Financial Catastrophe

[Vegeta2711]

http://www.frugalsquirrels.com/cgi-bin/ubb/ultimatebb.cgi?ubb=get_topic;f=1;t=044387;p=1

There's your handy guidebook for when The Shit Hits The Fan.

[Demonic Attorney]

And so it begins.

[JACO]

You're the one who fails to understand the enormity of the problem...The argument that I am making, which is undisputed by the majority of leading economists, is that some sort of intervention is necessary to avert a prolonged double digit recession.

I understand the problem quite clearly. A bunch of assclowns made risky investments and bets, which ultimately failed. They did so with risky mortgages, CDS, and other investments. That doesn't mean they deserve to be 'bailed out.' They deserve to fail, and have their remaining sellable assets bought up at whatever the market will bear, by competent companies and/or individuals.

You and others seems to be afraid of a recession, but as Grand Inquisitor alluded to, it is exactly what this nation needs. Too many people and companies, for too long, have been living above their means, and making risky bets and poor investments. The time has come to pay the piper.

Unfortunately, you and I are the ones who will ultimately be doing the paying, it seems. If this isn't socialism, and you don't think that our nation's government is moving in that general direction, then please feel free to make your arguments why it isn't. I'm actually legitimately interested to hear your thoughts on the matter.

[Juggernaut GO]

http://www.frugalsquirrels.com/cgi-bin/ubb/ultimatebb.cgi?ubb=get_topic;f=1;t=044387;p=1

There's your handy guidebook for when The Shit Hits The Fan.

"A 4x4 allows you to dive over the sidewalk or through wasteland, away from roadblocks or riots. I’ve see those that have 4x4s simply go off road, climb over a boulevard and leave while the rest of us poor car owners have to stay."



there is so much comedic value on that link, even though the person that posted this is from outside the USA, its still sad that there are people in our country that actualy think this way.

[Matt]

Unfortunately, you and I are the ones who will ultimately be doing the paying, it seems. If this isn't socialism, and you don't think that our nation's government is moving in that general direction, then please feel free to make your arguments why it isn't. I'm actually legitimately interested to hear your thoughts on the matter.

From Wikipedia: "Socialism refers to a broad set of economic theories of social organization advocating state or collective ownership and administration of the means of production and distribution of goods, and the creation of an egalitarian society."

1. No plan put forth thus far advocates for state ownership of anything. The plan is not for the government to OWN these failed assets, but rather (in the case of FM/FM) to temporarily take them over, fix them up, and then re-release them, and in the case of AIG & co., to act as guarantor of their bad assets. Most plans do NOT include the government taking on ANY equity (ownership) in these firms, even temporarily. We/the government puts up the money, but don't actually get to own or control anything. This is one of the big clues that this is just a direct, kleptocratic transfer of money upwards.
2. None of these firms have anything to do with the means of production (they 'produce' almost nothing, except debt, and that's not facetious, that is actually their business model). Nor does any of this have anything to do with the means of distribution - there is no high-level discussion at all which calls into question the social and legal structures that allowed this kind of corporate malfeasance.
3. There is nothing "egalitarian" about having 300 million people pay the debts of a few thousand of the very richest. In fact that is the opposite of an egalitarian society.

So, yeah. Definition fail. Government working for the benefit of private corporations is a terrible thing, but it is NOT socialism. The word you are searching for is plutocracy.

[Demonic Attorney]

No plan put forth thus far advocates for state ownership of anything. The plan is not for the government to OWN these failed assets, but rather (in the case of FM/FM) to temporarily take them over, fix them up, and then re-release them, and in the case of AIG & co., to act as guarantor of their bad assets. Most plans do NOT include the government taking on ANY equity (ownership) in these firms, even temporarily. We/the government puts up the money, but don't actually get to own or control anything. This is one of the big clues that this is just a direct, kleptocratic transfer of money upwards.

What about this?

[Matt]

No plan put forth thus far advocates for state ownership of anything. The plan is not for the government to OWN these failed assets, but rather (in the case of FM/FM) to temporarily take them over, fix them up, and then re-release them, and in the case of AIG & co., to act as guarantor of their bad assets. Most plans do NOT include the government taking on ANY equity (ownership) in these firms, even temporarily. We/the government puts up the money, but don't actually get to own or control anything. This is one of the big clues that this is just a direct, kleptocratic transfer of money upwards.

