Can You Explain This?
Okay, let me see if I got this right…
We got in trouble because the banks—not to mention Fannie and Freddie—wanted to lend us money whether we could afford to pay it back or not. So we borrowed it—and guess what?—we couldn’t pay it back.
Now we are in the dangdest mess you ever saw.
So, how are we going to get out of said mess? Well, first we have to get the banks to lending money again, preferably on easy terms.
Did I get that right? If so, then can somebody please explain to me how this is gonna work?
Then we gotta refinance all those mortgages that all those people can’t pay. Is there any way in the world we can do that without making credit too easy again?
Banks, automakers, and people who can’t—or won’t—pay their mortgage all get bailouts. But Ralph, you explain, they bought houses that are now worth less than they were when they bought them. Well, hell, so did I, but I’m still making the payments.
The guvmint’s gonna fix some things by taking them over and running them so well that it will save us all money. Wasn’t it Mike Huckabee who asked the question, “Can you remember the last time the government ran something and made it better?” I surely can’t.
My wife reminds me that the guvmint took over a, uh, “house of ill repute” one time, because the owners owed taxes. My wife told me at the time, “I bet they lose money on it.” Don’t laugh—they did.
Hillary wants to take over health care and save us all money. Heck, the guvmint already runs part of our health care. They call it Medicare, and they have it so out of control that the costs loom over our heads like a tsunami with proportions that dwarf our Social Security debts.
So why in the world would we turn the rest of our health care over to the guvmint?
I am sore afraid.
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R, I am sure you have noticed, some of your readers (”no last name Dave” is a perfect example) like to use this forum to gush forth their own diarrheal agenda, rather than to stick to the issue at hand. Interesting and sad for them. Keep up the good work!
Clyde McDonald
Mr. Hook—
Thank you so much.
Ralph Hood
Dave—
Not based on fact?
There is one fact that dominates throughout history. The places where the free market rules prosper compared to places where the guvmint rules.
Seems simple to me.
Ralph Hood
Ralph–
As usual, you are spot-on!
Please excuse me for stating the obvious, but it seems like the market is pretty fickle in defining a “quality loan” as well. A person with a high paying job takes out a mortgage that he can well afford, and then he loses his job. That goes from a good loan to a bad one. A AAA rated company does some dumb stuff and falls on hard times ( like AIG.) Triple A is now junk–or owned by we tax payers.
I get the drift from the other posting that you prefer market fickleness in determining quality to to government fickleness. Hard to see why. Both can blind-side you. Both can turn the world upside down and inside out. Both can be “unfair”.
It seems like a religious argument for some of the folks people. Pretty dogmatic, not based on a lot of fact or analysis or deep thinking that I can discern.
Jim Hackman—
A “quality loan” is—should be—whatever the market decides. It’s when the guvmint starts deciding that the world turns upside down and inside out.
Thanks,
Ralph Hood
Dave makes the point below that “banks can make high quality loans to sound organizations”. If judges or the government can rewrite the terms in some future circumstance, then what is a quality loan? The ability to take from those who have to provide for those who “need” is vintage Ayn Rand. If GOING GALT becomes widespread, then GOD will have to save us. JH
R, Agree or disagree,it really doesn’t matter…..I am tickled that at least one of your readers has heard of Mr. Smith. Maybe there is hope yet.
Clyde
R,I am vey
OK, so what happens when we let the banks, car companies, and insurance companies fail. What are the foreseen and unforeseen consequences ?
What is the toll on people–not necessarily on the people who created the mess, but on the people who are collateral damage of first, the decisions to take the businesses where they shouldn’t have gone, and then the decision not to prop up the institutions until they find a way out of the mess ?
I haven’t read any conservative notions of how that scenario plays out.
Ralph,
I don’t think anyone here can convince you we should bail out people or banks, mostly because we also don’t believe they should be bailed out. Agreed – let them fail, failure is an excellent teacher.
I do think we should give a few that were caught in extreme circumstances the chance to help themselves, A little assistance, but NOT a bail out.
A house is an investment and like all investments is subject to loose value – that should be a disclaimer on a mortgage app.
I’m not saying we should be bailing anyone out, just explaining why (IMHO) the Gvmt thinks it should.
