wealth grows and there is real poverty, that is a recipe for violence and social deteriorate.

    As for whether Angry Home Owner should receive welfare, I think yes. But only if he doesn’t have enough to eat and shelter to sleep in. If things have gotten that bad for him, I think a cot in a warm, clean government run shelter and hot soup, sandwiches, and job training are in good order. I will happily pay taxes to support this sort of treatment for Angry Home Owner.

    But if Angry Home Owner is such a detestable, evil, selfish person that he thinks that the hungry and homeless who starve and die in our streets are “losers” who he passes by in his enormous SUV each morning en route to work, then we have a clear moral problem here. I want to help everyone understand what a basic sense of morality is.

    America has become a nation of detestable people. The idea that the same middle class idiots who were selfish enough to loudly scream that we have to end welfare payments of $600 a month to poor single mothers with children (a $10 billion a year program that was ended as it was “breaking the budget”) now are asking for hundreds of billions or trillions to keep them from losing paper profits is a sign of deep moral deterioration.

    I’m not worried about middle class homeowners with speculative losses forming violent mobs. That’s not what they do. They may scream at barristas at Starbucks who put too much whipped cream on their morning mocha. But when faced with armed police, I don’t see the heavy set suburban office park worker leading a violent revolution. After all, what these speculators are fighting for is to remain differentiated from the poor, not to join the poor to topple the government and institute a new communist utopia where everyone enjoys the same material comforts. That would mean preparing your own mocha.

    But think about where we’ve arrived as a nation. Not once has any Republican or Democrat or the blaring news media mentioned increased government funds for welfare and poverty. Not once. And a lot of Americans are moving from poor to homeless right now. A lot of Americans are moving from renting a small room to living on the street. But the only “horror” we hear about is interviews with sad faced obese home speculators in Lexus SUVs with smeared mascara saying to the cameras how they “lost everything” and will soon have to rent! Well, renting isn’t so bad. It’s not poverty. You can rent a comfortable home or apartment and eat good food and live comfortably. Such people should not get welfare.

    So how do we end the crisis? I agree with the author that it should be let alone and nothing should be done to interfere in the markets. What the government is trying to do right now is coax investors to invest, speculators to speculate, shoppers to shop. That’s a losing battle. People invest when they think it’s smart to invest and speculate when they think that’s smart. People shop when they expect future wealth from their current speculating. People stretch to buy unaffordable homes when they think it’s clever to do it because they will get rich doing it — they do it to make money, not out of a sense of duty, or because the government has some program to assist them to do it.

    By helping homeowners avoid foreclosure, the government is driving away good speculators who would use their own money to buy up houses. The only speculators they are encouraging are the ones who will use government assistance and little or none of their own funds — speculators who will use government welfare to speculate. That’s not sustainable. To the extent that the government succeeds in stopping home prices from falling by subsidizing mortgage payments, loan modifications, and these other ridiculous programs, they will only be temporarily successful and they will prolong the agony. The home price declines will resume when government support is removed and if it is never removed, home prices will stay flat where the government froze them until the government itself goes bankrupt. The cost of freezing this disaster in place is high.

    Angry Home Owner is probably experiencing the pain of freezing a disaster in a lifeless still. Angry Home Owner is probably underwater on his second home and could walk, but he’d lose his down payment. So he keeps shoveling his income into the mortgage of that second home. Why does he have to do this? Couldn’t he rent it out? No, because it was SPECULATION. Angry Home Owner knew he was speculating at the time because he knew he couldn’t rent this second home out to cover even half of his carry costs (mortgage/insurance/taxes/maintenance). This huge gap between rental income and carry costs is what identifies Angry Home Owner as a speculator and not an investor (not that investors deserve government welfare anymore than speculators do).

