Bailout or No Bailout?

[scottwww]

Originally Posted by NoKids

what's so terrible about foreclosure? why does a house that forecloses devalue the house next to it? the house is still there isn't it? so what if the people moved out and stopped making payments. the bank can just turn around and sell it to somebody else. what am i missing here?
if everyone defaulted on their bmw leases, i'm sure bmw can just find someone else to take over, no?
why do they call some loans TOXIC? is there garbage in the living room of these houses?

Your questions are so basic, that it would be embarrassing to treat them seriously.

[iheartsole]

Originally Posted by NoKids

what's so terrible about foreclosure? why does a house that forecloses devalue the house next to it? the house is still there isn't it? so what if the people moved out and stopped making payments. the bank can just turn around and sell it to somebody else. what am i missing here?
if everyone defaulted on their bmw leases, i'm sure bmw can just find someone else to take over, no?
why do they call some loans TOXIC? is there garbage in the living room of these houses?

Forclosures are bad because it can affect your credit scores/ratings dramatically. and if your credit is bad you most likely cannot buy a house/car ever again. forecosures can happen to anyone for many reasons. i will give you one reason is because some people do not know how to manage/handle there money.

i dont think the house next to the foreclosed home will be affected. people who run away is because they cannot make their mortgage payment some cant even sell their home because they owe more than what its worth. im not going to answer some of those Q's just wasting my time. but i answered a few.

[Asiann]

I blame the people from the beginning that sought after those too good to be true 3/1 ARMs etc and later could not afford the payments after the DJ went sour. The banks could've refinanced the loans so that people whould be able to pay and afford to keep their homes and it would've been a lot better than where we are at today. Everyone gets greedy and fucks it for everyone. I would only agree to the bailout if they could ensure the taxpayers would come out on top in the end.

[TLud]

This thread helped me to realize why we're in the spot in which we currently find ourselves -- 90% of Americans don't have a flippin' clue. How did we as a country become so ignorant?

[NoKids]

Originally Posted by iheartsole

Forclosures are bad because it can affect your credit scores/ratings dramatically. and if your credit is bad you most likely cannot buy a house/car ever again. forecosures can happen to anyone for many reasons. i will give you one reason is because some people do not know how to manage/handle there money.

i dont think the house next to the foreclosed home will be affected. people who run away is because they cannot make their mortgage payment some cant even sell their home because they owe more than what its worth. im not going to answer some of those Q's just wasting my time. but i answered a few.

i will do some research, but the talking heads on tv have specifically said that home foreclosures affect neighborhood values. which makes no sense to me.

[louz4]

Originally Posted by scottwww

Your questions are so basic, that it would be embarrassing to treat them seriously.

Amen

[jaiman]

Originally Posted by NoKids

what's so terrible about foreclosure? why does a house that forecloses devalue the house next to it? the house is still there isn't it? so what if the people moved out and stopped making payments. the bank can just turn around and sell it to somebody else. what am i missing here?
if everyone defaulted on their bmw leases, i'm sure bmw can just find someone else to take over, no?
why do they call some loans TOXIC? is there garbage in the living room of these houses?

Wow. Just wow.

They are called toxic, because the house is worth less than the outstanding value of the loan. Yes the bank might be able to sell the house, although in this environment it is hard to get approved for a mortgage which shrinks the pool of buyers, which mean house prices fall further. Which means the bank takes a larger hit, so they cut back on their lending etc etc. It is a gigantic liquidity hole.

[bolinp78]

Originally Posted by TLud

This thread helped me to realize why we're in the spot in which we currently find ourselves -- 90% of Americans don't have a flippin' clue. How did we as a country become so ignorant?

+100

I agree.

[bolinp78]

Originally Posted by jaiman

Wow. Just wow.

They are called toxic, because the house is worth less than the outstanding value of the loan. Yes the bank might be able to sell the house, although in this environment it is hard to get approved for a mortgage which shrinks the pool of buyers, which mean house prices fall further. Which means the bank takes a larger hit, so they cut back on their lending etc etc. It is a gigantic liquidity hole.

