There are so many reasons a bailout of any sort is terrible public policy. First, it presents a real moral hazard problem; borrowers have incentive to act irresponsibly again in the future if the government will bail them out when things go bad. Second, any way you slice it, government action amounts to a transfer from those who chose to act responsibly to those who chose to act irresponsibly; there is no way such a transfer can be justified. Third, government action will keep housing prices artificially high, when prices need to fall to reasonable levels.

I imagine most policymakers know that it is unfair and irresponsible for the government to bail out the lenders and borrowers who have made bad decisions. It would be wonderful if the government showed the ability to, for the first time in some time, choose the equitable and wise path as opposed to the one that translates best into short-term political support.

Don’t we need to invest more capital in better transportation and energy life support systems, to insure the survival of our civilization for another generation or two?

Can we continue to devote trillions to “the American Dream of Homeownership,” when the people living in those suburban tract homes won’t have affordable fuel for their cars to get them to their jobs?

Just asking.

If judges dealing with foreclosures in court are demanding to see the paper before foreclosure, then how can both lender and borrower easily facilitate a refinance without producing that same paper?

Does this mean the lenders didn’t verify who actually holds the paper? Does this also mean each new refinance created new paper?

And this new paper was also sliced and diced?

So that means that the same house had had its new loans sold each time. And the only way that would be possible would be if the lenders inflated the value of the house which wouldn’t have happened if they didn’t agree to lend to the borrower. Otherwise, the equity in the house would eventually be negative–which is where we are now due to dropping housing prices.

And I assume, the lenders agents or brokers received fees and bonuses that encouraged them to freely lend money based on this over-inflating of a house’s price.

This is why everyone keeps referring to the mortgage crisis as a Ponzi scheme? And now, the lenders want to be rewarded with a bail-out?

Then, No. Absolutely not.

It was the lender’s role to maintain perspective just as it’s the bartenders role to shut off his best customer whose on their way to getting drunk.

I think the reason I find this so hard to follow is it defies basic rational and sound economic sense: which is simply, live modestly within your means.

So I’ll give my attention to the dilemmas that Mr. Smith appropriately makes explicit by recounting what I learned – or what I think I learned – from Hyman Minksy (who is why I stumbled into Naked Capitalism.) My training is in philosophy, but I took a course from Minksy in the Spring of ‘81 – the spring that Reagan and Reaganomics took the political field. The semester was Minksy expounding upon Reaganomics and “free market” ideology – all we read was the Wall Street Journal and the research papers he assigned – no text book. So it was a lot of him. I appropriated from him two main perspectives: His tripartite model of “finance entities” (the ponzi/ the hedge/ the rational); and his argument for regulation and government intervention. That argument was essentially this: Reagan is right, in a capitalist society, capitalists create jobs – when the collective outcome of their respective decisions are the “right” ones. When the collective outcome are the wrong decisions, you really only have two options: Do nothing (as suggested by the interesting use of “creative destruction” above – I don’t think that’s exactly Schumpeter’s meaning, but it is poetically sound) or you can re-establish a more reliable and predictable flow of funds to the capitalists. Minksy would then add his quips that Keynes figured this out because he took Marx seriously, which is different from being dogmatic, such as are those people who won’t take Keynes seriously precisely because they accuse Keynesianism of being Marxism in disguise. Minksy would say that one can either choose to be ideological about things and so limit choices by that ideology, or one can choose to determine what in fact is causing what and how to stop that when it is bad and how to promote that when it is good. Of course, the ideological elements return in those evaluations – but if is agreed good that capital be sustained, then how that’s to be done was, for him, a factual and not an ideological matter … Or so I thought I had learned…

I don’t believe that “creative destruction” in the form of a Bonus Army marching on Washington and literally millions of unemployed people standing in soup lines was thought good at the time (by most people, anyway, though some did then see the collapse they’d been awaiting for two generations), and I don’t think that the world as it could develop per Roubini’s 12 Steps will be thought good. The fact that preventing a collapse might entail benefitting people who in some moral sense ought not is, well, “a contradiction of capitalism”, as I sometimes like to quaintly say…

What you refer to as socialistic is really a form of taxpayer subsidized financial/banking, etc. (in this case) welfare.

