End the Crisis Soon

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EnlightenMe
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End the Crisis Soon

Post by EnlightenMe »

I'm posting an idea here to get some feedback. [political comment removed] What do you think?



How to Easily and Quickly Put an End to the Financial Crisis.

It seems quite simple to me. If we can agree that falling house prices are the problem, we need to do something about falling house prices.

My idea is to use free market capitalism to solve the problem. Very simply, make residential property ownership a better investment. It is more fair and simpler than some of the ideas I have heard about such as renegotiating contracts that went sour.

There a numerous ways to do this, some ideas are:

1) If an investor buys a foreclosed house, he will be exempt from Capital Gains on that property.
2) Increase the interest deduction (maybe double) for anyone who makes all of the payments over a several month period.
3) Allow investors a faster depreciation schedule.
4) Allow increased write-offs for owners or investors to buy a property.
5) Allow withdrawals from deferred accounts to buy residential real estate.
6) I’m sure you can come up with some of your own…………

The ideas seem endless, they can be targeted toward foreclosures, means tested, whatever one desires. The bottom line is to make residential property a better investment and the money will flow toward it. Prices will stop falling. Financial Asset prices will increase. The problem is nearly solved.

Sure it will cost some tax revenue but it beats the heck out of the Treasury/Fed throwing endless money at the banks.
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White Coat Investor
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Post by White Coat Investor »

You solve one problem but you inadvertently make housing more expensive. For those of us wanting to get a first house or a bigger house, you're screwing us over in favor of the baby boomers trying to use their overpriced house as an ATM.

I don't think the goal should be to maintain either housing values or stock prices. Keep credit reasonable available to credit-worthy people and businesses and let the chips fall where they may.

In the future, break up financial institutions before they get too big to fail; then, let them fail when they screw up.

As for now, keep the credit markets open. Even those toxic mortgage-backed securities are worth something. Make them transparent and people can make a reasonable bid for them. Sure, a lot of people will lose money, but that's how the markets work.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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mas
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Re: End the Crisis Soon

Post by mas »

EnlightenMe wrote:If we can agree that falling house prices are the problem, we need to do something about falling house prices.
Keeping house prices artificially high can not go on forever. We need housing prices to establish a new equilibrium (where they are actually affordable to people without relying on tricks), but it may very well be below the current prices - and it is definitely below the prices from 2 yrs ago.
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EnlightenMe
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Post by EnlightenMe »

Good points. I agree with both of you in many ways.

My point is that if the housing crisis is going to cause a depression it would be much cheaper and more fair overall to modify some tax laws and prop up housing as an investment rather than spending trillions of dollars on a gamble that those that caused the problem will somehow get us out of it. What if it doesn't work?

Make real estate a good stable investment with a reasonable expected return and many will invest money into it. Owning some rental property is not an anti-American activity. You could do it too. It would have a lower standard deviation than the stock market.

We do need to soak up the surplus inventory, I think most would agree with that.
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White Coat Investor
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Post by White Coat Investor »

EnlightenMe wrote:Good points. I agree with you in many ways.

My point is that if the housing crisis is going to cause a depression it would be much cheaper and more fair overall to modify some tax laws and prop up housing as an investment rather than spending trillions of dollars on a gamble that those that caused the problem will somehow get us out of it. What if it doesn't work?

Make real estate a good stable investment with a reasonable expected return and many will invest money into it. Owning some rental property is not an anti-American activity. You could do it too. It would have a lower standard deviation than the stock market.

We do need to soak up the surplus invesntory, I think most would agree with that.
The way to soak up the surplus inventory and make real estate a good investment with a reasonable expected return is to drop the price. Then the money will flow in and prices will stabilize. Propping up prices artificially will only delay the inevitable.

Helping people who can actually afford the home they're in renegotiate a fair mortgage is one thing, propping up housing prices is completely different.

Doesn't matter what I write anyway. Your last post referenced the bailout so the thread will soon be locked I'm sure.
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mas
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Post by mas »

The best way to make housing a good investment is to make its value cheaper. Would you rather invest in stocks when their P/E is 50 or 5? The same is true with houses, choose whatever metric you desire - the lower the prices, the higher the future returns will be.

You want the free market to fix the problem, but all that requires is time. Prices must drop to the level where housing IS a good investment, and investors will flock to it.
rich
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Re: End the Crisis Soon

Post by rich »

[political remarks removed]
Best regards, | Rich
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EnlightenMe
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Post by EnlightenMe »

Again, I agree. Prices should be always be allowed to adjust without intervention.

In this case however, we've been told that this problem will result in a depression unless action is taken. We have witnessed signs of it.

I think my plan is better than the current plan. Investment values are tied to tax policy. Change the tax policy and the value changes.

It's better than running the printing press at full speed and spending money that isn't really there.
Last edited by EnlightenMe on Mon Oct 20, 2008 9:54 pm, edited 1 time in total.
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stratton
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Post by stratton »

EmergDoc wrote:The way to soak up the surplus inventory and make real estate a good investment with a reasonable expected return is to drop the price. Then the money will flow in and prices will stabilize. Propping up prices artificially will only delay the inevitable.
Some people have heard you.

All the sales are in the lowest price range.

From Calculated Risk:

DataQuick: SoCal home sales up, 50% of Sales from Foreclosures
Southern California home sales shot up by an unprecedented 65 percent last month from the dismal, record lows of a year ago, when a credit crunch slammed the brakes on home financing. September sales also posted a rare gain over August as price cuts lured more buyers. Foreclosure resales rose to half of all transactions.
...
DataQuick shows median house prices have fallen significantly in SoCal, but these median prices are distorted by the mix of houses sold.
Paul
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EnlightenMe
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Post by EnlightenMe »

When I read your link, it sounds a lot more dire in SoCal than I thought it would. Foreclosure sales are way up, that is not a good thing for any market.