    So Angry Home Owner is doing the insane thing he wants the government to do too. He’s throwing his current precious wealth after a disaster and it is disappearing into a black hole. The government is encouraging him to do it because the government keeps announcing these welfare programs for middle class speculators like buying down mortgage rates using taxpayer money, doing taxpayer backed mortgage modifications and other sick transfers of wealth from the working poor to middle class speculators.

    The promise of future bailouts and programs keeps people like Angry Home Owner from doing the rational thing, which is to walk and take the loss. If you take the loss, then you stop bleeding money. When the sum of losses is tallied, it will be painful. It will be a disaster. But it will be a temporary disaster. The Great Depression was as much a function of government intervention as anything. And it wasn’t the intervention to feed and clothe the poor. It was intervention by throwing money at banks and investors to try to stem the losses.

    There is a bulge of middle class in America who work to differentiate themselves from the poor using symbols. Those symbols are certain sorts of cars, clothes, lattes, houses, second houses, vacations and other things. That class works very long hours for the purpose of deriving the satisfaction of identity in a group that is “comfortable” or “doing well financially” or whatever. It’s a symbolic identification with a class that is materially wealthy, but not really wealthy in the sense of having a lot of money like the bankers do.

    You can’t maintain the part of that middle class identity that drives people to work long hours and speculate by using government welfare. Government welfare carries the stigma of having failed in the race to acquire symbols of material wealth. The upside down logic of the past 24 months where government welfare is going to be dispensed to keep middle class people steeped in symbols of material wealth is a new low even in our bizarre upside down post modern era. It can’t work because it is the antithesis of itself. It’s like using a revolver to deliver your daily dose of magnesium. It can’t work and it’s so bizarre as to defy explanation.

    This inability to even talk about it in logical terms is why nobody can. Hank Paulson, and now Timothy Geithner have both been wholly unable to explain how handing all of this money out is going to help “return the economy to prosperity.” Obama was asked about the bank rescue plan and the experience of Japan and Sweden and how Sweden’s plan worked and Japan’s didn’t work and Geithner appeared to be using Japan’s plan. Obama responded that the United States is bigger than Sweden and has more banks. This non answer is an example of how completely off the charts we are. What government is doing makes such little sense that no one can even explain it without simple platitudes like “it will help create millions of jobs” or “it will help keep people from losing their homes.”

    The idea that someone who has an $800,000 mortgage on a $400,000 home that carries a payment of $6,500 a month and the house would rent for $2,400 a month is going to be helped by subsidies, intergenerational mortgages, a repeal of the 13th Amendment to allow at least debt servitude (which will be key to some of these refinancing schemes) — this doesn’t benefit the homeowner at all. The homeowner would benefit by walking away and renting the house across the street for $2,400 a month. Problem solved!

    And interestingly, the 13th Amendment talks about involuntary servitude. Maybe Congress could create a new legal framework for indenture, which is voluntary servitude. Instead of homeowners walking away and starting over, we could create a vast, complex system where they could pledge through indenture to banks or investors their lifetime servitude voluntarily in exchange for low interest loans. So instead of losing that $400,000 house with the $800,000 mortgage, you could have your mortgage principle lowered to say $450,000 in exchange for a 20 year indenture where you’d then have to do whatever your master required for 20 years and disobedience, escape, etc. would carry criminal sanctions (no one like unruly indentured servants).

    In closing, I believe that we are in store for a decade of horror not because government is acting too slowly, but because it has already acted to quickly and without any thought. The only thing driving government policy is the political and financial connections of those who are being rewarded. Some like the bankers practically own members of Congress under something similar to indenture, others have political power that could threaten a loss of votes. The relative power of each group or person can be seen in the amount of money they are being given. The last consideration of anyone is what will cause this downturn to end. And that’s why no one can clearly explain why what they propose will solve the problem.

    The “bad bank” buy toxic assets for nosebleed prices from banks and investors plan takes the cake. “If we pay $100 billion for these toxic Citigroup loans that the market thinks are worth $12 billion and that are jam packed with loans that already defaulted and with others that are secured by imaginary houses that don’t exist, then the bank will take this money and lend it to consumers and businesses and that will fix the economy!”

