Search


Subscribe to AFM


Subscribe to AllFinancialMatters
by Email

All Financial Matters

Promote Your Page Too

The American's Creed

Site Sponsors

Books I Recommend


AFM in the Media


Money Magazine May 2008

Real Simple March 2008

Blogroll (Daily Reads)

« | Main | »

Hillary: Let’s Keep People in Their Homes

By JLP | September 25, 2008

This comes to us from Hillary Clinton’s editorial, Let’s Keep People in Their Homes, that was in today’s Wall Street Journal:

…we must address the skyrocketing rates of mortgage defaults and foreclosures that have buffeted the economy and ignited the credit crisis. Two million homeowners carry mortgages worth more than their homes. They hold $3 trillion in mortgage debt. Nearly three million adjustable-rate mortgages are scheduled for a rate increase in the next two years. Another wave of foreclosures looms.

I’ve proposed a new Home Owners’ Loan Corporation (HOLC), to launch a national effort to help homeowners refinance their mortgages. The original HOLC, launched in 1933, bought mortgages from failed banks and modified the terms so families could make affordable payments while keeping their homes. The original HOLC returned a profit to the Treasury and saved one million homes. We can save roughly three times that many today. We should also put in place a temporary moratorium on foreclosures and freeze rate hikes in adjustable-rate mortgages. We’ve got to stem the tide of failing mortgages and give the markets time to recover.

This is why the bailout for the banks, brokerages, and mortgage firms bugs me so much: it fuels the argument that we need to help people afford the unaffordable since we helped Wall Street. I am against a bailout of any kind—damn the consequences. There is no reason to believe that these companies will change their ways just as there is no reason to believe that these homeowners (a really bad term since they don’t really own anything) won’t again run into trouble. What then? Do we come to the rescue with another dose of help?

The solution to all this is really simple: we need to return to responsibilty and standards for both companies and citizens.

Topics: Housing Market | 36 Comments »


36 Responses to “Hillary: Let’s Keep People in Their Homes”

  1. LegalTherapy Says:
    September 25th, 2008 at 1:09 pm

    Couldn’t agree more. I see on news wires that the bail out’s a done deal; sad day for the USA.

  2. Grumble Says:
    September 25th, 2008 at 1:34 pm

    Thousands of renters lose their homes every day. What is Hillary doing for them?

  3. Josh Says:
    September 25th, 2008 at 1:35 pm

    You all are clearly not thinking this through in enough detail. I wish more of our elders could be here to explain just how nasty the great depression was. If credit freezes, which is highly probable without a bailout, everyone suffers immense consequences. The economy WILL grind to a halt and many more people will be on the street looking for work. I assume many of JLP’s clients will no longer be able to afford his services causing he and his family to suffer. My family will be in a similar predicament. It will take many years to recover at great costs to our society. Having said that, I agree that we have a moral hazard issue going on in this country. However, I’m willing to live with this rather than face the consequences of the alternative at this moment. We are currently facing a situation that has no good outcomes. We must choose the option that provides the US economy with best chance of avoiding a catastrophic outcome. A tightly controlled bailout seems to be that answer despite its negative consequences. Finally, perhaps the saddest aspect of this situation is that we have no good options in our presidential candidates. Neither has a good grasp of economic issues nor a plan to balance our budget and return the country to fiscal discipline.

  4. JLP Says:
    September 25th, 2008 at 1:42 pm

    Josh,

    I’m thinking this through. Any sort of bailout is ONLY delaying the reckoning that will surely take place.

  5. JimmyDaGeek Says:
    September 25th, 2008 at 2:49 pm

    We don’t need a bailout, we need a workout. And the American taxpayer had better be paid in spades for the workout. When Chrysler was given loan guarantees, the taxpayer was given warrants in exchange. When Chrysler recovered, the taxpayer made money.

    The taxpayer had better be paid the same way.

  6. Adam Says:
    September 25th, 2008 at 3:10 pm

    It drives me crazy when people act like the “simple” solution is to just let the cards fall, tough it out, and we’ll somehow magically go back to simpler more responsible times. This is not a time for idealistic-daydreaming. People who talk as though the answer is that easy either don’t fully grasp the consequences of inaction, or have more resources hoarded than their neighbors.