Anyway, I'm kind of surprised at the responses. I don't think prices in any market should be supported by the government but it's pretty clear to me that stock prices have been supported for a year now. Wall Street cheers every time the Fed/Congress/Treasury comes to the rescue, except maybe lately. Didn't they just do it again today with the promise of another $300 billion of stimulus?

I'm not for supporting house prices forever but I'm a lot less for supporting the companies that got us into this mess. I thought supporting house prices for a limited period might be good policy, seems like I'm alone on that.
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Dynastar
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Post by Dynastar »

EnlightenMe wrote: Anyway, I'm kind of surprised at the responses. I don't think prices in any market should be supported by the government but it's pretty clear to me that stock prices have been supported for a year now. Wall Street chears every time the Fed/Congress/Treasury comes to the rescue, except maybe lately. Didn't they just do it again today with the promise of another $300 billion of stimulus?

I'm not for supporting house prices forever but I'm a lot less for supporting the companies that got us into this mess. I thought supporting house prices for a limited period might be good policy, seems like I'm alone on that.
The problem with "not supporting house prices forever" is once the benefit is in place it is very hard to remove- take the mortgage interest deduction for instance. Fundamentally until people can afford to buy a house the market will be out of whack, and propping up the prices will only hurt normal Americans who won't be able to buy now that crazy loans are no longer available.

I think as long as the Govt prevents a total financial system meltdown, and the capital-injection plan is a good step towards that, we will "just" have a serious recession. It won't be pretty, but the institutional memory that it will create will help us prevent future collapses, at least for a generation or two. :?
bluto
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Post by bluto »

We already have policies that favor home ownership. Deductible interest, Fannie and Freddie pushing rates down, etc. This helped cause the current mess.

So let's use more policy to fix the problem that was partially created by government.

I'm having a flashback... I'm sure I heard Ronald Regan preaching about this before... more government on the backs of people to fix problems created by too much government...

So where is the line between too much and not enough. I don't know.

Goodbye bailout thread.
phejjeff
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Post by phejjeff »

Interest payments have more or less always been deductible:

http://www.taxfoundation.org/blog/show/1382.html

But then again, the interest deduction is an upper-middle class tax deduction:

http://www.taxfoundation.org/publicatio ... /1341.html

This financial crisis will go away when capital is properly reallocated into sustainable investments. Unfortunately, the housing market will take a beating because the U.S. overbuilt. But, Freddie Mac and Fannie Mae will then complete their government mandate: housing will be cheaper for everybody.
bluto wrote:We already have policies that favor home ownership. Deductible interest, Fannie and Freddie pushing rates down, etc. This helped cause the current mess.

So let's use more policy to fix the problem that was partially created by government.

I'm having a flashback... I'm sure I heard Ronald Regan preaching about this before... more government on the backs of people to fix problems created by too much government...

So where is the line between too much and not enough. I don't know.

Goodbye bailout thread.
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EnlightenMe
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Post by EnlightenMe »

A few last comments:

First, this idea would involve private capital (real estate investors) solving the problem, not public funds.

Second, there is a lot of money in money market accounts making a low return as an example. It is possible that by relaxing some rules on withdrawals and making real estate investment more promising, that money could flow into the market in addition to other capital.

Third, the goal would not be to reinflate the housing market. The goal would be to stabilze prices at current levels, nothing more. Eventually inflation will catch up and the market will again function. The plan could be a 5 to 10 year plan, maybe even less.

Fourth, real estate investing is a calculation. It might only take some minor changes (possibly taxing rental income at the capital tax rate) to get money to flow in. This doesn't necessarily need to be a major tax overhaul. I'm not an expert, there are those in real estate that could help decide what the minimum thresholds are to make the plan work.

Lastly, it could stop the housing price slide almost immediately. Once investors know the bottom is in, I believe prices will stabilze quickly. That happens in the stock market all the time. There are investors out there right now sifting through the ashes buying up deals. Once the surplus inventory is off the market, the market will go back to functioning normally.

It seems to be a win-win solution. Nobody, except those looking to buy at firesale prices, gets hurt. Let private capital investors make some money and fix the problem at the same time.
Last edited by EnlightenMe on Mon Oct 20, 2008 11:46 pm, edited 1 time in total.
moneyman11
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Post by moneyman11 »

As someone who purchased a house priced at what I could afford, with a fixed mortgage payment that I could afford, I'm actually quite pleased with the decline in housing prices.

My property taxes are going down, and my homeowners insurance premiums are going down.

Also, I'm very happy that many young new homeowners are again able to afford homes using conventional, sane, mortgages that they qualify for, and the availability of these mortgages is limited in a way that ensures they can indeed afford them when they save up for them (at least 10% down).

I'm hopeful that if this trend continues, my children will be able to afford a home when they are grown, and have saved up for it.

My house is not an investment ... it is a home.
Last edited by moneyman11 on Mon Oct 20, 2008 11:49 pm, edited 1 time in total.
phejjeff
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Post by phejjeff »

These ideas simply prop up the price of real estate. It probably won't cause a bubble, but it certainly distorts pricing. Are current price levels the correct price level?

The Case Schiller housing index shows that house prices need to drop considerably to go back to their historical norms (this graph ends in 2006):

http://jluscher.googlepages.com/Housing ... m-full.jpg

Have housing prices dropped by about 30-50% yet?
EnlightenMe wrote:A few last comments:

First, this idea would involve private capital (real estate investors) solving the problem, not public funds.

