Predatory Legislators 28 comments
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With millions of homeowners now struggling to repay money they clearly never should have borrowed, our leaders have been righteously wagging fingers at predatory lenders who allegedly enticed innocent borrowers, and the country, into a financial snake pit. While the mortgage industry clearly deserves a good share of the blame, unindicted co-conspirators abound. The ringleaders are still at-large and are, in fact, busy hatching a plan to dwarf the earlier mistakes.
Contrary to the message bouncing off the marble walls of the Capitol, most borrowers in the inflating housing bubble clearly understood the terms of their loans. Most knew that they could not afford their mortgage payments once their teaser rates expired, but enthusiastically jumped into the debt pool anyway believing that guaranteed real estate appreciation, or a quick and profitable sale, would keep them afloat.
Although both lenders and borrowers were acting in their own perceived self-interest, what can we say of our economic policymakers who are expected to protect the good of all? Their actions encouraged the whole sad circus. Were it not for the excessively low interest rates provided by the Fed, the lax lending standards and moral hazards supplied by Congress courtesy of Freddie (FRE), Fannie (FNM), and the FHA, and the many real estate subsidies built into the tax code, none of these predatory loans would have been possible.
Had lenders exercised better judgment and had borrowers avoided overly burdensome debt loads, both parties would clearly be in better financial positions today. Instead, as borrowers were demanding the credit to fuel their dreams of instant real estate riches, lenders were being ordered to accommodate them.
In past generations, homebuyers were required to save for down payments and postpone their purchases until they could actually afford conventional 30-year fixed mortgages. But in recent years, as home ownership became a matter of public policy, the government accused lenders of discrimination and urged lower standards and easier terms. With government guarantees in place, the mortgage industry was happy to both expand their revenues and promote a better society.
But by denying credit, even if it requires borrowers to forgo something they clearly want, lenders not only provide a valuable service to borrowers, but to society. Given the mess in which we now find ourselves, due to the bad loans made during the real estate bubble, this lesson should have been well learned. Unfortunately it hasn't, as the same dynamic is now playing out on a much larger scale.
Faced with a prospect of downgrading its lifestyle, the U.S. government is instead borrowing trillions of dollars to artificially inflate our deflating bubble economy. The money is being used to both expand the size of government and finance additional consumer spending. Given our financial position, this is the exact opposite of what we should be doing.
Our global creditors are now making the same mistakes made by subprime mortgage lenders. They are loaning us money that we will never be able to repay. In the process, they are enabling the largest expansion in the size of our government since the New Deal and crippling an economy already suffering from excess consumption.
Although it may sound harsh, it would be far better for all involved if our foreign friends simply cut us off. Since their loans are merely fueling the growth of our government and artificially pumping up consumer spending, their savings will not only be lost but their sacrifice will severely exacerbate our problems as well.
Just as homebuyers did earlier in this decade, the U.S. government will borrow as much money as the world is foolish enough to lend, and it will use those funds to smother the life out of our economy. At this point government is growing like a cancer, feeding mainly off the funds it borrows from abroad. In the process, it is placing a horrific debt burden on its people, committing them to either a lifetime of crippling interest payments or run-away inflation.
There is nothing inherently wrong with foreign lending. If funding were directed toward private business to enable capital investments, the loans would not only benefit lenders, but they would benefit our nation as well. The funds would fortify our industrial base and provide the necessary foundation upon which to rebuild a viable economy.
If foreigners were to cut us off, there would be some immediate pain, but tough love is exactly what we need right now. Forcing Americans to live within their means, particularly the U.S. government, will be just as beneficial to the long-term health of our economy as similar restraint would have been had it been exercised by mortgage lenders. It's too bad so few of us seem capable of making this connection, or learning anything from the mistakes of the past – even when the ink in the history books has barely dried.