The “Invisible Hand” is a great theory, however IMHO it assumes that people will follow generally acceptable moral and legal behavior. Many mortgage brokers (and those like Madolf) did not. They encouraged people to lie on applications about their income (not that this resolves the applicant).
Try applying the Invisible Hand theory to a drug addict or con artist – doesn’t work, same goes for a money addict.
As for the shares that were sold for half what they were worth a year ago… This was more than a housing bubble, it was a stock market bubble, unlike years ago when stock prices were very closely tied to a companies assets and a little of their performance. Recently a companies assets had little to do with it’s stock price, mostly speculation on what they could potentially make. Just look a Google, selling for over $700 a share (a year ago) with very little assets. Now we have companies that could be liquidated and bring more than their stock is selling for.
To John (posted below), you are right that some of the blame is the adjustment of APR for variable loans. However, we haven’t really seen high interest rates in the last 5 years compared with historical figures. If the problem is variable loans then an easy solution would be to take all variable loans and switch them to fixed at 5%. However, switching the loans to fixed isn’t the answer since a tremendous amount of people speculated with interest only loans (with intent to flip before principal became due), bought more house then they could affort (even at 5% fixed), had a life changing event like a child or other expense that diverted income from paying a high mortgage payment, or losing a job, disability, etc. I also want to convey that a fixed loan may not be for everyone and depending on financing terms a variable may be more economical for qualified people. Too bad our citizens and banks forgot the word qualified.
I agree some people may be able to keep their homes if offered a fixed low rate. I just advocate that the government doesn’t over extend creating a false bottom on housing and creating stagnation for years to come.
John—
Uh, I have been paying attention. But nobody has really convinced me that the people who did pay their motgages should bail out the people who didn’t. Nor do I see why we should bail out the banks who loaned the money to finance those mortgages. As previously reported herein, I once heard a world class banker say that we—the USA—have succeeded to a great extent because we have always been willing to let people fail. I believe him.
Thanks for writing,
Ralph Hood
Dave—
My responses to your comments in order…
1) That’s exactly what worries me. The guvmint is investing where real investors fear to tread. The hostorical record for such “investing” is terrible. Private businesses, for example, feared to provide flood insurance. The guvmint feared not, and provided it. The guvmint lost over $20 billion on two hurricanes.
2) See number 1 above.
3) But I still don’t see why we—as taxpayers— should bail out failures.
4) You didn’t have a number 4.
5) We agree on this one.
Thanks,
Ralph Hood
Dan—
I sincerely hope I am wrong, but this BLOG was greatly influenced by the fact that we sold some shares this week for half what they were worth little more’n a year ago.
Hope the future is brighter than I fear.
Thanks for writing.
Ralph Hood
R,Very obviously,some of your readers have NO concept of the free market; much less Adam Smith .The “invisible hand”….oh,what the heck, I give up.Ignorance is bliss!
Clyde
Ralph,
Seems there is a bit of truth here but a large portion is missing.
True, variable mortgages are a problem, but by it’s self would not have caused this. Also banks aren’t entirely to blame.
I personally believe it was a lack of regulation on mortgage companies (yes I know we all hate regulation). Mortgage companies were not regulated like banks, so they could give loans to anybody they wanted, as long as they could sell those mortgages. So they sold them to Wall Street and banks, called Mortgage Backed Securities. They were bought, in part, because they were insured by AIG. They were also bought because the Mortgage companies packaged them up, sliced and diced them, and made them “look good on paper” so as to get a AAA rating. These mortgages were written on so called “stated income” rather than the bank regulated requirement of providing proof of income (3 years tax returns). So you had people claiming they were making 10 times what they were actually making in order to get a loan. And this worked because house prices were going up, so when their credit cards got maxed out they just got another equity loan and paied off their credit cards. Then people started spending faster than their house values were going up, so the mortgage companies “came to the rescue” with “interest only” and “negative amortization loans”.
Well common sense tells you that if you keep spending more than you make, it will all come crashing down eventually.
And to top it off we find out AIG was taking their mortgage insurance premiums and investing them in Mortgage Backed Securities – what a intelligent idea (said sarcastically).
So suddenly we have large numbers defaulting on their loans, AIG is losing money, and then house prices start falling. Now factor in that banks, by law, have to maintain a cretin % of liquidity (or valuable assets). These assets (mortgage backed securities) that suddenly have an undetermined value had to be counted as $0.00 on the books.
