patrick.net

It seems like the only time Bush makes the right choice is when he chooses not to make a choice.

I heard yesterday evening on this, that, or the other news-radio feed that he was already caving. Something about Bush signaled his willingness to endorse a bailout plan so long as it didn't expand the role of government in the banking sector. All he cares about is his benefactors don't get upset. He could give a shit about the people, whether be they the homedebtor FBs or the prudentrenter FSs. (Did I coin a new abbreviation? If so I propose FS, which is what many of us are likely to become if there's a giant bailout funded on the backs of our savings and larger tax burden).

SBRenter,

Like a lot of us with ties to the P.I (Peoples Republic of the Philippines) Hawaii always "seems" like such a great compromise (but never quite works out?) If you're up to sharing I'd love to hear what went wrong and why? What bubble-nomics from HI can you bring us?

It is fine to bailout the banks and the rich people. Let's hope that regular folks don't get let off the hook easily.

Randy H,

I hadn't heard that and I can't imagine where any Pres. would even begin to start with a bail-out on this scale? Oh, btw I believe FS was already designated as "Frustrated SELLER"? Or PILO (priced-in loanowner).

Peter P,

Yes, let's hope. :)

I just read Gross's commentary. Apparently the government has not yet done enough to "encourage" homeownership. Now with the purchase of a home you will get your very own "Greenspan put."

Pretty soon they will start rounding up renters and sending them to Guantanamo for forced re-education. Renters will be strapped to chairs and forced to watch videos of Leslie Appleton Young and David Lereah until they sign up for neg-am NINJA loans on at least 3 Pulte desert homes or Vegas condos.

Now with the purchase of a home you will get your very own “Greenspan put.”

Did you mean Bernanke Put?

I don't know why FBs can even be seen as victims deserving of help, even if they were preys to predatory lenders. This is just a simple case of Social Darwinism.

Did you mean Bernanke Put?

I was using the term "Greenspan put" generically. Technically, I guess it would be a "Bush Put" if Bush were to adopt Gross's recommendations.

I don’t know why FBs can even be seen as victims deserving of help, even if they were preys to predatory lenders. This is just a simple case of Social Darwinism.

In those cases where individuals were truly prey to fraudulent, predatory lenders, then the predatory lenders should be the ones financing the FB bailout, not us "prudentrenter FSs" (thanks, Randy).

In those cases where individuals were truly prey to fraudulent, predatory lenders, then the predatory lenders should be the ones financing the FB bailout, not us “prudentrenter FSs” (thanks, Randy).

You can't get blood from stone. Those lenders are already getting wiped out.

Regarding the safety of money markets (or possible lack thereof), here is an interview with a money market manager for Vanguard...I found it somewhat interesting...

https://flagship.vanguard.com/VGApp/hnw/VanguardViewsArticlePublic?ArticleJSP=/freshness/News_and_Views/news_ALL_mmtreas_08212007_ALL.jsp

*Note, I don't really believe it will come to all this, but to conjecture*

If it all does go down in the worst possible way for PrudentRenter FS's, then we are exactly like the GoldBug holding physical bullion in his bomb shelter: Congratulations, you were right. While you were digging and hoarding your stores everyone else was tripping the life fantastic. But when it all comes down, it's your door they kick in.

@Glen,

True, but my main point was it should not be *us* forced to bailout the reckless and greedy. Which may happen anyway, as Randy pointed out, because the habitually reckless and greedy vastly outnumber us and frighten politicians terribly.

OT, but I just had a lunchtime chat with one of the parking attendants at a hotel near my work, and found out he has a 2004-purchased property in Victorville he is having some trouble selling. Why Victorville (we both work in Pasadena)? Because it was an "investment" property and was relatively "cheap" ($245k 2 Bdm). Why the need to sell now? Because the recently evicted tenants trashed it and it's now vacant and bleeding cash (and I suspect he's also facing an option-ARM reset, though he didn't say). Unfortunately, it looks like the willing-and-able buyer real market value has now fallen below what he owes on the place.

And so the beat goes on...

If a bailout to keep FBers off the street were to happen, here's how I'd like it go go down :

1) FBer applies for foreclosure exemption. Not blanked foreclosure halting, etc.