Second, there is a lot of money in money market accounts as an example. It is possible by relaxing some rules on withdrawals and making real estate investment more promising, that money could flow into the market in addition to other capital.

Third, the goal would not be to reinflate the housing market. The goal would be to stabilze prices at current levels, nothing more. Eventually inflation will catch up and the market will again function. The plan could be a 5 to 10 year plan, maybe even less.

Fourth, real estate investing is a calculation. It might only take some minor changes such as taxing rental income at the capital tax rate, to get money to flow in. This doesn't necessarily need to be a major tax overhaul. I'm not an expert, but there are those who would know where the thresholds are to bring in the money.

Lastly, it could stop the housing price slide almost immediately. Once investors know the bottom is in prices, I believe prices will stabilze quickly. That happens in the stock market all the time. There are investors out there sifting through the ashes buying up deals. Once the surplus inventory is off the market, the market will go back to functioning normally.
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EnlightenMe
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Post by EnlightenMe »

Moneyman, I hear you. I'm looking to solve a serious problem, none of the solutions are nice.

I wonder, do you want the stock market to fall another 50% so your kids can buy stocks for their retirements at low prices also. Isn't it the same thing? I don't think any of us should ever want any price to soar or to crash.
retired at 48
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end (housing) crisis

Post by retired at 48 »

I'd like to come at this from a different perspective, and propose a solution to stabilize housing prices.

First , the whereas.

From my GE Finance 101 training, the value of any product or service is determined as the highest of any of the following four values.

First, the use value. For houses, this refers to comparisons of a mortgage to rental costs, need for a home, tax advantages, children using home, etc.

The second value is exchange value...this refers to a market quote/price, what one is willing to exchange right now for your house, or a stock, or a ticket to an event. Exchange values are what is now falling.

The third is intrinsic value. An example is your children's photos have a great intrinsic value to you, but of little value to others. For example, my house I have lived in for forty years may have intrinsic value to me above market values.

Fourth, and very important to today, is cost value. This refers to the actual costs to manufacture a product. This is the sleeper value for houses... the cost a builder would have to pay to construct a house in your area. Insurance companies for example have such costs determined, even for older homes. Then compare market prices to these costs. Housing prices will likely revert to the mean someday and equal construction costs. They have to, or builders cannot compete.

Let's take Florida. With current strengthened building codes (heavy duty windows for hurricanes, etc) it is often stated a builder cannot build even a modest 3 bedroom home for less than $225,000. Thus, if that same home was purchased for $260,000, and in foreclosure for $175,000, expect its value to eventually go up to the construction cost figure, $225,000.

So here's the plan

Rather than billions to the banks/mortgage procurements, etc, the following should have been done, and can still be done. The federal government announces a foreclosed home buying program for every community. The feds will buy up a sampling of foreclosures at building costs minus 10%. Period. Laid off real estate people will handle the inventory. Such homes will be made available for immediate repurchase to anyone at that price, or above. People now occupying such homes will be given an option to rent. Building cost minus 10 percent thus becomes the floor.

The affect

Let's say you and you spouse want to buy a house now. Like most, with prices dropping, you wait...lurking. One day, your wife spots a house in foreclosure for $175,000 and you peak inside. Looks great. You decide to buy, and call the listing agent. But he/she says, sorry, the feds just bought it for $202,500 (cost - 10%), under the new buyout program.

You are dismayed. Wow, you say to each other, we better buy soon, and fast, if we want one of these foreclosed homes.

The result..A reasonable floor will be put on home prices, and buyers will come out of the woodwork, fast. Home prices will gravitate to building costs minus 10%, as a minimum. Builders will not be constructing new homes for awhile until the inventory iws worked off (as it should be.)

Mortgage people/banks etc can put a price on defaulted mortgages, etc. We are on our way.

Lastly, while we moralize this, how about the innocent, hard working person who has owned his home for a decade, and is now advised he loses his job, or accepts a transfer to another state. He accepts the transfer, and now has to sell his house. Jeez, three foreclosure homes on his very street, being priced by banks at extremely low prices to simply rid of the houses. What is he to do? Is this fair, this short term market phenomena? Does not creating an orderly market help this person, who played by the rules?

Get the foreclosures off the street. Attack the problem head on, government. I believe a case can be made.

Whew!

retired at 48
moneyman11
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Post by moneyman11 »

EnlightenMe wrote: I wonder, do you want the stock market to fall another 50% so your kids can buy stocks for their retirements at low prices also.
The stock market will do what the stock market will do.

When the prices of any asset become overvalued, it will "crash" ... until they reach the point where they become undervalued, and then they will recover.

It's a wonderful system really. And it works even better when you treat a home as a home, a purchase you save up to make when you can afford it, rather than an investment.
phejjeff
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Re: end (housing) crisis

Post by phejjeff »

Why is the cost value the most important component? In some areas, like in California, whole communities were built in an unattractive area. What do you do about those? Clearly, selling at a discount to cost to build wouldn't work---no one wants to live there.

A better solution is to prevent foreclosures in the first place. In the short term it may require renegotiation between the lender and the borrower about writing down the principal of the loan. If we do this, then we risk insolvency in the lender: the lender will need to write down the value of many loans. If we do this, then we risk moral hazard in the borrower. He effectively got compensation in this transaction, so this would either be taxed as income or if when he sells, he can only profit if he sells for more than the original principal.

The long term solution is that housing ought not be subsidized as much as it is today. If you survey other countries, a 30-year fixed loan is an anomaly. Some loans are 30 year loans in which the interest rate changes every decade. Some loans require a higher down payment. A 30 year treasury bond is one of the most volatile bonds out there because of interest rate risk.
retired at 48 wrote:From my GE Finance 101 training, the value of any product or service is determined as the highest of any of the following four values[: use value, exchange value, intrinsic value, cost value.]

