It may seem obvious to many of us – and for quite a while – that lending a family 100% of the appraised value of their home, or 120%(!), or allowing for a lower initial interest rate (or zero interest rate) with changes at fixed time intervals in the future, might not be that stellar an idea. Indeed, it may even be thought of as economic stupidity for both lender and borrower.
The notion that home prices will always increase invites a little mathematic scrutiny. Looking over a long period of time you can infer that this is the case. Simply because of land, a commodity that is only increasing in unusable form by volcanic action, long-term investment in real estate has to be a profitable thing. Short-term, however, anyone who has lived in the San Francisco Bay area, or in Texas, for example, can tell you very different stories.
Now we are in a pickle. The sale of these sub-prime loans (prime used as in condition rather than interest rate) mixed up with decent loans – and many fraudulent loans with outright lies on applications – have been sold on through Freddie and Fannie, and have been traded as packages through investment banks worldwide. Investment bank is a misnomer, of course, because they hold no deposits so they are not strictly banks at all.
Ignore the chaos on Wall Street for the moment, which I think is a linked but separate calamity.
Treasury Secretary
Paulson (Henry M. Paulson Jr., "Hank" to his buddies, to put it in context – ranks up there with John Sidney McCain III) proposed his two-and-a-half page bailout plan to the Congress in a sales meeting that would have been better handled by a talkative monkey. The plan would have given him total control of a checkbook on an account with a opening balance of $750 billion. (A billion, in Europe, used to be a million-million, 10^12 in engineering parlance, but it has been degraded to a thousand-million, 10^9, on the western side of the Atlantic.)
Congress met (many times) and eventually a bill, the Emergency Economic Stabilization Act of 2008, was passed, and signed into law, complete with another convenient $100 billion of pork for Representatives’ and Senators’ home States. Both Presidential candidates were for it.
The original plan of buying out the bad loans (which are unrecognizable in the complete mélange of the mixture of loans) would have rewarded Paulson’s old friends in the investment banks where he paid himself hundreds of millions of dollars in his
role at Goldman-Sachs as CEO and Chairman. In other words, he was one of the greedy creators of the problem.
Since the Act was passed the story has been modified slightly so that the US can get into the business of copying the European solution of buying stock in the banks that are in trouble. The stock will be superior (preferred) to any other so that the US Treasury might be able to recover some of the investments at a later date when all the dud paper runs its inevitable course – every mortgage, after all, ends its life at some time, somehow.
Barack Obama believes that the perks and bonuses of the creators of this monster need to be reined in. I agree. But it should be across the board for corporate America. Make it law that total benefit packages (including the values of spas in Santa Cruz) should be limited to, say, 25% of published salary.
And in terms of the bailout plan? I thought the initial Paulson proposal was crap. I think partial nationalization of banks is still crap. But there is one simple solution to the whole thing – provided the corporate greed is reined in. If the Treasury is willing to print $750 billion for Paulson, then, instead of top-down economics, make it bottom-up.
There are
reportedly about 304 million estimated people in the US (and we have to trust the CIA!). Write a check, Mr Paulson, for $2500 for each of those people, paid by family of course. That money – tax free! – will avoid feeding the sinners in this mess and, instead, return money to the real spenders in the nation. Each family will have to do something with that money (probably an average of $7000 per family) and whatever their choices it will help. If they put it in a savings account it will make credit capital available to someone else. If they blow it on a car, that dealer may stay in business and Detroit stays in manufacturing one more day. If they pay their mortgage arrears they may save their house from foreclosure. If they just drink it the local liquor store stays open. The only way the economy would lose is if they take it out in cash and stuff it in their mattress. But that isn’t going to happen.
There is one other major change needed in the US housing market. I have zero sympathy for those who lie on credit applications to get “more house,” or to even get any house on their income and situation. The credit market looks at two things when it loans money: an ability to pay the money back, and a willingness to pay it back. Willingness to pay back a mortgage would dramatically increase if loans were made
with recourse. Currently, if you have trouble with your mortgage situation: your loan is upside down (worth less than the capital balance), or your repayment situation changes, or you simply could not afford the repayments in the first place, you can simply walk away with
no recourse. In other words you leave the problem with the lender.
In Europe that is not the case. If you walk away from a home mortgage you still owe the money, and you have no control over how much the lender will sell that property for. Recourse loans might make people think a lot longer before they enter into a real estate transaction that might go sour on them, if they knew that this loan could haunt them, and their future credit, for the rest of their lives. It would be a deterrent better than a lie detector. There also needs to be a law that makes it completely impossible to write a mortgage with less than a 20%, cash down payment on the property. Yes, it will make it more difficult for the young to get on the property ladder; yes, it will keep property prices lower. But that conservative (with a small ‘c’) approach is the only sensible way to go – for everyone in the home mortgage business, even the investment banks.
The Wall Street chaos is another matter. Yes, there are bank stocks than can and should be hit in their market valuation. But, most investors are looking for an excuse to revalue things and they have been handed the credit crunch as an excuse on a diamond-encrusted gold platter. My prediction is that we will see 20% knocked off the market value of stocks from the 11,000 Dow-Jones high, plus another percentage depending on how much the value of the US Dollar moves up against the Euro. I’m guessing 20% + 10%, with closings of about 7800 points in two months. What the Treasury does, what the Presidential candidates promise (all of which are immaterial and completely uninformed guesses compared to what the economic situation will actually be on January 20, 2009) are not going to affect Wall Street.
What would affect Wall Street would be absolute statements from the likes of General Motors with specific dates and performance levels for vehicles with alternative fuels for the next few years. And I will be so glad when this Federal Election is over and I don’t have to hear any more nonsense about "Clean Coal" and my e-mail box empties of all the nuts who have formed fake storefronts to push excuses for natural gas, shale and offshore drilling, and the like, with an emphasis on patriotism and the American way.
When Sarah Palin (who is paying for those expensive outfits?) ends up on Fox News in December, as a pundit, can we all have a block party and burn Alaskan State flags? No, just be relieved that Todd is no longer waving to us from the podium; that McCain is no longer playing with his wedding ring when standing behind Sister Sarah looking at her posterior; and that never convicted (on technicalities or not) Professor William Ayers is rehabilitated by the whole nation. Their bridges can finally, God willing, keep going to nowhere…