2) Gov pays the bank 85% of the principle on the loan. They were gonna lose 15% on foreclosure anyway. And giving them 100% is a moral hazard. Say it's a 500k loan, the bank gets 425k

3) Seconds on the house get a whopping 20% on their value and are told to take a hike. For simplicity, we'll pretend they didn't have one.

3) Gov gives FB a "Bailout" mortgage, in which they have a 30yr fixed on 50% of the original principle (not the 85%, the full principle) at 6%. So 250k at 6%. They place a lein against the property for the other 50% of the principle.

4) If the seller ever sells the house, or moves out (it cannot be rented) or buys another house, without paying off the bailout mortgage, the Gov takes 100% of the proceeds to repay the taxpayers. If they have a 250k mortgage, sell the house for 400k 10 years later without paying it off, they get nothing, taxpayers get 400k right into the deficit (or hopefully, the national debt)

5) If the seller pays off the entire Bailout Mortgage, they can then aquire the real rights to the house by paying the government the other 50% of the original loan amount. (Another 250k) They can do this by taking a mortgage. Or they can sell the house, and pocket whatever is left over after paying the gov 250k. Or they can pay the gov "interest only" payments at 6% until they eventually sell the house.

6) The FB can get rid of the other lein and make his bailout mortgage a regular one if he can pay the lein off in cash without having a non-mortgage debt larger than 5% of the lein.

The outer edges of The Fortress are starting to crack:

http://www.redfin.com/stingray/do/printable-listing?listing-id=997443

"Bank owned fixer" Sold for $726k 5 months ago, now $139k off. Has been on the market for a few weeks, too.

Some guy is trying to sell the same sized house on the same street a block down for $950k. I am sure his is in better shape, but is it really worth 60% more?

This is Rockridge, probably the best neighborhood in Oakland.

Jimbo,

B-O-F. BOFF??

sfbubblebuyer,

Nice, well thought out plan.

But that plan contains the evil of allowing the FBs to keep houses, thus preventing those houses from hitting the market at a future reduced price.

If house prices do not free fall to what people can actually afford, we will see rents rise and people will develop coping mechanisms such as families doubling up to share a house, SFH converts to duplexes, etc.

I know Patrick writes that rents are based on actual salaries, but I am seeing rents rise noticeably. They are consuming a bigger portion of that "limiting" salary.

sfbubblebuyer

You are forgetting one very important factor in processes like you're describing:

The further away from the initiating event, the less likely full compliance will be required. This is true of all government programs where a repayment burden of some sort is placed upon the recipient. The government would have to, from time-to-time, renew the program by closing loopholes that open, increasing penalties for fraud or default that become profitable due to inflation over time, and simply to remind owners that what they did 20 years ago still counts.

But those recalibrations seldom happen, or happen poorly, due to Realpolitik. Basically, you're telling the government that in 2027 they'll have to publicly and visibly strengthen the obligation and enforcement of this, by that time, hated and broadly considered unfair program. 20 years is a loooong time in politics. By then, the children of the FB will be the ones mostly affected -- at least in their own perception -- and they'll cry about how unfair the requirements are with the same vigor we all yell about Prop 13 today. They'll say it was just a way for us greedy (by then) multiple property home owners to steal from their poor, hardworking parents who raised them by holding down 3 jobs...

The fact that we were renting at the time and paid for the damned bailout won't matter one iota.

There, that's my doom & gloom for the day.

The only other bailout I can think of involves 'out back behind the barn' and would involve a rapid run-up in shotgun ammunition.

:D

But you're right. Any teeth in the program would get yanked as soon as any 'prosperity' was seen.

Even burning the IE to the ground wouldn't help as the taxpayers would have to bail out the insurance companies.

I think that the "bailout" will happen. I don't have any doubts about it. Zilch. And I am also sure that the Fed will cut rates even though it may not help.

The timing of Fed cut is not sure, and the exact nature of the bailout is the only question. Both are related. I think first a Fed cut will be attempted.

Who will be bailed out ? And how ? There are so many different possibilities. But I think - no matter what bailout will be attempted - it will be bad for the US$. Whether it's via Fed cutting rates, IRS not taxing people for the forgiven loan or whatever.

We should oppose the bailout, fight the battle as much as we can but nevertheless prepare for a weak US$. There are many ways to invest money accordingly. I am using commodity stocks, global bond funds and international stocks. Eventually, I will enter into a long term fixed rate mortgage when the time is right for me.