What about this?

I stand corrected on the point; it does appear that AIG has effectively been nationalized.

However, the government (the Federal Reserve) did this only extremely reluctantly, essentially at AIG's request. The AIG board of directors approved the loan, and only after seeking extensively for a loan/buyout in the private sector. Somehow, getting the government to buy up your failing company just doesn't have the same threat that "socialism" invokes. I find it hard to imagine a business owner who WOULDN'T jump at the prospect of selling off his or her worst mistakes.

Second, my points still stand as regards FM/FM, which were put into conservatorship (intended to re-privatize the companies after a taxpayer-paid cleanup operation), and Lehman, which was allowed to fail, and anything Paulson's Plunder touches, which is intended (like FM/FM) to be re-appraised and then sold off by the government, not keeping it in state hands.

This only counts as "the government taking over private business!" in the stupidest possible sense. It's not exactly socialism when the private enterprise WANTS to get bought out. It's not like the government is taking over SUCCESSFUL operations as a way to control its populace - it's taking over the worst failures of corporations. There's no sensible reading of events that isn't essentially "the government doing exactly what big business wants," which is the effective opposite of socialism.

[JACO]

1. No plan put forth thus far advocates for state ownership of anything. The plan is not for the government to OWN these failed assets, but rather (in the case of FM/FM) to temporarily take them over, fix them up, and then re-release them, and in the case of AIG & co., to act as guarantor of their bad assets. Most plans do NOT include the government taking on ANY equity (ownership) in these firms, even temporarily. We/the government puts up the money, but don't actually get to own or control anything. This is one of the big clues that this is just a direct, kleptocratic transfer of money upwards.

Wrong. As stated, the government is buying a stake in AIG, has effectively taken a stake in Fannie Mae, Freddie Mac, Indy Mac, and also brokered the recent Bear Sterns and WaMu deals, or they most likely would have essentially nationalized those as well.

The new $700 billion 'bail out' also has provisions for the government to buy a stake of the banks and companies they will be 'helping.' Your argument is null.

The concept of you and I being taxed out of our asses to 'help others' is at the basis of socialism. We are being essentially penalized for the failures and missteps of others, and will end up paying our own hard earned money to others. If you don't understand this as part of the spirit of socialism, then you simply don't understand all the concepts. From the same socialism article you and I both quoted, it also speaks about social interventionism, which this current situation is a great example of.

Again, I would ask you to please tell me how we are not heading towards a more socialist society.

[Godder]

More socialist does not equal socialist. When compared to the EU, for example, the USA is somewhat less socialist than any of those nations (or Australia, Canada or New Zealand, for that matter). Buying a few major financial institutions with the aim of saving them and flicking them off for profit later on is not Socialism and never will be.

[West]

Here's a list of economists (a few hundred or so, Nobel Prize winners included) that are against the bailout, with the primary reason being that

"Investors who took risks to earn profits must also bear the losses.  Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise."

http://faculty.chicagogsb.edu/john.cochrane/research/Papers/mortgage_protest.htm

[JACO]

More socialist does not equal socialist. When compared to the EU, for example, the USA is somewhat less socialist than any of those nations (or Australia, Canada or New Zealand, for that matter). Buying a few major financial institutions with the aim of saving them and flicking them off for profit later on is not Socialism and never will be.

Herein lies one of the problems. Part of the grand plan on Capitol Hill is to 'bail out' these institutions by valuing them at their 'maturation' price (what they will be worth in an optimal market in the future), and not at their current market valuations. In the unlikely event that these companies ever reach their peak 'maturation' value again, the government still would not make money on this.

All of this of course ignores the fact that we don't have $700 billion to begin with. We will be borrowing part of it and getting some of it through taxes, and if you've ever looked at a loan like a mortgage, you know that you end up paying back MUCH more than the amount you are borrowing. On a 30 year mortgage you end up paying back roughly twice as much as you borrowed, due to the interest over time.

Recovering this money, or even making money on it, is simply a pipe dream.

