Why our economy got bad

[Black1]

Guys if I can offer my two cents here.

From my perspective (and I am lets just say a senior guy in this field) the bailout is completely misunderstood because of the failure of the news to explain what it is.

The govt is going to trade equity stakes in healthy companies for medium term loans. The govt has NEVER EVER lost money in whole on a bailout. Why? Because their investments are sound.

Another part of the bailout is creating a fund to buy illiquid mortgage securities. To give you an idea of how big of a problem this is, 65% of all mortgages issued in 2004 were considered Alt-A. Not necessarily subprime, just not a traditional 30 year fix or 7/1 arm. The problem you have is when you have an asset that you can't trade, it functionally becomes worthless (just ask IBM in 1987). The govt would great a new pool of liquidity to buy up these bad assets and create a new hedge on the riskyness of the pool.

Now whom is to blame? You are. Not the banks, not the government, but the typical consumer. If you weren't able to understand that I pay x in years 1 and 2 and my worst case scenario is I pay z in year 3, and by the way I can't afford z then you are the biggest part of the problem.

Should the banks have lent money to everyone, no. Should everyone accepted loans, no.

This package has nothing to do with conservative or liberal views and nor should you believe any crap that says that it does.

If the government does not pass this package, you will see economic calamity like you have never seen in your life. Just remember we all work for someone and when you can't get easy credit for a business that business suffers.

Seth, please weigh in on my question stated below, if you could please...

What is everyone's consensus on Mr. Gingrich's idea of the President drafting a executive order effectively suspending the "Mark to Market" rule? He's saying it will immediately introduce more liquidity in the market, curing most of this problem.... Newt is coming at this like it is a accounting problem, and not necessarily a credit problem. I think he may have a point, but then again, this is all WAY above my pay grade. Anyone?

 

[seth]

Newt's position is inherently flawed. He is trying to offer value to a valueless instrument. Markets work on liquidity. Assigning a current value to something that may be worth something in the future is a bad idea. There is very little market for the instruments that would be affected.

Remove politics from the conversation.

 

[ChrisAZ]

I can certainly vouch for the fact that banks offered home loans to people that those people could not afford. Every time I have ever pre-qualified for a home loan (over the past 16 years) I was approved for more than I could afford. I almost took the bait a few years ago. There was a multi-million dollar home I wanted. I could not afford it with a traditional 30 year fixed mortgage but of course the bank was happy to offer up an interest only loan that would adjust after 5 years. If I had done that, I would be filing for bankruptcy when the loan adjusted unless I could sell it for what I paid, which might actually be possible since it was a pretty good deal. All I know is I would be sweating it right now. People were certainly tempted by these f'd up loans and many took the bait.

The best solution is to regulate lending criteria so that people will not be loaned more than they can afford to pay back. There should be a maximum allowed debt to income ratio and if it is an adjustable rate mortgage, the debt to income should be based on the worst case scenario when the loan adjusts.

 

[OCBob]

The best solution is to regulate lending criteria so that people will not be loaned more than they can afford to pay back. There should be a maximum allowed debt to income ratio and if it is an adjustable rate mortgage, the debt to income should be based on the worst case scenario when the loan adjusts.

Just a thought here, and I'm sure there are a million reasons it wouldn't work, but bear with me for a second.

Why not get rid of basically all the lending regulations? Let the bank loan money to whomever they please, based on their own criteria. If they get paid back, they get paid back, if they don't it's on them. If they have shitty lending practices they will find themselves out of business. That plays both ways. If they are too lenient they will find themselves with a lot of bad debt. If they are too strict they won't have enough business to stay afloat.

I know, it sounds too simple to work. hehehe

 

[seth]

Actually, just to be clear there are actually very, very few regulations on whom banks can lend money to. They can't charge usery or excessive fee's but there really are no loan risk rules that have to be followed. There are capital requirements, but part of the problem is that banks did lend money to everyone.

Just letting financial institutions randomly fail is a really, really, bad idea. You know that paycheck that you get every two weeks? Well your company generally takes a short term loan to pay that. Now their cost of borrowing just went through the roof. Maybe that raise doesn't come through (or worse).

 

[OCBob]

Just letting financial institutions randomly fail is a really, really, bad idea. You know that paycheck that you get every two weeks?

It isn't really random is it? It's based on their business practices. Seems there are other banks that have the capital to grab them up at bargain prices.

Unfortunately, it's been some time since I got one of those paychecks. But if you're telling me that my old company will fail over it, I'm all for it hehehe. (not really, as there were lots of good folks there too)

 

[Annu Kumar]

I can certainly vouch for the fact that banks offered home loans to people that those people could not afford. Every time I have ever pre-qualified for a home loan (over the past 16 years) I was approved for more than I could afford. I almost took the bait a few years ago. There was a multi-million dollar home I wanted. I could not afford it with a traditional 30 year fixed mortgage but of course the bank was happy to offer up an interest only loan that would adjust after 5 years. If I had done that, I would be filing for bankruptcy when the loan adjusted unless I could sell it for what I paid, which might actually be possible since it was a pretty good deal. All I know is I would be sweating it right now. People were certainly tempted by these f'd up loans and many took the bait.

The best solution is to regulate lending criteria so that people will not be loaned more than they can afford to pay back. There should be a maximum allowed debt to income ratio and if it is an adjustable rate mortgage, the debt to income should be based on the worst case scenario when the loan adjusts.

the homeowners are at fault too. The banks dont force you to sign on the loan papers. The homeowners knew it was wrong and they still signed it. I got into 2 bad loans and knew they were wrong and still signed it. The homeowners were just as greedy as the banks.