No matter how much the bail, the boat is going down, though. I mean, look at the prices vs. wages. We'd need WAGE inflation to actually keep prices up there. That's the only thing that can 'save the housing prices' and we'd still see a decrease in inflation adjusted prices in homes. Everything else would rocket up, though.

"Everything else would rocket up, though."

If your theory is true, than being a saver may have been stupid and niave after all.............

Depends on where you save. Cash would suck, but commodities/stocks/PMs/etc would be okay....

The worst thing for savers is monetary inflation during credit deflation, which is what I'm REALLY worried about.

Credit gets harder and harder to get, but they print money like crazy! So, consumables rocket up, and commodities stay flat.

I have an odd question.

If something like a third of our population own their homes free of debt, and a fair number are renters and, among those who have debt, a considerable number bought at a decent price and on reasonable terms, where is the constituency for a bailout of the remainder, the FBs?

Bruce,
The constituency is corporate America. The overarching concern is that without a bailout, the economy will spin into recession, consumer spending will dry up, company earnings will take a hit, and most importantly (for the proponents of the bailout in Washington), Wall Street will suffer - the banking industry, HF's, mortgage industry, bond market, stock market, etc. etc.

(“praise Allah…
them people down south.”

And lets give a shout-out to Applewhite and his Heaven’s Gate cult as well……

(With honorable mention going out to the People’s Temple…of course)

What in heavens name are you talking about?)

Just wanted to take a moment and acknowledge all the religous freaks nationwide........no need to give the southerners special treatment....

Skibum,

I know it was a leading question. All the entities you mention are concerned, I agree. All have carved out a synthetic reality (consumers included) for themselves - they form a sort of periodic chart of malinvestment.

Is recession so bad compared to the present trajectory? Seems we could use a little adult supervision.

Bruce,

I like the term "periodic chart of malinvestment" - nice one.

Your question about recession is also a leading one! ;)

Of course, for the reasonable, recession is a good thing - it lets us clean out the dead wood. But those controlling the politicos in Washington are deathly scared of losing their mega profits and mega bonuses.

Did you see the bloomberg.com piece on how Wall Street is worried they may actually have a drop, if not complete evaporation of bonuses this year? The HORROR! And just think what that might do to the lofty Manhattan RE market, not to mention the RE market in the Hamptons, on Cape Cod, etc....

Here's that article, if you care:

http://www.bloomberg.com/apps/news?pid=20601109&sid=a2kyW8bmxMd8&refer=exclusive

If there is a bailout, here is how I would like it to go:

1. Fill out form FB-2185. Be sure to include schedule FB-A19 and FB-C34 (but only if you meet the qualifying rules).
2. Check with an attorney or qualified FB assistant to see if you meet the test as a "Qualified Domestically Challenged FB" (QDCFB). If so, attach schedules A through R.
3. Include your SS#, DOB, amount of your last political contribution, names and addresses of all your lenders, a personal balance sheet (audited), contact information for 5 character references, and at least 3 affidavits attesting to your stupidity and naivete.
4. Mail form FB-2185 to Orem, Utah and allow 6-12 months for processing.
5. A package will be sent back to you with forms FB-1632 through FB-1691. Complete and mail the forms......

@skibum,

Thanks for that Bloomberg link. I think I'm going to be sick.

No bonuses this year for Wall Street paper-pushers?? Man the bailout pumps --call Bernanke and tell him to drop rates back to 1%! Turn those machines back on.... TURN THOSE MACHINES BACK ON!!...

Skibum,

Thanks for Bberg. Ack.

I notice traders involved in distressed debt are expecting to do well.

Just wanted to take a moment and acknowledge all the religous freaks nationwide……..no need to give the southerners special treatment….

..but of course you're not referring to me because of the handle I go by; right?

people like to blame the republicans, but its really these faux democrats who are to blame. Wall st. + Hollywood + Silicon Valley.

Hey, I never implied the blame lay with the Republicans. I have no love for either party these days. The point was that Wall Street realizes they may not get a whomping bonus this year, and they start crying. How about the fact that their reckless investment practices have led to a major financial crisis? Or that many HFs are flat to negative for the year? Why do they even think they deserve a bonus? They should feel lucky the HF they work for hasn't folded yet and that they still have a job.