Here's a list of economists (a few hundred or so, Nobel Prize winners included) that are against the bailout, with the primary reason being that

"Investors who took risks to earn profits must also bear the losses.  Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise."

http://faculty.chicagogsb.edu/john.cochrane/research/Papers/mortgage_protest.htm

Good link, Aaron. I believe this is the "5 pages of economists" paper that some of the House Republicans held up in their hands during interviews on CNN and MSNBC tonight, as they rejected many of the premises of the Paulson plan. Unfortunately, they are working on their own bail out plan, which is ultimately going to be flawed in many of the same regards.

[bluemage55]

Can you explain how a budget surplus has anything to do with when is a better time to have a recession/depression?  All of the recent bubbles have been global capital flows moving to whatever spot recent legislative changes made most appealing for the US consumer.

That's not the argument.  A budget surplus is a better time to undertake something that is bad for the economy in the short run and good in the long run, because you have a cushion to deal with the short term losses.

Nope.  What got us here is becoming a nation of debtors.  We need to deflation and to start producing.

By "here", I was referring to the subprime mortgage crisis and the consequent fallout.  What got us to massive national debt was American debtor mentality, that I do not disagree.  But the current financial crisis is directly attributable to a decade of financial deregulation.

[bluemage55]

I understand the problem quite clearly. A bunch of assclowns made risky investments and bets, which ultimately failed. They did so with risky mortgages, CDS, and other investments. That doesn't mean they deserve to be 'bailed out.' They deserve to fail, and have their remaining sellable assets bought up at whatever the market will bear, by competent companies and/or individuals. 

Bailng out an investment firm does not necessarily equate to allowing them to recoup their idiotic investments. 

The only point I'm making is that some sort of government purchase of toxic assets is necessary to prevent a domino effect of defaults.  I would greatly prefer if the process of doing so did punish those who made bad investments, while costing the American taxpayer nothing.  It's just more likely that the cost of preventing an economic disaster is going to carry costs we don't like on a fariness level.

You and others seems to be afraid of a recession, but as Grand Inquisitor alluded to, it is exactly what this nation needs. Too many people and companies, for too long, have been living above their means, and making risky bets and poor investments. The time has come to pay the piper.

I disagree the nation needs a recession.  What the nation needs is to not have any booms for a while (and to use the surplus gained during those times to fix our leaky infrastructure, wacky legal framework, and massive national debt).

But a double digit recession now, when the United States is stretched thin on multiple foreign conflicts (actual and potential), and with our national debt on the verge of turning away foreign funds, would be a mistake. 

Fixing our nation's substantial fiscale problems is an admiral goal, that I agree.  But to do so is an investment we cannot currently afford.  Just as a shrewd investor does not make long-term investments when not adequately bankrolled, the United States should not attempt to fix its problems now, when it cannot afford to.  The smart investor invests their surpluses when times are good, not when times are bad.

Unfortunately, you and I are the ones who will ultimately be doing the paying, it seems. If this isn't socialism, and you don't think that our nation's government is moving in that general direction, then please feel free to make your arguments why it isn't. I'm actually legitimately interested to hear your thoughts on the matter.

Socialism and capitalism are both extremes on a long continuum.  I do agree that the nationalization of financial firms moves in the direction of socialism.  But frankly, my political philosophy lies with pragmatism and empiricism.  I couldn't care less if dealing with this crisis moves us slightly toward socialism, so long as the catastrophe is averted and my nation makes it out stronger than ever.  I find it more likely that whatever move we make towards socialism can be undone more easily than a prolonged double digit recession.

In any case, I do think it is premature to assume that we are going to become a socialist state simply as a result of the federal government purchasing some major investment firms.  I prefer living in a capitalist state, but I also prefer it when the majority of the people I know can put food on the table for their children.  I think it's foolish for policymakers to operate on the basis of ideological preferences.  It's far better for everyone when policymakers do what's best for the people.

As an example, the people of India experienced a famine every 120 years in a semi-feudal, semi-socialist system before the British took over.  With the advent of British capitalism, a famine occurred every 4 years.  Which would you say was better for the people?  So likewise, though the capitalist system has worked out well for the United States thus far, I am not adverse to us sliding one way or another on the socialist-capitalist continuum.  That's less important to me than how well off we are.