And this is the same guy (nokids) that has steadfast opinions regarding politics (of which he preaches to us)...

[louz4]

Originally Posted by bolinp78

And this is the same guy (nokids) that has steadfast opinions regarding politics (of which he preaches to us)...

And again AMEN

[achien]

no bailout, this is part of the economic cycle...

bailout only means delaying the pain, just look at Japan...

[Voltigeur]

Originally Posted by freshnezzz

More national debt/spending= more inflation! so if you bought a house around 2003 housing lender scam your screwed.

From where I stand I'm more worried about a deeper deleveraging cycle and more forced sales of assets, this is ultimately deflationary. A global recession is deflationary.

[Voltigeur]

Originally Posted by achien

no bailout, this is part of the economic cycle...

bailout only means delaying the pain, just look at Japan...

The Japanese authorities completely effed up because of delayed and ineffectual responses to fix their banking system & the multiplier effects from their largest ever real estate bubble. They ended up in a protracted deflationary cycle.

To forestall this kind of malaise is exactly why we need action sooner rather than later.

[cgnahc]

good point. $700 B is equivalent to giving every family in the US a $6000 stimulus. This is beyond the other $B already handed out to completed bailouts and mergers.

[achien]

"delayed and ineffectual responses to fix their banking system" === the Japanese government kept 'propping' up their big fail banks with influx of cash instead of letting them go under!!!

Hence, the supply of cash drove down interest rates (to almost 0%) and created a deflationary cycle.

Low interest was suppose to generate demand and investments, but the government ended up "crowding out" investments from companies with their spending spree.

Unless you were in Japan and spoke to a real person that had gone through this sort of mess, you will never be able to comprehend.

Originally Posted by Voltigeur

The Japanese authorities completely effed up because of delayed and ineffectual responses to fix their banking system & the multiplier effects from their largest ever real estate bubble. They ended up in a protracted deflationary cycle.

To forestall this kind of malaise is exactly why we need action sooner rather than later.

[Voltigeur]

Originally Posted by achien

"delayed and ineffectual responses to fix their banking system" === the Japanese government kept 'propping' up their big fail banks with influx of cash instead of letting them go under!!!

Oh I agree, they needed to get past the "dead man walking" syndrome and let some of these cosy cross-linked banks go down. The ineffectual part refers to simple injections of cash and still permitting these banks to hang together.

Sweden managed to address a really bad credit cycle event in 1992 by stepping in w/ a response that included equity upside for taxpayers, which ultimately halved the cost of the plan from ~ 4% / GDP to ~ 2% GDP.

[cgnahc]

Academic economists side with opposing the bailout. Allowing the institutions to declare bankrupcy means the shareholders get wiped out, and transfers the ownership to the creditors. It does not mean the company disappears, but allows only profitable operations to continue, thus giving the company a chance to emerge to become a viable company again. Bankrupcy hurts all associated with high risk lending practices, such as those writing and accepting sub prime mortgages.

[Voltigeur]

Originally Posted by cgnahc

Bankrupcy hurts all associated with high risk lending practices, such as those writing and accepting sub prime mortgages.

It's the form of the package that matters, it's not universally condemned.

The issue w/ the bad debt is it's not just affecting the originators - no, it goes much wider than that and is held on the balance sheets of many others firms that did not write / originate this crap debt.

And these assets have not been fully "marked" (discounted to reflect problems - particularly ex-US holders), so to put it in simpler terms:
If I'm a bank w/ $10,000 in capital and use leverage of 10:1 (but typically higher) then I can expand my balance sheet out to $100k. Now let's say I have to write down $1k in subprime debt that I bought after it had been securitized (turned into bonds) after relying on the debt ratings agencies in good faith. Should the bank have relied and bought the debt - different question - but fact is when your competition is doing it the pressure is on to increase yield ...