    So let me get this straight. I loaned a guy $500,000 in exchange for a note (an obligation to repay) and he can’t pay me back. So if I sell you the government his note at face value and you give me $500,000, you think I’m going to loan the deadbeat ANOTHER $500,000? OK, let’s assume that the government guarantees the new loan and the taxpayers are on the hook for it. Then I’ll make the loan. What do I have to lose? I’ll make ridiculous loans just like when Wall Street was able to defraud international investors with such loans. But why would the delinquent borrower WANT to borrow another $500,000? To make payments on the other $500,000 loan that he’s delinquent on? To open a business in the midst of a downturn like this? To go shopping?

    I will never begrudge my tax money going to real poor people. I will never complain that my tax money is being wasted on giving a hungry child a school lunch and that such programs are “too expensive.” I will never shout and complain that using my tax money to provide shelter and food for homeless people, poor people, poor hungry children is “An outrage! Social engineering!” that merely encourages poverty and the lazy to choose not to work. I won’t begrudge these things because I am not a big ass. Only a big ass would say that it’s too expensive in America to give a cot and some soup to a homeless person or food to a poor child. America, apparently, is jam packed with big asses (figuratively and literally).

    But when it comes to using my tax money to back speculators’ losses, yes that is more than a little irritating and I don’t support it. More than that, those people like Angry Home Owner who not only want it, but advocate for it are best keeping their identities anonymous like Angry Home Owner has. Why? Because it’s antithetical to their goal in life. If you have two homes and a big SUV and your mocha and you’re chatting up friends, will you get the same kick out of it if you tell them that you’re on welfare paid using their tax money.

    “Hey Bob, how’s work. Oh, yeah. That’s my new Lexus SUV. Yeah, I got it mostly because it has a lot of space for my enormous ass. It was pretty expensive, but things have been going well at work, I got a bonus, and I got a bunch of special tax breaks and the government is paying half of my mortgage on my second home using the money of taxpayers like you, Bob. That’s really freed up some of my income to shop a little. Because I’m real savvy on money, the government and I came up with this plan for my second home. I’m going to pay half the mortgage and the government will pay the other half, while it sits empty there, and together we expect that we will break even by 2020. But if not, we’ll just cross that road when we get to it. That’s my big plan! So how are things with you, Bob?”

    People who are going to lose investment homes and cash they wagered on them are not poor. When I say poor, I mean hungry and can’t afford enough calories to keep the meat on your bones.

    Angry Home Owner wants 1% interest rates for home loans. Really? And taxpayers are going to pay for that? Does that include million dollar homes? Will the taxes of the poor counter clerk at the DQ help to subsidize your 1% mortgage on your million dollar home? Is that loan for your primary residence, your investment home, or both?

    In all fairness to Angry Home Owner, I do think bank regulation should be tightened a whole lot. I think Henry Paulson’s activities at Goldman Sachs securitizing mortgages, dealing with bond rating agencies to give those mortgage bonds AAA ratings and then his firm’s selling those bonds as safe and secure while simultaneously making massive secret bets that they would default — I think there should be criminal investigations of Paulson, Kashkari, Robert Rubin, and I think Chris Dodd should be investigated and removed from office for his illegal bribe from Countrywide bank in the form of low interest loans via their “VIP” program. That Thain jerk should be prosecuted for fraud too and jailed. Not one rich banker fraudster has gone to jail, but if you read the Santa Barbara police blotter in the News Press, you’ll see that a homeless man was arrested and held on $20,000 bail for stealing $7 worth of bread and cheese from a grocery store.

