Valuing Toxic Assets

The guiding principle behind the Geithner plan is, as Paul Krugman noted yesterday,

"that we’re looking at an unnecessary panic. The housing bust, so the story goes, has spooked the public, and made people nervous about banks. In response, banks have pulled back, which has led to ridiculously low prices for assets, which makes banks look even weaker, forcing them to pull back even more..and if we can get the market in troubled assets going, people will see that things aren’t really that bad...the vicious circles will turn into virtuous circles."

I'm a layman with no economics background but I have followed the housing boom and bust pretty closely and I think that Geithner's plan is guided by an unreasonably optimistic view of the value of toxic assets, particularly housing.

Consider the following: [More...]

Unemployment in states already hard hit by the housing bust is getting much, much worse. Indeed, in California the unemployment rate is expected to hit twelve percent.

The supply of homes is still very high.

The ratio of the price of housing to household income is falling but, as Calculated Risk noted in February, though "We are getting closer on prices, but it appears we still have a ways to go...One thing is pretty certain - as long as inventory levels are elevated, prices will continue to decline. And right now inventory levels of existing homes (especially distressed properties) are still near all time highs."

So even though housing prices have declined substantially we still have a long ways to go in price declines and indeed a fast-worsening unemployment situation will only drive down prices further. How then, as Geithner seems to be arguing, do we have an unrealistically negative view of toxic assets?

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    well, (5.00 / 2) (#1)
    by bocajeff on Wed Mar 25, 2009 at 01:07:24 PM EST
    What are the value of those assets? It's greater than zero and less than they were originally. The problem is trying to assign a value. That's all this is about.

    What you are seeing is a bunch of economists who are trying to fit their world view into the current crises (whether liberal or conservative).

    price, value (none / 0) (#29)
    by souvarine on Wed Mar 25, 2009 at 03:51:25 PM EST
    We know the market price of these sub-prime residential mortgage back securities, about 30 cents on the dollar. We know that the underlying value of those securities, the homes and the ability of their owners to pay, has collapsed. Home values have dropped about 28% from their peak, when these securities were struck, and they have another 15%-20% to go before they return to historical norms. The sub-prime securities are on exotic mortgages which, once their teaser interest rates reset, were too expensive for many of the owners to pay. Combine all of that with the downward pressure on incomes as the recession has taken hold, which is pushing even people with fixed rate mortgages on these overpriced homes into default, and broad swaths of the RMBS are probably worth 30 cents on the dollar.

    The interesting thing to note is that most economists, across the ideological spectrum, think that the market is correct to value these securities at 30 cents on the dollar. The only reason the big banks we are concerned with are not writing down these securities, and the reason the Obama administration is trying to inflate the price, is because those banks are insolvent if their RMBS portfolios are worth less than 60 cents on the dollar.

    That, at least, is what I understand all of these critical economists to be saying.


    I floow you but (none / 0) (#72)
    by befuddledvoter on Wed Mar 25, 2009 at 06:03:16 PM EST
    what is RMBS???

    I mean "follow" (none / 0) (#73)
    by befuddledvoter on Wed Mar 25, 2009 at 06:03:33 PM EST
    RMBS (none / 0) (#110)
    by souvarine on Wed Mar 25, 2009 at 10:41:28 PM EST
    Residential Mortgage Backed Securities.

    Of course they're overvalued (5.00 / 4) (#2)
    by Dadler on Wed Mar 25, 2009 at 01:12:13 PM EST
    When wages have been essentially flat for decades, with housing prices that rose for so long, it is inevitable that a massive crash will occur, as it has.  What is absurd beyond reason, is having all these houses sitting empty, so many people needing homes, and because we can't get "market" prices we'd rather they sit empty than actual humans inhabit them and pay a reasonable and reasonably financed price.  

    And listen, my wife and I didn't take the bait when we could have six years ago.  We sold our little old house in the city at about the best time we could have, getting a price even we can't believe today.  However, after looking at slightly nicer and bigger and more expensive places to buy, we soon realized they were all sh*t and there was no way we were going to struggle to pay for something sorely overpriced and completely underwhelming.  So we banked the money and have been renters for the last half decade or so.  And still, for all the smarts we showed, and which have paid off for us and continue to, we could still get burned by any good plan that actually might work to get those houses filled, get prices stabilized, and get things back to a reformed and remade "normal".  After all, it's more in our interest for housing prices to fall as far and fast as they can, then we can get a real deal.  Tee-he-he.  But we know there are larger concerns than our own individual ones.  Like what kind of neighborhood or city or state or nation we are going to be living in.  Getting a great house for a steal would be nice, but not if it means we are merely feasting on the corpse of a society.

    This is exactly right re income vs house prices (5.00 / 2) (#10)
    by DFLer on Wed Mar 25, 2009 at 01:52:00 PM EST
    and why those like Baker scoff at anyone who thought that the rise in housing prices was NOT a bubble, and/or was not highly over-valued.

    When wages have been essentially flat for decades, with housing prices that rose for so long, it is inevitable that a massive crash will occur, as it has.

    Obviously wages didn't set the price then (none / 0) (#25)
    by lodi on Wed Mar 25, 2009 at 03:33:06 PM EST
    The market conditions did. If wages were flat and people kept buying then wages were no an issue. Which means people were not only comfortable with the economy and their jobs but also of other conditions. Like low interest rates. And the likelihood that prices would keep rising so they made the investment on the come.

    So in reality one can't solely blame the bubble on Wall Street or mortgage brokers, or Fannie and Freddie who bought the loans, or on the people who packaged the loans into the derivatives to sell. Because if it were not for the buyers who kept bidding up the prices of the houses in the first place then the bubble never would have happened.

    Yeah I know. I'm blaming main street. But you can't argue that main street was not the problem. Had they refused to buy at the market price, and in many cases drive up the prices through bidding them up none of this would have ever happened. That really is the bottom like here.

    It is buyers who create bubbles. Not sellers.


    Under more normal circumstances (5.00 / 5) (#28)
    by inclusiveheart on Wed Mar 25, 2009 at 03:50:58 PM EST
    that would make sense, but there is a lot of evidence that the banks were pushing credit out the door - shoveling it out - to anyone they could find in an effort to not only make the money on the specific loans, but also to drive the prices up in the housing market so that they could make more money on what were becoming larger and larger loans on average.  There is also evidence that certain banks were ecouraging or at least looking the other way when inspectors were validating the exorbident pricing.  So in fact, the buyers had a smaller role in the bubble creation than they would have had a more traditional and honest system.  

    Any "exuberance" on the part of buyers was being exponentially amplified by the financial institutions' practices.  And I think it is safe to say that even if the public had been in a crazed frenzy even beyond what they were at the height of the market, the decisions that the financial institutions made in purchasing and selling the MBS's and CDS's at what look to be crazy over-leveraged prices indicates to me at least that they drank their own kool-aid and were smokin' their own crack to boot.


    So there was ample credit (none / 0) (#33)
    by lodi on Wed Mar 25, 2009 at 04:12:01 PM EST
    That's bad?

    Let's see ample credit would be a good thing now, but it was a bad thing then?

    I don't think credit in general was the problem. Even if you factor out the sub-prime loans the market was still over priced. Sub-prime loans were a small fraction compared to good credit loans.

    Face it. Buyers create bubbles not sellers. No one was twisting an A-credit buyer's arm to buy a new home. They were in the market for a new home before they even got the loan. They put an offer on the home before they got the loan. Ample loans were not the problem. Unless you advocate that limiting loans to those who can qualify is a way to avoid housing bubbles. I don't think you are saying that.

    No, loans were not the major problem. It was people wanting bigger homes, better homes, a home. That was the problem. But the bigger problem was that those people willingly paid extraordinary prices and kept driving the prices higher. And it was not for lack of supply. Builders were building many new homes. This was a factor of people wanting "more" and betting on the come that prices would keep rising. Does anyone here know a homeowner who didn't want the value of there home to grow or keep growing? I don't.

    Buyers create bubbles, not sellers. Buyers actions make other people rich, people don't get rich without the actions of buyers.


    The banks were buyers too (5.00 / 2) (#36)
    by CST on Wed Mar 25, 2009 at 04:22:14 PM EST
    They bought and sold the derivatives and mortgages because they bought into the mortgage bubble just as much as the person getting the house.

    If you write a mortgage that someone can't afford, they have every right to default.  When a bank gives a mortgage, they are in fact buying a house.  That's why you can be "forclosed" on.  


    Rational credit. (5.00 / 3) (#38)
    by inclusiveheart on Wed Mar 25, 2009 at 04:26:36 PM EST
    We had irrational credit.