.
.
.

The result..A reasonable floor will be put on home prices, and buyers will come out of the woodwork, fast. Home prices will gravitate to building costs minus 10%, as a minimum. Builders will not be constructing new homes for awhile until the inventory is worked off (as it should be.)

Mortgage people/banks etc can put a price on defaulted mortgages, etc. We are on our way.

Lastly, while we moralize this, how about the innocent, hard working person who has owned his home for a decade, and is now advised he loses his job, or accepts a transfer to another state. He accepts the transfer, and now has to sell his house. Jeez, three foreclosure homes on his very street, being priced by banks at extremely low prices to simply rid of the houses. What is he to do? Is this fair, this short term market phenomena? Does not creating an orderly market help this person, who played by the rules?

Get the foreclosures off the street. Attack the problem head on, government. I believe a case can be made.

Whew!

retired at 48
retired at 48
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Re: end (housing) crisis

Post by retired at 48 »

phejjeff wrote:Why is the cost value the most important component? In some areas, like in California, whole communities were built in an unattractive area. What do you do about those? Clearly, selling at a discount to cost to build wouldn't work---no one wants to live there.

A better solution is to prevent foreclosures in the first place. In the short term it may require renegotiation between the lender and the borrower about writing down the principal of the loan. If we do this, then we risk insolvency in the lender: the lender will need to write down the value of many loans. If we do this, then we risk moral hazard in the borrower. He effectively got compensation in this transaction, so this would either be taxed as income or if when he sells, he can only profit if he sells for more than the original principal.

The long term solution is that housing ought not be subsidized as much as it is today. If you survey other countries, a 30-year fixed loan is an anomaly. Some loans are 30 year loans in which the interest rate changes every decade. Some loans require a higher down payment. A 30 year treasury bond is one of the most volatile bonds out there because of interest rate risk.
retired at 48 wrote:From my GE Finance 101 training, the value of any product or service is determined as the highest of any of the following four values[: use value, exchange value, intrinsic value, cost value.]

.
.
.

The result..A reasonable floor will be put on home prices, and buyers will come out of the woodwork, fast. Home prices will gravitate to building costs minus 10%, as a minimum. Builders will not be constructing new homes for awhile until the inventory is worked off (as it should be.)

Mortgage people/banks etc can put a price on defaulted mortgages, etc. We are on our way.

Lastly, while we moralize this, how about the innocent, hard working person who has owned his home for a decade, and is now advised he loses his job, or accepts a transfer to another state. He accepts the transfer, and now has to sell his house. Jeez, three foreclosure homes on his very street, being priced by banks at extremely low prices to simply rid of the houses. What is he to do? Is this fair, this short term market phenomena? Does not creating an orderly market help this person, who played by the rules?

Get the foreclosures off the street. Attack the problem head on, government. I believe a case can be made.

Whew!

retired at 48
I generally agree with what you say. That's why I proposed the fed buy a SAMPLE of the foreclosures. Clearly there may be certain areas or streets that are undesireable or unusual. But now, potential homebuyers are hearing that prices may fall another 10-20%. Who would buy now, not me. Wait and lurk. With the fed being a competing buyer, lurkers/waiters will start to act now, if they hear their potential dream home is being snapped up by others.

The reason "cost" value is so important is reversion to the mean. Like stock prices. If a comparable home is being built for $200,000, and you can buy a foreclosure for $175,000, you will buy the lower priced unit. Thus there can be no new construction until that competing house is off the market. Eventually, equilibrium will be reached and when home construction begins again, it is the base price from which home sales will revert. So from an "investment" standpoint one can foresee a gain in any comparable home bought well below construction costs.

But I'm no expert.

R48
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Post by JW-Retired »

EnlightenMe wrote: It seems quite simple to me. If we can agree that falling house prices are the problem, we need to do something about falling house prices.
Disagree with this. I think you have it backwards. Falling house prices are the solution not the problem. The problem was rising house prices in the bubble, way above inflation adjusted historical averages or new buyers affordability. The market is now providing the solution. Personally, I like it. Keep it going another year or two and my kids will be able to buy a first home they can afford. I will be able to sell my house and move near them, buying another without having to pay huge cap gains taxes on the sale and huge property taxes on the new one.

Trying to prop up bubble prices is no solution and neither is giving real estate investors who have losses compensation. Many of us here have losses in the stock market, anyone think we deserve to be compensated for those?
JW
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Post by wide eyed »

I agree mostly with JW. Falling prices are not the problem, they are a symptom and a sign of the market doing what it is supposed to do. And the problem would not have been a crisis if not for poor decision making on the parts of large financial services organizations (note how carefully worded that is!)

The market needs to fall. I say let it.
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Re: end (housing) crisis

Post by Valuethinker »

phejjeff wrote: The long term solution is that housing ought not be subsidized as much as it is today. If you survey other countries, a 30-year fixed loan is an anomaly. Some loans are 30 year loans in which the interest rate changes every decade. Some loans require a higher down payment. A 30 year treasury bond is one of the most volatile bonds out there because of interest rate risk.

The 'subsidy' element in home ownership consists of:

- provisions in the US tax code that permit interest deductibility
- no tax on 'imputed rent' ie the rental value of the property you occupy
- various local restrictions on property tax (Prop 13 etc.)
- ability to 'dump' social requirements by moving outwards to counties that don't have social and infrastructural issues, and then pass zoning ordinances to prevent new development of higher density. This has massively contributed to urban sprawl in the US, and thus to higher fuel and transportation and other environmental costs (water, traffic etc.).