    I think we may indeed have mobs with torches and pitchforks, but when they come, they aren’t going to be middle class homeowners really pissed about taking a bath on their speculative second home purchase. When they come, they will be very poor people and they outnumber the complainers like Angry Home Owner by numbers greater than he realizes. When they come to his neighborhood, they are going to be looking for food. They aren’t going to knock at his door, they are going to break it down. Being such a revolutionary, will Angry Home Owner feed them and vow to join them, setting fire to his own house in protest and joining the mob as it camps in the forests during the day and travels at night toward Washington DC to besiege the capital? You ready for that Angry Home Owner?

    I’ll tell you right now, Angry Home Owner, if your house’s price rose and then fell, you lost nothing. I’ll bet that if you bought your primary residence a few years back, you’ve lost nothing. Indeed, you’re probably ahead. Your problem is that you spent the money. Your home skyrocketed in value, so you borrowed against it to take lavish vacations, buy an SUV, buy an investment home. If you lived within your means and didn’t speculate, nothing about this downturn would have affected you at all. It was all your decision. You called the shots. No real estate agent or mortgage broker (no matter how slimy and vile such people are) held a gun to your head. They didn’t point a gun at you and say, “Sign, speculator, or I’ll shoot!” They tried to turn you into the same slimeballs that they are. They probably said, “Oh, if you get this interest only mortgage, you’ll be able to deduct 100% of your interest payments and pay less in taxes than a poor person working at Wal Mart! And when this house rises in value and so does your other one, you will be a millionaire, just like me and you’ll be able to walk with all that cash! You will be able to take $500,000 in capital gains from your current residence 100% tax free and then move into the second house for two years and take $500,000 in capital gains from that house 100% tax free while that poor schmuck who made your mocha has to pay 12% tax on his $400 a week salary in just in “Social Security” taxes that get funneled into the general tax fund! Oh we’re both going to be rich!” Is that how the conversation with your real estate agent and mortgage broker went? If you made big gains on your primary residence and the investment home and got 100% of the capital gains tax free, would you have at least donated, say 10% ($100,000) to support food and shelter for the poor? I hope so.

    The greatest risk our stupid government is creating is that they are blowing all their cash too fast and too early. When the real poverty comes and they claim to not even have a few billions in money to pay for food and shelter for the desperately poor and hungry, there will be hot memories of the TRILLIONS that the government gave to banks and middle class homeowners/speculators. You can expect civil unrest at that point. If it gets to that point, civil unrest is a certainty. And I’m sure they have a plan for that too. It’s called Plan V (the V is for real violence).

  48. The United States spends more on its military than every single other country in the world combined. Yes, 160 or so countries’ military budgets combined are less, a lot less, than the US military budget.

    This is one reason why I’m not worried about a revolution. When the civil unrest comes, I think people will be surprised at how fast it gets put down. Americans have a joyous and vague appreciation of the destructive force of real military power. Just a few quick strokes and there will be quiet docility. There may be crime, but if it rises to the level to challenge government, you have no idea how impotent even millions upon millions of of Americans are and how massively powerful and well run our military apparatus is.

  49. EM said:

    “And from an individual standpoint, I will say what I have said many times before. Given the growing contempt for private property rights in this country, the most logical course of action to anyone who has the means to do so is to leave the country, take your money with you and get a new passport.”

    Well, guess what? The US government is well aware of the logic of that particular course of action, and is proposing action to prevent it. Have a read about the “Exit Tax”, that would, for anyone renouncing their US citizenship, levy a one-time capital gains tax on their worldwide net worth. Here’s an article about it (though it’s from May of last year):

    Your proposed course of action, by the way, requires renouncing one’s US citizenship, as the United States taxes their citizens wherever they may reside. So simply leaving the country isn’t enough.

  50. Sean Olender has the situation pegged. And I don’t think people are done making foolish financial decisions. I need only look to my family and friends to see this.

    My sister just bought a house that she cannot afford because the price was so good instead of buying an affordable house and paying off student loans, cars, credit cards, and family members.

    My best friend just got a tax check back for likely more than he paid in because of the number of kids he has. He bought a big screen TV and a Playstation3. At the same time, his factory has been cutting hours and overtime regularly….