    I live in a government town.  Most people can't make more than $400,000 in this area.  Housing prices sky-rocketed.  Ten fold in some areas.  Most people weren't making any more money, they were just being offered larger and lower-cost loans.  The housing prices couldn't have risen so dramatically had there not been irrational credit available.  I was receiving two or three offers a week to open a home equity loan on a house that I don't even own at the height of the insanity.  I wouldn't be the least bit surprised to hear that people less honest than I am actually took those offers and got the loans.

    These financiers were fools.  They ran their own businesses into the ground.  Borrowers did not force them to make these bad loans.  There was nothing standing between them and the word "No" - except of course their own greed and their crack pipes.


    Look (none / 0) (#59)
    by lodi on Wed Mar 25, 2009 at 05:17:10 PM EST
    I get it. You don't want to put any of this on the buyers. It's all the evil bankers fault. If not for them prices on homes would have gone up forever.

    History is wrong when they show that there were housing bubbles in the past that self corrected. History is wrong when it says that during the fake housing price corrections that homes were no longer worth what was owed on them. It's a conspiracy.

    Increased lifestyle of buyers had nothing to do with this. The evil banker made them look for a home. They made them get a loan. They made them refi so they could lease BMW's and get the ski boat and a timeshare and go on vacation to Cabo or Europe, and send their kids to private schools and dress them in designer labels. It's all the banker fault. I get it.


    No you clearly do not get it. (5.00 / 3) (#69)
    by inclusiveheart on Wed Mar 25, 2009 at 05:40:14 PM EST
    Without the participation and outright enthusiasm of the financial sector people would not be experiencing a 41% drop in their home values in a post-bubble economy.  They would be experiencing more like 5% or 10%, but in this case the lenders contributed heavily - in ways that the borrowers never could - to artificially driving up the prices of properties.  They did a number of things that could only result in inflationary pricing including allowing houses to be grossly over-valued, lending on those overly optimistic valuations, lying about borrower's qualifications, offering and giving out large home equity loans on houses sight unseen, allowing those home equity loans to be spent on purchases entirely unrelated to the properties themselves, and not requiring even a dollar in down payment in many instances.  The list of foolish things the lenders were doing is really breath-taking.  Just one or two of those practices in bulk would be bad enough, but the fact that they were doing them ALL really illustrates their absolute culpability in this crisis and worse the extremes to which they could manipulate the market in such a way that the fall from the high would be that much harder.

    yes.... (5.00 / 1) (#89)
    by Bemused on Wed Mar 25, 2009 at 06:46:54 PM EST
      That's all true and I don't dispute financial sector greed is a major contributor, but that's just part of the picture. Regardless of the current, transient value of a person's home, he should not take on a loan obligation he will be unable to meet in event of certain forseeable contingencies. Possible temporary unemployment, decline in income, medical expenses, and the like are things people should account for before borrowing. People should also not borrow based on an assumption values will always remain on a consistent upward trend. If you don't have a plan for paying your debts for a considerable period of time with lesser income or other large expenses which might arise, you are over-extending yourself.

      People should also realize that adjustable rate or balloon payment mortgages are almost always bad deals and that they will be at the mercy of future conditins when the term expires.

      A lot of people were enticed or taken advantage of, but many more people simply want to have the 4000 square foot home and the Escalade and the trips....  when their incomes are insufficient to support that lifestyle.

      I don't have a problem bailing out the unsophisticated buyer/borrower who got sucked into a modest starter home he can't afford. I do have a problem with my money, which I have worked hard to make and prudently preserved,  being used to provide assistance to people with homes more expensive than mine because they had to keep up appearances.


    This is not a criticism (5.00 / 2) (#93)
    by hookfan on Wed Mar 25, 2009 at 07:06:26 PM EST
    Do you have information on the actual percentage of buyers that are in that category? I've looked and haven't found any hard data. I've heard that the percentage is like only 5% of defaulters are in that category. Again, the primary data for quite awhile has been the largest proportion by far of defaults come from catastrophic illness costs, coupled with long term unemployment. If this is true, all the protest about buyers causing much of this due to "greed", or "poor judgment" is built on a false premise.

    Well (5.00 / 1) (#96)
    by Ga6thDem on Wed Mar 25, 2009 at 07:20:45 PM EST
    if you want anecdotal I can tell you that I have 8 houses on my street. 4 are for sale. 3 are in foreclosure. One not on my street but close by is in foreclosure. My area has been hit particulary hard by the housing bubble. Anyway, one foreclosure is buying too much house, more than they could afford. Neither of them had any changes in their job circumstances. Another foreclosure is because of a job situation. Another foreclosure is due to nothing but stupidity on the part of the lender because the buyer did not even have a job. Another foreclosure was due to the loan being a 100% financing loan and the loan became unaffordable over time due to it payment rising every year.

    no i don't (5.00 / 1) (#97)
    by Bemused on Wed Mar 25, 2009 at 07:21:46 PM EST
    and I'm not sure anyone including those charged with designing and implementing policy have them either. I see all sorts of people throwing all sorts of numbers but i have not seen anyone able to point to a reliable and authoratative source for their numbers. We appear to be rushing into things with a far from complete graps of anything but very rough estimates of aggregate numbers.

    A harvard study (5.00 / 1) (#102)
    by hookfan on Wed Mar 25, 2009 at 07:54:56 PM EST
    quoted in Consumer affairs may, 2005 apparently found 50% of bankruptcies were caused by medical illness-- far greater than any other cause. But that study was completed 2003-- to far away to be much help estimating for current. I'm still looking because it's important to have empirical evidence before placing blame.

    Why in the world are so many people (5.00 / 3) (#95)
    by inclusiveheart on Wed Mar 25, 2009 at 07:16:59 PM EST
    insisting that a plummer for instance should have a better understanding the ins and outs of real estate investment than the lenders?

    If a lender wants to get paid back, they set terms on the loans that should protect their investment.  Terms went completely out the window.  

    I was offered several loans during that timeframe.  None of which I took because I just couldn't see their pollyanna world persisting over the course of 15, 20 or 30 years, but I am good at math, have special insight into the state of business on a global scale, college educated, somewhat conservative about my investments, credit savy and a bit of a pessimist about money.  I'm not exactly typical of the average consumer who probably didn't even think to question their "expert" lenders and real estate brokers when they told them that they were getting into the deal of the century.

    But again, this focus on the borrower is ridiculous because if the lenders had done their due dilligency on the borrowers' qualifications for loans in earnest, a ton of these people would never have been given the loans in the first place.  And on the property side, there would not have been loans made on many properties had the lenders been doing their due dilligence either.  People would not have received a home equity loan on a falling down house to put in a $100,000 kitchen with granite counter tops and Viking appliances in a market where the mean house price was $50,000.  

    There was a lot of stoopid on the lender side.  So much of this crisis would not have existed had it not been for the lenders' foolish practices.  The fact that it is difficult for so many people to wrap their heads around the idea that the financiers are supposed to be the adults in charge and are the arbiters of which loans get underwritten is stunning to me.  Simply stunning.  The lenders are the originators of the loans.  The borrowers are completely at their mercy.  There are no loans when lenders don't make them as we can see now.  If there are no loans there are no delinquent borrowers.  They simply can't exist without some fool lending to them in the first place.  This is not a chicken and the egg question.  It is a simple equation of "A" not being able to exist without "B".


    OK (none / 0) (#98)
    by Bemused on Wed Mar 25, 2009 at 07:25:11 PM EST
     that's a good argument for not using public money to bailout lenders, but how is it any argument at all to require the prudent portion of the "buyer world" to subsidize the imprudent portion?



    Question: (none / 0) (#112)
    by Fabian on Thu Mar 26, 2009 at 02:28:22 AM EST
    What percentage of cars are repossessed?
    What percentage of homes are foreclosed on?

    I'm comparing apples to pears here because more people will purchase a car than a house, or even more cars than houses.  But still...how many consumers make bad financial decisions in general?

    How many people perk up their ears when they hear "Low Monthly Payments!" ?  Unless you are desperate for whatever is being pitched Low Monthly Payments! (and possible No Money Down!) should make you run away, not come hither.


    Most of the numbers I've read about (none / 0) (#114)
    by inclusiveheart on Thu Mar 26, 2009 at 08:40:02 AM EST
    foreclosures and car repos are inflated by the current contraction in the economy.  I've seen average mortgage default rates compared to the rates we are experiencing now and same with auto loans, but nothing in terms of the relationship to one another.  So I don't think I could answer your question.

    One thing I do know though... Americans have a pretty special relationship with their cars - they will do a lot to hang onto them - and the payments they have to make on them are much easier to put together relatively speaking than the typical mortgage payment is.


    Some people have a special relationship... (none / 0) (#127)
    by Fabian on Sat Mar 28, 2009 at 10:09:20 AM EST
    When my first car died on me, I bought a bike and got a new job that was within cycling distance.

    A 5-10% drop? (none / 0) (#101)
    by lodi on Wed Mar 25, 2009 at 07:46:08 PM EST
    I disagree with you. History shows normal housing bubbles drop more than that. Most bubbles do.