  7. Lord Says:
    September 25th, 2008 at 5:53 pm

    I would be much more impressed by someone wanting to let the cards fall where they may if they were in front of preventing it from happening in the first place. Abrogating responsibility earlier to abrogating it later is just irresponsibility.

  8. kim Says:
    September 25th, 2008 at 6:34 pm

    it’s seriously ignorant posts like this that are fueling the fire making people against the bailout. Sure, the bailout is not fair but it’s something that NEEDS to be done. you say damn the consequences but you have no idea what it would actually do to our economy and how long it would take for us to recover (10+ years?). EVERYONE would suffer deeply and the US would be in absolute ruins if a bailout does not occur. some people think this won’t affect them but it will. it is a ripple effect that would lead to a great depression where noone would be able to buy a house, send their kids to college….not only will large banks and businesses collapse but small businesses. unemployment would skyrocket. the list goes on and on.

  9. JLP Says:
    September 25th, 2008 at 6:44 pm

    Kim,

    Ignorant? Please.

    How are we going to keep people in their homes? We can’t! We’re only postponing the inevitable.

  10. Preston Says:
    September 25th, 2008 at 7:39 pm

    “or have more resources hoarded than their neighbors”

    Nope – but even at my age I’m sick of people who are irresponsible with money. I grew up in a single parent household on low income housing assistance with 2 brothers. It drove me nuts, even at the tender age of 10, to see my mom buy things like cigarettes and other “optional” things while she would stress about things like making the rent.

    It makes no sense.

    Letting the cards fall doesn’t solve the issue – it makes it so that people have to face the reality that the fake lifestyle they’ve been leaving is nothing but a charade. The consequences of inaction are what? You mean our dollar won’t devalue as quickly because we don’t be printing money as rapidly? Imagine that.

    The bailout hurts responsible people the most. I dont understand why the talk is “well since ‘Wall street’ is getting a bailout we need to bailout the homeowners too! The poor homeowners!”

    Yeah – the POOR homeowners. As in, they can’t afford their crap. Therefore, they’ve broken their contract (agreeing to pay) and need to get the heck out!

    Credit grinds to a halt and people are out of work – YES, jobs will be lost. YES, prices will go up. YES, discretionary spending will go down. However, our IDEALS will not be sold out. Our SOVEREIGNTY will be maintained as do not have to borrow money from other nations or devalue our own.

  11. Preston Says:
    September 25th, 2008 at 7:43 pm

    OH! And to Kim’s point:

    10 years to recover? You’re in it for the long haul! Guess what? LIFE is a constant stream. If you happened to be growing up during the 30’s you didn’t just get to say “Think of the consequences, you’ve made my life suck!” – you lived with it. Get over your narcissistic opinions and realize the center of the universe isn’t YOU.

    The fact of the matter is, it will suck, but hopefully it will suck ENOUGH that the 60% of Americans (heard on MSNBC last night, so unverified) that are behind on their bills NOW realize that credit ISN’T for what it has been used for.

  12. Preston Says:
    September 25th, 2008 at 7:45 pm

    Sorry for the rapid fire points – but this has been bugging me for the past three years (as I HAVE cried foul). Why should *I*, a responsible citizen who pays their bills to debtors be forced not only to have the “unfair” pleasure of paying all of my bills (instead of cashing out or getting a new deal) be faced with the taxes that will be required to fund initiatives to keep people in their homes that THEY cannot afford and could not afford in the first place?!

  13. Foobarista Says:
    September 25th, 2008 at 7:58 pm

    The annoying thing about all this is the “right thing” may not be the Right Thing. After the crash in 1929, Hoover and the Fed actually tightened credit and raised taxes as they didn’t want to run up the public debt. It deepened the recession after 1929 into a depression, as did the Hawley-Smoot tariffs that shut down world trade. FDR over-corrected with much of the New Deal legislation, which guaranteed that capital stayed put and kept the Depression going until WWII.

    The effects of the Depression weren’t just economic. You could put together an argument that WWII would have been far less severe, if not avoided completely, had the 1929 crash resulted in a couple-year “clean up the excesses” recession instead of a ten year worldwide depression.

    If the US economy craters suddenly and massively, it’ll take China and India with it, which won’t bode well for the peace of the world.