    My parents are divorcing, which will half what little savings they have. They both have new televisions, car starters, designer personal accessories, satellite TV, cellphones, etc. The spending continues despite poor employment prospects.

    Of course my family gets teased for turning down the furnace at night when we are sleeping, and selling products we don’t use on ebay or craigslist. We are preparing for the worst, and everyone around us seems to be bent on going down in flames. They are the majority and we are the minority.

    I find it hard to believe that economic recovery can be built on the backs of people who will quickly run out of resources. I don’t know what will happen when there money runs out…and it will run out…

  51. Truly amazed at some of the comments on this board. People still believe goverenment is the answer to the economic problems of the country. What programs can anybody point to that are truely successes of the government?

    Good example of the government interring in the makret place is this $787 billion stimulus bill. Anybody really think its going to create a job? I own a small business. If I get a one time contract I don’t go out and hire a bunch of people and new equipment for it. I know its a one time shot so I bank the money. It is artificial demand. If I am able to get a contract with a company then I can look to build my business, purchase a new vechicle and hire people as it will be a client that will continually provide me with revenue.

    Housing prices have to come down. People knew they could not afford the houses they were living in. They were playing the game. True banks were a souce of the problem. But the government was the biggest culprit. I am a little tired of the government blaming the Republicans for deregulation and therefore we need more. What is the FDIC, SEC and Sarbanes Oxley for. Isn’t that enough regulation? They all failed miserably. The SEC was alerted several times about Madof and audited the firm multiple times and came up with nothing. But now that we have a crises we need to have more regulation-I guess that makes sense. And we will lose more jobs as bank go over seas.

    They are currently trying to prop up the housing market by freezing foreclosers and altering the terms of the loans. This will not work, it will be a total failure as housing prices will continue to go down. The govt will get into setting rates and what houses people can purchase based on there income level. Already today I heard that they want to modify loans down to 31% of homeowners income. That means the median priced home will fall to that level quickly as banks will not loan out money that does not fit this criteria.

    And finally for all of the people crying that they have upside down mortgages and are losing there homes-tough luck. You should have asked questions about the loan and should not have lived above your means. Look in the mirror and you will see the true problem. If you didn’t sign on the dotted line the country would not be in this mess.

    Before you get upset with me for this post I am the one paying for all your mistakes. I work a job and own a business. I rent a house because I used common sense and realized the market was absurdly over priced. Therefore, you should thank me for you bail out money.

  52. > What programs can anybody point to that are truely successes of the government?
    How about the Internet? GPS?
    While they botch lots of things and should leave housing alone – and shouldn’t leave the big banks alone – I find it hard to read online that the government has never created value, because they helped lay the foundation for ‘online’ existing.

    We sold in 2005 because we recognized the bubble and that it was unsustainable. House prices have to match income, because that’s where people get the money to pay for them. Prices based on being able to create credit and sell the created credit upstream can’t last. I wish the FDIC would do a proper audit and take the top ~20 banks into receivership where they belong, leaving the rest of the economy and the world to recover as best it can. That doesn’t look likely.

  53. Much water has flown since the Real Estate bubble burst and as Warren Buffet said, “It is only when the tide goes out that one sees who has been swimming naked”.

    Why am I paying for my neighbors Vacation and cruise to Hawaii and Monte Carlo, their multiple trips to Vegas and the exotic chandelier and other high priced furniture in their home?

    Here is the story of a friend who bought a New home in Tracy, CA in 2004.

    The cost of the home at that time was 350K. I paid 20% down. My neighbors also bought the same model at the same time with a 3% down payment.

    They refinanced with a 3/1 Arm cash out in 2005 for 500K because the value of the home had gone up. I did not do any such thing and just continued to pay my mortgage. They quickly spent the money on buying the exotic chandelier and other high priced furniture in their home and went on a Vacation to Hawaii and then on a Cruise to Monte Carlo. In between they had time to party out in glitzy Vegas.