Tainted fish, tainted pet food, tainted toothpaste, tainted toys, baby bibs, etc.

But from what I'm reading, they've gotten tainted CDO's or whatever you call those things, tainted investments, tainted debt.

Sounds like an even exchange to me.

Bill Gross from PIMCO is advocating government sponsored bailout of distressed homeowners:

Where’s Waldo? Where’s W?

http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2007/IO+September+2007.htm

The ultimate solution, it seems to me, must not emanate from the bowels of Fed headquarters on Constitution Avenue, but from the West Wing of 1600 Pennsylvania Avenue. Fiscal, not monetary policy should be the preferred remedy, one scaling Rooseveltian proportions emblematic of the RFC, or perhaps to be more current, the RTC in the early 1990s when the government absorbed the bad debts of the failing savings and loan industry. Why is it possible to rescue corrupt S&L buccaneers in the early 1990s and provide guidance to levered Wall Street investment bankers during the 1998 LTCM crisis, yet throw 2,000,000 homeowners to the wolves in 2007? If we can bail out Chrysler, why can’t we support the American homeowner? The time has come to acknowledge that there are precedents aplenty in the long and even recent history of American policy making. This rescue, which admittedly might bail out speculators who deserve much worse, would support millions of hard working Americans whose recent hours have become ones of frantic desperation. And for those who would still have them eat some Wall Street cake as opposed to Midwest meat & potatoes (The Wall Street Journal editorial page suggested they should get darn good and used to renting once again) look at it this way: your stocks and risk-oriented levered investments will spring to life like the wild flowers in Death Valley after a flash flood. And if you’re a Republican office holder, you’d win a new constituency of voters – “almost homeless homeowners” – for generations to come. Get with it Mr. President and Mr. Treasury Secretary. This is your moment to one-up Barney Frank and the Democrats. Reestablish not the RFC or the RTC, but create an RMC – Reconstruction Mortgage Corporation. If not, make some modifications in the existing FHA program, long discarded as ineffective. Write some checks, bail ‘em out, prevent a destructive housing deflation that Ben Bernanke is unable to do. After all “W”, you’re “the Decider,” aren’t you?

>> a lot of it has to do with the fact that our universities have been gutted.

Please read:

The Price of Admission: How America's Ruling Class Buys Its Way into Elite Colleges -- and Who Gets Left Outside the Gates

From The Washington Post's Book World/washingtonpost.com
The frenzy surrounding college admissions has spawned a vast and profitable industry. Especially among affluent families, the hiring of private tutors to prepare for the SAT, coaches to nurture athletic skills, and college consultants to help prepare the right application portfolio have become familiar features of adolescence. Of late, the pressure on Junior to get on the track to Harvard has been pushed to ever-younger ages. In large cities, it is not uncommon for parents to hire counselors to coach their toddlers for the interview for admission to pre-school. In a bizarre foreshadowing of what is to come later, some pre-schools now proudly offer early decision programs for 2-year-olds. And just when it seemed that all the possibilities for satire had been exhausted, parents began to push for enrollment in the best play groups for 6-month-olds.
Stepping into this cauldron of anxiety about admission to elite colleges is Daniel Golden, a Wall Street Journal reporter who won a Pulitzer Prize in 2004 for a series of articles on the inner workings of college admissions offices. In his provocative and stimulating book, The Price of Admission, Golden makes a powerful case that the number of well-to-do whites given preference to highly selective colleges dwarfs that of minorities benefiting from affirmative action. He follows this central theme in a wide-ranging series of case studies of systematic preference for the wealthy, the privileged and the famous, as well as legacies, faculty children and -- most innovatively -- athletes in such patrician sports as rowing, horseback riding, fencing and even polo. A tough investigative reporter, Golden does not hesitate to name names -- not only of specific institutions (including Harvard, Duke, Brown, Notre Dame, the University of Virginia, Princeton, Stanford and Amherst) and administrators, but also of individual students (including the sons of Al Gore and Sen. Bill Frist) whom he deems to be beneficiaries of preferences for the privileged. The result is a disturbing exposé of the influence that wealth and power still exert on admission to the nation's most prestigious universities.