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This article has 28 comments:
just never works does it. kind of like the reverend and obama. if you really want to help, don't.
in this free society you are given the opportunity to buy the nicest home, the best healthcare, the fastest car, that you can afford. you have no right to these things. you have every right to procure them for yourself.
alas we stupidly slide down the slope into the cesspool of socialism, the great failure. why should i work harder to fund more welfare because the lazy and worthless think they have a right to the fruits of my labors.
i noticed a hail of letters from small business owners beginning on nov. 5th that they were laying off, shutting down or selling out because they were sick of socialist government stealing their success to give to the parasites. b.o. promised more of the same so the ignorant, the stupid, and the lazy would back him with their vote. trouble is the uaw, the banksters, the teachers union, etcetera already bought a big piece of him. he is a hollow man. sadly mccain seemed little better as an option.
oh well, just print more money, great plan. i am glad to see tax evasion is now o.k.. somehow i am still afraid to try it.
just last night i listened to a bo supporter whine because his property taxes rose because the state of florida raised his appraisal. he asked, "how can that be?"
i said,"from each according to his ability. to each according to his need." this is what you campaigned and voted for. enjoy the Bad Odor of a rotten, failed, system.
i know there are a few more dinosaurs out there who believe in the free market system, minimal government, and fair trade. that is what allowed the u.s. to rise above the rest.
for now it seems prudent to make sure i just coast to make sure i do not help what failed over and over by paying more taxes. i'm just picking up my marbles and going home until the situation changes. luckily i am in a position to do this.
i feel for the other dinosaurs who have to play the rigged game to give to the worthless.
facsism? that's what i call it.
The mortgage brokers and banks made all of the loans they possibly could to maximize their fee income, selling the loans as fast as possible so they could make even more. The Wall ST. securitizers bundled these loans and payed off the rateing agencies to rate them artificially high so they could sell them for more than they were worth, making billions in the process.
There is nothing surprising about any of this as, in every step, human beings were just acting in their own short term best interest with little concern for later consequences. I'm afraid that the politicians are now acting in what they percieve to be in their best interest with the same little thought to eventual results.
This selfishness is just inherent in the human psyche and unless we figure out how to alter human nature, we can expect a continuing series of similar scenarios for the foreseeable future. Learn to live with it.
Hopelessly naive. With the crowd just recently elected, prudent Americans cannot stop this runaway train to fiscal ruin. Too many of our fellow citizens are looking to Big Government for their salvation. It is a cautionary tale for the separation of school and state.
I don't think this is merely a liquidity problem as Jay Boslin suggests - making and borrowing more money and throwing it in the wrong places is only going to make things worse in the long run. It is not just counter intuitive, it is counter productive. We are propping up a system that is deeply, deeply flawed and needs to have the reset button pressed, whether we like it or not.
This concept of macroeconomic stimulus is one big perverse confiscation of resources. Every dollar the Fed prints, and every dollar Congress spends has come from the private savings of Americans. We talk about liquidity and money as if the sum total of each individuals' resources were "national" and available to play with. Why such a perverse philosophy? Since when in America did your savings become mine to play with?
On Feb 22 11:09 AM JAY BOSLIN wrote:
> Even though in a perfect world we should stop borrowing, stop spending
> and hunker down, that's what happened going into the great depression
> and it exaserbated and prolonged the conditions until WWII. It may
> be counter intuitive but we have to do as Bernanke, a student of
> the great depression, has been doing and flood the system with liquidity
> to keep it going. The companion piece is everything the administration
> and other countries are doing to provide fiscal stimulus. There
> will be inflation at some point, but the alternative is worse.
Its hilarious and sad all at the same time.
What Peter and the other people here seem to leave out of the story is
A)The Government is never going to do nothing. Right now the potential for a depression is on the table. If it starts going that way the shouts for the government to do nothing are going to be drowned out, quite quickly.
B)Doing nothing will not solve the problems. People will become quite irrational tying to wait for things to "shake out" and the markets to do their job. Markets are quite slow and usually quite over reacting because of course humans are the main interactor with the market. Chaos would take hold much sooner than the shake out period would take.
Governments of the world can run as Ponzi Schemes perpetually. Its not like the Governments of the world are Bernie Madoff, however Peter would have us believe they are the same. If that is the case, the world is insolvent anytime there is a downturn.
Either you create a new system or you kick the can down the road. To do nothing with the current system in place is not a good idea no matter how it may look on paper.