The political nature of each of the above makes them essentially unassailable (although, say, a 25 year phaseout of mortgage interest deductibility would be no bad thing).

The 30 year bit is actually something to be admired in my mind. The US had the best capital market in the world for providing safety to the investor and flexibility to the borrower. And, indeed, 30+ year mortgages are not uncommon in other countries. And at a very low cost to the borrower.

Whether by 'Covered Bond' as in Germany (Pfandbrief) or by MBS securitisation, the US system has much to say for itself.

There are interesting proposals out there for inflation adjusted mortgages (which would mean inflation adjusted securities on the other side) but complexity makes me think they won't happen.
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Post by jh »

...
Last edited by jh on Thu Dec 11, 2008 5:18 pm, edited 1 time in total.
Rodc
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Post by Rodc »

EnlightenMe wrote:
Moneyman, I hear you. I'm looking to solve a serious problem, none of the solutions are nice.
Nor as suggested in the OP are they simple.

The solutions are never simple.

R48, interesting idea.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Post by grayfox »

JW Nearly Retired wrote:
EnlightenMe wrote: It seems quite simple to me. If we can agree that falling house prices are the problem, we need to do something about falling house prices.
Disagree with this. I think you have it backwards. Falling house prices are the solution not the problem. The problem was rising house prices in the bubble, way above inflation adjusted historical averages or new buyers affordability. The market is now providing the solution. Personally, I like it. Keep it going another year or two and my kids will be able to buy a first home they can afford. I will be able to sell my house and move near them, buying another without having to pay huge cap gains taxes on the sale and huge property taxes on the new one.

Trying to prop up bubble prices is no solution and neither is giving real estate investors who have losses compensation. Many of us here have losses in the stock market, anyone think we deserve to be compensated for those?
JW
JW is 100% correct :thumbsup
retired at 48
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Post by retired at 48 »

Rodc wrote:EnlightenMe wrote:
Moneyman, I hear you. I'm looking to solve a serious problem, none of the solutions are nice.
Nor as suggested in the OP are they simple.

The solutions are never simple.

R48, interesting idea.
Oooh, Rod...you made my day :!: For if there was a big flaw in my plan, you would be jumping all over me. Take that back, you don't jump on anyone, rather, you give very insightful replies...always welcomed.

Take care...R48
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mas
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Post by mas »

retired at 48 wrote:
Rodc wrote:R48, interesting idea.
Oooh, Rod...you made my day :!: For if there was a big flaw in my plan, you would be jumping all over me. Take that back, you don't jump on anyone, rather, you give very insightful replies...always welcomed.

Take care...R48
It is one of the less ridiculous "bailouts" that I have seen proposed. Unintended/unforeseen consequences would still be a major issue.
phejjeff
Posts: 111
Joined: Tue Jul 08, 2008 7:00 am

Re: end (housing) crisis

Post by phejjeff »

You can't just do it with the federal government buying a sample of foreclosures. It won't make a market unless the federal government is willing to purchase all foreclosures (or distressed loans). All this will do is prevent the market from finding the correct price. If the market clearing price is less than cost, then all that shows is that capital was misallocated.
retired at 48 wrote: I generally agree with what you say. That's why I proposed the fed buy a SAMPLE of the foreclosures. Clearly there may be certain areas or streets that are undesireable or unusual. But now, potential homebuyers are hearing that prices may fall another 10-20%. Who would buy now, not me. Wait and lurk. With the fed being a competing buyer, lurkers/waiters will start to act now, if they hear their potential dream home is being snapped up by others.

The reason "cost" value is so important is reversion to the mean. Like stock prices. If a comparable home is being built for $200,000, and you can buy a foreclosure for $175,000, you will buy the lower priced unit. Thus there can be no new construction until that competing house is off the market. Eventually, equilibrium will be reached and when home construction begins again, it is the base price from which home sales will revert. So from an "investment" standpoint one can foresee a gain in any comparable home bought well below construction costs.

But I'm no expert.

R48
rich
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Joined: Fri Mar 16, 2007 6:51 pm

Re: end (housing) crisis

Post by rich »

retired at 48 wrote:I'd like to come at this from a different perspective, and propose a solution to stabilize housing prices.

First , the whereas.

From my GE Finance 101 training, the value of any product or service is determined as the highest of any of the following four values.

First, the use value. For houses, this refers to comparisons of a mortgage to rental costs, need for a home, tax advantages, children using home, etc.

The second value is exchange value...this refers to a market quote/price, what one is willing to exchange right now for your house, or a stock, or a ticket to an event. Exchange values are what is now falling.

The third is intrinsic value. An example is your children's photos have a great intrinsic value to you, but of little value to others. For example, my house I have lived in for forty years may have intrinsic value to me above market values.

Fourth, and very important to today, is cost value. This refers to the actual costs to manufacture a product. This is the sleeper value for houses... the cost a builder would have to pay to construct a house in your area. Insurance companies for example have such costs determined, even for older homes. Then compare market prices to these costs. Housing prices will likely revert to the mean someday and equal construction costs. They have to, or builders cannot compete.

Let's take Florida. With current strengthened building codes (heavy duty windows for hurricanes, etc) it is often stated a builder cannot build even a modest 3 bedroom home for less than $225,000. Thus, if that same home was purchased for $260,000, and in foreclosure for $175,000, expect its value to eventually go up to the construction cost figure, $225,000.

So here's the plan

Rather than billions to the banks/mortgage procurements, etc, the following should have been done, and can still be done. The federal government announces a foreclosed home buying program for every community. The feds will buy up a sampling of foreclosures at building costs minus 10%. Period. Laid off real estate people will handle the inventory. Such homes will be made available for immediate repurchase to anyone at that price, or above. People now occupying such homes will be given an option to rent. Building cost minus 10 percent thus becomes the floor.

