Any source on this? I remember reading somewhere it was 40 billion.

Thanks, I went and looked at the IMF report detailing 124 bank crisis since 1970. My thesis is that when an economy gets too far underwater in terms of debt, it is almost axiomatic that reflation/devaluation follows. The report does not cover this. However, I do know that the Argentina Peso fared poorly over the time frames listed here. Ditto for the Brasilian Real. I am not a keen historian of what goes on in Djibouti, but I can’t imagine we saw a rush into their currency when the bank crisis happened there.

Can you cite one exsmple, apart from Japan, when reflation/devaluation did not happen? Can you even cite a balance of statistics to suggest that this won’t happen this time around?

If the history so clearly leans in this direction, how come nobody is talking about it?

You don’t understand the law. BK judges can already cram down absolutely any loan except primary residence mortgages. They have always been able to. They were able to cram down primary mortgages too until the government started enforcement of a law prohibiting cramdowns for primary residence mortgages only, in the ’90s. The change was supposed to reduce mortgage rates, but had no benefit whatsoever.

Besides being good policy for a crash like this, cramdowns will make BK law consistent for all loans and return us to a time-honored and proven practice.

Yet, Barry Ritholz suggested the 30-20-10 solution recently. It make sense, doesn’t try to protect everyone and it’s Mom just for the sake of it, and appears to minimize disruptions in the marketplace.

The essence of the proposal:
“In doing so, let’s recognize several truths regarding the current housing situation:

• Home prices remain elevated;

• Artificially propping up home prices is counter-productive;

• Home owers (No equity, 100%+ debt) who are in houses they cannot now, and never could afford, are going to have to move to homes or apartments they can afford;

• The banks that made these bad loans to unqualified borrowers should suffer writedowns;

• Taxpayers should not have to bailout borrowers who are in over their heads, or lenders that made these bad loans.

If we use these as our preliminary facts and assumptions, we can craft a response that is rational, effective, efficient and requires very little taxpayer money. This means, however, that there are still several million people that are in the process of moving from living in a mortgaged home to moving to a rental property or a purchased property they cannot afford.

This is what is required to help normalize prices and supply.

Instead of the massive Paulson bailout plan, let’s consider a different type of solution, one that can be effectuated by a combination of policies and actions via Congress, banks, and private equity, with the loan servicing industry participating.

I call it the “30/20/10″ solution to the credit crisis:

30: Takes up to 30% of any current delinquent mortgage and separates it from the “main” mortgage; it goes into a 2nd, interest free-balloon mortgage, and stays on the books of the present mortgage holder;

20: The plan’s goal should be saving at least 20% or so of the current delinquent and potential foreclosure properties; Of the 5 million homes that may be late in making payments, (the first step along the road to delinquency, default and foreclosure) the process should make 20%, or 1 million homes eligible;

10: The Balloon payment comes due in 10 years, and will be treated as a 2nd mortgage, with interest charges only accruing as of October 1, 2018; it can be refinanced or paid off in full.”

There are many more details in the original post.

Perhaps one modification that could be made to the proposed law allowing BK judges to modify mortgage terms would be to limit their discretion to the single family residences of homeowners.

This proposed revision could help garner more votes in the Senate.

For example, yesterday I was told of a California resident in bankruptcy court who, as a security guard making around 12 dollars an hour, had used hyperleveraging to buy 3 homes in New York, 2 in Texas, 4 in Nevada and 2 in California.

He has now thrown himself at the mercy of one of our local bankruptcy courts.

Although I am a firm believer in this proposed increase in discretion for bankruptcy judges, I don’t feel this particular person should escape liquidation of his scheme.

So perhaps for homeowners only….

Matt Dubuque
mdubuque@yahoo.com

If we want confidence the Paulson plan is not the way to do it. Adopting a bad plan over intense public resistance makes Congress politically illegitimate and shows they have poor judgement with our money. That’s not the way to inspire confidence. If Congress worked across party lines to adopt a constructive, fair, and well-considered plan with wide public support *that* would inspire confidence. You don’t respond to a major crisis by making the only institution possibly able to cope with it morally and financially bankrupt.

@Nude: I agree they’re trying to patch things over and delay Armageddon. I don’t see, however, any plan or intent to use the spare time to fix underlying problems. Bear fell apart 6 months ago; have they done anything about the derivative and CDS tangles that forced them to save Bear? No. It is coordinated; but remember these agencies are all arms of the same administration except the Fed and Bernanke by choice is working very closely with Paulson. Coordination is what you should expect from this crew.

@Richard Kline: The ultimate choice for the mortgage owner is to keep the current occupant there at a price he can pay or to sell for foreclosure prices. In many, many cases the first is higher than the second and it’s just dumb to foreclose. The anecdotal evidence I see on there forums is that mortgage servicers are not acting on this and so buying and reworking will be a substantial net benefit to the country.

Where foreclosure and firesale is inevitable servicers appear to be delaying that too which also means their actions are a major net minus for the country, as the time lost is pure waste and delays the eventual price discovery. So right now buying up the underlying mortgages and managing them intelligently (which is going to include a lot of principal forgiveness) would be a big boost to our long-term prospects.