Posted on 09/26/2008 4:52:09 PM PDT by TigerLikesRooster
STIGLITZ CALLS BUSH BAILOUT PLAN "MONSTROUS"
Wednesday, 24 September 2008
(Ed. Note: Everybody has an opinion about the current Wall Street meltdown and how best to deal with it, but perhaps the opinion of a Nobel Prize winner in economics should carry special weight.
So it is interesting that recent remarks by Nobel Prize winner Joseph Stiglitz to European reporters did not get much play in the U.S. media. Could it be that the U.S. media, so comfortable with Wall Street’s crony capitalists, is part of the problem, too?
This report on Stiglitz’s analysis is reprinted from MercoPress .)
Economy Nobel Prize Joseph Stiglitz last weekend said that the current bail out plan for the U.S. financial sector would be "monstrous" for US taxpayers.
"This plan is nothing else but a short term solution," said Stiglitz in a Sunday interview with Germany's Frankfurter Allgemeine Sonntagszeitung (FAS). "We're turning risk investment funds into the hands of taxpayers," pointing out that since no private investor wants to take responsibility for "risk investments, we're simply wall papering them on to the taxpayer, and this is monstrous".
According to Stiglitz the current crisis marks the end of a "disastrous economic model" and the end of the ideology "by which free and deregulated markets always function." As a consequence of the current situation the US financial system as well as the US government "has lost all credibility."
Stiglitz argues that to rescue the system and bring stability to markets, the US government is planning to buy from banks and financial institutions all "non liquid" assets that nobody wants and were the origin of one of the greatest and deepest crises ever faced by Wall Street and the US economy, the Great Depression of 1929.
For this reason, the Bush administration has requested from Congress US$700 billion for a special fund to purchase these assets and bring stability to financial markets. However, private estimates believe the cost of the final bill could be well over US$ one trillion.
But Stiglitz, who is currently a professor at the Columbia University in New York, the Bush proposal will not help solve the problem: "there's every chance that other banks could also be affected."
Stiglitz believes the root of the current situation is the sub prime housing problem and that government assistance must be directed at the mortgage problem. "This is only the beginning of the crisis," he said, and predicted that the US is on the brink of a prolonged recession.
The solution is not bailing out banks by eliminating "toxic" debts, but rather helping home owners renegotiate conditions of their mortgages.
Still, US public opinion seems to be split regarding the rescue plan announced by Treasury Secretary Hank Paulson and which is currently under discussion in the US Congress.
A poll from Zogby International shows that 46% support the package and a similar percentage is against it, while 8% are undecided.
But opinions coincide regarding the depth and extent of the crisis: 70% see it as a long-term threat and only 24% believe it's a short-term situation. An overwhelming majority, 84%, are convinced that it's only a matter of time before other investment banks and some of the US main financial institutions collapse in the coming months. The Zogby opinion poll has a plus/minus 2.1 percentage points error.
In spite of the urgency requests from President Bush and Secretary Paulson, Congress is taking its time and the opposition Democrats insist in including aid for families affected by housing foreclosures and limits on the “golden parachutes” awarded to CEOs for mismanaging their firms.
SOURCE: MERCOPRESS
GOP got it right.
“Nobel Prize”, hope his was based on real economics and not psuedo-science like algore’s
Works good in theory, but who gets to renegotiate? I'd like a lower principal and lower interest rate on my mortgage. Sure I can afford it, but still, if the guy next door gets to reduce his mortgage obligation by $100,000 because he was stupid enough to buy a house he couldn't afford, why shouldn't I be entitled to reduce my mortgage obligation even though I can afford to make my payments and I didn't buy a house that was bigger then I could afford?
If Joe Six pack gets his mortgage renegotiated to reduce his principal and interest, then I want the same deal.
Nobel Prize is a joke. Arafat, Gore............
Stiglitz was an “anybody but Bush” stooge in 2004. He’s an economist, and generally knows what he’s talking about, but he is no friend to Republicans.
Interesting that we’re getting economist after economist calling the $700 billion bail-out a piece of crap. Yet the Rats are going against common sense.
Thanks for the post.
yes, but are we surprised?...no...he's a globalist afterall....
Good to know who was maligning him, then I know if he was on the mark. Thanks.
Can someone answer a question for me or correct me if I’m wrong?
Fannie and Freddie sell these subprime loans to investors.
If the loans go in default are the investors backed by a guarantee by the Federal Government?
Thanks in advance..
It doesn't take a Ph.D in economics to be "right" on this one. Stiglitz loves to tell the Euro audience anything bad about Bush/Repubs.
