Mar
19
It’s Called A Correction
Filed Under Economics | 2 Comments
You can call the economic quagmire the world is in right now a “recession,” “downturn,” or even a “depression.” However, in the world of professional finance and economics, especially when dealing with stocks, a downfall is referred to as a “correction.” What is being corrected are the poor investments and behaviors of agents in the economy. When the government conspired to fuel an unsustainable housing bubble, that was incorrect. When banks made loans to people who couldn’t pay them back, that was incorrect. When these people took these loans to achieve the “American Dream” or whatever else kind of excuse they can think of to become the next Carlton Sheets, that was incorrect.
So naturally we should welcome a correction, correct? Not exactly. As Moonbattery reports:
Anyone who doubts that our current economic crisis was largely brought on by liberals forcing banks to apply Affirmative Action to mortgages under the deranged Community Reinvestment Act is referred to one small bank that resisted pressure to make bad loans, the East Bridgewater Savings Bank in Boston. From the Boston Business Journal, via Capital Commerce:
Bad or delinquent loans? Zero. Foreclosures? None. Money set aside in 2008 for anticipated loan losses? Nothing. … The bank even squeaked out a profit of $87,000. And its Tier 1 risk-based capital ratio was 31.6 percent, or more than three times higher than many community banks in Massachusetts. “We’re paranoid about credit quality,” [CEO Joseph] Petrucelli said.
Companies that make bad loans are showered by the government will $billions stolen from us, our children, and our grandchildren. Responsible banks that only make loans that might be repaid are treated very differently. The FDIC is crawling all over Petrucelli’s bank, accusing it of “not advertising and marketing its loan products enough” and giving it a “needs to improve rating” under the disastrous and still operative CRA.
For those unfamiliar, the CRA refers to the Community Reinvestment Act, signed by President Jimmy Carter in 1977. It gave the government authority to pressure banks to make loans in areas they otherwise would not, in the interest of ending perceived discrimination. As usual, the government solution to a problem turned out to be much worse than the problem in the first place. It also set a dangerous precedent for the federal government to make lending decisions based on lofty social goals instead of realities in the housing and credit markets. This led to some very incorrect lending practices.
As the above post shows, even when a correction is trying to take place through the free market, government is there to make sure this doesn’t happen. As I said here, the Obama administration would much rather repeat the mistakes of the past.
What about other efforts to stimulate the economy? From the Conspiracy to Keep You Poor and Stupid:
THAT WAS THE WHOLE POINT! Even the Wall Street Journal doesn’t get it:
Troubled insurer American International Group Inc., now 80% owned by U.S. taxpayers, spent the weekend deflecting mounting criticism of how government funds have been funneled to various banks…After calls for more transparency, AIG disclosed Sunday that roughly two-thirds of the $173.3 billion in federal aid it received has been paid out to trading partners such as banks and municipalities in the U.S. and abroad.
But that’s what it means for a company to be “systemically important” — that it has obligations to third parties, the failure of which would set off a domino effect of continuing collapse. When it is said that these “funds” are “funneled,” that’s just provocative language for saying that AIG was able to pay its debts, which was the whole purpose of the bail-out.
So it turns out that not only is the free market not allowed to work out our obvious missteps, neither are government initiatives, which were poor ideas to begin with.
Feb
23
Because It Worked So Well Last Time…
Filed Under Economics | 2 Comments
This week President Obama introduced his plan to use the resources of the federal government to attempt to stabilize the housing markets and, hopefully, the economy at large. The plan uses two strategies: allow homeowners who are current but have negative equity to refinance into a lower-rate loan under Fannie Mae and Freddie Mac, and to use incentives to “encourage” mortgage holders to modify loans where the borrowers are already behind on their payments. Why did I put “encourage” in quotes, you ask?
But the administration is also wielding a big stick. It will work with Congress to amend bankruptcy laws to allow judges to modify mortgages, a step community advocates say is badly needed but that the financial industry abhors.
If lenders don’t do what the government “encourages,” they could be in for some nasty surprises.
In bankruptcy cases, President Obama favors judges having leeway to reduce or “cramdown” the principle of the mortgage or rewrite the terms unilaterally. This blatant disregard for the rule of law will not only void agreements made volutarily by the the lender and borrower, it will greatly discourage banks from wanting to enter the mortgage market if they know that a contract can be voided at the will of a bankruptcy judge. Then again, that may not be a problem when all of the banks are owned by the government.
When Communism Now! covered the plan, they were glad to see that the bankruptcy courts would now be extorting lenders. Said guest Josh Zinner (emphasis mine):
So many people are underwater. They owe more on their mortgage than their house is actually worth. And this plan right now would do little for them. In bankruptcy, what a judge could do is cram down the amount owed down to the value of the property, and then a judge would be able to modify the terms of the mortgage—reduce interest rates, freeze interest rates on adjustable mortgages, adjustable-rate mortgages, extend the terms of loans.
…
The reason it’s critical is that right now there’s really no stick to mortgage servicers. There’s nothing to force them to do these modifications that are in everybody’s best interest, and they’re not doing them. If they’re facing an impending bankruptcy filing, that’s going to change dramatically, and it will cause them to do a lot more modifications within the parameters of the plan. So these changes are really critical for this plan to work.