The affect

Let's say you and you spouse want to buy a house now. Like most, with prices dropping, you wait...lurking. One day, your wife spots a house in foreclosure for $175,000 and you peak inside. Looks great. You decide to buy, and call the listing agent. But he/she says, sorry, the feds just bought it for $202,500 (cost - 10%), under the new buyout program.

You are dismayed. Wow, you say to each other, we better buy soon, and fast, if we want one of these foreclosed homes.

The result..A reasonable floor will be put on home prices, and buyers will come out of the woodwork, fast. Home prices will gravitate to building costs minus 10%, as a minimum. Builders will not be constructing new homes for awhile until the inventory iws worked off (as it should be.)

Mortgage people/banks etc can put a price on defaulted mortgages, etc. We are on our way.

Lastly, while we moralize this, how about the innocent, hard working person who has owned his home for a decade, and is now advised he loses his job, or accepts a transfer to another state. He accepts the transfer, and now has to sell his house. Jeez, three foreclosure homes on his very street, being priced by banks at extremely low prices to simply rid of the houses. What is he to do? Is this fair, this short term market phenomena? Does not creating an orderly market help this person, who played by the rules?

Get the foreclosures off the street. Attack the problem head on, government. I believe a case can be made.

Whew!

retired at 48
You already posted the above word for word in another thread:

http://www.bogleheads.org/forum/viewtop ... 59&start=0
Best regards, | Rich
rich
Posts: 933
Joined: Fri Mar 16, 2007 6:51 pm

Re: end (housing) crisis

Post by rich »

retired at 48 wrote:I'd like to come at this from a different perspective, and propose a solution to stabilize housing prices.

First , the whereas.

From my GE Finance 101 training, the value of any product or service is determined as the highest of any of the following four values.

First, the use value. For houses, this refers to comparisons of a mortgage to rental costs, need for a home, tax advantages, children using home, etc.

The second value is exchange value...this refers to a market quote/price, what one is willing to exchange right now for your house, or a stock, or a ticket to an event. Exchange values are what is now falling.

The third is intrinsic value. An example is your children's photos have a great intrinsic value to you, but of little value to others. For example, my house I have lived in for forty years may have intrinsic value to me above market values.

Fourth, and very important to today, is cost value. This refers to the actual costs to manufacture a product. This is the sleeper value for houses... the cost a builder would have to pay to construct a house in your area. Insurance companies for example have such costs determined, even for older homes. Then compare market prices to these costs. Housing prices will likely revert to the mean someday and equal construction costs. They have to, or builders cannot compete.

Let's take Florida. With current strengthened building codes (heavy duty windows for hurricanes, etc) it is often stated a builder cannot build even a modest 3 bedroom home for less than $225,000. Thus, if that same home was purchased for $260,000, and in foreclosure for $175,000, expect its value to eventually go up to the construction cost figure, $225,000.

So here's the plan

Rather than billions to the banks/mortgage procurements, etc, the following should have been done, and can still be done. The federal government announces a foreclosed home buying program for every community. The feds will buy up a sampling of foreclosures at building costs minus 10%. Period. Laid off real estate people will handle the inventory. Such homes will be made available for immediate repurchase to anyone at that price, or above. People now occupying such homes will be given an option to rent. Building cost minus 10 percent thus becomes the floor.

The affect

Let's say you and you spouse want to buy a house now. Like most, with prices dropping, you wait...lurking. One day, your wife spots a house in foreclosure for $175,000 and you peak inside. Looks great. You decide to buy, and call the listing agent. But he/she says, sorry, the feds just bought it for $202,500 (cost - 10%), under the new buyout program.

You are dismayed. Wow, you say to each other, we better buy soon, and fast, if we want one of these foreclosed homes.

The result..A reasonable floor will be put on home prices, and buyers will come out of the woodwork, fast. Home prices will gravitate to building costs minus 10%, as a minimum. Builders will not be constructing new homes for awhile until the inventory iws worked off (as it should be.)

Mortgage people/banks etc can put a price on defaulted mortgages, etc. We are on our way.

Lastly, while we moralize this, how about the innocent, hard working person who has owned his home for a decade, and is now advised he loses his job, or accepts a transfer to another state. He accepts the transfer, and now has to sell his house. Jeez, three foreclosure homes on his very street, being priced by banks at extremely low prices to simply rid of the houses. What is he to do? Is this fair, this short term market phenomena? Does not creating an orderly market help this person, who played by the rules?

Get the foreclosures off the street. Attack the problem head on, government. I believe a case can be made.

Whew!

retired at 48
Also almost word for word here.

http://www.bogleheads.org/forum/viewtop ... highlight=
Best regards, | Rich
retired at 48
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Post by retired at 48 »

Rich posted:
(You already posted the above) Also almost word for word here
I disagree...this was substantially different, in response to a different question of whether or not it is a good time to buy houses. Yes, I cited the four "values" for assessing homes, but absolutely no discussion of federal government buyout of foreclosed homes, and the consequences.


and Rich posted:
You already posted the above word for word in another thread:


The two posts asked substantially the same question. I was not going to post on this thread until the OP said, gee, nobody is taking the other side, offering ideas to stabilize home prices. I then provided an idea, the type I thought the OP was requesting.

That it is substantially the same wording used elsewhere is irrelevant. The OP questions were essentially the same. I have provided recommendations to others, often, that are substantially the same theme.

Lastly, your repeating a lengthy quote, twice, gives the false impression they were the "other posts." They are not.