It would be fair if they extended the term for payback. If they lower the payments through extending the term, then everyone has to give a bit, EXCEPT the taxpayer. The real issue is finding the payment that WILL be paid by the borrower. People renegotiate on this basis all the time. Likewise, people renogotiate ARMS and interest only’s all the time. That’s the point, you’re only supposed to use an ARM if you intend to be in the house 3 years or less. The interest only loan is the same, but it’s because you expect an income increase in the very short term.
At that point, the homeowner is either selling or renegotiating for a fixed rate at a term he can afford.
No friend of Republicans?
He loathes Conservatives. He loathes Reganomics.
In a column he penned for The Guardian UK, Stiglitz wrote:
“Today, in contrast to the right, the left has a coherent agenda, one that offers not only higher growth, but also social justice. For voters, the choice should be easy.”
Stiglitz is an Obama boy, 100%
For instance the problem of dealing with folks who are currently in default because they cannot manage current rates provides an interesting challenge. There are a few choices:
1. Renegotiate interest rate and principal outstanding to reflect what the current occupant can pay and what the market currently says the house is worth (rather than its Greenspan housing bubble peak price).
2. Punish the deadbeat by throwing him out, repossess the house and sell it, at a very large loss for what it will get at auction further incurring the loss on the paper you are going to have to buy back to bail out the bankers.
3. Punish the deadbeat by throwing him out, repossess the house and keep it on inventory until you can sell it through a realtor in a normal fashion, leaving it to sit unoccupied where it will rot and be vandalized, thereby losing all value, destroying the neighborhood, and costing you even more in taxpayer bailouts.
Option 1 would seem to minimize the financial losses all the way around, but the so-called free market solution preferred around here would execute #2 or #3 and ruin everybody. Unfortunately Stiglitz goes for opion 1, which makes him a communist. I predict that I will also be called a communist within 10 posts of hitting the post button.
That is why he is a communist like me. I think Travis is a communist too. I don't know whether you have been called a communist yet. I predict it, but just haven't seen it actually happen.
There you go. I don’t keep up with his every comment, but this guy is pretty easy to figure out.
Actually the difference between a 30 year mortgage and a 50 year mortgage is only about a 5% or 10% discount in the P&I payment. Extending the term is probably not going to be the answer.
The only real answer is forgiveness of the debt or turning a mortgage into a rental contract or maybe a rent-to-own contract where, if the homeowner makes his payments on the rent timely for a long period of time, a portion of the rent would apply to a down payment on a purchase at a pre-determined price (kinda like a stock option).
But in order to do that the government must hold the mortgage.
Therefore any provision which would allow a homeowner to renegotiate the terms of the contract with the federal government would require that the Mortgagor must be the Federal Government. And in order to "fairly" do that, the Federal Government would have to own every mortgage in America.
Buying up all this bad paper is only a first step in allowing anything of that sort to take place.
The first part of #1 is OK, but renegotiating the principal is out of bounds, as far as I am concerned. The lender is entitled to his money back.
If you happen to think achieving “social justice” should be a requisite function of the successful marketplace, then I understand why you feel as you do.
Is it Communism? Not purely. But it sure as hell ain’t free market capitalism.
Anyway, a pro-lib Stiglitz and we are in agreement on this issue. One more rationale to beat up on Dems, who balks at GOP deal.
I could live with solution 1, as long as the owner’s rate is somehow tethered to his income. If he gets a sweetheart rate, then finds a higher-paying job, he shouldn’t be able to slide on that completely.
So, now what do you do?
Well, yes, it is. Purely. The "Social Justice" concept was originated by the Castro regime, as part of the "liberation theology" they tried to peddle via young priests in Central America.
"Social Justice" was also an objective described by Saul Alinsky in his Rules For Radicals.
"Social Justice" is a code-word for the marketing of unadulterated Communism.
By the way,
Your option One?
Renegotiate interest rate and principal outstanding to reflect what the current occupant can pay and what the market currently says the house is worth (rather than its Greenspan housing bubble peak price).
Why stop at mortgages? Let’s make ALL loans “renegotiable”.
Let “renegotiate” our credit card interest rates.
Heck, let’s get rid of foreclosures, bankruptcy, defaults altogether.
We’ll just “renegotiate” our way out of debt.
Nope. But in housing there have been lots of swindlers all the way around, not just the guy who took out a mortgage that he would not be able to repay when the rate reset.
So between this and Dem/Paulson proposal, which one do you prefer? I suppose you are not in favor of Dem/Paulson one.
Of course, there is a third option. We just let everything go, making market sort it out. I am bringing this up because politicians in D.C. would not go for the third option. Then, GOP deal is less repugnant.
Sorry.
Indefinite article :”it”
“It” refers to the list of possible alternatives to foreclosure offer by the OP.
If I have a 150,000 dollar house, the payment at 6% for 30 years is 899. At 40 years it’s 825. At 50 years, it’s 789. At 5% it’s 681 for 50 years.
