Blinder: 'Fiddling on Foreclosures'

Snappy;

It takes two to tango. Both the banks and the lenders were winking at each other wrt these liar loans.

I think Northslopetenter put it well. If someone has suddenly fallen on hard times due to an unexpected illness or such, that's one thing. Rewarding flippers and irresponsibility is another.

I am totally opposed to any government bailout for the housing market, for two reasons:

-it makes no sense to prop up a market for which the pricing is still unreasonably high. In trading terms, the market needs to "clear", that is, find the pricing level that makes sense in terms of peoples' income levels. By propping up those who are in danger of forclosing, you are hurting two parties: a) the person who currently owns the house. You are incentivizing them to stay in a house that they cannot afford. Studies have shown that even if the terms of their mortgage are relaxed, these folks oftern still foreclose, due to poor habits of thrift, or unsteady income, etc; b) a person who could aford to buy the house at its true lower market price.

-although I didn't vote for Obama, I am hopeful that he will realize that a fundamental change must take place in US society. The government must stop subsidizing consumption (which is what the mortgage interest deduction and loan relxation is,effectively) but rather, start rewarding plain old-fashioned thrift.

Posted by: benson at January 26, 2009 10:37 AM

Correction to my previous post:

Both the banks and the BORROWERS were winking at each other wrt these liar loans.

Posted by: benson at January 26, 2009 10:42 AM

Snappy;

Yes, basically I am advocating that the foreclosures continue and that there be a "cleansing" process. I'm not sure that our political leaders have the fortitude to let it go forth.

I know it sounds hard-hearted to say that foreclusures should continue, but it really isn't. If someone is in over their head, where is the mercy in telling them that they should continue to try swimming? Interviews with many folks who have gone through foreclosures finds that it actually brings a sense of releief when it's all over, as they no longer have a huge burden on their back, and can start again. I would be supportive of giving those who have gone through foreclosure some type of classes on how to pick themsleves up and get started again. I am also supportive of providing classes through the community colleges in which folks can improve their job skills, so that they can truly uplift themselves. Again, it goes back to the whole idea of incentivizing thrift/productivity versus consumption.

If you are interested in further exploring this whole topic of the government's subsidizing consumption versus thrift, I heartily recommend a book that was published in 1996 called "The Return of Thrift", by Philip Longman:

http://www.amazon.com/gp/product/product-description/0684823004/ref=dp_proddesc_0?ie=UTF8&n=283155&s=books

This book is uncanny in its prescience.

Posted by: benson at January 26, 2009 11:46 AM

Iknow;

I didn't favor bailing out the banks either. This goes to Traveller's point. I hear what you are saying, Traveller, but my belief is that the federal government has actually induced more of a panic and economic slowdown than would be the case if they had simply allowed the private market to settle this out. Their rash actions inspired a loss of confidence.

There are many healthy banks who didn't participate in the reckless lending spree. These stronger banks should take over the weaker banks.

In the early 1900's, there was a similar panic in the banking system. At that time, JP MOrgan sat the banking community bigshots in a room, and personally knocked some heads together. He literally commanded who was going to take over whom. The banking sector quickly emerged the stronger after this expedited shake-out.

Posted by: benson at January 26, 2009 12:44 PM

Iknow and Traveller;

I think we're partly in agreement. Iknow is right about the economic impact of widespread foreclosures. I would counter that the entity that is most aware of this fact, and able to act on it, are the banks themselves. Banks lose alot of money if a house goes into foreclosure. They have to pay legal fees to proceed with foreclosure, money to maintain the property while it is waiting to be sold off and fees to dispose of the property. They lose even more money if the price they can fetch is depressed due to alot of foreclosures in an area.

It is for this reason that foreclosure is the last resort for banks. They could save themselves alot of money by renegotiating a loan, if it is possible to salvage the situation.

I would argue that it is for this reason that the banks themselves are the best arbiters of the "renegotiate versus foreclose" decision. They are incentivized to avoid foreclosure where possible, and have the means to judge someone's ability to meet the new terms.

My fear is that if the government takes on this role, they will be ham-handed, and there will be a political dimension to their decision-making that will get us into further trouble down the road. Let's no forget one of the largest roots of this housing bubble: Alan Greenspan kept interest rates low for too long in the years 2002-2005, because he wanted the banks to recover their losses and stimulate the economy after the dot-com implosion. He looked like a genius at the time, but now we know better. I'm afraid of a repeat of this situation.

Good debate.

Posted by: benson at January 26, 2009 3:42 PM