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Tuesday, February 03, 2009

Ninety Percent Nonsense

You know it is.

The only good news I can see on the horizon is this encouraging study that insulin seems to protect people against Alzheimers, but it appears to be too late for this treatment for our government. It appears that the only thing that can break us out of this tailspin of ridiculous policy will be the electorate. Well, some of that electorate is very rational
Last year — I am talking about just 3 months ago — I thought it was fairly clear that the immediate cause for the financial meltdown for which the TARP bailout was being crafted was the systematic relaxation of underwriting standards that led to large numbers of loans (and their lenders, securitizers, etc) going belly-up. Folks could argue whether this was because of deregulation or greed or government distortions and interventions, but I thought there was not doubt that poor credit judgment and excessively free credit were at the heart of the problem.
So Frank and Obama are upset that the bailout of banks that were overgenerous on credit did not include provisions to force them to be more generous with credit?
and realistic.
Texas has grown because states like Michigan and New York kill their business climate. And yet, a Texas liberal refused to hear the truth about taxes and unions while simultaneously lamenting lay-offs at her company. This kind of disconnect is disturbing, but revealing.

What liberals want is a guarantee. She wants no one to ever lose a job. She wants no one to ever to know economic discomfort. She wants the country to have Texas’ economy but tax and unionize like New York and Michigan. You can’t have it both ways. It won’t work, as California is now learning.
Some of it is more asinine than a donkey:
18. We're in Central NJ . . . too late for any "news" on it, it seems . .
However, keep in mind that Global Warming will bring increasing instances of earthquakes, tornadoes, cyclones --- all that stuff.
Sure. Earthquakes. Global warming-caused earthquakes. In the middle of a rather cold winter in the NE.

The problem isn't that we have the wrong leadership right now. It's that we have no leadership. As Carl carefully reviews in taking a look at the auto union question, our new policies are almost all self-contradictory.

We've got proposals for a stimulus bill that will deliver much less stimulus than last year's bill in the current year. We've got green proposals out the butt, but we are essentially trying to keep our unionized car industry staggering along, when the reason why our unionized car industry can't compete on smaller vehicles is the union labor premium. Green vehicles are smaller, lighter vehicles that have a lower profit margin per vehicle, and those are the vehicles that Detroit can't sell at a profit. When your auto industry can't profitably build those models, you can't keep bailing it out while demanding that they build more of them.

As Coyote notes, you can't fix bad loans that are killing banks while insisting that banks make more loans and lower rates at a time when default risks are increasing rapidly across just about every loan category. Barney Frank needs to get one piece of information firmly lodged in his brain - to a bank, deposits are liabilities and loans are assets. It's not that banks don't need and want to lend the money they have. It's that they don't want to lose the money they have, because then they will have to pay it back from their assets that are still good, thus suppressing lending further to good credit risks.

Demand for loans is dropping. Your conservative people who want to buy something on credit aren't going to spend the money until they feel they're getting a good deal. I know quite a few people with large amounts of cash, but all of them are financially prudent and will not spend until they really need something or until they see a very good deal. These types are well aware of the risks, and even 4% mortgages won't get them to buy a home that they believe will substantially depreciate over the next several years. The reason why they have the money is that they are prudent and cautious, and they didn't participate in the insanity. You are not going to get these types of companies and individuals to abruptly do stuff that seems risky. The banks don't have anything to do with it. The bankers would have orgasms if these people showed up asking for a loan.

The 25-30% of the US population that's significantly underwater in their cars? They mostly will have to pay that off before they buy another vehicle. That's reality. They have to show up with cash to pay off their current vehicle, or they have to wait.

The people who are deeply underwater in their homes are mostly going to lose their homes, and nothing is going to change that. Do we really want to keep them in those homes? I'm with Ramsey Su. I think we don't. Unless the borrower is sure that he can keep the home until they get some margin in it, he would be foolish to keep paying the mortgage on a home that he may well lose anyway.

The reason why the default rate on significantly underwater homes is so high is that most borrowers will experience some sort of life/financial disruption over a decade. Unemployment, medical emergencies, family emergencies, divorces, etc. If a borrower is barely able to pay the mortgage and is significantly underwater, the borrower can't save to carry himself through those emergencies, he can't spend or borrow to maintain the home, and the value of the home depreciates even more than the overall market does. So when those emergencies arise, the borrower has no choice but to default. In those circumstances a pay cut, a few months out of work, unexpected medical bills, etc all become crushing emergencies that usually start a cycle of financial collapse.

All of the above is not news to the mortgage industry. It's more like the Mortgage Law of Gravity. Approximately seventy percent of these loans (borrower is 15% or more underwater now) are going to default over time no matter what anyone does, UNLESS THE LOANS ARE WRITTEN DOWN NOW. So the losses are baked in. You can take the loss now or you can take an even bigger loss later when you eventually foreclose on a house that's had no maintenance done and has depreciated further.

Now, since these loans are bad loans and the losses are real, the idea of having them be marginally adjusted, guaranteed by the government, and reissued is just a way to capitalize the investors. If we are going to do this, let's do it up front by giving banks the money (if they aren't too underwater) and taking stock in return. Because otherwise, we are just accumulating future taxpayer liabilities. And guaranteeing bank debt is just a way to do the same thing (have the government guarantee bad loans). It's not going to work unless the fee paid for the guarantee is very high, and that would defeat the entire purpose.

Let the underlying assets (loans) default per the norm. If we decide to bail out some banks, let's take stock in those corporations. It can come out of the bonuses paid to the top executives. There's room there, believe me. Schumer's idea of guaranteeing assets on bank balance sheets is just handing cash straight to bad bankers. Why would anyone want to do this? There are good, well-run institutions out there. He's really proposing taxing individuals, businesses, and well-run banks to shore up bad bankers. That's insane, and it will produce a long drag on the economy that will prevent recovery.

As loans foreclose and the homes roll back out there, the market will begin to pick them up as soon as the pricing makes sense (and that is already happening), and you will see a bottom forming. For most homeowners (the ones who haven't refied their way into insolvency, didn't overbuy, didn't buy at the top of the market, and didn't buy extra houses as a way of creating speculative income), a long, sustained downturn is worse than letting the markets get to bottom. That's because the rate of life/income disruptions aside from recession-induced ones is pretty stable over time.

We have to stop blowing bubbles. It's better to take our lumps now.

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