    How about the internet bubble? Was that the banks fault too? were people forced to buy those vapor stocks? Or was that the same lifestyle wish at work that I mentioned and you ignored to comment on?

    You see when a poster like me posts something that is the well known truth about bigger and better homes, and refi's for the cars and vacations and the yada yada - which has been written about in every major publication - and then people like you just skip right past that truth then you already lost the argument by default. If you refuse to address the well known published truths when they are brought up then unfortunately you are just taking to yourself and not having a conversation at all.

    Buyers create bubbles, not sellers.

    Without buyers there can be no bubble no matter how many sellers there are or what they are selling.

    People don't buy homes because builders build them. Builders build homes because people want to buy homes.

    Sellers fill the wants and needs of the buyer.

    End of story.


    Yes and all of those people (none / 0) (#109)
    by inclusiveheart on Wed Mar 25, 2009 at 10:18:58 PM EST
    who bought the Pinto and were blown up: To Blame! lol

    I would guess you'd be advocating for bringing it back.  I can't say whether or not you'd favor disclosures about trying to avoid rear end collisions though.


    Wonderful! (none / 0) (#117)
    by lodi on Thu Mar 26, 2009 at 10:50:17 AM EST
    Your response to a post that says you are avoiding valid points made is what? More avoidance!

    So now you change the subject? From homes and loans to defective cars? Not quite persuasive.

    Back to home loans. Did some people get deceived on loans? Sure. Could they have avoided that by during some research on a little known resource called the internet? Yes.

    Are their foreclosures the bulk of the busted real estate bubble? No. Were people predicting a real estate correction as far back as late 2004 prior to the derivative bust? Yes they were. did prices start to drop prior to the derivative bust? yup. did they drop further when housing inventories began to rise prior to the derivative bust? Yes again.

    Real Estate bubbles like all bubbles are self-correcting sooner than later. Does it take a willing buyer to create a bubble? That is self-evident.


    Do you really believe that the (none / 0) (#118)
    by inclusiveheart on Thu Mar 26, 2009 at 10:54:33 AM EST
    large majority of Americans are as smart as you are?



    Yeah I do (none / 0) (#120)
    by lodi on Thu Mar 26, 2009 at 11:34:01 AM EST
    I think they are as smart because when I see people eating at Denny's and not at Mimi's Cafe I figure they know ow much they can afford to feed their family. When I see them driving a Civic and not a Acura I figure they are smart enough to know what kind of car payment they can afford. When I see them shopping at Penny's and not at Nordstrom I figure they are smart enough to know what they can afford to spend on clothing. When I see people who pay cash at Penny's instead of using a Penny's credit card I figure they are smart enough to limit their debt.

    I figure those same people who can figure out those things out can also figure out how much they can afford for rent or a mortgage too. And most do. All are capable.


    You assume too much. (none / 0) (#121)
    by inclusiveheart on Thu Mar 26, 2009 at 11:54:19 AM EST
    I have never ever come across a first time home buyer who was not surprised by some aspect of their financial obligation in owning a home.  Most of the people I'm thinking of are financially comfortable, college educated and had the means to deal with a $20,000 plumming bill that came out of no where.  Those people would be considered "qualified buyers" - people who would have the means to not only satisfy the mortgage payments, but also have the means to keep up with the financial responsibilities of home ownership.  The lenders chose to take on a lot of unqualified buyers - a lot of them.

    banksters (5.00 / 3) (#43)
    by souvarine on Wed Mar 25, 2009 at 04:40:22 PM EST
    Lending lots of money to people who were unable to pay artificially inflated the price of houses. In this case the mortgage brokers created this bubble, by lending money with no anticipation that the borrower could pay it back. As long as house prices went up they were ok, and they sold off the loans as RMBS anyway so that they wouldn't be stuck holding the bag.

    Borrowers are not good evaluators of risk, that is why banks usually have income requirements before they will make a loan. The banks constructed this system of packaging mortgages and abandoned proof of ability to pay they so that they could inflate real estate prices and make money on a vast flipping scheme. They claimed to have a formula for evaluating the risk of the RMBS, but it didn't work.


    Look ther is no question that (none / 0) (#50)
    by lodi on Wed Mar 25, 2009 at 04:53:58 PM EST
    sub prime loans are a smaller percentage of the problem. But the larger percentage of the problem is  the bubble burst on home prices. That is the larger hit on mortgage portfolio's.

    You blame the banks for inflating RE prices. Well as i have been saying without a willing buyer it does not matter what the banks or anyone else in the RE business does.

    This on is laid at the feet of the buyer. Did the industry take advantage that the buyer was in a feeding frenzy? Probably. If people were demanding bigger an better homes and loans to buy then then that is what an industry does - supply what is in demand. But the demand was created by the buyer.


    Willing buyers? (5.00 / 4) (#55)
    by Romberry on Wed Mar 25, 2009 at 05:06:41 PM EST
    How about "qualified" buyers? How about buyers with an equity interest (read "down payment")? How about buyers who actually had their applications underwritten according to the three-C's of credit?

    All of this was ignored at the height of the frenzy. Did buyers make banks, mortgage companies and loan originators ignore these things? Did buyers invent option-ARM's and no-doc liar loans? Or did buyers respond to the siren song of "Buy a house now 'cause tomorrow it will be worth more and you can refinance and use that money to support your life and when that loan comes due the house will be worth more and you can refinance and use that money and it will all just go on forever and you don't even need a down payment...lather, rinse, repeat."

    No, this whole thing is more than buyers. Buyers can't buy unless someone is willing to lend. We had willing lenders for buyers who never should have been buyers in the first place, because only by doing that could the bubble be sustained...until some of those payments on those overpriced assets started coming due and it became apparent that the lack of standards has allowed for loans to be made that should not have been and there were no longer enough patsies at the door to keep the bubble growing. It was like a Ponzi scheme. Hell, it WAS a Ponzi scheme.


    the banks were (5.00 / 4) (#62)
    by CST on Wed Mar 25, 2009 at 05:25:18 PM EST
    the "willing buyers" - that's why they own all these forclosed homes and problematic mortgages.  They bought them when they fronted the cash for the house.

    well duh! (none / 0) (#99)
    by lodi on Wed Mar 25, 2009 at 07:31:06 PM EST
    And what does that make the people who bought the home? Oh yeah - Willing Buyers.

    I know you think you have a point... (5.00 / 2) (#104)
    by Romberry on Wed Mar 25, 2009 at 08:11:58 PM EST
    ...but you really don't. A great many "willing buyers" were more like "scared buyers" responding to the ever escalating prices of homes by trying to get into a home (everyone needs a place to live) before they were (or so they were being told) irretrievably prices out of the market. In fact, this was a pretty standard part of the broker/realtor sales pitch. ("If you don't buy now, someone else will and the price is just going to be higher tomorrow" is the gist of the way that line went.)

    People signed up for option-ARM's (which are beginning to reset and which represent the next wave of the crisis) with payments that did not even cover the interest in the expectation (again part of the standard pitch at the height of the bubble) that it didn't really matter (because they were being told it didn't really matter) since the home would be worth ever more and they could just jump into another no doc/low doc liar loan refinance.

    You seem to want to blame people who were in effect relying on the "good advice" they were being given by just about every talking head around. You want to blame people for responding to government encouragement for them to become part of the "ownership society." Sorry, but save for a relatively small percentage who were in the markets as speculators, your argument holds less water than a bucket with no bottom.


    People have been hearing for years (5.00 / 2) (#106)
    by Anne on Wed Mar 25, 2009 at 09:04:31 PM EST
    that a home is one of the best investments one can make, that homes only appreciate in value, that the stretch you have to make in the beginning eases when incomes increase, that this is the real American dream.

    What a lot of people forgot is that today's banks and mortgage brokers are not the banks/brokers of old - if they had thought about the fact that these are the same banks that started charging fees for everything under the sun, rigged the rules to be able to charge exorbitant overdraft fees, started hiking credit card interest rates and making payment schedules that almost guaranteed late fees and more rate hikes - they would have been more skeptical about the free lunch they were being offered.

    And Congress made it possible by eliminating much of the regulation that had kept a lot of this in check, and the Fed turned the other way and pretended it was all good.  Much could have been done, structure would have kept the cannibals from feasting on the bones of the trusting - but the smell and taste and feel of the money blotted out everything else.

    I would like to think that lessons have been learned, but I'm not sure they have.


    Yes Anne (none / 0) (#119)
    by lodi on Thu Mar 26, 2009 at 11:11:55 AM EST
    people are all sheep. Not able to think or reason. Which is why EVERYONE in the US has an exploding ARM loan and bought more house than they could afford. No one in the nation has a fixed loan. No one bought within their means. No one is responsible. They are all sheep. It's all the bankers fault. 100%. Sheep don't make bad decisions because they are sheep. Sheep are never greedy and want more that what is within their means. Sheep have no personal responsibilities to their decisions. Others make those decisions for them because they are just sheep. How dare people tell others they should own a home. How dare mothers and fathers tell their children they should own a home someday! What is wrong with them? Rent your entire life should be the message. Then you can blame the landlord instead of the banker.

