Housing Collapse Caused the Current Crisis?

They were all up on Capitol Hill yesterday- Treasury Secretary Hank Paulson, Fed Chairman Ben Bernanke, and SEC Chairman Christopher Cox - talking about the financial crisis and the $700 billion proposed bailout.

It was like one big group therapy session. Hopefully, someone will feel better after it's all done, but it probably won't be the U.S. taxpayer.

You can watch it on CSPAN 3 if you're looking for something to do to pass the time.

Senator Chris Dodd (D-Conn.), who chairs the Senate Banking Committee, spoke first and, right off the bat, you know that we are all just sooooo screwed in this whole affair.

In yet another example of how the entire country is in denial regarding the unsustainable nature of the current system of seemingly endless money and credit expansion (well, actually, credit expansion seems to be stopping rather abruptly lately), Senator Dodd said:

As I and many members of this committee have argued in the past 17 months, since I became chairman of this committee, the root cause of our economic crisis is in the collapse of the housing market triggered by what Secretary Paulson himself has called bad lending practices.

The root cause of the collapse of the housing market doesn't seem to get much attention these days - it should. It's kind of like the history of the Great Depression that, according to most economists, begins in 1929 when the stock market collapsed and conveniently omits the nearly decade-long expansion of money and credit that preceded it.

Most people would like to think that the history of the financial crisis begins when we were all wealthy beyond our wildest dreams due to rising home prices and that, somehow, we can just revert back to that time. But, it actually begins long before that - back when this particular asset bubble began to inflate.

Sadly, with this kind of thinking, we'll get nothing but Band-Aids from here on out.

Comments

[Doomsday:]

Tim,

Could you please post your own detailed proposal to solve the issue. 2 pages is fine Treasury thought it was enough. Most Seeking Alpha authors whine incessantly about this current mortgage debacle but have absolutely no solutions, suggestions or detailed plans. If you venture to reject Tresury's plan please detail your alternative.

2008 Sep 24 08:15 AM

[jkh307:]

The obvious 'solution' to to let the banks fail...
along with the people who borrowed the money ... for those of you who failed economics 101..that is called 'capitalism'.
It is not called 'always bail out the mistakes'.

2008 Sep 24 08:24 AM

[Reinko:]

To Doomsday:

The solution is utterly simple: Just pay off the debt...
That's all that is needed, simply pay your debt!

We had a new FED Z1 release last week, total debt that the US financial sector has upon herself:

2007 Q2: 14998.1
2008 Q2: 16507.5 billions of US$.

Link (look in the one before last column and scroll down:
www.federalreserve.gov...

So during this so called credit crisis the entire US financial sector picks up over 1500 billion in new debt and year on year this is a debt expansion of over 10%.

Another funny detail: The total debt is over one US gross domestic product so a lot of this new debt will turn toxic in the future because the amount is so big it will never get paid back.

Why Bernanke and Paulson think that just picking up 700 billion in toxic loans from the banks will make much of a difference beats me.

2008 Sep 24 08:30 AM

[debtacid:]

Here is my draconian but Constitutional solution:

Bail out only the individual and married/joint U.S. tax payer. Only tax payer bank accounts, 401k, and pensions. Freeze U.S. tax payer losses immediately.

The IRS will be abolished and over 20 years, every dime of income tax they have collected since 1920 will be refunded.

Abolish the Federal Reserve.

Abolish fractional reserve banking.

Re-establish the gold standard.

There is no reason why banks should be any more profitable than your local car wash.

Bank depositors will voluntarily make their deposits available for lending from 5% to 7%. The depositor will collect the monthly interest and pay the bank a fee.

Max mortgage life will be 10 years, No interest greater than 7% on anything.

The major goal of this plan is to stop the plundering of Main street by Wall street, Washington and international bankers.

2008 Sep 24 12:04 PM

[Diyg:]

Every time I read comments like some of the above, my IQ drops 10 poiints.

2008 Sep 25 11:14 AM

[yodoc:]

The problem at this point imo is the mortgagees. This bubble was fueled by greed and the easy money concept. If the mortgagees had the integrity, they would not have jumped into something they could not afford if the music stopped. These people wanted easy money and will walk away from obligations that are too onerous. No doubt some will stick it out, but imo a lot are just living rent free at the moment as the foreclosure process drags on. Maybe some still hope the market is about to turn around, but with time that's going to fade. House prices are in trouble because they are too expensive and a lot of people in the foreclosure process who got in for easy money are going to dump their homes back on the banks because they have no equity to lose and paying off a mortgage over decades ain't easy money.

2008 Sep 25 01:16 PM

[woodsey:]

The root cause is laisser-faire of which the present manifestation began in 1980 when congress let it be known that anything goes.

2008 Sep 25 03:42 PM