Everyone of this forum does not see all posts. Sorry you feel an idea is not portable. And I would rather stay away from motives, otherwise.

R48
retired at 48
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Re: end (housing) crisis

Post by retired at 48 »

phejjeff wrote:You can't just do it with the federal government buying a sample of foreclosures. It won't make a market unless the federal government is willing to purchase all foreclosures (or distressed loans). All this will do is prevent the market from finding the correct price. If the market clearing price is less than cost, then all that shows is that capital was misallocated.
retired at 48 wrote: I generally agree with what you say. That's why I proposed the fed buy a SAMPLE of the foreclosures. Clearly there may be certain areas or streets that are undesireable or unusual. But now, potential homebuyers are hearing that prices may fall another 10-20%. Who would buy now, not me. Wait and lurk. With the fed being a competing buyer, lurkers/waiters will start to act now, if they hear their potential dream home is being snapped up by others.

The reason "cost" value is so important is reversion to the mean. Like stock prices. If a comparable home is being built for $200,000, and you can buy a foreclosure for $175,000, you will buy the lower priced unit. Thus there can be no new construction until that competing house is off the market. Eventually, equilibrium will be reached and when home construction begins again, it is the base price from which home sales will revert. So from an "investment" standpoint one can foresee a gain in any comparable home bought well below construction costs.

But I'm no expert.

R48
It is my opinion that someone in the market buying up even one fifth of the foreclosures will have a considerable impact on both the market and human behavior. A "shill" at an auction does not have to participate in bidding on all items.

Once word is out in any community that feds are buying up some homes, all lurkers, buyers in wait, will need to reassess. Just like normal when buying a house. When your real estate agent says someone else is bidding, you have to decide is this phony, or not. The mere presence of government involvement via licensed real estate agents, will be felt quickly, IMHO.

And when your wife says, we are going to lose this home honey, and it will be your fault...the pressures mount up fast.

R48
Topic Author
EnlightenMe
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Post by EnlightenMe »

R48, I'll accept your plan. I like mine better because it uses private capital.

I know many disagree but I think those wanting house prices to stop falling greatly exceed those that do not.

I hope the mods will allow this because I'm not intending to make a political statement, or chosing sides, but if a candidate were to say "I'll stop the slide in housing prices within 6 months of getting elected and here's how I'll do it" I think they could get a lot of additional votes. It could be an October surprise for one of them.

I for one, want to hear it.
moneyman11
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Post by moneyman11 »

Gee guys, why don't we just cut out the middle man.

Let's just have the government buy up every house on the market.

Then they can let people finance the homes at low fixed treasury bond rates, and the government can guarantee that your home will always go up in value at the rate of inflation - you just sell your home back to the government for the inflation adjusted price.

We can cut out the entire realtor industry, and end those pesky market price fluctuations at the same time. Yeah, everybody's happy!!!

Who's on board with my plan!?
retired at 48
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Post by retired at 48 »

moneyman11 wrote:Gee guys, why don't we just cut out the middle man.

Let's just have the government buy up every house on the market.

Then they can let people finance the homes at low fixed treasury bond rates, and the government can guarantee that your home will always go up in value at the rate of inflation - you just sell your home back to the government for the inflation adjusted price.

We can cut out the entire realtor industry, and end those pesky market price fluctuations at the same time. Yeah, everybody's happy!!!

Who's on board with my plan!?
To just stick to the main flaw I see, even the government does not have enough of a balance sheet to buy all the homes. What's the real estate value, like 15 Trillion Dollars, if my memory is correct.

That's why a sampling, say 20% of the houses in foreclosure, which is a much smaller percentage to start with, is doable. And the government simply funds selected real estate firms to carry the load...like the government just hired PIMCO to handle the new fed short term corp bond financing.

R48
moneyman11
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Post by moneyman11 »

retired at 48 wrote: To just stick to the main flaw I see, even the government does not have enough of a balance sheet to buy all the homes. What's the real estate value, like 15 Trillion Dollars, if my memory is correct.
Oh come on now ... that's nothing a little tax hike can't fix. Your plan only works in theory. My plan works for sure. House prices will immediately stop going down, and will always go up at the rate of inflation - guaranteed by the United States Government. That's what's important right - stopping this decline in our precious house prices.

Shouldn't be hard to swing, right? After all, "those wanting house prices to stop falling greatly exceed those that do not."

Be bold!
Ron
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Post by Ron »

moneyman11 wrote:My property taxes are going down, and my homeowners insurance premiums are going down.
Don't understand this comment. Public services (paid by real estate taxes) are not getting cheaper. Even though your home may be reduced in value, dosen't all the homes in your area would also be reduced in value?

Also, my homeowner's insurance preimum has not reduced at all (it still cost's money to build/replace a damaged home).

Just wondering...

- Ron
moneyman11
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Post by moneyman11 »

Ron wrote:
moneyman11 wrote:My property taxes are going down, and my homeowners insurance premiums are going down.
Don't understand this comment. Public services (paid by real estate taxes) are not getting cheaper. Even though your home may be reduced in value, dosen't all the homes in your area would also be reduced in value?
Maybe it's different where you live, but where I live, like most places, property insurance is based on the value of your property.

When it's value goes up, your taxes go up ... when it's value goes down, your taxes go down.
Ron wrote: Also, my homeowner's insurance preimum has not reduced at all (it still cost's money to build/replace a damaged home).
It now costs considerably less in my location to replace my house than it did 3 years ago ... thus, lower insurance rates (assuming you demand them by shopping around).
retired at 48
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Post by retired at 48 »

moneyman11 wrote:
When it's value goes up, your taxes go up ... when it's value goes down, your taxes go down.
Maybe...or a little. The millage rates, or the percentage of assessed value that is taken in taxes, is simply increased by the taxing authorities, each year.