    Too bad we don't live in a nation that isn't made up of sheep. Can you imagine what a wonderful country and what a wonderful economy we would have if we weren't all sheep? Can you imagine how wonderful things would be if people accepted personal responsibility and we weren't all sheep?

    But we are all sheep. I guess your a sheep too?


    I do have a point (5.00 / 1) (#107)
    by lodi on Wed Mar 25, 2009 at 09:21:22 PM EST
    and you saying I don't doesn't negate my point. Nor would my saying you don't have a point negate yours. The difference between you and I is I recognize that. In which case that would make my point superior to yours because my view gives me credibility and your refusal to not recognize that view weakens your credibility. That's kind of how life works.

    Your post is funny. You blame everyone from the government on for people's decisions. You suggest they not only can't think for themselves but that they are not too bright. That they just listen and blindly follow. That none of them subscribe to the information age. You are really quite flattering to your fellow citizen. Given your view that I have no point it does not surprise me that you would suggest such things about others in your post.

    There is very large multi-builder development not far from where I live. Many professionals moved there from a county 20 miles away because the homes were more affordable. A lot of these people were college educated business owners and mid to high level management in corporations. The homes in the development ranged from the mid 300K's to 1 Million. When many of these educated people saw these 500 - 600 - 800 - Million dollar mini-mansions they couldn't resist even though they could only qualify for 300 or 400K. Naturally their egos went with the home that was double of what they could afford and qualify for and they went with option-ARM's. These were educated people who were betting on a better financial future in a year or two. Well when that future never arrived guess what happened starting in the summer of 2005 and 2006? Yeah they started to lose their homes because they could not afford the payments. Now this was before the pre-derivative crash.

    So I don't want to hear that everyone was taken advantage of. These people and millions more of normally bright individuals at different income levels all over the country went in and knowingly bought over their heads betting on the future. I know some of the personally. They even shopped for the best ARM! Now you don't read about it much because the dumbbell doesn't make for a great story while the guy that got deceived does. But just because you don't read about it doesn't mean it didn't happen.

    Additionally you have the same type of person who refi'ed and upped their lifestyle. When their financial boat did not come in they couldn't afford the payment of the home they had been in for 15-20+ that they took the equity out of. They lost their lifestyle and their homes. Educated people. Of course to you they not only can't think for themselves but they are not too bright.

    Your point is full of holes and omissions.

    Are there people out there that can't think for themselves and that are not too bright? If you say so.


    probably? (none / 0) (#58)
    by of1000Kings on Wed Mar 25, 2009 at 05:12:52 PM EST
    only the son of a banker could declare otherwise...

    uhmm, the easier it is to get credit the higher (none / 0) (#42)
    by of1000Kings on Wed Mar 25, 2009 at 04:37:30 PM EST
    prices would go...

    that's simple...

    the problem was that the banks were loaning money they didn't have...so that they could loan out more money and make prices rise higher and higher, so that they could conceivably make more and more money (that 140 ft yacht is a poor man's yacht...I need a 200 footer)....

    they would make loans, and then they would sell the derivatives so that they could put the value of the derivatives on the books and use the 'value' (LOL) of the derivatives to hand out more loans, even though the money was just on paper, and not real at all (well, that is what our economy is basically based upon anyway, isn't it....the people who are treated with the most respect in our communities are usually the magic money-changers)

    and now they don't have any money and they're crying....lol...it's sick and sad at the same time...

    you are correct, though, that a lot of blame has to be put on the upper middle class, too, those who were paying extreme amounts of money for the crap that builders call houses these days (square footage takes place of quality and efficiency)...

    and blame has to be put on the appraisers (most of whom worked in alliance with those crappy boiler-room style mortgage broker houses...the ones that were in the black mirrored-glass office buildings...the ones that folded up and filed for bankruptcy before anyone could question their practices...while they kept the personal money they earned while only the company went bankrupt...it's a good scam...


    also, if we've learned anything about the bulk (none / 0) (#47)
    by of1000Kings on Wed Mar 25, 2009 at 04:44:56 PM EST
    of Americans it's that most of us are sheep...we just go along with the crowd...how else do you explain 'internment camps' throughout our history...how else do you explain the music on the radio...how else do you explain some of our presidents and political leaders (limbaugh comes to mind)....and racism and slavery, etc, etc, etc....

    most americans don't have time to think about whether they are paying too much for a house, they just assume that everyone else is paying the price so it must be right...

    maybe this is by divine design or something, so that the greatest of us can teach the rest how to do great things, but right now that's not the way it works...it works to suppress the right thing, to suppress greatness in favor of the casual mass...

    and then we just bail out those that didn't think very well to begin with...those who abused the sheep nature of americans, and human beings in general...


    Sort of, but (5.00 / 3) (#79)
    by befuddledvoter on Wed Mar 25, 2009 at 06:09:41 PM EST
    many people relied on mortgage brokers and banks who approved the mortgages, thinking that meant they could afford the house. That is a huge problem.  The thinking was "if I could not afford this, why would this bank ever approve it?"  I know people who relied this way and in fact cannot understand the problem, since they were absolutely truthful on all their applications.

    That was the first... (5.00 / 1) (#83)
    by kdog on Wed Mar 25, 2009 at 06:24:02 PM EST
    and biggest mistake of the people...thinking an approved loan meant affordability.  Trusting bankers and mortgage brokers...how willfully blind can you be?

    I mean right after I learned to speak and walk I learned you never take a bankers or a cops word for it...jeez.


    Generalizations (none / 0) (#84)
    by Bemused on Wed Mar 25, 2009 at 06:29:58 PM EST
      People who have gotten in over their heads range from unsophisicated and young first-time buyers lured by preadtory lenders invoking the American Dream of homeownership to the the quite  wealthy who purchaed 2nd or subsequent homes knowing full well what they were doing and why.



    And flippers (none / 0) (#88)
    by CoralGables on Wed Mar 25, 2009 at 06:43:23 PM EST
    who get starry eyed and assume there is no risk. I've known several that get caught up buying properties and own 6 or 7 and all but one over the years came crashing down.

    You've got a point... (none / 0) (#27)
    by kdog on Wed Mar 25, 2009 at 03:42:21 PM EST
    shorter version, it takes 2 to tango.

    I think people paid more attention to the "ownership society" bullsh*t, the fantasy where everyone is a landlord and a boss and toilets clean themselves...and not enough attention to what the asking price was on that over-priced house they bought.

    I expect Wall St. to be irresponsible leecherous gamblers, thats a given...I expect more of my people, the Main St. people...we should have never believed the hype, and those that did believe are gonna pay through the nose. Sh*t, even those that saw this coming are gonna pay through the nose...only Wall St. and Capital Hill get to skate.


    If I loan you $20 and I know you're (none / 0) (#35)
    by inclusiveheart on Wed Mar 25, 2009 at 04:16:54 PM EST
    never gonna be able to pay it back, I think your not paying me back is my fault not yours.

    The money people gave away their money and now they are crying in their soup.  Only a small percentage of the borrowers were actually in the business of borrowing.  The financiers on the other hand are in the business of making loans and they blew it.  They had far more information, expertise and experience than the people who were borrowing from them.  I would have had a different perspective if it were not crystal clear at this point that the "pros" compounded their problems beyond anyone's wildest dreams.  I mean in what flat-wage universe does a set of properties pay off on a leverage of 900 to 1 within any reasonable amount of time?


    Sorry (5.00 / 1) (#46)
    by lodi on Wed Mar 25, 2009 at 04:43:34 PM EST
    I know you are trying to defend buyers who made some bad choices and largely created the bubble but to say what you said is ridiculous overall.

    If I loan you $20 and I know you're never gonna be able to pay it back, I think your not paying me back is my fault not yours.

    Now if every loan in the nation were a sub-prime 'commission driven' loan then you would have a point. But that is not even close to being true which makes your argument far from a responsible one. Most loans were Freddie Fannie conforming 'A paper' loans.

    Another thing you have to realize is even before the derivative boondoggle unveiling RE prices were starting to decline because the market had peaked. And just like all housing bubbles in the past they find their ceiling and then fall. It is pretty safe to say that today we would be having a bad loan crisis of some extent without the derivative problem. And it would have had very little to do with people making loans that they did not expect to be paid back on. It would have had to do with prices of real estate naturally declining and real estate values not maintaining the amount of the actual loans.