On Feb 22 01:56 PM OldLimey wrote:
> Throughout this crisis I've watched US bloggers reach in near-Pavlovian
> fashion for the 'socialism' word at almost every turn. As a European
> who believes in things like high-quality, free, universal education
> and health care I just put it down to a combination of paranoia and
> definitional dyslexia. After watching the first month of the Obama
> administration I realise that the bloggers were right and I was wrong.
This is a well prepared and thoughtful article, but it should also include the bigger picture issue of lagging average household incomes.
How much blame should we ascribe to the borrowers who saw an opportunity to bridge the gap between household income and rising cost of living? If your friends and neighbors were using their house appreciation to support an ever demanding middle class life style and the banks were facilitating this process don’t you think you would also want the same opportunity?
As for the legislators they were also attempting to solve the same problem of lagging household incomes and life style maintenance. After all, there were a lot of people employed in the housing game, from builders, to real estate brokers and agents as well as the lenders. All of whom were hoping to support their life style from the housing phenomenon. These are the people who elected the legislators to further their employment and income opportunities. How could the legislators have denied the demands from their constituents for a better lifestyle when a solution appeared in the form mortgages and housing?
Don’t you think the structural issues and the solutions to the problems of lagging household incomes should be included in analysis?
Jack
Although I agree with your main point that mortgage borrowers must make sure the loans they take on is within their means to afford, and lenders should not approve loans people can not afford. I disagree with your notion that people must save and accumulate large downpayment before they are allowed to buy a house.
Because housing is a basic human needs. Read here:
seekingalpha.com/artic...
People need to live under a roof. I do not suppose you are advocating for people to live on the street exposed to the environment until they have enough downpayment? Of course not. So you are effectively advocating people to RENT versus buying houses.
But do know know what country has the HIGHEST home ownership? Not the riches country you would imagine. The countries who has the highest home ownership are some of the poorest countries in the world. The people's home are probably just some mud put together. But it's still their home and shelter and they OWN it. They did not rent it.
Home ownership, from the long term point of view, are ALWAYS cheaper than rental. When you rent, some one else need to own the house and rent to you. Your rental fee should be able to cover the home owner's mortgage payment and leave him some profit to be incentive enough to own the house and rent it out. So home ownership is always CHEAPER than rental, on the principle.
What people need is live within their mean and buy houses that they can truly afford the mortgage payment. Buy a 3 bedroom or even two bedroom home if they can not afford a 4 bedroom one. Buy a mobile home if they can not even afford a one bedroom studio. Home ownership should always be more affordable than rental, as long as people do not buy too expensive homes.
seekingalpha.com/autho...
But be careful with the broad paint brush.I'm a boomer who never owned a boat,fancy car,or macmansion...just saved and helped others when I could.
The coming inflation will likely be a real game changer..
Maybe, just maybe those in Washington can wake up to the fact that, as a country, we have leveraged ourselves on waste. We have borrowed trillions to feed our military, to overspend on education, and to guarantee entitlement spending.
Whether you are a country or a company, if you're going to use leverage, it needs to be for productive purposes or else you get burned. What's happening is the government is reacting to the private sector's overleverage on bad housing bets to by overleveraging on pure waste.
Are the collectively deluded? I doubt it.
In some ways, they are switching from long-term debt to short-term T-bills already. Any pullback from the foreign supply of credit will happen very, very slowly. They cannot risk a sudden depreciation of the $US (and appreciation of theirs).
Think of it: It may be in China's best interests to keep the US on an IV drip of credit to keep China's factories humming. That may not be working, however. Where Peter Schiff has been wrong is that he expected the dropping of the $US to be swift, and he's been wrong. He also predicted rather quick transition to domestic spending and consumption for Asian economies. It looks like that is going to e a very slow process.
So there is something else at work here. One possibility is that many Asian economies and foreign creditors have less faith in their political economies than they do in that of the U.S.
Its a little rough, I'll admit, but hell I would take 'rough' over 'stagnant' for the benefit in the long run!
On Feb 22 10:11 AM fireball wrote:
> "i'm from the government and i'm here to help you."
> just never works does it. kind of like the reverend and obama. if
> you really want to help, don't.
> in this free society you are given the opportunity to buy the nicest
> home, the best healthcare, the fastest car, that you can afford.
> you have no right to these things. you have every right to procure
> them for yourself.