OT: Yah know that paranoid thing I deal with regarding The Pension Protection Act, i.e, the little matter of DOL underwriter exemptions, which allow hedge funds to use pension funds to invest in derivatives like CDOs ??

That feeling just got worse after reading this little bonus clip — and in all honesty there is a tsunami headed towards pension accounts, which will be ground zero for money market liquidity!!! DANGER!!! read your prospectus and head for the high ground!!!

United States Government Accountability Office
GAO Report to Congressional Committees
PENSION BENEFIT
GUARANTY
CORPORATIONJuly 2007

http://finance.senate.gov/press/Gpress/2007/prg071307b.pdf

In January 2007, DOL officials orally directed PBGC to have no direct
contact with OMB without DOL’s approval, a condition that PBGC
officials believe has strained the relationship between DOL and PBGC
budget offices.

DOL now closely monitors PBGC’s interactions with
OMB by attending meetings and participating in telephone calls. DOL
officials said that such action is needed to coordinate with PBGC in
order to provide OMB examiners with a consistent message. OMB
officials said that DOL’s review of PBGC’s budget submission was
useful.

One former PBGC
Executive Director also noted that PBGC could not be just like any other
DOL agency, because if it were, the Secretaries of the Treasury and
Commerce, by a two-vote majority, could theoretically directpolicies of
another federal cabinet department.

The uncertainty of PBGC’s status has resulted in confusion over the extent
to which DOL has the authority to manage PBGC’s operations. According
to our internal control standards, agencies should ensure that key areas
of authority and responsibilities are defined and communicated. However,
neither the board, DOL, nor PBGC has developedformal policies and
procedures to define its authorities and responsibilities. Instead, PBGC
officials typically react to DOL’s periodic written and oral
communications, which PBGC officials said sometimes become a part of
PBGC’s operational framework.

** Well worth looking at the fine print in the 1000 page PPA doc, which both Obama and Hillary voted for…obviously McCain as well, as SIFMA is highly connected and will tap your cash accounts!!

Today’s mortgages are standard for a 30 year term, something that ought to have been adjusted as interest rates went down. There ought to have been regulation as to what the maximum borrowing term could be based on the interest rate, with 12 years at zero percent and 30 years at 12 or more percent.

If you want a strong economy, the maximum qualifying term for the current 6% mortgages should be around 21 years.

Instead we had mortgages even longer than 30 years offered.

Another disaster in underwriting standards was to increase the qualifying income with declining interest rates when the opposite should happen. Say you want to leave the 30 year standard, well, then at 0 percent you should have to qualify for the loan with 15% of income, not up to 50% as some under writing standards went to. So the 6% mortgage should not have been issued with more than about 22% of gross income.

This way there is built in ability to handle changing interest rates and changes in household circumstance.

http://www.timesonline.co.uk/tol/comment/columnists/guest_contributors/article3422319.ece?openComment=true

Three trillion dollars – or about £1.5 trillion – is a lot of money, particularly when contrasted with the White House’s initial estimates of $50-$60 billion. It dwarfs even official estimates of the cost of the war so far as about $645 billion.
There is even a figure for Britain: more than £20 billion for direct military and social costs, not including some of the wider economic consequences. That, however, no longer looks such a big number when set against the £100 billion of Northern Rock debt the government has just taken onto its books.

** There are $1 trillion in outstanding subprime mortgages, with potential losses estimated at about $250 billion, said Bose George, an equity analyst with Keefe, Bruyette & Woods Inc. Columbia University professor Charles Calomiris pegs the losses even higher — at between $300 and $400 billion.

Merrill Lynch’s Bostjancic said the biggest impact of rate resets, from a dollar perspective, will come in the third quarter of 2008. She sees losses from all loan defaults exceeding $500 billion in 2008.