    Sure, I’d love to see Wall Street “smart guys” line up in front of soup kitchens, and “homeowners” who did incredibly dumb things go back to apartments where they belong. But there’s far more moving parts to this than just that in the world economy.

    I’m not sure what to do, but letting the whole thing collapse sounds like a bad idea.

  14. Sean Says:
    September 25th, 2008 at 8:34 pm

    Are you saying our long-term economic reckoning and total economic output will be the same, no matter what happens?

    If you have thought it through, can you argue the other side for a minute… describe a wholesale economic liquidation?

    The responses that popped up at the end here sound like a delicate recession by comparison.

    I’ll be honest and say “damn the consequences” sounds stark raving mad.*

    (*Nothing personal, I often enjoy your perspectives.)

  15. Kitty Says:
    September 25th, 2008 at 9:37 pm

    I agree with Josh and Foobarista. The rest of you seem to think that because you have been responsible, you’ll be OK no matter what. So you are suggesting doing exactly what was done in 1929 — let investors lose their money and banks fail. You are essentially saying that Hoover policy – drive all the “rottenness out of the system” was correct even though most analysts agree that this is what caused The Great Depression. It took over 20 years, all the way to the 50s for the market to reach the same level it was at in 1929. Just the same level, no gain. Or have you all sold your stock two years ago? Do you think your job is secure and immune to this crisis?

    I heard an old commentator on TV tell “when the market crashed in 1929, my father said ‘it serves them right’. A year later he had to close his business”. This is exactly what you are saying. Well, I hope a year from now you aren’t going to lose your job.

    Even if you don’t work for banks, you are likely to be affected. Your company needs credit too. Oh yes, I know, according to some of you nobody is supposed to use credit. So do you think the companies shall just keep piles of cash lying in a vault earning nothing or just have it broken up in nice chunks of under 100K in multiple banks? No business can afford to do that. The cash is invested in the business. When a business needs to pay your salary it takes short term loans, then when it gets its revenue, it pays the money back. Without loans all business except for maybe some large cash-rich corporations (like the one I work for) can survive. But these corporation may be producing products that banks used to buy e.g. computers or furniture…. Without banks buying it, these companies will suffer to, laying off people and adding to unemployment. Currently there is almost total credit freeze – nobody lends money to anybody else. Many smaller businesses are having pretty hard time – businesses that had nothing to do with real estate or mortgages.

    I also just love this “There is no reason to believe that these companies will change their ways”. What exactly is a company? Is it a single monolith? Is it one person? What percentage of the employees of any of these companies were involved in this type of decisions? Is a teller at a bank responsible? How about a database administrator? A network administrator? A computer programmer? Or a secretary to some manager? Think about thousands of people that were employed by some of these companies. How many of them do you think actually made the decisions that got us into this mess?

    You are willing to “punish” thousands, maybe millions of people so that a few of those can “learn a lesson”? Newsflash. Those responsible for this crisis have already made millions and probably can retire nicely. You, on the other hands, may lose your jobs because the company you work for may have trouble getting credit it needs. Or because with so many unemployed people, there will be not many left who can afford to buy its products. Then you may have trouble finding another one because there are so many unemployed people around.

    Oh right, all of these people were supposed to save money. Enough to live in for a few years of unemployment. What about young people? Those who graduated a year or two ago and still have student loans? They’ll be unemployed too.

    Incidentally, unemployed people don’t pay taxes. What exactly do you think will happen with government budget with so many unemployed people? And how do you think FDIC will be handling bank failures after it runs out of reserves? Print more money? Here we go.

    What about the real estate market? With the credit freeze as it is now, it’ll be extremely difficult to take mortgages. It already is. So the prices will fall. Good, right? Except for it’ll cause more foreclosures and more bank failures.

    As Foobarista has already pointed out, the Great Depression had other effects as well. It spread to other countries. One of the countries it hit the hardest was Germany. Remember what happened next? Hungry people are ready to elect any charismatic leader who promises to feed them. Has anybody here ever experienced real hunger?

    Yes Preston, your IDEALS are great – let thousands, maybe millions suffer just so we can punish a few wrong-doers. Are you sure you will not be affected?

  16. Jeremy Says:
    September 25th, 2008 at 10:20 pm

    Newsflash. 1929 != 2008.