    In 2008 their first re-set took their payment way above what they could afford and they fell behind on their payments. The current value of the home is back to what it was valued in 2004 – 350K.

    Now, per some of the advocates of foreclosure prevention, a principal write down (from 500K to 350K) is going to be handed out to my neighbor by the government using my tax dollars, so that he can continue to pay the same monthly payment as me after having run through 150K of Tax payer money! Thus forcing me to pay for my neighbor’s luxuries?

    Both of us have teenaged kids. I did not indulge in any of the splurges that my neighbor indulged in. I in fact saved up for 8 months of living expenses in case I lose my job, I put some money in a CD so that it could help pay for my kids college tuition fees!

  54. Look all, in regards to the audacity of Government doing nothing – If people are in need, then the ones who know them best will step up and take care of them…just like days of old.

    Look to the private sector (Churches, Synagogues, etc.), and organizations like United Way, Salvation Army, to do what the Government cannot do – take care of the people in each community.

    The Government can help by not changing the rules so quickly, invest in professionals, instead of kids, to oversee the financial sectors; and, work on macro level items. Continuation of welfare and food stamps would be a good thing, thereby leaving the individual States to take care of their own unique projects.

    By letting the people take care of their neighbors, we not only free up our Government to focus on the larger issues, we avoid growing Government to unsustainable levels ( I believe at WW2Govt was at 12% GDP – now it’s up to 40%?), and we maintain our freedoms, while not turning more personal dependency on the Government.

    E Pluribus Unum.

  55. Lots of great posts here, from both sides of the spectrum. Healthy to hear different perspectives, even if not in agreement. Ok, heres one man’s opinion. All this talk, and looks like action soon for bailing out every hog at the trough (banks, homeowners, autos, porn industry, etc). What about the majority of taxpayers that had nothing to do with any of this? With all the so called “smart” acedemics hired to figure out this problem, why can’t the taxpayer be factored into the solution. And not some BS like “Gov’t buys crap assets from banks and resells later for a profit on behalf of taxpayers”. What about something like this.

    Gov’t allows idiot homeowners that are upside down to walk away from their mortgage. Or those who wish to remain can have the mortgage written down to market. Banks take half the hit (this assumes no taxpayer funds to banks). Shareholders/bondholders take their medicine as that is part of speculating./investing. Ok, heres the kicker part-will probably piss off some of you but hear me out. Government (taxpayers) take the hit for the other half. Market for housing is allowed to reset to where prices should be. Homeowners that are drowning are given a lifeline to get out of the debt situation and hopefully move on to a more sustainable lifestyle (lower standard of living which is what you can afford). Blah Blah tells us something new in your plan Mr. Turd that we havn’t already heard. Patience Grasshopper. I will now impart to you the wisdom from the sacred dog turd. Here goes. Any bailed out taxpayer has a liability to the government for the bailout amount, including interest until it is paid off. Wait Master, I do not understand how these people will be able to pay back such a debt. Ah, GH here is the secret of the sacred D.T. These people have until they reach retirement age to pay back these funds. if they do not, the amounts will come from their social secuurity payments that are “owed” to them. If they happen to die before the debt is paid off from ss, taxpayer is first in line when the estate is settled, including any life insurance proceeds that pay outside of the estate. So let me make sure I understand Master. Banks take a hit like they should but are not crushed, thereby supporting our financial system. Homeowners are given a chance at life but are not off the hook. And taxpayers don’t take it in the pooper. Ah-so master! (sound of gong in background)

  56. RichTurd you stated in the 2nd paragraph:
    “Market for housing is allowed to reset to where prices should be.”

    The problem is that sellers do not want to do this. Many homes are sitting vacant or are being rented out because sellers do not want to “give it away.” They refuse to think that they should have to take anything less than whatever percentage they planned on taking in profits on the sale of the home/property/land.

