THE FAILOUT FAILED, WRITE TO CONGRESS AND STOP THIS ATROCITY
Posted on 09/22/2008 3:22:38 PM PDT by politicket
I have no job and no real collateral. Isn’t that good enough?
If there is to be a bailout, my likely short-sighted thought would be... Pay 50% of the principal on all distressed homes to the banks. Let the homeowner have the equity...
Pay half the mortgage off for distressed properties. The liability that the bank is exposed to is greatly reduced. The home might actually be worth as much as is owed.
The homeowner now may actually have positive equity in his/her home.
So, the banks would got a load of money, but that money would be paid on behalf of the homeowner/taxpayer. The homeowner and the creditor benefits... the taxpayer is still on the hook, unfortunately.
This would be wiser, still, though, it seems, than only letting the loose-lenders in on the money.
I am assuming my idea is extra stupid, because I’ve heard no one else mention it.
If you wnated folks to feel wealthy, paying off half their mortgage might really help a lot with that... They refinance, lower their monthly payments... Possibly restrict their ability to cash out equity if they agree to have their mortgage paid down...
I am worse than a noob regarding finance. This is a vision of amatuerish thought I know.
$750,000,000,000
Guess 5 million distressed homes at $300 K
Can pay 1/2 the mortgage on 5,000,000 homes.
Banks get the cash, homeowners get the equity.
Yep, it’d still be a bailout, but a far more fair one than the one they seem to be discussing.
What would be the problem with 5 million taxpayers becoming $750,000,000,000 richer? Is that less fair than 1,000 corporations becoming richer? While the taxpayers foot the bill?
Feel free to tar and feather me now. :c)
Good question. What if the county decides to take the property without compensation to the mortgagee?
My God, man, what sort of fiend do you think I am. Of course I’m not having him dig his own grave! My accountant pointed out two years ago that as a vet my dad was entitled to a grave and a marker at government expense. I’m glad you brought this up and gave me a chance to give you that tip a about dealing with aging parents.
Could you summarize while their plan won’t work. I think it has a small chance to work. They are trying to reflate housing and will now be running the printing presses to try to inflate.
The big debate now is, will delfation or inflation ultimatley win. There is absolutely no consensus among intelligent people, by which I mean the people who have been right all along about this crisis and who have been slandered for it.
It seems there are three possibilities:
1929 style deflation.
1990s Japan style stagnation deflation
Double-digit inflation after disinflation
I have NO CLUE what the outcome of this crisis will be. I would like to benefit from your resolve that the bailout won’t work to prevent 1929 style deflation. Isn’t there some chance to cushion a 1929 style depression now that the printing presses have been switched on.
Or is it that we simply don’t have a big enough printing press to flood the world economy so as to inflate and retard catastrophic deflation. One could make an arguement that the scale of absolute billions of dollors of losses in the financial system are an order of magnitude greater than the helicopter fleet that Bernanke can muster to pump it up with.
Can you please outline briefly why the bailout won’t work? I’m very much stumped about this and anybody who can bring a logic argument to the table has a chance to carry a lot of weight forming my opinion.
HELP. Please.
Just wait till your father gets an ACLU lawyer when you take away his water breaks. He’ll sue you for age discrimination and take away all that money the government gave you. T
Feel free to tar and feather me now. :c)
This basically amounts to a massive redistribution of wealth (i.e. Socialism). What about all the tens of millions of homeowners (and renters, for that matter) who paid on-time every month...what would they get out of this, other than subsidizing the lifestyle of people who made irresponsible choices?
Agreed -
The have destroyed our jobs, taken away benefits and ruined our savings and investments.
Fat cats and politicians get fatter.
Where the heck is the outrage on this? I want to see Republicans push to get the government out of the mortage business, to holler loud and clear that it was risky loans for unqualified applicants that got us into this, and place the blame squarely at the Dems’ feet.
Tom Coburn, DeMint - someone stand up for us, please!! Impede all legislation that does not include drastic change of the status quo.
Interesting idea, but it won't work unfortunately.
When an individual purchases a home loan then the mortgage lender makes a profit and immediately sells the loan "up the chain". Virtually all mortgages end up at Fannie Mae and Freddie Mac. These institutions then divide this pile of paper into tranches ("buckets of real-estate backed paper") and sell it to the bond market as AAA rated paper (being guaranteed by the full faith of the U.S. government). These bonds are then used as collateral on credit default swaps in the derivatives market (an unregulated market that is international in scope and bets on everything under the sun). The credit default swap bets have been going bad - they were backed by the paper - and the paper is now worthless (even if it had a slight residual - it would be extremely difficult to find out what that is). Many of the credit default swaps contain numerous "counter parties", and those counter parties are going down as well - so many of their bets go bad as a result - and many of those bets had numerous counter parties, etc., etc., etc.
My point: the main problem (and the one that won't get fixed by this phoney plan) is the derivatives market. The international markets will go down hard if our government keeps up with this foolishness.
(Is that more than you wanted to know... ;-) )
My father was mentally scarred by the Great Depression. Anybody who says they are willing to go through such an event is delusional, irrational, or more likely, is infinetely clueless of the depth of misery during that era and its affect on many people.
It’s fun to spout off and say “screw ‘em all”, but in the end, trust me, you don’t want to go through a catastropic deflation. I am not saying the bailout will work. It well may not, and the catastrophic deflation may occur no matter what the Plunge Protection Team has in store for us.
That said, I would prefer to avoid a depression and I agree with the government’s attempt to prop up the economy. It that means FreeRepublic won’t renew my VRWC membership in good standing, then so be it.