    I love how the media, and regular people are jumping on the bandwagon that somehow we’re heading into the great depression after the market drops 20% in a year. That barely classifies it as a bear market at all, let alone a cataclysmic event. This isn’t even as bad as the market conditions we saw in 2000-2001.

    Granted, we’re talking about the foundation of our financial system here, so the comparisons may seem legitimate, but let’s be realistic here. The stock market, and economy of 1929 is so incredibly different than it is today, that you can’t even begin to make a sane comparison.

    How many people were invested in the market in the 20s and 30s? You didn’t have employer-sponsored retirement plans allowing every average joe to get into the market, you didn’t even have retirement plans and the average citizen couldn’t even consider investing. You had to know someone on Wall St. or have a lot of money. Not only that, but the market back then consisted of a handful of domestic companies. So any downturn was significant and affected a lot of people right here at home. Now, the markets are entirely global. Even American companies are global and even if a downturn is noticed here at home, that doesn’t mean companies like GE, Microsoft, and BP are going to suddenly stop selling their products across the world.

    Anyway, I’m not going to get into the right or wrong debate in terms of the bailout, but I have to say that all of this comparison that’s going on between today and the great depression is borderline ridiculous. There may be some common threads, but too much has changed in the past 80 years to even entertain a possible correlation.

  17. Sean Says:
    September 26th, 2008 at 12:24 am

    If we wanted a wholesale liquidation bad enough, we could jolly well have one. That is the whole point here. I for one do -NOT- think we will have a 30’s style depression, because I don’t think it would be tolerated. Preston may be willing to do it, but I don’t think enough people want to participate in such economic self-flagellation.

    At the same time, I don’t think we as a nation are great about learning from best practices. So I don’t expect a Stockholm solution, either, if that’s what’s needed. We can’t get too cocky about messes in places like Japan. A lot of things that were supposed to work over here, haven’t. The economy has a lot of fast-moving variables and not all of them play out on paper.

  18. Preston Says:
    September 26th, 2008 at 12:35 am

    I’m not saying I won’t be affected. I’m saying quite the opposite. It will be hard, even for me. However, my family is prepared to tough it out. And should the stuff really hit the fan, I think we’d do alright.

    As far as needing credit for new mortgages and whatnot: I plan on staying where I am. As far as my job, I’m employed by a government entity that won’t receive a cut no matter the economy.

    As far as world impacts – we need to stop focusing on this ‘paper money’ and focus on tangible goods or services.

    As far as the comparisons to the 20’s – The difference is we had a gold standard then. We didn’t have a ginormous national debt. We didn’t have such large unfunded liabilities. It was completely different.

    It isn’t just ideals – the fact of the matter is, I’ve not heard anyone say just how this plan will affect the dollar. Some aren’t even sure it will stave off the very same catastrophe that they are trying to avoid. Others entertain the idea it is like pouring 1 gallon of water into an above ground pool that has a leak 12″ in diameter. Eventually the pool will run empty, 1 gallon of water or not.

  19. Tim Says:
    September 26th, 2008 at 5:56 am

    JLP, I agree and it’s refreshing to see someone commenting, because everyone else seems to be focusing on wall street because of the election. Everyone already quickly forgot the $300b homeowner bailout, so we can keep the hard working poor homeowner stay in their homes they couldn’t afford to begin with. People are continuing to revert back to the hard working homeowner getting a piece of the $700b bailout too. Something like the great depression needs to occur again, because changing behavior requires truly hitting rock bottom. It will cost more in the end, but I agree, let depression come on. Everyone seems to be refelcting on the Great Depression, but they also forget that we came out of the Great Depression, too.

    However, the biggest difference between now and then is the fact that the economy has legs. there are lots of companies sitting on huge cash reserves, so they can weather out an adjustment to the financial system. Although it wasn’t politically correct to state by Mccain, he is right, because most other sectors are doing just fine whereby we aren’t seeing large layoffs, etc. unemployment is still relatively low, heck it is the same as the Euro zone.

    @Jeremy: there are far more people who are at fault than who aren’t. US has negative to zero savings rate, we have high debt, we have lots of crap and mortgages that we can’t afford. It wouldn’t be punishing the few people on wall street, who are easy targets for election fodder. I think people should lose their homes. a home isn’t a right, and I surely don’t want to bailout the homeowner when I don’t even own a home. they can rent just like i do. their credit should be ruined like a bankruptcy, and they shouldn’t be able to get a lone easily just like in bankruptcy. unfortunately, the way things were, you could get another mortgage even if you defaulted on a previous one pretty easily. hopefully that will change.