This loss of value in the debt means the bank now has to contract its balance sheet by -$10k (10x leverage). That's what can & is happening and it means reduced lending even when the bank had not originated the subprime loans. Now expand that globally and you can see what a mess this is and why banks don't trust each other...

[scottwww]

Originally Posted by achien

"delayed and ineffectual responses to fix their banking system" === the Japanese government kept 'propping' up their big fail banks with influx of cash instead of letting them go under!!!

Hence, the supply of cash drove down interest rates (to almost 0%) and created a deflationary cycle.

Low interest was suppose to generate demand and investments, but the government ended up "crowding out" investments from companies with their spending spree.

Unless you were in Japan and spoke to a real person that had gone through this sort of mess, you will never be able to comprehend.

Were you in Japan at that time? It might be interesting if you would write more about this.

[achien]

yes, I was working in and out of Tokyo back in 2000 - 2001. Interest rate was at all time low, but no consumer or business would borrow to buy or invest.

Granted, the dot-com did bring some life back in those years, but it turned south again shorty afterwards.

Originally Posted by scottwww

Were you in Japan at that time? It might be interesting if you would write more about this.

[louz4]

Originally Posted by Voltigeur

It's the form of the package that matters, it's not universally condemned.

The issue w/ the bad debt is it's not just affecting the originators - no, it goes much wider than that and is held on the balance sheets of many others firms that did not write / originate this crap debt.

And these assets have not been fully "marked" (discounted to reflect problems - particularly ex-US holders), so to put it in simpler terms:
If I'm a bank w/ $10,000 in capital and use leverage of 10:1 (but typically higher) then I can expand my balance sheet out to $100k. Now let's say I have to write down $1k in subprime debt that I bought after it had been securitized (turned into bonds) after relying on the debt ratings agencies in good faith. Should the bank have relied and bought the debt - different question - but fact is when your competition is doing it the pressure is on to increase yield ...

This loss of value in the debt means the bank now has to contract its balance sheet by -$10k (10x leverage). That's what can & is happening and it means reduced lending even when the bank had not originated the subprime loans. Now expand that globally and you can see what a mess this is and why banks don't trust each other...

As with your other posts in this thread, you are clear,concise an as far as you go correct. Most people don't understand that debt makes the financial world go round. The effect of bad debt (of this magnatude) will reverberate throughout our economy. And the economys of several nations. Subprime loans ARMS's, margin buying and general bad business pratice which was fed by greed and lack of oversight. I hear about regulating banks and I wonder if people really understand how heavily regulated they already are. Combine these things (and others) with increased fuel cost, which effects us all in many ways and which to some extent is also motovated by greed, and we have the reciepe for a real mess no matter who's elected. Tight credit, inflation and recession will be the real problems for the next administration. And it will be interesting to watch. I can not help but wish we had that 300 trillion we're spending in Iraq back.

[scottwww]

I don't go along with everything in this article, but it is a rather basic treatment of the principles that might go into a real solution to this financial disaster.

09/30/2008
SOMETHING WICKED THIS WAY COMES

by Darrell L. Castle
Constitution Party 2008 Vice Presidential Candidate

Laws, originally evolving out of the New Deal legislation written in response to the great depression, once protected the American financial system. Starting in the 1990’s, in response to intense lobbying efforts by the financial industry, those laws were stripped away. The most important one was Glass Steagall which separated commercial banking from the type of investment work of a stockbroker. Glass Steagall was signed out of existence in 1999 by President Clinton and less than 10 years later the entire financial system is bankrupt. Another law, known as The Uptick rule, prevented companies from crashing due to large scale shorting of company stock. A company’s stock could not be sold short as long as it was in continuous decline. Short sellers had to wait for an uptick in the stock before shorting. The Uptick Rule ended in 2007 just about one year ago.

The end of the laws protecting the American public from unscrupulous speculators disguised as bankers caused changes in the way our banks do business. The banks decided that simple banking, that is loaning money at interest, was not profitable enough so they began investing in risk paper. This changed them from banks into something akin to casinos. Now that the gamble has finally failed these new casinos are asking the American taxpayer to pick up the tab for their greed and excess.

