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Government deaf to simple plea: less debt!

By someone else follow someone else   2008 Apr 21, 12:30am 35,556 views   307 comments   watch   nsfw   quote   share    


Saver: I'd really like lower house prices instead of "affordability" programs that just tell me to get deeply into debt.

Government: How about the nice mortgage debt interest deduction? The more you borrow, the more you save! But if you have no debt, then no tax break. Sorry.

Saver: You're not listening. I don't want debt. I just want your debt-mongering programs to go away, so I won't have to bid against people committing financial suicide with debt. No saver can bid as much for a house as foolish borrowers can, borrowers who don't care about their future bankruptcy.

Government: Say, have you considered what Fannie Mae can do for you? You can get a slightly lower interest rate on your debt since we have taxpayers on the hook in case of your default.

Saver: I still don't want any debt.

Government: OK, we'll increase the Fannie Mae conforming limit, so you can get whopping jumbo loans in California, and we'll make Midwestern taxpayers cover it! Then you get hella deep into debt and the banks will be safe in case you default.

Saver: NO! I still don't want any debt.

Government: You're a tough nut to crack. OK, I'm going to hand you cash and say you borrowed it.

Saver: But I don't want to borrow money!

Government: Too late, I just added your "stimulus" payment to your part of the national debt. Ha! Gotcha.


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268   HeadSet   ignore (2)   2008 Apr 24, 1:45am     ↓ dislike (0)   quote   flag        

Our true goal should be to provision well for ourselves (food, medical care, retirement) and then spend our lives attaining a minimum of possessions and a wealth of love, joy and kindness.

I believe you will see more fellow travelers in the coming contraction. When the loss of house ATM proceeds cause people to cut back, they will find they are just as happy with the less prestigeous home and the more sensible auto. People will find that less time driving or driving alone does not kill quality of life, that neighborhood hangouts are just as fun as crosstown tony clubs, and that rediscovering walking, bicycling, and knowing the neighbors can actually add to qualty of life.

269   HARM   ignore (0)   2008 Apr 24, 2:14am     ↓ dislike (0)   quote   flag        

@Brand & Headset: "Amen"

270   HARM   ignore (0)   2008 Apr 24, 2:18am     ↓ dislike (0)   quote   flag        

Pssst... I've got a 20lb bag of pure Basmati... not the crap they sell at Sam's Club, but the good stuff. I'm selling dimebags at $20 a pop. Any takers?

271   Peter P   ignore (0)   2008 Apr 24, 2:27am     ↓ dislike (0)   quote   flag        

Gold is still being killed.

272   Peter P   ignore (0)   2008 Apr 24, 2:36am     ↓ dislike (0)   quote   flag        

Forget about the rice crisis, this thing is worse. Much worse!


273   DennisN   ignore (1)   2008 Apr 24, 2:52am     ↓ dislike (0)   quote   flag        

I have another dumb question. Reposessed real estate owned by the banks and whoever bought their MBSs is called "REO". What do they call reposessed real estate owned by the government or GSEs? Government-owned-real-estate (GORE)?

Anyway I have been thinking about an alternative plan to the present bail-out proposals. The present bail-out proposals all propose to keep the homedebtor in his present house. Yet this present house is exactly why he is in such straights - he really can't afford a house that nice.

There are hundreds of thousands of REO and GORE houses, but they are not all alike in terms of affordability. They range from McMansions down to humble shacks. It would be possible for the bankers and government to arrange these REOs and GOREs into tranches of actual affordability, say on a scale from "A" (big McMansion) down to "Z" (squalid shack).

My bail-out plan would be for the bankers/government to facilitate downsizing the homedebtors into a house they could really afford. Say homedebtor Joe is facing foreclosure in a "D" tranch house, but upon investigation it is determined Joe could actually afford a "H" tranch house. Since there would be numerous "H" tranch houses in Joes area, he would be offered to pick one, move in, and assume the loan. Joe's old "D" tranch house would then go onto the pile of REOs/GOREs.

Meanwhile, Sally who owns a "B" tranch home but could only really afford a "D" tranch home could be offered a selection of "D" tranch homes - perhaps Joe's old place.

In this manner, all but the highest tranches of REOs and GOREs could be recycled by "pushing down" the homedebtors into more modest and affordable homes - where they should have been from the beginning. It would be possible to structure the agreements so that Joe and Sally wouldn't get black marks on their credit histories if they accepted a voluntary "push down" and voluntarily relinquished the home they couldn't afford. Only homedebtors in the lowest tranches would get pushed back into the rental market.

274   HARM   ignore (0)   2008 Apr 24, 3:34am     ↓ dislike (0)   quote   flag        

Thanks, Peter P. Note to self: never vacation in Congo!