  20. Sean Says:
    September 26th, 2008 at 7:11 am

    This discussion is tricky, b/c it is fragmented. In some cases, there are opposite solutions being argued from the same side. Jeremy says we can’t have another US-style great depression. I 99% agree. Preston says a liquidation-depression is a viable solution. I 100% disagree.

    Anecdotally, offline… the people who play video games are saying stop with the negativity, and the people who read books are saying stop with the unreality. Online, I’m sure more of the permabulls are readers, but I wonder if memorization is overemphasized (unintentionally, of course) at the expense of uncovering the underlying relationships. Are there really so many upsides without a potential flip side?

    > employer-sponsored retirement plans

    That money does not stay in the plan to retirement if people need to eat today.

    > every average joe to get into the market

    Millions of people who can bet against their own currency, directly or indirectly.

    > markets are global. companies are global

    Two ways our various means of production can be bought or moved on the cheap.

    > government entity that won’t receive a cut no matter what

    No matter what? The transition from a real job to FDR make-work would be seamless.

    > we didn’t have a ginormous national debt

    All the more reason not to want a GDP haircut. (existing interest vs. less revenue)

    > an above ground pool that has a leak

    Accurate, but I’d say the alternative is like drilling a hole in the bottom of a boat.

    > we came out of the Great Depression, too

    10+ years of stagnation and WWII? Can we gamble with 10+ years of stagnation and WWIII?

    Whew! I swear, I try to be 90% positive. I’m about to brew a huge pot of coffee and work to grow our economy, via domestic & global means. But I think people who are 100% positive can be a bigger danger to our well-being than people who are more negative. (I think we have already seen that play out on the major stage, but I’ll leave it at that.) It just makes me crazy when people like Foobarista and Kitty clearly have a sense of history, sociopolitical as well as economic, yet overall we can’t seem to integate that knowledge into a more nuanced debate. Hopefully, the worse-choice solution will sound like hyperbole because we will choose a less-destructive solution. I wish everyone here well, even those who happen to disagree. I think most do, which is why the debate has been civil.

    Finally,

    “The problem is that one can’t teach the market a lesson. Even if specific individuals learn not to do some things again, there are new players entering all the time and they have “learned” nothing,”

    Google that if you want to read a really frigging smart comment. (not mine, unfortunately)

  21. Jesse Says:
    September 26th, 2008 at 11:27 am

    Tim said, “Something like the great depression needs to occur again, because changing behavior requires truly hitting rock bottom.”

    While I’m certainly not hoping another great depression on this country, I AM hoping that we can start to see a behavior change. If we’re going to see one, it’ll have to be grassroots (not gov. sponsored) and there’ll be pain felt.

  22. Greg Says:
    September 26th, 2008 at 2:13 pm

    I don’t understand why we have to bail people out of this mess. They are the ones that made the bad decision to get a mortgage for two and a half times their homes value on a variable rate. Did they think that it would not change? Do we need to define “variable” for them? If you do something that inane then you ought to have to pay for it. Should we start bailing out everyone that files for bankruptcy also? Where will it end?

    I believe that we are really setting this country and economy for a huge fall. Since when is it the business of our government to bail out companies. I don’t see them subsidizing the little mom and pop stores when Wal-Mart moves in and puts them out of business.

    If there wasn’t the attitude that “the one with the most at the end wins”, we might have companies in this mess. All the “golden parachutes” and “parting gifts” that the CEO’s of these companies get are a large part of the problem. I mean if you come in to a company and leave with it’s butt in a noose then why should you be rewarded. Mr. Paulson is an example of that. He left one of the companies being bailed out,Fannie Mae or Freddie Mac, whichever, when it was heading into a hole, and now he has gotten the government to fix the problem he caused. GREED, is what this is all about. I understand the take what you can get mentality, but it ought to be take what you need and leave some for everyone else.

  23. Evan Says:
    September 26th, 2008 at 2:56 pm

    I am a self proclaimed liberatarian (one who hates government intervention – i.e. the opposite of the Liberal lol), but even I sees that there has to be some sort of “bail out.”