I hate this socialist act to bailout private failures on the back of the public but an attempt has to be made to stave off catastrophic deflation and depression unless that attempt is expected to be ineffective. If there is a chance that moving all of the leveraged mortgage debt onto the our back will avoid a depression, then I say we have to do it. If that attempt will only delay a depression a decade or two or even three, then I agree that we might as well take the 40% unemployment and violent riots in the streets now, than put it off until later.
Just my 1 deflated cent.
The basic premise is that they're trying to put out a fire in the fireplace when there is a raging forest fire all around them - called the derivatives market.
The Mayor of New York just announced today that New York will now begin regulating all Credit Default Swaps and was heavily encouraging Washington to pay attention to them. At this point, that is like using a water pistol to fight the forest fire.
Sorry,
I replied to Puddlegum instead of you accidentally. You’ll see my reply there...
Exactly. Starve the beast before it consumes us. It’s the only hope we have left
THE FAILOUT FAILED, WRITE TO CONGRESS AND STOP THIS ATROCITY
You said the derivatives market is the problem (which I mainly agree). Isn’t the problem the extent to which the derivates leverage each mortgage? So with respect to the mortgage market, if the Fed takes a loan off Fannie Mae’s books and puts it on its own, doesn’t that prevent the default of the mortgage in the market and prevents triggering the derivatives?
Theoretically, if the Fed just paid off every bad mortgage, as huge as that cost would be, would that not eliminate the astronomical levereged cost on which all those mortgages are made and completely solve the problem with the derivatives betting on those mortgages?
But the riders the Dems are trying to attach to Paulson's plan will not work at all. They will destroy the intended effects of the bill, and make it just another useless boondoggle. I will explain why.
First, they are trying to require that any company that trades with the treasury under the plan, sign over its future upside to the treasury. This amounts to restricting the trading partners to dying firms that would otherwise immediately go bankrupt. Bankrupts don't pay their debts anyway. What it wouldn't do is help solvent firms, which are the ones that would actually loan again with this stuff off their books. It won't help because they won't sell it. Drive too hard a bargain and you get adverse selection - only bankrupts will trade with you. This will also make dealing with the Treasury a stigma matter in a sharkpit. The Fed has to bend over backwards to get banks to borrow from it at 2% for 14 days, because they don't want to show weakness.
Second, the provision that the Treasury not foreclose on anyone destroys the whole basis of mortgage lending. Mortgages are available at 1/2 to 1/3 the rate on personal loans because there is valuable collateral behind it. Remove foreclosure and there simply isn't, and the free market rate for a mortgage loan is 15% or so. Right now house prices cannot be supported because only 20% of the population can afford payments on the median house, on normal conservative mortgage terms. Raise the required risk portion of the rate, and that falls even further.
It also removes completely the Treasury's negotiating power with people behind on their mortgage payments. The congress envisions that people will negotiate lower payments with the Treasury to keep their homes. But they have told them up front they will keep their homes - so they will simply lowball their ability to pay. They have nothing to fear in doing so - or indeed in paying late etc. They are telling deadbeat squatters that the gubmint is on their side to win their votes, but it won't win any money or clear any houses.
That is why the markets melted today. Congress is scuttling the deal with useless populist pork that is economically illiterate and does not begin to understand the purpose of the bill. Or worse, is actively hostile to that purpose and wants vindictively to destroy Wall Street.
Understand, there is no way wall street pays these losses. It isn't there. The bankers themselves own only a tiny sliver of the equity of the street, most of which is owned by mutual funds and pensions. But even that equity in its entirety cannot absorb the hit. It will therefore fall to wall street's creditors instead. Which means the banking system as a whole. Depositers. Us. Or the FDIC insuring us, take your pick.
The choices before us are, we take the hit in our capacity as taxpayers and put this behind us rapidly to renew economic growth, or we first try to get financier who can't possibly pay it, to pay it for us, and destroy the banking system, and pay about 20 times as much ourselves in our capacity as bank depositers if we let it become a chaotic run, or about 5 times as much in our capacity as taxpayers, if we just let the FDIC bail us all out in our capacity as depositers.
The only wealth in the system big enough to take the hit is ours. We can decide which hat we are wearing when he take the hit, and the hat on our head determines how big it is and what else is smashed to atoms in the meantime. But it is a free choice on our part.
Taxpayers - Paulson approach - cost $250-750 billion.
Taxpayers - FDIC saves depositers after banks destroyed - cost $2 trillion to $4 trillion.
Depositers - refuse to refund FDIC, mad scramble, deflation, cost $15-25 trillion or so.
There is another version of the first options. Bypassing an obstructionist congress, the Fed could effectively implement the Paulson plan without their approval, by buying the securities in question in open market operations. This would cause more monetary disorder than the Paulson approach, and it suboptimal. But it is better than the other two, by miles.
The tendency of the congress critters rider-strewn idiocy is the second option. It will cost a trillion, and fail, and destroy the banking system. Then they will bail depositers out via the FDIC.
Nobody here can play this game, in case you hadn't noticed.
Sorry,
I replied to Puddlegum instead of you accidentally. You’ll see my reply there...
It won't work that way exactly.
Fannie Mae or Freddie Mac would just create tranches with the toxic loans and sell them as AAA rated paper to the bond market.
Understand, this "plan" would do exactly the same thing, but with more overhead. Paulson would buy $700 Billion worth of debt from Fannie Mae, divide it into $50 Billion dollar tranches and sell it to the bond market as AAA rated paper. Then he would go back, buy ANOTHER $700 Billion of toxic loans, rinse, and repeat. He will be able to literally CYCLE trillions upon trillions of bad debt through this $700 Billion facility.
The paper is still worthless garbage. The "push it away and maybe it will disappear" scheme will try to delay what is coming - and end up making it worse due to the added layer of government interference.
Not a pretty picture...
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