    Thus, they WANT government intervention in the housing market to act as a safety net for their “investment.” Why do you think Obama got elected?

    As I posted above, I am a renter. Recent example: My architect LL is using the rent income from this rental to support her declining business of architectural design. She recently had this rental reappraised presumably to extract more money from the bank on refi (this is her 2nd appraisal and refinancing in less than 2 years-btw, this rental should be cash-flow positive with a monthly profit of *at least* $700/mo). She and the appraiser laughed in my presence regarding “what a great rate is out there right now for refinancing. So many are refi’ing now…business is great!”

    Laughing. And here I am paying for their irresponsibility. If her business is faltering, then she needs to lay off her staff and sell the building she operates out of and work out of her home on a part-time basis as many people have to do these days. But no, she simply goes to the property ATM and extracts more cash to continue the dog and pony show.

    Are these people concerned about bringing down the country or even the entire world due to their unending greed? NO.

    What are the chances that any of them would agree to repaying bailout funds upon retirement as you suggest? NONE.

  57. CG. Some good points. The focus of my thesis is not so much whether or not housing will reset. My point is that there is a way to make (force) bailout recipients repay their debt. They would not have a choice of whether to pay back or not. Funds owed would simply be deducted from social security payments or estate settlement. Instead of taxpayers paying for their mistakes, taxpayers become creditors. There are ways to create incentives for people to pay back these funds. Just have to make it painful enough for them do it. And if they don’t, they pay in the end.

  58. Rich:

    You make some interesting points, but there is no way in hell I’d take you up on your proposal (for details of my predicament, see above). Depending on the circumstances of a borrower, the only skin they have in an underwater mortgage is their good(?) credit score. I will not sacrifice a cent of retirement savings, or risk indentured servitude to preserve my credit score.

    PS, since my post above, I have consulted a CPA (in addition to RE attorney). I have zero tax liability if I walk away, and zero liability on the debt. I do wish to exit the situation gracefully, somehow, and thus I continue to pay my mortgage on time every month (I can afford it, but made the mistake of taking a time-bomb — I mean ARM) note.

  59. RE: Angry Homeowner’s post February 12.

    >I used equity to buy a new home and now that equity is gone, and I am >upside down because of greedy unregulated, unrestricted asshats you call >investors. You still got your money, I deserve my home. So you damn well bet > I want relief. And I don’t give two shits if you ever invest another dime or >make another dollar.

    I have only one question for Angry Homeowner and thousands of others in the same self – induced – as far as I know nobody put a gun to these Homeowner’s heads at the close of escrow – negative equity situation. WHEN YOUR HOUSE APPRECIATED IN VALUE AS YOU SURELY MUST HAVE EXPECTED, HOW MUCH WERE YOU GOING TO GIVE BACK TO THE GOVERNMENT AS A DONATION? That’s what I thought, big fat zero. And with our ^&(*(ed up capital-gains taxes on homeownership, there would not have been any forced donation either as long as you stayed in your house long enough.

    Grow a set and quit trying to blame others. YOU MADE A CHOICE. I choose to live my life as a chooser, not a victim. Quit playing the victim.

  60. The banking system would not fail…just some banks within the system. America has about $6 Trillion more in “overleverage” that needs to be purged/cleansed from the system.
    Do not doubt for one second that you are in a depression. Your lying politicians begging for your vote tell you otherwise but I hope you are smarter than that.

  61. I agree with what you say and I am sure you arent making up the conversation with you money management friends. The problem is we live in a democracy.

    ‘Much of the justification for government intervention comes from the assertion that markets have failed. One money manager scoffed at this idea. “The markets are working fine, but they’re giving people answers that they don’t like, so people cry market failure.” ‘

    I totally agree with this. The thing is, if our government didnt try to intervene, first under a conservative Republican and now a moderate(but more liberal) Democrat, the “public” would be even more outraged. Welcome to mob rule.

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