    First and foremost, nothing has been passed yet (at least not in the past hour since I checked google). Second, even if the plan which is up – does pass, it doesn’t seem like a bail out, per se. IT IS A LOAN! When the government has done these deals in the past, and there have been a ton of them so don’t kid yourself that this is the first time, the treasury MADE MONEY! Buffet even said if he had the money the US Treasury does, he’d invest along with them…for most, that is good enough lol.

    Additionally, there seems to be like 3 arguments happening in this post. The FIRST argument is whether we should bail out companies; the SECOND is whether we should bail out homeowners; the THIRD is whether we should somehow crush corporate golden parachautes.

    I’ll respond to each one individually, so when people decide to bash me they can respond accordingly.
    1) You have to provide some sort of company for these companies. The WORLD is interconnected today…if AIG went down, or other insurance/reinsurance/finance companies we are all going down. This is not to say that the system couldn’t handle 1, 2, or even 5 of these companies failing, but we are talking about 10 to 20 with capatilizations of more than most countries in South America (maybe)!

    Kind of a tangent but – this goes beyond the value of the stock market. I think this is a point most people miss. Jeremey from GenX (amazing blog btw) I think misses this point. The 20’s and 30’s was a global slowdown of production and consumption (as will be today). It wasn’t that US Steel dropped 45%, it was that US Steel couldnt’ buy or sell!

    2) I agree with most here, we should not be bailing out individual homeowners. They should have read their contracts. Not sure if anyone read Greenspan’s book but he mentioned something profound in there – not so eliquontely paraphrasing – US is great because it is the easiest place to do business and OUR COURTS ENFORCE CONTRACTS. The gov’t should not get involved in breaking up contracts unless there is fraud.

    3) The gov’t should not get involved in breaking up contracts unless there is fraud. A CEOs compensation (outside GSEs) has nothing to do with a certain Congressman, or the Bush admin., it has to do with a board of directors, shareholders and Executives.

    Kind of long, I should have made it in to a post of my own! lol

  24. Jeremy Says:
    September 26th, 2008 at 3:39 pm

    I agree with Evan for the most part, and thanks for the compliment. I just wanted to point out that I used the stock market comparison just because that is the benchmark everyone seems to use when determining the direction and state of the economy. It is far from the only thing to be concerned about, but just one way to easily quantify what’s happening on a daily, weekly, or monthly basis.

  25. Evan Says:
    September 26th, 2008 at 3:53 pm

    oops couple of mistakes in there! but I think the point gets through

  26. Leslie Says:
    September 26th, 2008 at 4:05 pm

    What will the impact on the economy as a whole be if we don’t bailout homeowners in some way? I mean, if all these people lose their homes and other people can’t afford to buy them because credit is tightened, won’t banks just end up holding a whole bunch of empty houses that are essentially worthless? That would seriously drive down home values overall. Couldn’t it end up being that the decrease in my own home’s value resulting from that situation would be MORE than the amount I’d have to pay as a taxpayer into a homeowner bailout plan? In other words, if this situation would cause my house’s value to drop $20,000, while my share as a taxpayer of the bailout plan would be $2000, don’t I come out ahead financially by supporting the bailout and keeping my home’s value up?

  27. kitty Says:
    September 26th, 2008 at 4:28 pm

    Just an example of an effect of the current situation on businesses world-wide; businesses that have absolutely nothing to do with mortgages or derivatives:
    http://www.guardian.co.uk/business/feedarticle/7830087

    This is just one industry, but do you seriously think other industries will not be affected. Think what will happen if this continues.

  28. Kitty Says:
    September 26th, 2008 at 11:15 pm

    Jeremy, you have a point that there are differences between today and the great depression. You are also right that so far stock market drops were much smaller. But the crisis is not over yet and as long as it continues there is still danger.

    Yes, there are now more people invested in the stock market. Doesn’t it also mean that more people get to lose their money and savings when the market goes down? It seems to me that the fact that we have more people invested in the market would mean that the effects of the market continuous decline may have a stronger effect on everyone and may cause panic. Why do you think more people invested can make this situation better than in 1929?