 

[Prof]

the homeowners are at fault too. The banks dont force you to sign on the loan papers. The homeowners knew it was wrong and they still signed it. I got into 2 bad loans and knew they were wrong and still signed it. The homeowners were just as greedy as the banks.

Nice Annu...

We are all to blame. How often do we just put it on the card and pay it off over time...How many here in our house, just got emotional and purchased an SRT 10 without having the financial underpinnings to do so.

We are part of the instant gratification culture. Debt has become second nature.

 

[OCBob]

the homeowners are at fault too. The banks dont force you to sign on the loan papers. The homeowners knew it was wrong and they still signed it. I got into 2 bad loans and knew they were wrong and still signed it. The homeowners were just as greedy as the banks.

Yes, they do bear some responsibility. But most of it lies with the banks. They do this for a living. If you take your truck to somebody to fix, you have them do what they tell you needs to be done, because they are the pros, right?

 

[Prof]

Using Supercars words...GULP...cough, cough, cough...

Accountability....

 

[OCBob]

Using Supercars words...GULP...cough, cough, cough...

Accountability....

Let me clarify what I was trying to say.

Imagine that you are a first time home buyer. Talk about and exciting and scary time. Obviously you have no experience to draw upon, so you must place your trust in someone.

That someone is invariably your realtor and lender. They tell you that you can afford a house much bigger and nicer than you ever expected. You think, really? But they assure you it can be done, and not to worry about the increase in payments as you can surely refi and get them back down, maybe even lower than they will start at! So you fall for it, and now it is you that many are trying to blame for the current crisis.

Why would they push you into a home you can't afford? What sense does that make? It's rather simple, it's the money. The more the house the more the commission. The more the loan the more the commission.

But the real beauty of the whole thing is that now they are the ones that are crying and asking the government (really you) to bail them out. Never mind that you lost your home, along with all the money you have spent to date. Never mind that you now have credit problems and can't get into a house that you truly can afford.

Yeah, there is some blame to lay on the folks that took the loans, but it is minimal.

 

[ChrisAZ]

Of course people are ultimately to blame for taking the loans but putting some lending criteria in place will help. Do you think people file bankruptcy becaus they made smart decisions. If you walk up to 10 people with a briefcase full of $100,000.00 and tell them they can haveit if they sign on the dotted line agreeing to pay it back, probably 8 of them will do it without even reading the fine print. Why do credit card companies send pre approved cards out? Because the morons take them and max them right away.

I would like to think the free market will take care of itself if we just leave it to competition. In fact, it does work for the most part. Really, competition will take care of itself but as we see by the current situation, lenders and borrowers can f it all up too. Lending guidelines would at least keep the system in check when we all get too stupid to control ourselves as we recently did. The lenders and the borrowers all bought into the greed. Hell, I'm one of them although I can repay the loan I got myself into.

I remember when housing prices here in AZ went crazy. I told people that it was out of control because homes in Phoenix were selling for what you could buy a home for in San Diego with an ocean view. I asked people how the hell it made sense that a home in Phoenix was valued the same as beach front property. That's when I knew there was a bubble and it was going to burst. Home values have dropped 50% from the peak to now. I know the statistics don't show that but that is because it's an average and there weren't enough homes sold right at peak to average out to 50% but trust me, homes sold for double at the peak compared to what they will sell for now in my own neighborhood. It is amazing how many supposed smart people bought into it. The free market did not work and it had such an impact that it has crushed the economy.

 

[ChrisAZ]

Let me clarify what I was trying to say.

Imagine that you are a first time home buyer. Talk about and exciting and scary time. Obviously you have no experience to draw upon, so you must place your trust in someone.

That someone is invariably your realtor and lender. They tell you that you can afford a house much bigger and nicer than you ever expected. You think, really? But they assure you it can be done, and not to worry about the increase in payments as you can surely refi and get them back down, maybe even lower than they will start at! So you fall for it, and now it is you that many are trying to blame for the current crisis.

Why would they push you into a home you can't afford? What sense does that make? It's rather simple, it's the money. The more the house the more the commission. The more the loan the more the commission.

But the real beauty of the whole thing is that now they are the ones that are crying and asking the government (really you) to bail them out. Never mind that you lost your home, along with all the money you have spent to date. Never mind that you now have credit problems and can't get into a house that you truly can afford.

Yeah, there is some blame to lay on the folks that took the loans, but it is minimal.

I bought my first home when I was 22. I qualified for a home twice as expensive as the one I bought. I knew I couldn't afford what the bank said I could. All you have to do is add up your bills and see if you can pay them. Unfortunately, people don't do that and many people hedged their bets hoping the home they were buying would be worth more right away. They weren't buying a home, they were trying to make money and it bit them.

 

[joemags54]

Hear it in the words of a Democrat. It's worth the listen 5 Min.http://www.youtube.com/watch?v=S27yitK32ds

 

[OCBob]

Hear it in the words of a Democrat. It's worth the listen 5 Min.http://www.youtube.com/watch?v=S27yitK32ds

Hmmmm, thanks for that link Joe.

BTW, it also led me to his link from the guy that I would have liked to see as the nominee (or maybe at least VP), instead of the guy that was going to Washington last week to "get this done" and merely managed to get a few bs words added to a dying piece of legislation.

http://www.youtube.com/watch?v=dv6rQ0U01Yc&feature=related

 

[joemags54]

Hmmmm, thanks for that link Joe.

BTW, it also led me to his link from the guy that I would have liked to see as the nominee (or maybe at least VP), instead of the guy that was going to Washington last week to "get this done" and merely managed to get a few bs words added to a dying piece of legislation.

http://www.youtube.com/watch?v=dv6rQ0U01Yc&feature=related

Yes, if you really want to "shake things up"............ Ron Paul