Why should banks have to give loans at 50 years and 5%? Because they do have some culpability for being too anxious to pursue easy money. Can they afford to take that amount?
It’s a smaller pie to slice up, but there’s money to be made at 5%....otherwise I wouldn’t have a 4.5% loan myself.
Everybody involved gets a little bit hurt: borrower, bank, bundler. The taxpayer doesn’t pay.
If the borrower won’t do this, then the house is forfeit, and is up for resale.
‘Course there are “swindlers” all the way around.
And even more will show up if a plan to “renegotiate”
terms is adopted.
Every Tom, Dick & Harriet will want “a better deal”.
People who are not really in trouble will get into trouble, thinking they can game the system.
It’s human nature.
I honestly don’t know what the best thing to do is. I’m skeptical of Paulson, but concerned about the consequences of no action.
it = social justice...as clarified in the pullquote.
Wall St. corporatists and their media latches misled people for 10+ years and people fell for it. I did not. However, there have been plenty of accomplices in this forum, too. Too many to list.
Now we have the biggest mess in 70+ years to clean up. We could go cold-turkey. I don't have problem with that. I have big problem with Paulson's idea. So it is a choice between cold-turkey and renegotiating deal. Either way, I don't have dog in the fight.
so what did he have to say when the government was forcing the development of the subprime mortgage?
the change chance of a snow ball in hell
Fannie and Freddie only kept about 5% of the paper in house until the Clintonites got involved with them. It peaked around 20% in 2004 or so. They kept more loans in house so they could get the management fees and big paydays..
If the buyer is willing to stay in the house with the improved repayment terms, then you don’t repossess. If he walks away from it, then you can force him into bankruptcy, which is not a pleasant place to be during a credit-crunch.
WE THE PEOPLE (i.e., the Government) can't make the banks renegotiate contracts. That is a direct violation of the constitution. If the feds want to allow homeowners to renegotiate contracts, then the feds must buy the mortgage. The banks are not going to sell the mortgages of people like me who make my payments. They are only going to sell the bad mortgages and until the feds own those loans, they can't do a thing to help out the homeowners.
Frankly anyone who cannot make the payment on a mortgage is not a "homeowner" and should not be considered a homeowner. Anyone failing or refusing to make a mortgage payment is technically a squatter. If I can't make my payments either because I have lost my income or lost my mind and purchased a house I can't afford, then I have no right to continue to live rent free in my home and I have no right to insist that the bank or mortgage holder cut me some slack. I can ask, but I am in no position to insist.
Tough love.
Nearly all loans are renegotiable, if the lender and borrower can agree upon revised terms. Unfortunately, the loans in many mortgage-backed securities are sliced and diced in such a way as to make any sort of agreement between the borrower and lenders logistically impossible.
One solution I would suggest would be to redistributed mortgages among shareholders by lottery. If a set of 100 loans is divided among 100 shareholders, give each shareholder a 100% interest in one of the loans, selected at random. If the loans don't divvy up quite so nicely, and/or some shareholders don't want to own entire loans, then randomly dish out as many whole loans as possible to people who want them, and then subdivide the rest of the loans among everyone else.
Once loans are consolidated into the hands of individual investors, then those people will be able to, if they are so inclined, work to renegotiate mortgage terms to their own best advantage, or work out a deal where they buy back the house with the defaulting "owner" as a tenant, or whatever. Some people would by the luck of the draw get good mortgages. Others would get houses that had been so badly trashed as to be worth less than a vacant lot. But the overall value of the mortgage assets would be enhanced by giving control of them to people who had a vested financial interest.
But, renegotiating isn’t about the federal government. It’s about sanity. What those lenders WANT is federal intervention buying their bad debts.
If the government won’t do that, then the banks have to either repossess the property which they’re sure to take a loss on given the short amount of time since the loan was made, or they’re forced to renegotiate the terms.
In short, if the government does NOTHING, then the banks are FORCED to do what banks MOST OFTEN like to do in these circumstances: renegotiate the terms of the loan.
Far too many people have walked away from their property.
Not just homeowners but developers and speculators.
What do you think of #44?
Logistically, renegotiaton of MBSs is impossible. But regulators could make it possible (see #44).
No action would (supposedly) cause the market to crash, and a lot of people to loose lots of money.
Paulson plan might hold off the crash for a short time, but it will still happen. The only difference is that the taxpayers get fleeced to the tune of $10000 per family or more.
The Repub plan might work or might not but at lease the taxpayer doesn’t loose directly.
Any bank who is not willing to renegotiate a loan to keep a homeowner willing to make an adequate payment in order for that homeowner to remain in possession in this market deserves to go belly up.
But you can't make banks do it.
The banks right now are counting on the Feds bailing them out of these loans.
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