    Yes, the world is more interconnected. But if you notice, there is a global slowdown everywhere. Credit freeze affects everyone. In my post above I posted a link that shows the effect of this on the shipping industry world-wide. This is just one industry example, but what I’ve seen there – and I own a couple of stocks – is that good solid companies, that have been showing excellent earnings and that have contracts at a specific price going as far as 2010 and 2011 lost a lot of their value. Stock value affects companies.

    Every crisis is different. So, of course today is not 1929. But it doesn’t mean that what happens today is less serious or cannot have similar devastating effects.

    Sean I agree with you on 1. and 3. I am ambivalent about 2. for the reasons mentioned by Leslie: yes, these owners made bad decisions and are largely to blame for this situation. But falling home prices and foreclosures affect all of us and contribute to further decline. Without the bailout even for some homeowners, we are likely to lose a lot more.

  29. Preston Says:
    September 26th, 2008 at 11:21 pm

    Why is it that the consensus seems to be that a home is somehow an investment to make money rather than a stable, safe place to live and raise a family?

    Perhaps folks who are overly concerned with home value need to put things in perspective: You’re getting exactly what you agreed to.

    That is it. I don’t want to get into a theological discussion, but if you swing that way (and hey, polls show most of the US does): Matthew 20:1-16 explains it just fine.

    The folks get what they agreed to. It isn’t about fairness, it is about getting what you signed on for. The folks who put their money in the stock market signed up for that (like it or not). The folks who bought homes signed up for it. The folks who wrote bad loans signed up for it.

  30. Chad Says:
    September 27th, 2008 at 3:55 am

    This bailout is a bad idea. EVERYTIME the govt has tried to intervene in the market, so far this year, it has backfired. Yes, the market orgasms for a few days or a month but it falls back down once the “euphoria” of the latest fix wears off. The economy right now is bloated. Greed on all levels have made the entire economy become a bubble that has grown over the last 15 years at such a rate that it is now imploding on itself and can no longer support its own weight. We have prices increasing outrageously on almost everything (altho some are now starting to correct like housing and becoming more reasonable). Credit use has gone insane. I mean we are at the point now where the average person cant survive without using credit. Credit actually caused this problem i think, The spike in economic growth started about the same time wide spread credit (ab)use began. And as a result we grew too fast and everything has destablized. If we leave everything alone and let it progress out, prices on everything will fall back down to reflect where wages are at.. If the mass majority cant afford something, prices have to fall if the companies actually want to sell something…
    An example look at oil prices this past week.. Everytime it appeared that the bailout was going to go “thru” the price of oil rose, when the “bailout” fell apart, oil dropped.. if this bailout goes thru, inflation is going to go off like a nuclear explosion. when they first announced the idea of a bailout, oil rose the highest amount in 1 day EVER. this bailout CANT happen. We cant afford it.

  31. Sean Says:
    September 27th, 2008 at 9:40 am

    Even if you are making your payments, how many empty homes does it take for a neighborhood to stop being a safe place to live and raise a family? (I’m asking because I don’t know.) Fatwallet threads about $1 Detroit houses are probably the most extreme examples. At what point does the fabric of a neighborhood stretch and when does it rip? Are we really better off with tent cities and squatters? As taxpayers, as a society, is it a question of Frugal vs. Cheap?

    For those only concerned with financial matters, how much do foreclosures & vacancies amplify the losses on everything we are backstopping? The paper losses feed on themeselves, but you could argue there is a natural bottom somewhere. Fine. What about the physical structures which give meaning to the paper? If they are neglected, vandalized or totally gutted, where is our ROI?

  32. Preston Says:
    September 27th, 2008 at 11:03 am

    I’ve got no idea about the ‘entire neighborhoods’ losing because my neighborhood was built in the 60’s and many of hte original residents still live here (they only leave pretty much when they die, which is how I got my home).

    That being said, ANY “bailout” should go to protect those who are still in their homes from that sort of activity (squatting and whatnot). Increased police patrols for those neighborhoods, perhaps.

  33. Kitty Says:
    September 27th, 2008 at 6:43 pm

    @Chad: “EVERYTIME the govt has tried to intervene in the market, so far this year, it has backfired. ”

    And one time that it did not help the markets – in 1929, it backfired in a really major way. Also, some industries bailout (like Chrysler’s in 1980) did earn money for the government.

    Incidentally, 1929 was also in part caused by credit i.e. margin trading. It was also a bubble bursting. Yet the burst took everyone with it.