> alas we stupidly slide down the slope into the cesspool of socialism,
> the great failure. why should i work harder to fund more welfare
> because the lazy and worthless think they have a right to the fruits
> of my labors.
> i noticed a hail of letters from small business owners beginning
> on nov. 5th that they were laying off, shutting down or selling out
> because they were sick of socialist government stealing their success
> to give to the parasites. b.o. promised more of the same so the ignorant,
> the stupid, and the lazy would back him with their vote. trouble
> is the uaw, the banksters, the teachers union, etcetera already bought
> a big piece of him. he is a hollow man. sadly mccain seemed little
> better as an option.
> oh well, just print more money, great plan. i am glad to see tax
> evasion is now o.k.. somehow i am still afraid to try it.
> just last night i listened to a bo supporter whine because his property
> taxes rose because the state of florida raised his appraisal. he
> asked, "how can that be?"
> i said,"from each according to his ability. to each according to
> his need." this is what you campaigned and voted for. enjoy the Bad
> Odor of a rotten, failed, system.
> i know there are a few more dinosaurs out there who believe in the
> free market system, minimal government, and fair trade. that is what
> allowed the u.s. to rise above the rest.
> for now it seems prudent to make sure i just coast to make sure i
> do not help what failed over and over by paying more taxes. i'm just
> picking up my marbles and going home until the situation changes.
> luckily i am in a position to do this.
> i feel for the other dinosaurs who have to play the rigged game to
> give to the worthless.
for how long will Asian countries, specifically Japan and China, subsidise US economy?
This is a very complex geopolitical question with very many variables and many national interests. This question has to be also addressed in light of historical prospectives starting with the end of WWII when two superpowers ( the USA and USSR) dominated the world.
Two superpowers were engaged in the "Cold war". But every single effort was made to keep it "cold" without going into nuclear holocaust
In 1974, once again, Soviets were ready to invade China. China was looking for some protection and urgent development of its economy. This was the reason for China to seek some alliance with the USA. During the last 35 years, China grew from nobody & nothing to what it is today, i. e., the third largest economy in world with strongly growing economic and military power.
It is important to note that there is no Soviet Union anymore; and China does not need American protection. Russia is still a nuclear superpower but it has a relatively small army and its economy is in trouble. At the same time, Russia has commodities China badly needs for its development and growth.
As long as America was a responsible guardian of US$, the world reserve currency, China was happy to invest in US financial instruments.
Now, US Treasury and FED are printing US$ as if there is no tomorrow. Consequently, it must be expected that China will start to reevaluate its investment strategy in US$ denominated financial instruments.
China strong growth has a very profound and strategically important impact on its neighbour Japan. Consequently, Japan also will reevaluate its relationship and investment strategies regarding to the USA.
The bottom line:
- Chinese and Japanese economic and investment strategies regarding to the USA are being reevaluated and can be changed in a very near future.
- The status quo will not last for long thanks to the US totally irresponsible economic policies.
rentersrebellion.ning....
Handshakes and smiles all around.
The Renters helped screw us into the Ground into the First Place. Monthly Mortgage payments were less than monthly apartment rental costs. So they Bought.
With mortgage payments rising and rentals dropping, they just walked away. They didn't buy for "ownership", they bought on the basis of Economic Common Sense.
They are walking for the same reason.
Meanwhile, in the United States, the average man lives in a house he can't pay for, drives a car he can't afford, and waits for the next shipment from Hong Kong for distractions he can't resist. He saves nothing and believes the Chinese will lend him money forever, on the same terms.
That this cannot go on forever hardly seems worth pointing out. Whether it goes on much longer, we cannot say. But that it will end badly seems a cinch."
(Bill Bonner and Addison Wiggin, Empire of Debt, 2006)
Congress actually in Congress.
For Good or Bad, at least they are working for a Change.
Many of the problems we have now are due to the fact that we left this standard. Your point is understood that long term renting can be more costly. However this depends on the current interest rate environment, etc... Since 2003 I have avoided purchasing a rental property even though I wanted to. The truth was the return on my investment unless I leveraged to the hilt was just too low. I can make 5-6% doing lots of other things. So while renting is more costly in the long run. The owners are responsible and aren't making a killing.
So I think at least 10% down should be the bare minimum on house purchases.