Friday, August 31, 2007

Long Live the Credit Bubble!

Today Bush announced plans to essentially bail out irresponsible lenders, developers, borrowers, brokers, basically anyone involved with the subprime mortgage mess, as this news release outlines.

There are a number of responses, critical as in Mish's post, and I do think Mish is right on with his analysis.

I am not sure what to make of "Parting the Bankrupt Sea." He points out that those hurt by this move are those who correctly assessed that these were bad investments and there would be a crash. I simply don't get the part of this post that says:

This is a good move by our government (unless Bush does something really odd during his speech later today or Bernanke usurps President Moses Bush with comments that are at less than positive and supportive)


I don't see at all how it can be a good move to bail out highly irresponsible activities. Governments role is to regulate highly irresponsible activities, not dip into taxpayer's pockets to make irresponsible activities ok. At best, it is a short term solution that allows the wealth to cut their losses.

Another post, just a graph, shows the degree to which US debt has risen relative to that which makes a nation strong. The graph screams to me the degree to which today's promise is short term, unsustainable and further cannibalizes the future.

4 comments :

AndrewBlogs said...

You really should do your homework before you dis anyone.. the plan is not aimed at bailing out the predatory companies, it is to help those individuals facing bankruptcies..

1) The fact is that I am totally against the government bailing out any institution or investor that got hurt by making poor investments that were predicated on greed
2) The comment ” what will get hurt” was directed at stocks that may lose value due to the comment and/or plan by Bush. It was simply looking at the day ahead. If you look at the entire paragraph that preceded this, you will notice that I was making an observation about the stocks that would benefit from this. Nothing more, nothing less.
3) What I understood was that the plan by Bush was to help individuals what are caught up in this mess, get needed credit and mortgages during a time that the credit markets are essentially frozen.
4) Without intervention, individuals will suffer the greatest and that is not a good thing.
5) The companies that were the cause of this problem should be punished severely
6) In my comparison of the bible story, the soldiers today are some of the parties in the group mentioned in #5 above
7) NO ONE wants a bailout of the predatory lenders. What we are in favor is help to the individuals that are in need of help during this credit crisis. Unless of course they are also part of the #5 group.
8 ) The only help that the financial companies should get is in direct relation to their ability to help individuals and businesses.
9) Last point: There are surely many innocents with this, but do not tell me that the millions that used creative borrowing to purchase homes at low rates or those that expanded credit beyond their means are innocent. We all had a part in this and we are all going to pay the price.

www.thedisciplinedinvestor.com

Deborah said...

I can not take the comment quoted in my blog as anything but support of a bailout for bad investments, and I disagree that that should be done. Buying a home that you can ill afford is a bad investment and it ought be no one's problem but the people involved, the lender and the borrower.

Giving government guarantees for irresponsible lending is simply wrong. Government's role is to legislate responsible practices in the first place. While the lending practices were irresponsible, by grade 9 you learn enough math in school that you ought to be able to figure out that entering into those financial arrangements is a very bad idea. The opportunity for this level of education was provided, for free, by the education system.

In Canada we already have far more responsible legislation. First, you can not buy a home with nothing down and you must pay mortgage insurance to buy a home with less than 25% down. I do not think our legislation is strong enough, but it certainly has saved Canada from the degree of the subprime mortgage mess that the US has.

Having said that, there have been the same kind of new home garbage sales incentives where homeowners have been able to buy a new home with the first 1 to 3 years at discounted mortgage rates, so we have people who have bought with say a 2.9% mortgage and only 5% down, but they would have paid a 2.5% insurance, and that covers loan defaults. In Canada, at risk borrowers, pay the insurance premium, as it should be and these loans are guaranteed.

For sure losing your home and any down payment or equity hurts and is a source of hardship, but it is a self inflicted hardship.

To be very frank here, your point number 9 is complete and utter nonsense. I had absolutely no part what-so-ever in this whole creative borrowing/lending activities. I have been an advocate that homes ought to require at least 10% down, and more when interest rates are especially low. It is bad enough that the subprime mess has sent ripples through the economy that we will all pay for it. Government backed loan guarantees transfers more of the cost of paying for this mess to where it does not belong and enables further irresponsibility.

My post, "Low Interest Rates -- As Destructive as Usury" has a paragraph,

"In 1976, after my mother passed away, her two bedroom condo in Kitsilano lay fallow for more than a year for not being able to sell it for about $30k. In that over a year period it ate all of the equity she had built into it as well as the equity of her 3-year-old car. Indeed, when the bank foreclosed on it, her estate owed more than it had."

My mother had a down payment and had paid off a second mortgage when she passed away. I saw her work two jobs to pay off that second mortgage. When she passed away she had reasonable equity in her home. There was no bad or irresponsible decisions made here, just unforeseen tragedy. This kind of thing is far worse than what these people are facing. Life is full of tragedies and hardships.

What has happened with the subprime crap isn't tragic, but a highly predictable outcome and that needs to be put into perspective.

AndrewBlogs said...

OKAY, you are not part of the problem. I guess that no matter what I say or write, you will not read the points and understand this: I AM AGAINST A BAILOUT!!!!!!! Is that clear? I do not want innocent individuals hurt, unfortunately that may mean some of the bad guys benefit... That sucks, really sucks..
AND, to be fair, I have been talking about the housing problems and the mortgage mess for 2 years as it seemed that I was talking to air.

So, I AGREE WITH YOU! SEE #3, #5, #6, OH, what's the use. I am sure you will say that I am for a bailout and I want the predatory lenders to benefit... YIKES!

Deborah said...

Who is innocent and how are loan guarantees not bailouts?