[Demonic Attorney]

And another one bites the dust.

[bluemage55]

JP Morgan Chase looks to be in pretty good shape for the foresseable future.

[Smmenen]

  This.

Even beyond that, the solution to this crisis is very, very simple: stem the number of mortgage defaults and foreclosures and the securities will no longer be bad debt.  Then, no bailout will be necessary.  To do that, we have to restructure mortgages for people who are willing and able to pay with loan modifications.   

Currently, the banks claim to be open to loan modifications, but the banks are currently set up as if this were 2005, not 2008.   Their loan modification proposals are ridiculously unrealistic. 

[DarkfnTemplar]

Maybe due to the fact that those who are able to pay off the mortgages don't want to pay more than they have to?  Thus the banks would have to somehow strong arm debtors with some sort of legal push behind more government meddling. 

[desolutionist]

I'm with Travis on this one.  Though, I have my money invested on the bailout getting signed.

[West]

BB&T (NYSE: BBT), has issued the following statement on the banking crisis and the proposed bailout:

Key Points on "Rescue" Plan From A Healthy Bank's Perspective

1. Freddie Mac and Fannie Mae are the primary cause of the mortgage crisis. These government supported enterprises distorted normal market risk mechanisms. While individual private financial institutions have made serious mistakes, the problems in the financial system have been caused by government policies including, affordable housing (now sub-prime), combined with the market disruptions caused by the Federal Reserve holding interest rates too low and then raising interest rates too high.

2. There is no panic on Main Street and in sound financial institutions. The problems are in high-risk financial institutions and on Wall Street.

3. While all financial intermediaries are being impacted by liquidity issues, this is primarily a bailout of poorly run financial institutions. It is extremely important that the bailout not damage well run companies.

4. Corrections are not all bad. The market correction process eliminates irrational competitors. There were a number of poorly managed institutions and poorly made financial decisions during the real estate boom. It is important that any rules post "rescue" punish the poorly run institutions and not punish the well run companies.

5. A significant and immediate tax credit for purchasing homes would be a far less expensive and more effective cure for the mortgage market and financial system than the proposed "rescue" plan.

6. This is a housing value crisis. It does not make economic sense to purchase credit card loans, automobile loans, etc. The government should directly purchase housing assets, not real estate bonds. This would include lots and houses under construction.

7. The guaranty of money funds by the U.S. Treasury creates enormous risk for the banking industry. Banks have been paying into the FDIC insurance fund since 1933. The fund has a limit of $100,000 per client. An arbitrary, "out of the blue" guarantee of money funds creates risk for the taxpayers and significantly distorts financial markets.

8. Protecting the banking system, which is fundamentally controlled by the Federal Reserve, is an established government function. It is completely unclear why the government needs to or should bailout insurance companies, investment banks, hedge funds and foreign companies.

9. It is extremely unclear how the government will price the problem real estate assets. Priced too low, the real estate markets will be worse off than if the bail out did not exist. Priced too high, the taxpayers will take huge losses. Without a market price, how can you rationally determine value?

10. The proposed bankruptcy "cram down" will severely negatively impact mortgage markets and will damage well run institutions. This will provide an incentive for homeowners who are able to pay their mortgages, but have a loss in their house, to take bankruptcy and force losses on banks. (Banks would not have received the gains had the houses appreciated.) This will substantially increase the risk in mortgage lending and make mortgage pricing much higher in the future.

11. Fair Value accounting should be changed immediately. It does not work when there are no market prices. If we had Fair Value accounting, as interpreted today, in the early 1990's the United States financial system would have crashed. Accounting should not drive economic activity, it should reflect it.

12. The proposed new merger accounting rules should be deferred for at least five years. The new merger accounting rules are creating uncertainty for high quality companies who might potentially purchase weaker companies.

13. The primary beneficiaries of the proposed rescue are Goldman Sachs and Morgan Stanley. The Treasury has a number of smart individuals, including Hank Paulson. However, Treasury is totally dominated by Wall Street investment bankers. They do not have knowledge of the commercial banking industry. Therefore, they can not be relied on to objectively assess all the implications of government policy on all financial intermediaries. The decision to protect the money funds is a clear example of a material lack of insight into the risk to the total financial system.