275   Peter P   ignore (0)   2008 Apr 24, 3:45am     ↓ dislike (0)   quote   flag        

Note to self: never vacation in Congo!

Yeah. In most other places, you can at most have your kidney stolen. But Congo is different.

276   HeadSet   ignore (2)   2008 Apr 24, 4:34am     ↓ dislike (0)   quote   flag        

Forget about the rice crisis, this thing is worse. Much worse!

Gee Peter, you sound like you are talking from experience. Do you believe you are a victim of penis-shrinking witchcraft? Or just looking for an excuse/explanation :)

277   HeadSet   ignore (2)   2008 Apr 24, 4:35am     ↓ dislike (0)   quote   flag        

Please unmoderate my joke at Perter P's expense

278   Peter P   ignore (0)   2008 Apr 24, 4:36am     ↓ dislike (0)   quote   flag        


279   HeadSet   ignore (2)   2008 Apr 24, 4:37am     ↓ dislike (0)   quote   flag        

What a good sport!

280   Duke   ignore (0)   2008 Apr 24, 6:00am     ↓ dislike (0)   quote   flag        

Busted quoted a recent Robert Shiller speech that I would like to discuss.

It has been Shiller's view that, net of inflation, housing price do not increase. Or the more common way this is stated, housng prices inccrease, over the long term, at the rate of inlfation.

I feel Shiller has certainly debunked the 'not making any more land' myth. Quite simply, as housing prices rise, companies can relocate to cheaper areas and restart the cycle. Witness aerospace move from New York to California to Colorado over the last 70 years.

But what about govenrment intervention? With new zoning, we see that government can always limit growth to prop up prices. Government can also regulate. As positive examples think: fire-retardant roofs, superior insulation, quality electrical and plumbing, are appropriate engineering (wind/earthquake). These things tax a cities requrces less.

Also, how about economics? As a smaller and smaller portion of our pay-check go into basic needs, we can direct more of our disposable income into housing - thus asigning more value to construction labor and builder risk.

In my view, the days of zero-net-inflation return on housing are over. In my opinion, Shiller should make projections based on data no older than the mid-70s when talking about long-term trends.

All of that said, barring a massive exodus of employers in the Bay Area (which has happened at least once before) we will retrace roughly 35% from peak in inflation adjusted dollars. This means year 2000 prices in 2011. However, inflation is high and getting higher. In non-inflation adjusted dollars we are likely to see prices like 2003 in 2011 with those extra 3 years representing 7% annual inflation.

I would say something like, "If oil massively spikes all bets are off", except that long before OPEC and Russia force a world Depression, they will come under economic attack (how fast can we build nuclear power plants?) and perhaps, even, actual attack.

So my final thought is this. To those on this site wishing to bound the likely decrease in housing prices. At one end we have people saying we are done; especially with congress chucking money at the problem. At the other end we have Shiller stating it could be as much as the full 85% gain from 1997-2006. For me, I think it will be 35%+/-5% by late 2010/2011 baring huge news like mass job exodus and/or large oil-price hikes.

281   OO   ignore (0)   2008 Apr 24, 6:42am     ↓ dislike (0)   quote   flag        

Now I am swamped by email inquiries from friends around the world about our "rice shortage" problem. One email from Beijing says, "OO, are you ok? We are deeply concerned about your rice situation, is there anything we can help?"

NVR, you are responsible for this! Next time, please be more discerning when you post food scare news, especially if it hits home. Or I will have to report you to homeland security :-)

282   OO   ignore (0)   2008 Apr 24, 6:44am     ↓ dislike (0)   quote   flag        

I don't eat white rice, I only eat brown rice, and that stuff is hard to hoard, because micro rice bugs start to proliferate if you leave it untouched for a few months.

OK, just to get back at the white guys who are hoarding our staple food, I am going to Trader Joe's to hoard a case of multi-grain pasta.

283   Peter P   ignore (0)   2008 Apr 24, 6:46am     ↓ dislike (0)   quote   flag        

Multi-grain pasta is yucky. Please don't hoard squid-ink pasta!

284   EBGuy   ignore (0)   2008 Apr 24, 7:13am     ↓ dislike (0)   quote   flag        

Now I am swamped by email inquiries from friends around the world about our “rice shortage” problem.
Does "warehouse discount club" translate easily? :-)

It's Thursday, so time to crunch the Fed H.4.1 numbers. Relatively quite -- maybe, dare I say, things are stabilizing? Non-depositories gave back around $2 billion at their discount window and depositories took out about the same amount. The only major change was another $26 billion of Treasuries was swapped out at the TSLF. According to Bloomberg, the bid to ask on the last TSLF auction ($75 billion) was 0.79.
Also H3 is showing non-borrowed required reserves increased (which is a good thing) about 10% to -$90.9 billion.