    I am not trying to defend anyone (5.00 / 2) (#51)
    by inclusiveheart on Wed Mar 25, 2009 at 04:54:45 PM EST
    who made bad decisions.  Looks to me like you're the one trying to deflect justifiable criticism of the financier's lending practices by placing the blame on the consumers and as I said in this case I do not agree with you at all.

    There are houses that I know of that last sold for $800,000 that aren't worth more than three or four in real terms in this market.  A responsible banker would not have financed more than half the value, but they did.  One in my neighborhood is probably going to end up in foreclosure because it is a terrible little house and when there is no credit - if people have to fork out the cash on their own - they just won't do it even if they can.  This bubble was not created by people buying more house than they could afford.  It was created by lenders allowing them to buy less house for far more than the houses were worth in a realistic market working under reasonable and rational guidelines and there is a distiction.


    Buyers could not have created that (none / 0) (#115)
    by Militarytracy on Thu Mar 26, 2009 at 09:31:48 AM EST
    bubble by themselves, lenders were just as involved if not more so because they commited fraud on the paperwork involved.  Lenders are highly involved in the creation because the bundled mortgages were worth more than any mortgage the lenders had ever dealt with prior to deregulation/modernization of the systems.  It was "inspiring".

    It's your fault for making a bad loan... (5.00 / 1) (#77)
    by kdog on Wed Mar 25, 2009 at 06:08:52 PM EST
    and my fault for accepting a loan I knew or should have known I wouldn't have the means to pay back.

    I probably coulda qualified for one of these shady loand and been living in a Mini-McMansion all through the boom...but even my college drop-out dopefiend arse knew better.  What's the people who took these loans excuse?  Envy?  Belief in the fraud that is the "ownership society"?  

    I've got no patience for the bankers cryin' either, I'd make 'em eat every loss and fail....come what may.


    Greed (5.00 / 1) (#86)
    by CoralGables on Wed Mar 25, 2009 at 06:34:02 PM EST
    What's the people who took these loans excuse?  Envy?

    Greed, and it cut both ways.

    I was offered 5 times my annual salary in a re-fi with the entire sum a cash out. Greed says take the money and hope you can pay it back and live high on the hog.

    I've always seen home as a home rather than an investment or a cash cow and I chickened out. Smart? Maybe this time because greed would have buried me should I become unemployed and I always assume unemployment is on the table.


    There would have been no (none / 0) (#100)
    by inclusiveheart on Wed Mar 25, 2009 at 07:38:00 PM EST
    opportunity for default had I decided not to make the loan in the first place.  Or if I had determined that you would be good for $5, but not $20 and gave you the fiver.

    You could have qualified for two :) (none / 0) (#116)
    by Militarytracy on Thu Mar 26, 2009 at 09:32:20 AM EST
    In a way (none / 0) (#32)
    by eric on Wed Mar 25, 2009 at 04:00:34 PM EST
    it could also be said that flat wages in some ways caused the bubble.  This is because many, many people saw real estate as a money making venture.  And a lot of people did make money and financed their lifestyle with refinancing, home equity credit, etc.

    People actually saw buying a house, or houses, as a money making venture to accommodate for the fact that wages alone will not buy you what you want.


    I see your point - but (5.00 / 1) (#37)
    by lodi on Wed Mar 25, 2009 at 04:23:16 PM EST
    Even if wages were keeping pace with where they should have been I don't think you can say that people would not have still did what they did regarding real estate.

    They still would have bought. They still would have overpaid. They still would have refi'ed. They still would have used housing to finance an enhanced lifestyle. Lifestyle: That's the key. That's what created the 'Buyer' bubble.


    My point was meant to say that (none / 0) (#68)
    by DFLer on Wed Mar 25, 2009 at 05:39:20 PM EST
    when housing prices so greatly out-run all other prices and wages, you could have a big bubble.

    I worked for a Phoenix homebuilder (none / 0) (#123)
    by Inspector Gadget on Thu Mar 26, 2009 at 02:15:28 PM EST
    during the biggest surge of home prices 2004-2005. Despite the high rate of foreclosures already in existence in that area, the executives of this private homebuilder's company would gather every Monday morning in the conference room and just add $1,000-10,000 to the price of every floorplan.

    Buyers were trying their best to stay ahead of the surge, but builders would only agree to sell a few houses in each development each week, forcing people onto waiting lists and into raffles to try to get a house before the dream was completely lost.

    The plunge in that area has taken home values down below their 2003 value. If the buyers are to take blame, it's shared with those they trusted as the people who are supposed to be experts.


    Experts (none / 0) (#124)
    by squeaky on Thu Mar 26, 2009 at 02:20:41 PM EST
    At killing the goose that laid the golden eggs, aka unbridled greed.

    wages have been essentially flat for decades... (5.00 / 3) (#12)
    by desertswine on Wed Mar 25, 2009 at 02:25:47 PM EST
    Real wages are even less than they were in 1964.

    Good Move (none / 0) (#14)
    by squeaky on Wed Mar 25, 2009 at 02:29:03 PM EST
    Glad to hear you held off. If I had sold I would also have not had anywhere to go except to an extremely overpriced nothing. Unless I moved out of NYC.

    My circumstnace also (5.00 / 1) (#81)
    by befuddledvoter on Wed Mar 25, 2009 at 06:15:00 PM EST
    I am in Cambridge with the old homestead and it WAS worth a bundle, well over a million.  Note, family bought it for 6.5K. Crazy.  If we had sold, we would have had to spend almost that much for something not so nice. This was primarily a blue collar neighborhood that became gentrified.  Most of the oldtimers paid a few K for their houses.  The newbies all paid in excess of a milllion. No way in hell were some of these properties worth anywhere near that.

    Already there are foreclosures.  


    Agree with Eric... (5.00 / 1) (#13)
    by Ethan Brown on Wed Mar 25, 2009 at 02:25:47 PM EST
    I was actually going to update my post with a link to the piece about housing prices falling another 41 percent in California.

    Now, it's fairly safe to assume that housing prices in CA will decline even further because of the unemployment rate there.

    So I think that Krugman is right to reject Geithner's notion that what we're seeing is irrational pessimism...

    Also worth noting: the banks are assigning values to these toxic assets that far higher than even optimistic projections about what they may be worth.


    I wonder if there could be some kind of .. (5.00 / 1) (#17)
    by gtesta on Wed Mar 25, 2009 at 03:02:17 PM EST
    real market-based solution to this, rather than the Giethner/Paulson idea. One idea might be to create a pool of mortgage backed securites and to let home owners with mortgages bid on them and use them to pay their mortgages with.  Legislate that banks have to take mbs's as payment for mortgages.
    You need a way to actually create demand for these mbs's, but in a way that provides value for mortgage holders.
    If I could pay my mortgage by paying 70 cents on the dollar for mbs's, I'd do that.

    Well, what the banks are doing is (none / 0) (#22)
    by inclusiveheart on Wed Mar 25, 2009 at 03:26:33 PM EST
    continuing to take the rosiest of projects of what value those assets might have well into the future.

    I am sure that there are a lot of people out there having a hard time making their mortgage payments who would like to be able to hold onto their houses until its value recovered, but word is that the banks are being kind of tough on them and foreclosing.  Funny how that works huh?


    the "Fair Market Value" of an asset (5.00 / 2) (#19)
    by cpinva on Wed Mar 25, 2009 at 03:12:24 PM EST
    is the price a ready, able and willing seller will sell it to an equally ready, able and willing buyer for. if these assets are so "undervalued", there should be a line of ready, able and willing buyers at the door, to scoop them up. there isn't.

    this tells me one of two things must be true: a. the potential buyers are too stupid for their own good, and don't recognize a great deal when it's slapping them in the face., or b. those assets are still wayyyyyyyyyyyy overvalued.

    i'll take b, for $500 alex!

    you can say all those wonderful, built houses are reasonably priced all day long, if that makes you feel better. if no one's buying them, they aren't.

    that's just the basic economic law of price = supply vs quantity demanded. it really hasn't changed much, since adam smith first articulated it. assuming an unfettered market, of course.

    In general terms, yes -- but (5.00 / 1) (#21)
    by Cream City on Wed Mar 25, 2009 at 03:23:18 PM EST
    this does not build in the tight loan situation.  I have older neighbors who want to sell a great old house and alerted several coworkers I know, looking for just that size of house in our neighborhood.  

    These are coworkers with good salaries -- two great salaries -- and good homes already (if too small for growing families) and great job security.  They are having trouble getting loans.  It looks like the banks are just not trusting even appraisals.  


    [grimace] (none / 0) (#111)
    by Fabian on Thu Mar 26, 2009 at 02:14:09 AM EST
    Stupid banks!  Why weren't they skittish about appraisals before?

    One of the more subtle real estate scams involved appraisers overstating property values so everyone could get a slice of a bigger pie.  Appraisers got kickbacks or simply patronage.  (Harder to prove than some of the more blatantly illegal scams.)