Now all this risk paper, known in the financial world as “the derivatives market” is collapsing. Derivatives are not stocks or bonds or anything else substantial. They are simply paper derived from other paper such as futures and options. Futures and options are exchange traded derivatives, but the largest group of derivatives is not even traded on the exchanges. These are called “counterparty derivatives” and consist of such things as collateralized debt obligations, mortgage backed securities, and credit default swaps. It is estimated that total derivative exposure of the financial system is between one quadrillion and one and a half quadrillion. A quadrillion is 1000 trillion. To put that in perspective, the entire GDP of all the world’s countries in 2007 was approximately 60 trillion. GDP is basically everything that is produced for sale. The American people are now being asked to shoulder the risk of the entire derivatives market and if they do, 700 billion will prove to be a drop in the bucket.

The rapid increase in the price of fuel during the last year is a good example of the destructive nature of the derivative market. Much of the price increase was due to speculation in futures especially by Goldman Sachs (Henry Paulson’s company) and Morgan Stanley. These companies, it is believed, are responsible for about 50% of the speculative price of oil. What that means is that every time we buy gas we subsidize the parasites who feed off us so they can continue their existence. We are now being asked to accept increased taxes to cover their losses.

Now that this mess has been created, what should be done to resolve it with the least amount of pain for the American People?

1. All failed and at risk financial companies, not just those we constantly read about, should be seized by the F.D.I.C. (Federal Deposit Insurance Corporation) and put into involuntary Chapter 11 Bankruptcy. The money people have on deposit would carry the same FDIC guarantee as before so there would be no need for panic. The Chapter 11 trustee would examine the assets of these institutions and all derivative paper should be discharged in bankruptcy. The American people should not accept one penny of risk for derivative paper. The real assets such as mortgages on residential real estate should be separated and foreclosure should be indefinitely frozen. The at risk mortgages, whether subprime or not, could be written down to the current value of the property and re-amortized for a payment the homeowner could afford. The mortgage could then be returned to the bank for service or referred to Fannie and Freddie if the bank did not survive Chapter 11.

2. The Federal Reserve Banks should be seized by Congress under Article 1 Section 8 of the Constitution. The FED banks could survive as Clearinghouse banks but the Federal Reserve that has robbed the American people for 100 years would cease to exist. The debt owed by the American people to the FED banks would be discharged in bankruptcy. Congress would take monetary policy from the FED and would simply stand in place of the FED through a monetary board. The FED credit computers would be transferred to Congress who would issue new credit (money) because under our present system 97% of all money originates as credit. This new credit would keep the system going and prevent collapse. It could all be done without interest and without debt. The backs of the international banking cartel would be broken forever and the American people through their elected representatives would control monetary policy i.e. money in circulation, interest rates, and credit availability.

3. Glass Steagall and the Uptick Rule should be returned. Speculation in the futures markets of essentials such as fuel, food, and medicine should be banned or at least have a punitive tax say 50% attached.

4. The Chapter 11 Bankruptcy Trustee would immediately move to seize any assets taken by the CEO’s and Boards of Directors from the bankrupt companies during the prescribed time period. No bankruptcy system would allow the CEO of the bankrupt company to keep hundreds of millions as in some of these cases. At the same time, the U.S. Attorney should be directed to examine the process for criminal sanctions where laws have been violated.

In conclusion, this plan would return our monetary system to the American People and ignite a new wave of prosperity and liberty. Every crisis presents opportunities if we only look for them. This is an opportunity for the American people to throw off the yoke of debt bondage that has enslaved them for 100 years and gain direct control of monetary policy through representatives answerable directly to them. No particular philosophy has been respected or spared in this plan. I am more interested in saving the system for the American people than I am in respecting anyone’s philosophy of money or government. This is intended to be a simple, easy to understand, explanation of our banking crisis with a Consitutional solution.