14. Arbitrary limits on executive compensation will be self defeating. With these limits, only the failing financial institutions will participate in the "rescue," effectively making this plan a massive subsidy for incompetence. Also, how will companies attract the leadership talent to manage their business effectively with irrational compensation limits?

[Smmenen]

BB&T (NYSE: BBT), has issued the following statement on the banking crisis and the proposed bailout:

Key Points on "Rescue" Plan From A Healthy Bank's Perspective

1. Freddie Mac and Fannie Mae are the primary cause of the mortgage crisis. These government supported enterprises distorted normal market risk mechanisms. While individual private financial institutions have made serious mistakes, the problems in the financial system have been caused by government policies including, affordable housing (now sub-prime), combined with the market disruptions caused by the Federal Reserve holding interest rates too low and then raising interest rates too high.

LOL!!!!

This is 100% absolutely true! 

The companies whose CEO's saw infinite profits in securitizing subprime loans had absolutely no responsibility.  They did nothing wrong.  How were they supposed to know that gauging people of their money would backfire?  How were they supposed to foresee that people wouldn't be able to afford these loans?   Neither did the originating banks who originated these predatory arrangements and sold them down stream.  Nor do the brokers have any responsibility for trying to get two bites in a few years, doubling their income. 

Yeah, this is obviously the governments fault for somehow "sponsoring" two entities that were entirely private companies, and organizations like ACORN, and all of those miserable fair housing advocates who tried to get the government involved in providing mortgages for low income poeple.  But above all, the idiots who got into these loans should have known better! That's obviously the people to blame.  Greed had nothing to do with it.   It's so obvious.  If you were rich like me you'd understand that.   

[Moxlotus]

Steve, how can you not see that the people who took the mortgages have some blame in the matter?  Don't buy what you can't afford.  I'm not going to say that greed wasn't a huge part in the matter, but people should have known better than to take out mortages that are 9 times their annual salary.  As I said earlier, if you're going to make the most important purchase in your life, you might want to spend that $14.99 on a book to learn some basics about the process.

Yeah, this is obviously the governments fault for somehow "sponsoring" two entities that were entirely private companies

It is obvious that they were essentially government sponsored because the government rushed to stop them from going under. 

[West]

I know you want to blame "greed," but it's just a silly cop-out that our politicians are clinging to. The profit motive is what drives businesses and individuals to make the best choice given their options. You mean to tell me they were so interested in their well-being that they bankrupted themselves? Nowhere does the list abdicate lenders' responsibility in this; instead, it's arguing that the government providing false market incentives is the primary cause. Everyone who buys into it will be damaged and share the responsibility of what happened. We as taxpayers are who will ultimately foot the bill. Sucks.

[Smmenen]

I know you want to blame "greed," but it's just a silly cop-out that our politicians are clinging to. The profit motive is what drives businesses and individuals to make the best choice given their options.

This is absoultely true!

But the idea of the profit motive is that people acting in their individual self interest actually benefits everyone.  For example, someone trying to make money comes up with a new product, sells it, and makes money. 

That's not what happened here.   Banks gave out mortgages they knew people couldn't afford and then sold them to another bank, passing off the risk of foreclosure.  In any case, these mortgages were backed by the value of the property, (right? lol).

Nowhere does the list abdicate lenders' responsibility in this; instead, it's arguing that the government providing false market incentives is the primary cause.

I guess if you are cunning enough you can convince people that up is down and down is up.

Or, I guess, people will believe anything...which explains our political situation, I suppose. 

Steve, how can you not see that the people who took the mortgages have some blame in the matter?  Don't buy what you can't afford. 

It wasn't that these people simply were dumb and signed up for mortgages they couldn't afford.   Everyone assumed that housing values were not going to go down.

The idea was that people would refinance BEFORE the rates reset in any case.    The problem is that the housing values went down so there was no equity when the rates reset, so people bailed.   

But that's not even the main problem.