285   Peter P   ignore (0)   2008 Apr 24, 7:36am     ↓ dislike (0)   quote   flag        

My wife loves crunchy nature bars.

(In Nature, food is never in the form of crunchy bars... hmm...)

286   Claire   ignore (0)   2008 Apr 24, 8:24am     ↓ dislike (0)   quote   flag        

Re Rice

Now that it has been widely covered by the media - there will be a scarcity as everyone will rush out and buy some while they can. Worsening the situation in the short term.

Something happened like this in England 50's;60's or 70's - not sure as it was before my time, but I remember my mother telling me that when her aunt died in the 90's - they found suitcases full of bags of sugar in the attic that had to be throw away. I guess hording does not always pay off.

287   Peter P   ignore (0)   2008 Apr 24, 8:30am     ↓ dislike (0)   quote   flag        

Clarie, the same psychology also drives the housing bubble.

288   OO   ignore (0)   2008 Apr 24, 8:49am     ↓ dislike (0)   quote   flag        

Rice cannot last 30 years. I think 5 years is the max.

It is amazing that your aunt's house was not infested with ants. I have to be very careful with where I put my sugar, the ants always have a way of finding it.

289   DennisN   ignore (1)   2008 Apr 24, 9:20am     ↓ dislike (0)   quote   flag        

OK, just to get back at the white guys who are hoarding our staple food, I am going to Trader Joe’s to hoard a case of multi-grain pasta.

Well just so long as you don't mess with us white guys' ammo supply. As you may have been told by one of the candidates, we are BITTER and CLINGING to our guns, god, and dislike of swarthy foreigners..... ;)

290   Peter P   ignore (0)   2008 Apr 24, 9:28am     ↓ dislike (0)   quote   flag        

Apparently, Pennsylvania did not agree with that candidate.

291   DennisN   ignore (1)   2008 Apr 24, 9:32am     ↓ dislike (0)   quote   flag        

They prefered the tough broad who could toss back a shot.

293   DennisN   ignore (1)   2008 Apr 24, 9:44am     ↓ dislike (0)   quote   flag        

No comments on my "push-down" bailout plan?

294   Peter P   ignore (0)   2008 Apr 24, 9:49am     ↓ dislike (0)   quote   flag        

I feel brain dead... too many words for a Thursday afternoon...

I will comment tonight.

295   OO   ignore (0)   2008 Apr 24, 9:51am     ↓ dislike (0)   quote   flag        


I misread that as "...BITTER and CLINGING to our guns, GOLD, and dislike of swarthy foreigners"

Swarthy foreigners, hmm, you mean southern Italians?

296   DennisN   ignore (1)   2008 Apr 24, 9:52am     ↓ dislike (0)   quote   flag        

And if wheat crop failures due to drought in Australia aren't bad enough....


We had three days of overnight frost here in Boise last weekend - the end of April - and it is feared the cherry and apricot crops are ruined. We shall see. The buds on my apricot tree are questionable right now, and I think I lost one of my ornamental grasses.

297   DennisN   ignore (1)   2008 Apr 24, 9:53am     ↓ dislike (0)   quote   flag        

Oh my goodness, Obama just lost the Italian vote.

298   Peter P   ignore (0)   2008 Apr 24, 10:11am     ↓ dislike (0)   quote   flag        

We had three days of overnight frost here in Boise last weekend - the end of April - and it is feared the cherry and apricot crops are ruined.

Frost? Must be "global warming."

In a few years, they will be talking about Ice Age again. I can already visualize them propagandizing with photographs of polar bears freezing to death on newly-created ice sheets.

299   B.A.C.A.H.   ignore (0)   2008 Apr 24, 10:57am     ↓ dislike (0)   quote   flag        

Dennis, were you serious on your suggestion about repossession tranches?

Local government around here is strapped, and it got itself addicted to the inflated assessments of recent years.

Do the tranches pay property taxes on the foreclosed houses? If the owners of the tranches don't pay it, then how does the government get the money? Does the government take the house away from the tranch and then auction it?

300   B.A.C.A.H.   ignore (0)   2008 Apr 24, 11:02am     ↓ dislike (0)   quote   flag        


This week a local news station reported millions of dollars worth of crops were ruined in the wine country because of the April frost there.

301   Peter P   ignore (0)   2008 Apr 24, 11:04am     ↓ dislike (0)   quote   flag        

Dennis, your idea makes a lot of sense. I like it. :)

(Unfortunately, it makes too much sense because it forces people to face reality. Moreover, many home-"owners" cannot even afford Z-grade housing and they rightfully belong to the jealous bitter renters group.)

302   Brand165   ignore (0)   2008 Apr 24, 1:49pm     ↓ dislike (0)   quote   flag        

Dennis, what will you do with the A-tranches? Assumedly that housing is too expensive for everyone who got foreclosed. Now we've just concentrated all the loss in a few single big assets which might have a very small addressable market.