    Now they wonder if appraisals are accurate?  I guess they aren't entirely dense, they can learn.


    residential appraisals (none / 0) (#113)
    by Bemused on Thu Mar 26, 2009 at 06:55:34 AM EST
     really just build on each other. If your appraiser sets a value by looking at 3 recent sale prices of similar homes in your neighborhoos and then marks up and down to account for the marginal differences, your appraiala is directly influenced by the over (or in some times, under) valuation of those homes.

      On the other hand, if  mortgage lenders deliberately seeks out  appraisers willing to cook numbers a bit so thye can write  mortgages that looks good enough on paper to sell in the secondary market and then after sale to the secondary market they are bundled into a security which is then purchased  (perhaps several times) by people who do nothing most would consider "due diligence excpet pro forma paperwork, and then  still other people purchase CDS related to that security, and so on, then "pure fraud" can be argued to play a role in what is going on.



    The law of supply and demand requires (5.00 / 3) (#30)
    by coast on Wed Mar 25, 2009 at 03:58:04 PM EST
     an informed buyer and seller.  In the case of the toxic assets I don't think you have either.

    Bingo (none / 0) (#108)
    by gyrfalcon on Wed Mar 25, 2009 at 09:39:18 PM EST
    This is the whole problem, and the logjam Geithner's program is specifically targeted at.  Maybe it won't work, but it's damn ingenious and it just might.

    Just anecdotally, I've now heard several money manager types on financial programs say their phones have been ringing off the hook with individual investors wanting to know how they can get in on some kind of fund to buy these things.


    Absolutely!! (none / 0) (#82)
    by befuddledvoter on Wed Mar 25, 2009 at 06:19:21 PM EST
    Anything is only worth what someone will pay for it.  You can price things all you want but if no one will buy it is worthless in the here and now.

    an analogy (5.00 / 1) (#20)
    by Bemused on Wed Mar 25, 2009 at 03:16:41 PM EST
      A bridge is built by selling bonds (assume no underwriting and that the bond is not  backed by the general credit of any entity). The bonds are to be retired with toll revenues. Toll revenues fail to meet projections. Bondholders either sell the bonds at a discount for whatever the market value, hold the underperforming asset hoping for afuture traffic increase or take recourse under the bond agreement  and take ownership of bridge itself and operate, or more likely sell it.

      In any event, the bridge exists and has some value. It's not the cost to build the bridge or the amount of principal and interest outstanding, but it has some  substantial value. All value is not gone simply because  obligor can't meet his obligations.

       Multiply this by a few million borrowers and add the bundling into derivatives and this roughly describes the current situation.

      With one bridge and one group holding direct debt againsr it, it's still largely speculation to assign a value. With millions of properties and numerous parties holding portions of aggregate debt  in a variety of different security types each including a different mix of many speciifc properties-- which are vary in quality from fully performing and likely to continue to do so throught he full range down to already defaulted and secured by an asset worth a small fraction of the debt, determining a value is at best educated guesswork.

       I'm no more convinced by those who claim Geithner et al premising it all on substantially over valuing as I am by the assurances a value with an accept range of error can and will be determined.

      The guy above who said it's just people pushing agendas and proclaiming based upon the assumptions with which they walked into the debate contains a great deal of truth. None of them have provided any real information from which the public can make informed judgments.

    I basically (5.00 / 1) (#24)
    by Ga6thDem on Wed Mar 25, 2009 at 03:30:30 PM EST
    agree with the crux of this post. The underlying problem is really the lack of jobs. It won't matter if we save the banks with double digit unemployment because no one will be able to borrow the money anyway.

    I don't think (5.00 / 1) (#31)
    by CST on Wed Mar 25, 2009 at 03:59:30 PM EST
    this is about individuals borrowing money so much as businesses and companies borrowing money.  For example, at my job we were working on a major mixed-use development, where the developers already had signed leases and were going full steam ahead with engineering and construction work, when the bank froze their line of credit.  All the work on the project shut down.  They can't collect the "rent" money that would be used to pay off the debt, because they can't get the money to finish the project.

    Speaking to people in different industries you hear that same story over and over.  Businesses need to be able to borrow money so they can operate and then hire people.


    So then (5.00 / 3) (#54)
    by hookfan on Wed Mar 25, 2009 at 05:03:58 PM EST
    wouldn't it be a more prudent use of taxpayers' money to lend directly to business, rather than to give to the bankers who stockpile and refuse to lend? The top down solution in the US is not working. why not invest directly, much more heavily, into job creation? The populace will just not return to participating by purchasing unless jobs are secure.
       Secondly, the biggest factors leading to foreclosure has been for quite awhile catastrophic health issues and job losses. Until we deal effectively with necessary healthcare expenses bankrupting people, and adequate pay for people in stable jobs we will continue to have a default problem, whether or not the bankers get bailed.

    not a bad thought... (5.00 / 2) (#61)
    by of1000Kings on Wed Mar 25, 2009 at 05:21:39 PM EST
    the government should just nationalize one of the banks and then use that bank to infuse money into small businesses...small businesses that actually have a plan for the money, to create jobs and enterprise...

    forget the banks...just go directly to the small businesses...try to recoup some of the domestic product deficit that way...

    but wait, first we need to figure out how the richest of the rich can make money off this, then we can do it...


    Sometime I want to play a game (none / 0) (#66)
    by hookfan on Wed Mar 25, 2009 at 05:30:02 PM EST
    called "If Obama were really a socialist, he would. . .(fill in the blank). I wonder, compared to where we are if what he would do would seem so bad. . .hmmm

    Want a stimulus plan that helps real people (5.00 / 2) (#64)
    by MO Blue on Wed Mar 25, 2009 at 05:27:34 PM EST
    fix the health care system. Single payer, affordable health care.

    Annual premiums keep going up accompanied by greatly increased out of pocket expenses for any services received.

    My premium went up 735% in 2 years and a service that cost me a $25 co-pay last year now costs me almost $700. It has gotten to the point that only the rich and the congresscritters (who are receiving all of our taxpayer money) can afford to be sick.


    Heck! It would help business also (5.00 / 4) (#76)
    by hookfan on Wed Mar 25, 2009 at 06:08:22 PM EST
    You're not alone. I'm currently going naked-- can't afford the premium monthly costs let alone realistically being able to pay the deductible if anything catastrophic would again occurr. I was bankrupted by my first wife's losing 2 year struggle with cancer. The costs of repeated hospitalizations and treatments overran the million dollar cap on the insurance policy. It is not on my very fun things list for people to experience. A few years later due to ongoing stress, and an allergic reaction to medication, I suffered a stroke paralyzing my left side and distorting my speech, and lost my job. Not to worry, all the pain I was experiencing told me I was still alive-- apparently very alive. thankfully, I hadn't declared bankruptcy yet. So I still had a way out and just before the new rules were passed.
       If we had single payer universal healthcare, much of the financial pain and struggles would have been eliminated. Our healthcare system, imo, is just predatory, and insurance is just a false confidence game-- most of us can't afford the cost even with insurance.

    I had to grit my teeth like mad last night (5.00 / 3) (#80)
    by Militarytracy on Wed Mar 25, 2009 at 06:13:13 PM EST
    when Obama said that the key to much of what ails us lies in cutting healthcare costs.  Really truly, why are out healthcare costs so ghastly compared to Canada or Europe where people receive healthcare without all of the denials and B.S......they just get healthcare and somehow it seems to cost the whole world less than our shabby crappy pathetic system costs us.

    Because (5.00 / 2) (#87)
    by hookfan on Wed Mar 25, 2009 at 06:42:35 PM EST
    our healthcare system isn't mostly about providing healthcare to us. It's largely about servicing the healthcare players in the system.

    my health insurance premium (5.00 / 2) (#92)
    by Bemused on Wed Mar 25, 2009 at 07:00:04 PM EST
     is by far the single largest recurring expense I  have  other than payroll and taxes, and I have $5000 annual family deductible before benefits kick in and then its only 80/20 for the first $200K.

      It got so bad I decided to go to this plan and basically pay all my own medical expenses. We won't meet the deductible unless someone gets  sick. I just gave my  employees raises to make up for increased out of pocket expenses they incur under the new plan because it's cheaper than continuing with the old plan with lower annual deductibles.


    In theory that sounds good (5.00 / 1) (#65)
    by Bemused on Wed Mar 25, 2009 at 05:28:16 PM EST
     but those who don't receive loans while their competitors do from a source they support with taxes would have problems with it. It's one thing for a private entity to say, "A" and "B" have equivalent financials but I'll loan to "A" because my business judgment is his future prospects are better than "B's." It's another for government to be making that call.

      Of course, the government now throwing money at the Cs whose financials look like crap takes some of the force out of that argument.