Those on the left excuse such actions by being in ‘everybody’s best interest’. The CNN article quoted Obama in his speech in Arizona:
“In the end, all of us are paying a price for this home mortgage crisis,” Obama said. “And all of us will pay an even steeper price if we allow this crisis to deepen — a crisis which is unraveling homeownership, the middle class, and the American Dream itself. But if we act boldly and swiftly to arrest this downward spiral, every American will benefit.”
The question I pose is, if such actions really are in “everybody’s best interest,” then why the hell aren’t they doing them in the first place?
First of all, I realize that banks cannot profitably foreclose on every loan that falls behind and that voluntary loan modification is indeed in their best interest. If banks are failing to do so in these cases, its probably because they know they can wait for a plan like the one listed above to pay off their poor lending decisions.
However, in many cases it is not in their best interest. Its important to remember that, save a select minority of cases, these mortgages were agreed to voluntarily by the lender and borrower, and that the lender is the one that paid for the house. Borrowers have no right to demand that the bank or anyone else pay for their decisions. Whether a mortgage modification is in the best interest of the lender is the decision of - the lender! Not a borrower, a judge, or a politician.
The first part of Obama’s plan will have Fannie Mae and Freddie Mac take on even more loans, that, by definition, are significant credit risks because the program targets loans that exceed the actual value of the home. Not only is this taking on a risk in gross dollar terms, but a homeowner will have less incentive to keep up payments on a home that has no or negative equity rather than in a home that they do have equity. As we have seen, over the last decade especially, is that not only are Freddie Mac and Fannie Mae inept at assessing credit worthiness, their sheer size makes any problems they have for the reasons stated above particularly harmful.
In an article entitled How US mortgage debt could cause a global financial crisis, Dan Denning states:
In the US, Fannie Mae (FNMA) and Freddie Mac are Government Sponsored Enterprises (GSEs) which buy residential mortgages and repackage them to sell on as mortgage-backed bonds.
Denning then reviewed statements from former Treasure Secretary Henry Paulson:
The large size of GSE mortgage portfolios (about US$1.5 trillion), coupled with the lack of market discipline at correctly pricing the risk of GSE debt, multiplied by the interconnectivity of the world’s financial institutions has led to a possibility ‘without precedent.’ Henry adds that ‘Financial markets across the board would likely become very illiquid and volatile as firms with significant losses attempted to unwind their positions.’
Paulson is later quoted as saying:
“Has it been so long that we have forgotten Fannie Mae’s significant financial troubles in the late 1970s and early 1980s? During this time period, Fannie Mae’s balance sheet looked a lot like a savings and loan. As interest rates rose, Fannie Mae’s cost of funds rose above the interest rate it was earning on its long-term, fixed-rate mortgages. Like many S&Ls, Fannie Mae became insolvent on a mark-to-market basis. It lost hundreds of millions of dollars.”
So the risks of Fannie Mae and Freddie Mac taking on loans that are inherently dangerous could have lare-scale effects throughout the American and global economy. But what is so interesting about the above article?
It was written in July of 2006.
The current conundrum we are in was not only foreseen and preventable, but directly attributable to the overleveraging of government sponsored enterprises (GSE’s) Freddie Mac and Fannie Mae. I thought the Obama administration was all about ‘change’ and not repeating the mistakes of the Bush administration. Please. Obama is Bush on steroids. In addition, having the government refinance such loans is just a ‘bailout’ for the ’speculators’ who own the mortgages. Didn’t Obama vow not to protect these evildoers?
The following well-circulated video from 2004 is an example of the kind of big-government, Democrat-Party-style policies that led to this mess.
Obama’s plan would only increase an unsustainable, government-fueled housing bubble.
I’ll close with Dan Denning’s last line, in response to Paulson’s remarking of the hundreds of millions of dollars lost by Fannie Mae in the 1980’s:
If the same thing happens today, you can replace ‘hundreds of millions’ with ‘trillions.’
Jan
25
Change We Can Believe In!
Filed Under Economics | Leave a Comment
You’re never going to believe this, but I got the scoop on President Obama’s new legislation! Here’s a few new acts he’ll be pushing through congress:
- The heart of today’s economic crisis is the way the Bush administration handled the mortgage crisis. America needs decisive leadership from our next president. That’s why, as president, Senator Obama will create the Mortgage Amortization Reset Exchange (MARX). Through this, no American will be forced to live in a house they bought because they were preyed upon by unscrupulous lenders. If, at any point, a citizen cannot make their mortgage payment, they will be allowed to take over any house that is in their county of residence. That homeowner will be required to house, feed and clothe them and their progeny for as long as needed. That way, no American will be forced to face the consequences of their actions.
- While speaking with folks all over America, Senator Obama has heard countless stories of ordinary Americans being pushed aside in the workplace over the past eight years. That’s why in the senate Barack Obama sponsored the Work Ethic Equality Act. For too long our friends and neighbors have been discriminated against by employers just because they don’t work hard. President Obama will make it a capital offense punishable by 30 years in prison to deny a worker a job on the basis of work ethic, attendance, punctuality, or ability. Its time we put the working (or non-working) class first again after eight disastrous years of George Bush.
- An Obama administration will make sure all Americans have the ability to voice their concerns with their government through the American Yearly Executive Request Service (AYERS). Through this program, Americans of all walks of life will be trained on how to make an explosive impression on local government and government buildings and how to realize how awful and terrible our country has been.
Yes we can!