On the other hand, maybe it's easier to sell just a few big properties when the market comes back, instead of a vast and motley distribution of REO.

303   DennisN   ignore (1)   2008 Apr 24, 6:07pm     ↓ dislike (0)   quote   flag        

Yes that's the point - it would be better to have relatively few expensive places as REO or GORE than be stuck with all of those units. I'm just proposing an orderly "push down" for the majority of those houses.

I don't think anyone has really gotten their head wrapped around the concept of hundreds of thousands of REO and GORE sitting empty and decaying from vandalism and lack of maintenance.

304   Randy H   ignore (0)   2008 Apr 24, 10:40pm     ↓ dislike (0)   quote   flag        

From a strictly financial perspective such a cram-down plan is sound. Unfortunately it is impossible due to primarily legal reasons.

* There is no uniform foreclosure regime. That falls squarely under states-rights, and some states themselves delegate to the counties/cities/parishes.

* The Fed gov't probably cannot assume rights over foreclosures without a constitutional amendment. Especially given the current Supreme Court.

* Even on a local basis, it is questionable whether any government or private body would have the right/ability to enforce such a plan. I'm not worrying about the voluntary participant of the distressed homeowner, but instead of disagreeing third parties. For example, reinsurers, recourse debt holders, politically motivated advocacy groups...

And then I ask the most basic question of all: why not just let the market work? I realize there will be a lot of vacant houses. But the market is the best allocator of resource. Most of those empty houses *will* be recycled in one way or another at a price. If houses got overbuilt in shitty areas, then that price might be low enough that a landfill company buys them, knocks them down, and opens a landfill. Most of the others will just end up with a new set of owners.

Yes, there will be collateral damage. Old granny who's lived in the neighborhood for 40 years, paid off her home, and did nothing wrong. Now the 60% outburban sprawl constructed in the past 6 years sits empty and crack dealers rule her neighborhood. Well, life sucks. Granny should stop listening to the AARP and pay attention to whom she blesses with her vote. Granny should move, and tell her grandbabies stories about how terribly the Great Housing Bubble destroyed the hopes and dreams of an entire generation. Maybe then the bubble-culture will be lessened, instead of just covered up by yet another well laid plan.

305   DennisN   ignore (1)   2008 Apr 24, 11:27pm     ↓ dislike (0)   quote   flag        

Well the Constitutional issue is an interesting one. Art. I Sec. 8 reads in pertinent part "The Congress shall have the Power ... To establish ... uniform Laws on the subject of Bankruptcies throughout the United States." It would appear plausible that foreclosures are part of the "subject of Bankruptcies" although I haven't researched any case law (if any) on this issue.

306   Duke   ignore (0)   2008 Apr 24, 11:58pm     ↓ dislike (0)   quote   flag        

I think we are going a little far on the notion of the magnitude of vacancies and vandalism. Some areas are very hard hit. Older areas with poor job prospects. I have heard some amazingly bad stories in Ohio and Michigan. But mostly people begin to pick off properties once it makes sense to be a landlord, and eventually vulture firms will buy up large numbers of places if they are rentable/recoverable/convertable.
I still see the most probable outcome is that the government will outright buy as many of the mortgages that investors are willing to finally give up as a large loss (70 cents on the dollar?more?) then they can do whatever they like for workouts and cramdowns because they will own the paper.
In the end the taxpayer will foot a pretty large bill and, for a while, there will be large feelings of inequity.
Distracting us from that complaint will be complaints of the inflation we created to soften and slow the credit crunch. Looking for a scapegoat for inflation we will blame Big Oil (the market has already punished the financial sector).
I am more and more of the opinion this can take 7 or more years to work out, in which time (on average) most people will have sold their homes and moved - further distancing the feelings of inequity on the cram-downs.

I hold a pretty dim view of the potential for real reform until we change the way we elect our leaders. Popularity contests amongst the sound-bite crowd willing to have their personal lives scoured by the media is not a recipe for good leadership.

307   SP   ignore (0)   2008 Apr 25, 12:29am     ↓ dislike (0)   quote   flag        

Duke Says:
I am more and more of the opinion this can take 7 or more years to work out

After my post yesterday (8:05 AM), I did a little more digging through the numbers for new-home-sales.

Operating on the theory that the peak-to-trough fall in this metric is roughly indicative of the length of the recession in months, my back-of-envelope calcs show that the official recession itself would last about 9 quarters this time!

Instead of using raw sales numbers, if I used percentage drop from peak (the % drop looks a little less severe because the peak was so high), it still pencils out at about 5 quarters - which is roughly what the 1982 recession was.

Again, this was just for kicks - I could point out a few flaws in this myself, so don't take it as a reliable prediction.

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