    Yeah (none / 0) (#67)
    by hookfan on Wed Mar 25, 2009 at 05:38:07 PM EST
    It doesn't hold much water to complain, unless one is already on record complaining about Bush's no bid contracts here and in Iraq. And no amount of complaining stopped him very much, just sayin'. If Obama wants to make equitable bidding rules, I suppose he can. I just want people to be put to work.

    There could be rules (5.00 / 2) (#71)
    by Bemused on Wed Mar 25, 2009 at 05:47:32 PM EST
     that are purely objective, but that likely would cause problems. My judgment is that in the future there will be larger and more profitable market for widgets than thingamajugs might be very sound, but if the thingamajig company shows a stronger balance sheet, etc., at the time of the application reliance only on objective criteria would dictate loaning to it.

      That's not even bringing into the equation about the social value of activities and products. would government loan to mountaintop removal companies, tobacco companies, or just name something you don't like.

      Then, you have the direct conflict of interest that could arise when the government might loan to a company when it believes it is necessary for it to fill a government contract but denies a loan which causes a different company to be unable to meet a private obligation.

      To some extent these concerns already exist due to many programs through which government subsidizeds favored private entities but making the government THE banker would much exacerbate the concerns.


    That's a point (none / 0) (#85)
    by hookfan on Wed Mar 25, 2009 at 06:30:25 PM EST
    However, why couldn't many of those concerns be managed through increased regulatory oversight.
       Second, why could not a vastly expanded SBA be utilized to funnel money to businesses and start ups? I realize Bush shrank its function and funding to almost nothing, but it doesn't have to stay that way.

    This is what I think (5.00 / 1) (#75)
    by Militarytracy on Wed Mar 25, 2009 at 06:08:05 PM EST
    Without a healthy middle class the banks have nobody to serve.  Save the banks to serve who, .....not many are credit worthy at this time and the banks are swimming in junk assets.  If the banks are going to earn their way clear of all of this they have to charge someone for something, and they already are in many instances with their new and improved late fees and such and people are having a hard time affording it and that isn't going to improve anytime soon.  

    RMBS, not CRE (none / 0) (#40)
    by souvarine on Wed Mar 25, 2009 at 04:30:25 PM EST
    The CRE crash is only beginning to hit the banks. The toxic assets people have been talking about are RMBS, residential mortgage backed securities. We haven't begun to bail out from the CRE crash.

    It's more than RMBS (none / 0) (#57)
    by Romberry on Wed Mar 25, 2009 at 05:10:55 PM EST
    The toxic assets also include securitized credit card debt, auto loans, student loans and a whole host of other products that were bundled up into securities and sold. The "plan" for dealing with toxic...er...legacy assets allows for literally all of these things and more to become a potential burden...er..."windfall" for taxpayers. It's a crock of stinky poo and we are all going to be having steaming piles of it for dinner for a long, long time.

    You're pretty much (none / 0) (#53)
    by Ga6thDem on Wed Mar 25, 2009 at 05:01:43 PM EST
    conceding that the first "bailout" didn't work since it was supposed to solve that problem. Why is this one supposed to work when the other one didn't? It seems to me that taking a different tack would would be better than trying to improve on something that failed previously.

    sure (none / 0) (#60)
    by CST on Wed Mar 25, 2009 at 05:19:01 PM EST
    I wasn't making a statement about the usefullness of the bailout.  Just responding to the part about no one being able to borrow due to unemployment.

    Okay. (none / 0) (#94)
    by Ga6thDem on Wed Mar 25, 2009 at 07:10:46 PM EST
    Sorry I misunderstood you.

    The elephant in the room (5.00 / 5) (#34)
    by NYShooter on Wed Mar 25, 2009 at 04:13:11 PM EST
      is a nightmare scenario that no one is mentioning:

    Its not the housing bubble" bursting that we're witnessing. What we're witnessing is the "American bubble" bursting.

    The chickens have come home to roost. Excesses of every type, held up by a long gone, "America is #1" fantasy.

    What Obama, Geithner, et al are desperately trying to stave off is the ever clearer realization that our standard of living is in free-fall. Where it will settle is anybody's guess.

    Years and years of living beyond our means simply had to have a "settlement date." From completely outrageous, and unnecessary military spending, to Corporate incomes in the tens of millions of dollars; what were we thinking?

    Michelle Obama's garden is a cryptic metaphor for the future we all have to look forward to.

    What I'm worried about is the gargantuan looting the "masters of the universe" are planning for themselves as the rest of us are left to fend for ourselves..  

    Or, (5.00 / 1) (#39)
    by Bemused on Wed Mar 25, 2009 at 04:29:32 PM EST
    just perhaps, they sincerely don't share the "no hope" scenario and don't think promoting panic is the shrewdest move. Even that would be unlikely to end life as we know it, but it would be very unlikely to help recovery. A President seeking recovery is fine by me.

      There's a lot to criticize, but complaining the President is encouraging people not to despair and throw in the towel seems a bit much.


    It is also called (5.00 / 2) (#52)
    by eric on Wed Mar 25, 2009 at 04:58:23 PM EST
    unbridled capitalism.  But Americans are so brainwashed that they can't even see the obvious:  The market has failed.

    "the gargantuan looting" (none / 0) (#63)
    by desertswine on Wed Mar 25, 2009 at 05:25:44 PM EST
    It sounds like you think we may be in the middle of a coup. Or rather, nearing the end-game.

    Yeah, well (4.00 / 0) (#105)
    by NYShooter on Wed Mar 25, 2009 at 08:19:12 PM EST
    maybe a little melodramatic, or a slight misuse of poetic license, but..

    consider that the CEO of Mobil/Exxon took out almost a B..B..Billion dollars to insure a cozy little retirement.

    Just saying that if the High Priests of Power believe a major economic adjustment is taking place, don't stand next to any widows or orphans ahead of you in line.


    Scrubbing the Idol's Mouth (5.00 / 2) (#56)
    by Robot Porter on Wed Mar 25, 2009 at 05:10:31 PM EST
    Back in the early history of man, when things went badly our ancestors turned to the priests.

    The priests would say, "The Gods aren't talking to us.  And this is because you let the mouth of our idol statue get dirty.  Go scrub the idol's mouth and it will start talking."

    The priests hoped that things would turn around while the tribe was busy scrubbing.

    Think that's what's happening here.  The Geithner plan is just the modern equivalent of scrubbing the idol's mouth.

    Quick points (5.00 / 1) (#90)
    by reslez on Wed Mar 25, 2009 at 06:50:17 PM EST
    1) We are in a lull of mortgage pain right now, but a second wave is coming.

    2010-2011 will see far more rate resets for Alt-A and Option ARMs. See this chart. Option ARM resets in 2010-2011 are going to bring major pain. And for Option ARMs, it doesn't matter if interest rates are low.

    This means housing prices will continue to fall. We are not near a bottom and we will not see one until 2012 at the earliest.

    2) We have not solved the problem of home foreclosures.

    Bankruptcy judges still cannot modify mortgages in bankruptcy proceedings. Servicers still can't find the loan documentation, in many cases, to prove they have the legal right to foreclose. And we still have not solved the CMO problem, wherein a single mortgage has been sliced and diced so many times it's impossible to track down all the note owners to get them to agree to a loan modification. Until these problems are solved the foreclosure problem will continue to dump families on the street, housing prices will drop, and the value of these "toxic assets" will continue to circle the drain.

    We are not near the end, and our leaders in government are not even trying to find a solution.

    Suppose there's massive fraud in the mortages (5.00 / 2) (#91)
    by lambert on Wed Mar 25, 2009 at 06:56:29 PM EST
    Are the derivatives then valid?

    Maybe ... (5.00 / 1) (#103)
    by santarita on Wed Mar 25, 2009 at 08:03:15 PM EST
    Credit default swaps would generally not be written on individual loans but rather packages of loans bundled into a security. Maybe all loans from one originator were packaged and sold and if that originator was making fraudulent loans and the buyer of the credit default swap knew of the fraud and didn't disclose it to the issuer of the credit default swap, then maybe the issuer could declare its obligations void from the beginning.

    But if any part of a package was corrupt... (none / 0) (#122)
    by lambert on Thu Mar 26, 2009 at 12:19:16 PM EST
    ... wouldn't that make the whole package corrupt? I'd certainly make that argument if I were a buyer of the CDSs.

    (I'm assuming here that a forensic accountant would determine widespread fraud. William Black, who got Charles Keating, believes that there is.)


    corrupt (none / 0) (#125)
    by Bemused on Thu Mar 26, 2009 at 02:22:02 PM EST
     is not the same as fraudulent.

      For legal purposes actionable fraud requires an intentional misrepresentation of a material fact which the opposing party relied upon in entering the agreement.

      You also have the issue that by the time many of the transactions were made which result in these banks and other entities holding the bad paper,  the buyer probably had access to the same information as the sellers, who were also well removed in the chain from the intial loan and security transaction.

      Corrupt? Yes. Fraud? Only case by case analysi we can't make would tell.