So in theory, this money is suppose to keep the banks books within the % specified by law.
As for the economy, supposedly now that Mortgage companies are regulated like banks the cause has been rectified (or so the politicians think).
I tried to condense my thoughts as much as possible but it’s a complex problem.
Final thought – No Gvmt can’t fix it, hell they created it by saying everyone should have a home, I’m sorry but no they can’t.
Rick–
I think Mike Pickett is right—our only hope is that enough conservative people get riled, scream like hell, and bring on the pressure. I’m not sure if that’ll work, but it might.
Ralph Hood
How’s it gonna work? Our grandchildren will be paying for this mistake their entire lives.
Banks, Automakers and Health Care is just the beginning, their administration hasn’t been in charge for 60 days yet and we are already scared of what may be next.
The mortgage part of your question is easy to answer if you have been paying attention. For some people, the problem started with variable rate mortgages where the interest rates started to go up and the payments went up with them. Some peoples mortgage payments had doubled and tripled. Who was to blame for the problem in the first place can be debated, but we help fix that problem by refinancing with fixed rates that help to make the payments affordable and stable.
I don’t know what the cost of that is, but that’s how it works
I guess I see things a little bit differently.
1. I believe the government is providing money to industries that are failing,not to industries that are doing well. I don’t see the government threatening to buy 40% of McDonald’s, which is thriving in this economy.
2. The government is providing the money because private investors won’t.
3. ALL Investors –whether private or government–attached strings to their investments. For publicly held companies, the market demands that they hit their numbers every quarter, or the stock gets hammered. Government owned companies will, inevitably, face the demands of a grand standing Congress that tries to appeal to the typical constituent (who doesn’t own an aircraft, isn’t a pilot, thinks all aircraft owners are rich and arrogant, and who resent the noise produced by our vehicles.)
If the banks go back to the same lending practices they applied in recent prior years, they are stupid. But banks have basically stopped all lending to anyone. That tips over the first domino, and the companies that rely on banks for short term cash flow needs can’t meet their payment obligations and more dominoes fall. Not a good thing. But let’s at least get the banks back to the point where they will make high quality loans to sound organizations. We are not there yet.
5. Some financial institutions are finding the strings attached by government in exchange for money are too daunting, and are refusing to take, or are starting to give money back. This is a good thing.
The Mother of all Tidal Waves are coming….. from over the horizon. Guvmint run amok.
“I am sore afraid.” is a accurate feeling. Feeling helpless is another.
Mike Pickett–
Oh, I was so hoping that you, with your aviation sales, marketing and banking background, would disagree and tell me there is a rainbow over the horizon, a silver lining on all clouds and all God’s chillun gonna have Gucci shoes.
One big problem is that we reward politicians locally to operate nationally. A “good” congressperson is one who brings more money from D.C for his/her constituents than his constituents send to D.C.
Ralph Hood
William–
Man, I don’t know. I’m scared to death that Obama & Company will decide that they need to take over–totally or bit by bit–the airlines for our benefit. That would be totally ignoring the fact–repeat, fact–that airline travel is cheaper, safer and used by more people than when the guvmint regulated the market (fares and schedules).
Now, before the unions start screaming that the airlines can’t make a profit as is, let me say that I know that already, but this is not my problem and I am not responsible for the solutions.
Ralph Hood
Ralph, you are right to be afraid. The best we can hope for is that the conservatives will be revitalized by this debacle.
On a lighter note, I remind you of the words of Simon Cameron, 19th Century Kingmaker and U. S. Senator: “An honest politician is one who, when bought, stays bought”
What’s in your wallet?
Just to tie aviation in to your post: where do you think the airlines are headed? Will gov’t require bailed out airlines to limit pay to the airline’s management team? Maybe the gov’t will require an airline to fly to certain cities even if that market cannot support the flights with passengers? Now, let’s take a look at the manufactures, will Boeing, Cessna, or General Electric need a bailout. How will a manufacturing bailout change the airplane mix being offered? Maybe the government will set an emission standard or fuel mileage for aircraft manufactures that took a subsidy?
Were getting a sneak look at what’s over the horizon. There is quite a few of us that don’t want airline regulation or manufacturing ruined by unions while supported by government. But there obviously were not enough of us to thawrt gov’t sharing the same bed with the auto-makers, banks, and insurance (soon health-care). It is all related.