30 September 2008

Mess, pt I

I am going to be wading into the financial morass slowly but certainly and here is the beginning.

First, I can't recommend strongly enough to call your federal representatives and tell them not to support the $700,000,000,000 bail-out. My wuss representative's office "didn't know" how he was going to vote on the matter as the roll was being taken. After I saw that he voted for the bill I called his office to let them know how he did vote and to tell them that I will now do whatever I can to make sure he doesn't get re-elected.
The Democratic promulgation and further enhancement of the Community Reinvestment Act did play a significant role in the current mess, but it is not, as some of the bigger conservative morons would have it, solely resposible. If it were, the failing mortgages would be concentrated in poor, urban areas. The current mess is spread evenly through geography and income levels (not quite so much in higher incomes because a person with more means can bite the bullet and refinance into a better loan even if there is loss in equity in the real property). Do not let my calling out of "conservative" morons mean that Barney Frank and his friends are absolved of guilt and are not idiots themselves. Fannie Mae and Freddie Mac were bad ideas to begin with and got worse with time. Their function also is not the concern of the federal government.

But it happened. It all happened and here we are.

We have a Republican president and his Treasury secretary putting forth one of the worst ideas in modern history and he (proudly) gets the support of the Democrats in congress. Because, you know, we have to do something.

One of the catalysts of our current problems is that homes were over-valued and that value was borrowed against. If the home isn't worth $100,000 and you have a mortgage for $120,000 you're in trouble. If one million people have the same problem, then--the logic is--we all have a problem. Nonsense. On stilts.

The government's "fix" is to buy only the bad mortgages, giving lenders breathing room, and holding onto the notes until the market "stabilizes," and the homes are worth the paper. This is such a self-evidently bad idea it just stuns me that it's not only being taken seriously, it's constantly being framed as "necessary" and the better option.

If the houses are over-valued as a result of bad investing, why in hell would it make sense to put the onus on the taxpayer? Since the property is over-valued, why would I want to back it? Would you buy a piece of stock for $100 if the broker told you, "by the way, it's really only worth about $70, but it might very well be $100 at some point in the future. Trust me, I'm the guy who over-valued it in the first place." If you would, please call me. I might have some shit to sell you.

Would the credit market tighten up? Yep. As it should.

It doesn't make sense to offer no-doc loans to people with credit scores of 620, or sell people negative amortization loans with "pick-a-payments" that can ruin you if your home doesn't appreciate in five years, or have lots of first-time homebuyers getting 80/20 loans. I work in title insurance and can tell many stories of people signing stuff that they don't understand with a loan officer over their shoulder saying, "trust me" or "don't worry, your house will always appreciate." And these weren't fools or rubes. Were they taken advantage of? Probably. But while they weren't fools many were foolish. Making the lowest payment required on a loan is rational in the short term, it leaves you with more money. But on a negative amortization loan, it leaves you with increased principal. Most loan officers I know who sold these loans don't understand this concept.

But eventually banks would realize that the only way they can make money, other than the government giving it to them, is to lend to people. At first, they would only lend to people with great credit. Then, barring any government intervention, lending would relax to more people who are still credit worthy. And hopefully the lender's would remember the lessons from this debacle and keep to standards and practices that will keep them solvent. Some won't and they'll go away. That's business, that's life. QED.

I don't care that Wachovia has been around a long time. They bought World Savings, purveyors of the aforementioned Pick-a-Payment loans. They got what they deserve. So did Lehman by buying securities it didn't srutinize well enough.

The market will recover.

It will recover better and more quickly so long as Captain Fantastic and his Motley Crew keep out of it.

These problems didn't arise out of a lack of regulation. Many of the policies banks had/have in place are solely to conform to regulations. The problem is the cost of the unintended consequences of government trying to "help." No government can interfere in the allocation of resources without things getting corrupted in some way.

And I don't know how McCain would address the markets, but I get a feeling of how Obama would from this, and I can only add this to the reasons I won't vote for him.

Also, I'm glad congress isn't doing anything today--if I had my way I'd rip the air conditioners out of congress to keep them out of there at least 4.5 months a year--but if we are in a financial crisis, does it make sense to adjourn for a religious holiday?

More later.

Some good info: here, here, here, here & here.

Other great articles here and here.

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