    Then I meant fraudulent (none / 0) (#126)
    by lambert on Thu Mar 26, 2009 at 11:27:55 PM EST
    Any manager doing their job would have known that the documenation was bad, yet they went ahead anyhow. Just like Enron. And if we can't know because the records were lost or destroyed, surely that's actionable as well?

    What value (none / 0) (#3)
    by eric on Wed Mar 25, 2009 at 01:19:08 PM EST
    does an "asset" have when the whole basis for its value is gone?  We hear today that in California, the median price for a single family home has declined 41% from a year ago.

    41% is just gone.  Mortgages that fall within that 41% are worthless.  Securities that are collateralized by mortgages within that 41% are worthless.

    This is the problem.  A lot of value just disappeared - its gone.  People need to quit calling these things "toxic assets", when what they really are just plain "losses".

    where can I find stats for (none / 0) (#8)
    by DFLer on Wed Mar 25, 2009 at 01:48:06 PM EST
    median prices in CA, say, in the 1990s, or early 2000s?

    I'm looking to see how much of that 41% "value" drop was %41 bubble up in the first place.


    As someone who's been in CA (5.00 / 1) (#45)
    by allimom99 on Wed Mar 25, 2009 at 04:42:29 PM EST
    through the period, I would estimate probably ALL of it. I lived in the SF Bay Area until '97, and the big runup in prices started around then. Now I'm in the far northern part of the state (Humboldt), where the prices have been lower, and the increase later. We're not yet experiencing the dramatic drop in prices, but we will soon enough.

    If that's not enough, we have a poor economy in the best of times, and are paying $2.59/gal for regular.


    overvalued no doubt (none / 0) (#4)
    by Bemused on Wed Mar 25, 2009 at 01:19:18 PM EST
     but the 64 dollar question is to what degree. We really don't have a lot of information that would be helpful.

      For example, it's safe to assume the majority of the securities are -- well down the chain--- backed by finished homes which have substantial value. It's also likely that banks can capture some amount of excess liability over foreclosure sales from some defaulters.

      On the other hand, do we know whether  some substantial amount of the debt is against unfinished or even non-started construction backed by loans?

      We also have the "tautological" or "symbiotic" aspects of the situation. we know the worse the general economy gets the lower the capturable value of the toxic assets but how do we know how bad the general economy will get before recovery and how long until recovery begins?

      These are just a couple of things WE don't know, and many are becoming increasingly worried  leave our policy makers equally reliant on what are essentially guesses.

    Financial Crises is not directly related to just (none / 0) (#5)
    by gtesta on Wed Mar 25, 2009 at 01:27:31 PM EST
    home prices.
    The root cause is that derivitives were created from mortgages (mortgage-back securities)which are basicallly bonds with a yield and a par value.
    Financial institutions established horribly irresonsible positions with these mbs's using tons of borrowed money to boost returns.  When the underlying mortgages stared to default, then the bonds turned into discount bonds loosing value.  I have absolutely no idea what the value of a mortgage-back security is if some percentage of the underlying mortgages on which it is based go into default. No one else does either.  Hence Geitner's plan to try and let the market find a value. Otherwise, what the heck do you base it on?
    I think AIG FP executives and investment and commercial bank executives whose institutions took horribly irresponsible positions, should be tried for financial crimes against humanity.  I'm totally serious!!  We need some kind of financial Nuremberg Trial.

    It's (5.00 / 3) (#6)
    by Bemused on Wed Mar 25, 2009 at 01:31:41 PM EST
     not really accurate to describe it as allowing the market to find the value when the government is pumping money into the market which is intended to allow for there to be a value above that would exist in the absence of the intervention.

    I Hear You... (none / 0) (#7)
    by gtesta on Wed Mar 25, 2009 at 01:38:30 PM EST
    I'm not going to really defend Geitner's plan, I don't much like it.  But it is a plan to let the market determine a value, but you're right, it's not much of a free market.
    It's just an alternative to having the banks declare the loses now, which will make them insolvent.

    One other quick comment... (none / 0) (#11)
    by gtesta on Wed Mar 25, 2009 at 02:04:03 PM EST
    I think that the Giethner plan, is laying the groundwork for temporary nationalization, or pre-privitization of these really huge banks.
    I think the banks need to see their postions being valued at a nickel or dime on the dollar by private investors before they do realize that they are broke.
    It is a shame in some respects, because there will be value in these assets over the long term, but Vinnie and boys want their money today.   Which is as it should be, I always thought there should be daily settlement on leveraged positions.

    I Think You May Be... (5.00 / 1) (#48)
    by santarita on Wed Mar 25, 2009 at 04:51:47 PM EST

    Right now we are at an impasse.  The banks think the assets are undervalued, in part because there is no active market.  The government would be looking at significant litigation by multiple parties if it put the banks into receivership.  The government might win in the end but at what cost.

    Having a private-public group (with incentives for the private partner) examining the assets and bidding on them establishes a price that will look better in court than just the government's establishing a price.

    I think also the government needs to get some more ducks in a row before it takes on the receivership of a Citi or a B of A.  It might have some authorities now but I think it wants more clear direction over bank holding companies and non-US affiliates.


    there is no plan (none / 0) (#9)
    by Bemused on Wed Mar 25, 2009 at 01:48:09 PM EST
     anyone could assemble that would either satisfy everyone or succeed in all possible contingencies.

      The only consensus appears to be that in  the broadest sense that the government must take extraordinary action. There is also strong consensus it must act quickly, but that is obviously something that hindsight may show down the road equals rashly.

      Personally, I have not been convinced that avoiding some large banks becoming inslovent deserves the priority it is being given. I don't say I couldn't be convinced of that or that I might later be proven wrong if I remain unconvinced,  but no one has shown me in concrete terms why propping up banks with tons of my money, your money and children's money is preferable to allowing insolvency and letting these banks go into Chapter 11 (or other form of receivership) and be reorganized or liquidated with the available assets being distributed based under "normal" legal standards.

    I hope you are right (none / 0) (#16)
    by Militarytracy on Wed Mar 25, 2009 at 02:58:39 PM EST
    Discovering that everything he has lukewarmly done though is inadequate is going to eat up a bunch of his political capital in getting the more adequate solutions.  So be it though because there isn't anything I can do about it.

    He has a lot of leeway to do so (none / 0) (#18)
    by Cream City on Wed Mar 25, 2009 at 03:02:31 PM EST
    because he has a lot of political capital -- and if it works, he will recoup it and then some.

    Not really (5.00 / 3) (#23)
    by Ga6thDem on Wed Mar 25, 2009 at 03:28:42 PM EST
    No one has much political capital in the end. The public can turn on a dime. Bush thought that he had the political capital to privatize social security and we all know what happened there.

    To solve these problems you have to NOT think about being reelected and KNOW that you are doing the right thing. You have to have a core set of beliefs that you are willing to promote and stand by even when things get tough.


    Contra Klugman (none / 0) (#70)
    by KoolJeffrey on Wed Mar 25, 2009 at 05:43:09 PM EST
    I see the Geithner plan as being relevent only to banks that are solvent. For those that are found - after stress tests - to be insolvent I see as the proper solution - -as I have widely written - to nationalize them and thus clean them up to prepare them for re-privatization.

    The stress test should do a triage between banks that are illiquid and undercapitalized but solvent given the provision of capital and liquidity and those that, under a reasonable stress scenario are effectively insolvent. Those that are insolvent should be nationalized.

     -- Nouriel Roubini

    Two things (5.00 / 1) (#74)
    by Romberry on Wed Mar 25, 2009 at 06:04:18 PM EST
    First, who is Klugman? I know a Krugman who's had some things to say about all this, but the only Klugman I know of used to play opposite Tony Randall in a funny TV show. But anyway...

    Second thing is this: Roubini is asking you to read a bit between the lines. Read the whole thing, along with his clarification (which you can see here), in which he says ""You are going to need that in shutting down, potentially, a bank like Citigroup" (and the boldface on Citigroup is his, not mine) and it becomes apparent that Roubini is not exactly saying that the Geithner plan is a cure. In addition to that, I believe Roubini is depending on real stress tests for the banks, not the overly optimistic faux "stress test" that Geithner and company are conducting now. Why is Roubini depending on that? Because (again, reading between the lines) he's thinking that the banks are no longer going to be able to hide the true value of these assets once they start getting bids in this proposed rigged market and those bids are still not high enough to make these banks willing to sell or their balance sheet solvent.



    I will learn how to spell... (none / 0) (#128)
    by KoolJeffrey on Mon Mar 30, 2009 at 12:18:54 PM EST
    when you learn how to post a link, you old school marm.

    The "stress tests" have been sidelined (5.00 / 2) (#78)
    by Militarytracy on Wed Mar 25, 2009 at 06:09:23 PM EST
    Or slow walked, or what have you.