The problem was that Wall Street was so hungry for these securitized instruments of bundled mortgages that they were basically telling brokers and originating banks to do whatever it took to get them.   Brokers would routinely falsify income on mortgage applications because Wall Street appetite was so powerful.  Of course would be homeowners went along for the ride. 

Yeah, this is obviously the governments fault for somehow "sponsoring" two entities that were entirely private companies

It is obvious that they were essentially government sponsored because the government rushed to stop them from going under. 

By that logic, Chrysler and AIG are "government sponsored" LOL

[Moxlotus]

By that logic, Chrysler and AIG are "government sponsored" LOL

Nobody knew if the government was going to rescue them.  Everyone knew and even made risky investments banking on (lol, pun!) the government rushing to bail out FM/FM.

It wasn't that these people simply were dumb and signed up for mortgages they couldn't afford.   Everyone assumed that housing values were not going to go down.

The idea was that people would refinance BEFORE the rates reset in any case.    The problem is that the housing values went down so there was no equity when the rates reset, so people bailed.   
 

No, that is stupid.  That is people simply being dumb and signing mortages they couldn't afford.  They were hoping things would work their way in the end and they would be able to afford it after some market changes--but at that time they could not afford it.  That is just plain stupidity when dealing with the most important purchase you'll ever make and I refuse to feel the least bit sorry for anyone stupid enough to try to do this and who ended up getting burned.  Buy a house with a fixed rate and borrow 3-4x your annual salary to do it.  This is your freaking house, you don't play investment games with it.

[ELD]

It wasn't that these people simply were dumb and signed up for mortgages they couldn't afford.   Everyone assumed that housing values were not going to go down.

The idea was that people would refinance BEFORE the rates reset in any case.    The problem is that the housing values went down so there was no equity when the rates reset, so people bailed.   

That brings to mind the real difference between the classes:

The Poor have no extra money beyond their basic needs.
The Rich have extra money beyond their needs and buy Assets.
The Middle Class have extra money beyond their needs and buy liabilities that they think are assets.

If you think your in the 99%+ of people who think their house is an asset, things could get very very ugly.  IMO a reset of the housing prices is just getting started. 

The profit motive working guiding as an invisible hand only works with legitimate business.  Robbing someone at gun point does not help the economy, or anyone else involved.  The fractional reserve system needs to be examined.  The federal reserve has failed in epic fashion, both in essentially causing the great depression, and now with their horrific handling of the interest rates.  I truly believe that central control of the interest rates is a flawed idea, and it will always result in disaster.  The monetary system that the government has in place is essentially theft on many levels.  Inflation robs the value of savings, which should be the foundation of our society.  The flow is from the poor and middle class, to the rich.  The unbelievable financial burden we are all going to have to deal with is absolute madness.  If the Federal Government was a business, it would have been belly up a long time ago.  I've been trying to stay out of this one on TMD, as I spend a great deal of my time IRL discussing this subject, but I did want to get a quote from the wise Lord Acton -

"The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks."

[bluemage55]

Steve, how can you not see that the people who took the mortgages have some blame in the matter?  Don't buy what you can't afford.  I'm not going to say that greed wasn't a huge part in the matter, but people should have known better than to take out mortages that are 9 times their annual salary.  As I said earlier, if you're going to make the most important purchase in your life, you might want to spend that $14.99 on a book to learn some basics about the process.

Some blame goes to them, yes.  But there is a reason that the government prohibits loan sharks.  What occurred was a near-equivalent.

It's a matter of the consumer protection principle.  At least in our country, we don't allow businesses to rip people off.  Just because people should learn how to spot fake cars does not mean that we allow fake cars to be sold.

[Smmenen]

By that logic, Chrysler and AIG are "government sponsored" LOL

Nobody knew if the government was going to rescue them.  Everyone knew and even made risky investments banking on (lol, pun!) the government rushing to bail out FM/FM.

It wasn't that these people simply were dumb and signed up for mortgages they couldn't afford.   Everyone assumed that housing values were not going to go down.

The idea was that people would refinance BEFORE the rates reset in any case.    The problem is that the housing values went down so there was no equity when the rates reset, so people bailed.   
 