Unless you cutback and or lower salaries of teachers, etc (good luck), the lowered house asset base has to provide the same total amount of funding to the school system. So the rates are increased. Home value drops, rates go up...same taxes collected.

R48
rich
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Post by rich »

retired at 48 wrote: That it is substantially the same wording used elsewhere is irrelevant. The OP questions were essentially the same. I have provided recommendations to others, often, that are substantially the same theme.
I think many feel it is a waste of time debating with someone who repeatedly cuts and pastes huge chunks of text. Why not just make one post and keep bumping yourself to keep your idea alive? That is essentially what you are doing anyway.
retired at 48 wrote: Lastly, your repeating a lengthy quote, twice, gives the false impression they were the "other posts." They are not.
I was responding directly to the lengthy post you made in this string by quoting your post in this string. First, via a link, I showed you made an identical lengthy post elsewhere. Second, via a link, I showed you made a similar one in yet another place.
retired at 48 wrote: And I would rather stay away from motives, otherwise.
I'm fine with exposing my motive which is I don't want to be screwed over paying for other people's poor decisions. Since you brought it up, is your motive Saratoga, NY and Florida (the locations you had in your profile)? Do you own houses in both places? (Just a question.)
Best regards, | Rich
moneyman11
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Post by moneyman11 »

retired at 48 wrote:moneyman11 wrote:
When it's value goes up, your taxes go up ... when it's value goes down, your taxes go down.
Maybe...or a little.
I don't understand the arguing here.

I'm telling you that my property taxes went down this year.
For sure ... for certain ... in real money. And it's because the government assessed value of my property went down, as it did for nearly everyone else in my metropolitan area.

This isn't an opinion of what may happen ... it's a fact of what has happened as a direct result of declining home prices.
retired at 48
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Post by retired at 48 »

moneyman11 wrote:
retired at 48 wrote:moneyman11 wrote:
When it's value goes up, your taxes go up ... when it's value goes down, your taxes go down.
Maybe...or a little.
I don't understand the arguing here.

I'm telling you that my property taxes went down this year.
For sure ... for certain ... in real money. And it's because the government assessed value of my property went down, as it did for nearly everyone else in my metropolitan area.

This isn't an opinion of what may happen ... it's a fact of what has happened as a direct result of declining home prices.
My real estate taxes declined, too, on one home. But no way near the percentage the home prices declined. Yes, the politicians realized, especially on my Florida home, that they had to have an actual dollar decline. Take your actual tax bill percent decline, then compare it to the home price percent decline. Not close, for most people in the country, if indeed they even had a decline.

So here's my taxes. Two years ago, 20% increase in house prices, 20% increase in taxes. Next year, 20% decrease in house prices; $150 decrease in taxes. This type of yo yo can be dangerous to one's financial health.

BTW: when is saying "maybe...or a little" considered "arguing?"

R48
moneyman11
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Post by moneyman11 »

retired at 48 wrote:when is saying "maybe...or a little" considered "arguing?"
Because for the case I was describing, there was no "maybe" about it.
retired at 48
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Post by retired at 48 »

moneyman11 wrote:
retired at 48 wrote:when is saying "maybe...or a little" considered "arguing?"
Because for the case I was describing, there was no "maybe" about it.
Sorry moneyman11, but you weren't referring to your situation when you say:


When it's value goes up, your taxes go up ... when it's value goes down, your taxes go down.
I responded, Maybe...or a little....I think your use of the word "your" taxes...refers to others on the forum. Does it not?

R48
moneyman11
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Post by moneyman11 »

retired at 48 wrote:
moneyman11 wrote:
retired at 48 wrote:when is saying "maybe...or a little" considered "arguing?"
Because for the case I was describing, there was no "maybe" about it.
Sorry moneyman11, but you weren't referring to your situation when you say:


When it's value goes up, your taxes go up ... when it's value goes down, your taxes go down.
I responded, Maybe...or a little....I think your use of the word "your" taxes...refers to others on the forum. Does it not?

R48
No, it does not.

Read my posts in context with each other, and with those that were responses to them, and all will become clear.

The theme of my posts was why I personally found declining home prices to be not all bad, much to the surprise of the OP.
phejjeff
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Post by phejjeff »

What is wrong with the falling price of a house? Are you trying to sell your house in the near timeframe? If you're planning on staying in your house for a decade or so, then why care? Just because there are many that want house prices to stop falling doesn't mean that it should stop falling.

The country as a whole overbuilt houses in the last decade: useful capital was diverted away. There is more supply than what is demanded. Simple microeconomics says that the price of housing should go down.

I want my net worth to stop going down and I want to buy my investments at a cheap price too. (Hint: you can't have both)

EnlightenMe wrote:R48, I'll accept your plan. I like mine better because it uses private capital.

I know many disagree but I think those wanting house prices to stop falling greatly exceed those that do not.

I hope the mods will allow this because I'm not intending to make a political statement, or chosing sides, but if a candidate were to say "I'll stop the slide in housing prices within 6 months of getting elected and here's how I'll do it" I think they could get a lot of additional votes. It could be an October surprise for one of them.

I for one, want to hear it.
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Post by Mel Lindauer »

Let's calm things down a bit and be less argumentative, guys.
Topic Author
EnlightenMe
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Post by EnlightenMe »

phejjeff wrote:What is wrong with the falling price of a house?
Respectfully,

Nothing other than it is currently causing the greatest financial crisis since the great depression. At least I think that is the primary reason used to justify spending trillons of our taxpayers dollars.

I'll let it go at that, thanks for the comments.
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