That virtually all elite private colleges give preference to the sons and daughters of alumni will come as a surprise to no one. But preference also extends to wealthy applicants whose families have been identified as potential donors -- "development cases" in the parlance of the trade. Golden documents that even Harvard, with its $25.9 billion endowment, is not above giving preference to the scions of the super-rich. His primary example, however, of development cases being central to the admissions process is Duke, where the university embarked on a systematic strategy of raising its endowment by seeking out wealthy applicants. Golden estimates that Duke admitted 100 development applicants each year in the late 1990s who otherwise would have been rejected. Though this may be something of an extreme case, special consideration for applicants flagged by the development office is standard practice at elite colleges and universities.

Also enjoying substantial preference at elite colleges, both public and private, are varsity athletes. In a fascinating case study of women's sports at the University of Virginia, Golden shows how the effort to comply with Title IX, a gender equity law that has the praiseworthy goal of ensuring equality between female and male athletes, has had the unintended effect of giving an admissions edge to female athletes who play upper-class sports. Between 1992 and 2002, the number of college women nationwide in rowing, a sport highly concentrated in private schools and affluent suburbs, rose from 1,555 to 6,690; more recently, the number of female varsity horseback riders increased from 633 to 1,175 between 1998 and 2002. The net effect of the rise of these overwhelmingly patrician sports, Golden argues, has been to further advantage already advantaged women.

After spending most of the book roundly criticizing the admissions practices of many of the nation's most prestigious colleges, Golden turns to what he considers a model institution: The California Institute of Technology. Unlike other leading colleges, Caltech does not allow the prerogatives of privilege -- whether wealth, fame or legacy status -- to affect who gets in. In stark contrast to other top institutions, Caltech believes that it is possible to raise the funds necessary to maintain a great university without using admission as a bribe, and its own distinguished history supports that belief.

But the Caltech admissions policy, though exemplary in its integrity, is not without problems. In no small part because of its narrowly conventional definition of merit (primarily scores on standardized tests, grades and rank in class), it has been notoriously unsuccessful in enrolling African Americans; in 2004, just one out of 207 Caltech freshmen was black (for purposes of comparison, the black proportions of the undergraduate student body at MIT, Stanford and Harvard -- all of which use a more flexible definition of merit -- were 6, 10 and 8 percent, respectively).

A recent study by the Century Foundation estimated that only 3 percent of freshmen at highly selective colleges came from the bottom socioeconomic quartile, compared to 74 percent from the top quartile. Growing awareness of this shocking disparity has led a number of leading private colleges and universities, including Amherst, Harvard and Princeton, to take measures to increase the number of low-income students. But Golden is surprisingly ambivalent about these efforts, fearing (perhaps justifiably) that the admission of more poor and working-class students will be accompanied not by a reduction of preference for the rich, but by a decline in the number of middle-class students. The Caltech model that he finds so appealing is utterly inadequate to address the problem. Given the magnitude of class disparities in educational achievement, only affirmative action for the disadvantaged -- what former Princeton president William Bowen has called a "thumb on the scale" for low-income students -- promises to produce significant results.

The Price of Admission estimates that the end of affirmative action for the privileged would open up roughly 25 percent of the places in the freshman class at elite colleges and, in so doing, free up spaces for aspiring students of modest origins. Based on my own research, I would estimate a figure of 10 to 15 percent -- still a considerable number. But the main beneficiaries of such a shift -- absent a more profound change in the prevailing definition of merit -- would not be the socioeconomically disadvantaged, but rather the children of the upper-middle class.

In his final chapter, Golden issues a series of sensible and hard-hitting recommendations -- among them, ending legacy preference (already a fait accompli at Oxford and Cambridge universities in supposedly class-bound Britain), abolishing preference for athletes in upper-crust sports and for faculty children, and developing conflict-of-interest policies for the staff of the admissions offices. Equally important is his suggestion that a firewall be constructed between the admissions office and the development office -- a change of no small moment in institutions where the link between the two now looks more like an autobahn. But if the past is any guide, change is unlikely to come from within and will await a social movement with the strength and clarity of purpose to demand that our colleges and universities, at long last, live up to their professed ideals.

Reviewed by Jerome Karabel
Copyright 2006, The Washington Post. All Rights Reserved.

That's an interesting article.

And that kinda thing's been going on for a long time.

It's probably why most of the really important disruptive innovations continue to come from the un-elite in our society.