Posted on 02/01/2008 6:15:42 PM PST by grey_whiskers
Over the last few days, much of the talk in Washington (at least, that which was spared from the elections) has centered on the so-called “stimulus package.” The tale is an old one. The government enacts policies designed to encourage certain behaviours—say, indiscriminate lending—in the service of a perceived social goal. What had become a noble idea becomes first a fad, then a trend, and then a bubble. The bubble (as all bubbles do) explodes. Surveying the wreckage, the government, always ready to help, finds scapegoats, and then comes in to help. This help usually makes the original problem worse, and then over time becomes its own bubble in the opposite direction of the first.
In this case, the behaviour to be changed was “redlining” – refusing to make home loans within certain geographical boundaries, due to the higher risk of default. However, this was siezed upon by the government as proof of racism – loans denied to low-income or high-risk individuals were thought to be denied primarily due to racism, regardless of any other factors involved. The bubble was helped along by both the federal reserve, which held interest rates at 40-year lows for over a year after 2001, and by the wunderkinds of the banking industry, who discovered both how to sell mortgage debt to other people, but insisted they had found a way to mix good and bad loans in a way that reduced the overall risk. Finally, since the banks had found a way to get the real estate loans off of their own books, they could make riskier and riskier loans (“liar’s loans, interest-only, negative amortization, no money down, 2nd mortgages as a down payment, adjustable-rate resets…all were part of the pantheon.) and pocket hefty processing fees. Hey…it wasn’t their money. And besides, fueled by all the speculation, housing prices were going to rise forever. Right?
Fast forward to now. Lo and behold, people had signed up for loans that they couldn’t dream of paying back. People whose payment-to-income ratio was over 100%. People whose mortgage payments tripled. Those who never had any intention of paying the money back. So guess what happened then? All of the “mortgage-backed securities” began to unravel…as did even more complex financial instruments based upon them. Along with the sudden loss of confidence in the banks, came the sudden stop in demand for housing…and construction…and mortgage brokers…and housing prices began to fall. Never mind the annoyance of losing some of your equity – what if you had cashed out the equity and spent it? What if you bit off more than you could chew on the payment since “housing prices would rise forever” and you could sell if things ever got bad?
All of the escape hatches slammed shut for the bad borrowers, just as the bubble burst.
Enter the Federal Government to the Rescue! The President and the Congress have begun hurried work on a flurry of efforts to help the distressed buyers, and rescue the economy from the doldrums. One such effort is the “stimulus package” – a $150 billion payment to the American worker…from the back of higher earning taxpayers. (If you make more than $75,000 as an individual, or $150,000 as a couple, you’re out of luck.)
Conservative blogger and commentator Michelle Malkin, and others, noticed something about the stimulus package. As the law is currently written, the package would allow a substantial portion of the payments to go to…non-citizens. You know. Illegal aliens. (You didn’t know that many of the banks were allowing illegals to open bank accounts with less documentation than US citizens needed, did you? It was a “new source of revenue.”) After something of an outcry, various Republican lawmakers vowed to fix the bill…even though the fix relies on after-the-fact enforcement. And many of the conservatives were (grudgingly) placated.
But there is another danger I see in this bill. Conservatives tend to play checkers, over the skirmish of the moment. Liberals and statists tend to play three or four moves down the road…and are always intent on advancing their ultimate goal, even sacrificing minor gains to the larger picture. By giving refund checks to illegal aliens, the government is de facto legitimizing them…remember how President Bush agreed to have Mexicans eligible for Social Security? These moves, in effect, create legal precedent that the illegals are now within the tax system of the United States. Big deal, you say? Remember the old phrase? “Taxation without representation is tyranny!”
I fear this is just a Mexican horse (or Trojan burro?) in order to help eliminate the border, or to grant voting rights to illegal aliens.
Tea in the harbour is not going to be enough this time, folks.
It sure is confusing to hear all the talk about our great enforcement efforts when at the same time the same gov’t is handing out freebies and special perks to the illegals.
There is also the Trojan Funnel Cake, or giving tax rebates to those who pay no taxes.
That depends upon the loan-to-book value and the amortization schedule...
In a way you are right, but it is not "welfare" for the rich.
A lot of the banks have sold bundles of mortgage-backed securities far and wide, from US cities and municipalities, to foreign banks, to retirement funds.
And then there are more complicated instruments based upon those.
The problem is that some of the firms assigning the risk to these instruments have now *admitted* that their models were built upon the assumption of prices going up forever--and that they would fail *badly* if prices were just *flat* for a couple of years, let alone falling...!
So the problem is, we have all kinds of debt where the risk (and therefore the price of interest paid, the % collateralized, etc.) was badly done. None of the banks want to rock the boat and force any sales, for fear it will start the dominoes falling -- "mark to model" is very different from "mark to market". And this is compounded by the fact that many collateralized debt obligations are required *by law* to be backed by AAA-rated securities. So if one of the insurers gets downgraded, it will start a cascade of selling in order to meet the collateral requirements; which will drive prices further down; etc. etc. Kind of like a margin call in the stock market, but worldwide, and on steroids.
So putting higher loans under Fannie Mae etc. is designed to increase the confidence of lenders. The problem is not that "the rich" will lose money, they do that all the time. The current problem is that the velocity of money is dropping, nobody wants to take the risk of lending. And lowering interest rates is like pushing a string, you can't *make* people want to lend.
The side effect of lowering the interest rates will be to push up inflation and to crater the dollar. India's steelmakers have just announced a 15% hike in spot steel prices.
And it isn't just "the rich" homebuyers either...
As an example Yahoo.com wrote in the last couple of days a story about a Mexican immigrant with three kids, whose mortgage was going to reset from $659 / month to ~$2500 / month -- almost quadrupling.
I have spoken with local realtors about this -- he told me of a client six months ago who in normal times would barely have qualified for a $600,000 home being approved for a $1.2 million dollar home. The realtor got his money, the loan originator got his money, the sap client lost the house in 6 months. Nobody cared.
Will be interesting to watch.
Cheers!
And the both of them should be doing the prep walk, looking at 10 to 20. There is no reason to stick the tax payers with guaranteeing these loans.
How about the “rebate” broken trojan...leaving the US pregnant with a baby depression!
The 'rich' don't get anything for free. The 'rich' in this case are the lenders, and they just get their money back. It's the poor who get a free ride for a while in a house they can't afford.
The rich lenders were just doing what the government wanted, making loans in previously (and accurately) redlined areas.
It's not like they were charging high rates like your average credit card. Rather than bail out folks with overstressed credit card accounts, the govt tightened up on the bankruptcy rules.
A lender is not the bad guy, unless he is foolish enough to lend where any problem might show the failure of a government policy. Then the press and government will come done on him like a ton of bricks.
That is exactly what happened.
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