    Incidentally, you noticed how the bailout talks affect oil prices. Do you also notice how markets react? Incidentally, company share price doesn’t just affect the investors, it affects the company itself. Company can use it shares, for example, to finance expansion. When the shares fall, the company is affected. Did you notice that it’s not just the banks whose shares have taken a beating lately? Good solid companies that have nothing to do with real estate are suffering too.

    There were other reasons for the oil jump last Friday – options expiration and short squeeze. The prices fell down Monday morning long before there was any news of bailout. Yes, the oil fell when the talks appeared stalled, but since most on wall street still believe the some form of bailout will go through, it is not entirely clear. Also, the reason for oil falling is the fear of global slowdown. Could it be that this is the one of the reasons for oil going up – that the bailout can help the economy and prevent global slowdown?

    As to credit, you are really simplifying. Yes, maybe some people buy some things they cannot afford and it improves the balance sheet of some merchants; but it doesn’t do much for other industries like a large computer company selling its hardware to banks. Nor does it affect much outside of the US since most people in China or India don’t use cards. Yet, this crisis affects their economy too. And yes, real estate bubble was caused by easy credit. The problem is – when it collapses, it takes a lot of us with it.

    Additionally, not all credit is bad. There is credit that some people use to live beyond one’s means and there is credit all businesses rely on for day-to-day operations. Has always relied on. Imagine a company that employs 1000s of people and sells and rents some equipment to other companies. Every two weeks they need to pay salaries, yet they earn income when they sell equipment and maybe when the money they get for rental comes. The money for contracts and sales don’t come at exactly 2 weeks interval. So what they do is to borrow money e.g. from a bank, then pay the loan when they get the money and invest the rest in the business. What do you propose they do, keep payroll money on a checking account earning 1% instead of investing in the business? Do not buy parts for the equipment until you actually make a sale? But if you don’t buy parts you cannot build whatever you are selling, right? No company other than maybe your local bagel shop can operate without credit.

    Similarly, transportation companies get money when they deliver something, but they need to pay people and to pay for gas before they can make the delivery. So they borrow to cover the expenses, make the delivery, then repay the loan and invest the rest in future transportation means that can bring them more money. If they cannot get credit, they cannot pay their people, so they cannot make the delivery. This is what is happening right now world-wide as the link I included in my post above shows. Note that these companies have absolutely nothing to do with the US or mortgages. But because banks are afraid to loan money now, every business is hurting. It is a whole lot more serious that you realize.

    Similarly banks don’t keep your deposit in a vault. They also invest it e.g. in mortgages. If too many people come in to withdraw money, more than they have inside a branch, they borrow from another bank. Then they repay. If many people try to withdraw and the bank cannot get a loan, it goes under. This causes further credit problems. Not to mention massive unemployment.

    @Preston, the bailout is meant to protect others – our economy, our jobs, our savings. I personally couldn’t care less if some people who bought places they cannot afford lose their homes. IMHO, they’ve never owned them to begin with.
    But foreclosures affect businesses. This credit crunch affects businesses many of which had nothing to do with mortgages. There are less orders for home improvement, for example, so companies like Home Depot suffer.

    Your idea about increased police patrols doesn’t really do much — police also has budget. Plus when neighborhood becomes less attractive, education suffers as well. People who have been responsible can’t move because nobody wants to buy their homes.

  34. Preston Says:
    September 27th, 2008 at 11:39 pm

    Basically the choices are:

    Get screwed, get screwed, or get screwed more.

    I’ll take #1, because it screws ME less. Yes, others might get screwed too, but since we’re all going to get screwed, at least I’m not getting stuck with #3 while others get #0, not getting screwed.

  35. Tim Says:
    September 28th, 2008 at 4:27 pm

    I agree. Hillary’s suggestion is in addition to the $300b homeowner rescue bailout that no one talks about anymore. I think i’m going to buy a house that i can’t afford so all you suckers like me can pay for it for me.

  36. Evan Says:
    September 29th, 2008 at 2:44 pm

    I hate to be that guy….BUT I said a bail out HAD to go through, and well it didn’t and look where we are at?

    In the end I have faith in our system and our economy and it will heal but watching the planners pick up their phones is kind of painful right now.

Comments