No, that is stupid.  That is people simply being dumb and signing mortages they couldn't afford.  They were hoping things would work their way in the end and they would be able to afford it after some market changes--but at that time they could not afford it.  That is just plain stupidity when dealing with the most important purchase you'll ever make and I refuse to feel the least bit sorry for anyone stupid enough to try to do this and who ended up getting burned.  Buy a house with a fixed rate and borrow 3-4x your annual salary to do it.  This is your freaking house, you don't play investment games with it.

So much fail here.   

First of all, I have already explained this multiple times, but many of the people who are being foreclosed upon DID NOT by houses they couldn't afford.   Instead, they were buying houses they could afford, with the assumption that they would refinance before the adjustable rate set in. 

Let me explain.   You buy a house that is worth $200,000 with a subprime loan.   After three years the rate will adjust, likely upward.    That's what makes it unaffordable.  However, your broker tells you that you will be able to refinance before the new rate kicks in.   You won't be paying down on the principal during the three years, you'll just be paying a low monthly payment mostly on interest.  However, if your home appreciates in value, you'll be able to refinance in 3 years on a home now woth $230,000.  You'll then have $30,000 in equity.

That's not stupid, it's a sound, low risk investment.

Here is what makes it worse:  the brokers are telling potential buyers that this is a good idea.   In fact, they are saying: you will make money, so we are going to even lie about your income.  If you can't afford the refinance in 3 years, you can sell the home with some equity in it.  Worst case scenario, you have to walk away.    The banks never go after the homeowner for indemnity after a sheriff's sale, so the risk to the person is basically nil.    The broker made money on the original deal, and then also when the homeowner went back to refinance.

No matter what happened, this was not a risky investment; at least no more than putting money in the stock market.   

The problem isn't simply that people are being foreclosed upon and losing their homes.   The problem is that the entire housing market is losing massive value due to the foreclosure crisis. 

This is your freaking house, you don't play investment games with it.

This is your freaking retirement, people shouldn't play "investment games" with their retirement money with the stock market!!!  

[Matt]

If the Federal Government was a business, it would have been belly up a long time ago.

Of course, the government ISN'T a business, and consequently should not be run like one or judged as one. The government has powers that no business should be allowed to have, and has obligations that no business would ever accept. Fiscal & financial solvency is a good thing, and something to hope for in a government, but unlike a business that is not the sole or even most important criterion to judge a government by.

Government handing out gigantic favors to big business has never been, and is not now, a feature associated with socialism. This bailout is symptomatic of business taking over government, not the other way around. If one's definition of socialism does not appreciate that distinction then one's definition needs revising.

[Godder]

The fractional reserve system needs to be examined.  The federal reserve has failed in epic fashion, both in essentially causing the great depression, and now with their horrific handling of the interest rates.  I truly believe that central control of the interest rates is a flawed idea, and it will always result in disaster.  The monetary system that the government has in place is essentially theft on many levels.  Inflation robs the value of savings, which should be the foundation of our society.

The fractional reserve system has its issues (a big one being that a run on the banks is very very bad because most of the money isn't actually there), but a big benefit is a massive increase in the amount of capital available for legitimate business. The ease of access to that capital is one excellent way of providing anyone with a decent idea for a business with the means to get it off the ground faster and easier than at any time in history. It's also a good point that inflation actually means that people can't just hoard cash - they have to invest it, thus putting it to use.

In my opinion, whole mortgage fiasco came about because nobody actually did anything useful with their money - they were buying property with the expectation that it would rise substantially and that they could make a quick, easy profit for doing nothing more than buying and selling property. No value added by improvements (although some of them no doubt went down that path as well), no property development as such - just buy, hold for 2 years, sell and count the money at the end. Essentially, this was money for nothing aka a free lunch, and, as we all know, there's no such thing as a free lunch (or, if it sounds too good to be true, it is). It's not just the mortgagees either, but the mortgagors and brokers as well, who really should have known better.

[Matt]

Mr. Fishman [WaMu CEO], who has been on the job for less than three weeks, is eligible for $11.6 million in cash severance and will get to keep his $7.5 million signing bonus, according to an analysis by James F. Reda and Associates.

Socialism!

My new favorite fact: the previous CEO of WaMu was actually named 'Killinger.'