End the Crisis Soon

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
rich
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Post by rich »

EnlightenMe wrote:
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.
The falling house prices are not necessarily the reason for the spending. It, in a large degree, is to free up clogged credit markets. The spending purportedly is not to guarantee no one ever loses a penny on a house.

You are are a new poster and you said you will "let it go at that". However, I hope you are not a person that thinks a house (or any asset) should only go up in price. That is just naive.
Last edited by rich on Tue Oct 21, 2008 8:42 pm, edited 1 time in total.
Best regards, | Rich
gassert
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Post by gassert »

New flash:

The OP made the assumption that falling home prices is tha cause to this "problem"

Unless anyone on this well informed website has been living under a rock falling home prices are not the "cause" to any of our "problems." So whatever you want to do to firm up home prices is fine, but it's not the issue.

Unless you want an essay on "what" the problem is I wont get into it, but it's not falling home prices.
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EnlightenMe
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Post by EnlightenMe »

I said I'd let it go. But....I believe I could find quotes from Bernacke, Paulson, Bush, Congressional members, candidates, and many others saying that falling house prices are a primary cause of the crisis. It is at least one of the primary causes, we shouldn't need to disagree on that I don't think.

But granted, I do realize the are other reasons for the crisis.

Stabilize housing prices and risk of a depression will be eliminated, MBS paper will have a calculated value, banks will heal, and things will eventually get back to normal. I do believe that.

And no, I don't care if house prices fall. I am fully in favor of all asset prices falling and rising without intervention. What is different right now is that I do want to avoid a depression; and, spending trillions of dollars of future generations of taxpayers money.

Let me add, this sure is a tough crowd. :)
rich
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Post by rich »

EnlightenMe wrote:I said I'd let it go. But....I believe I could find quotes from Bernacke, Paulson, Bush, Congressional members, candidates, and many others saying that falling house prices are a primary cause of the crisis. It is at least one of the primary causes, we shouldn't need to disagree on that I don't think.

But granted, I do realize the are other reasons for the crisis.

Stabilize housing prices and risk of a depression will be eliminated, MBS security paper will have a calculated value, banks will heal, and things will eventually get back to normal. I do believe that.

And no, I don't care if house prices fall. I am fully in favor of all asset prices falling and rising without intervention. What is different right now is that I do want to avoid a depression; and, spending trillions of dollars of future generations of taxpayers money.
Well if you want to avoid spending future generation's (mine) money, then I am not clear how spending a pile of money to bail out homeowners (of which I am one) accomplishes this goal. Also why do you assume that bailing out homeowners will ensure the US avoids a depression? Couldn't deficit spending tons of money bailing out homeowners actually cause a depression? Or why does there have to be a depression with/without a homeowner bailout? Can't prices just correct and hence the market will clear?
Best regards, | Rich
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Met Income
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Post by Met Income »

EnlightenMe wrote:I said I'd let it go. But....I believe I could find quotes from Bernacke, Paulson, Bush, Congressional members, candidates, and many others saying that falling house prices are a primary cause of the crisis. It is at least one of the primary causes, we shouldn't need to disagree on that I don't think.

But granted, I do realize the are other reasons for the crisis.

Stabilize housing prices and risk of a depression will be eliminated, MBS paper will have a calculated value, banks will heal, and things will eventually get back to normal. I do believe that.

And no, I don't care if house prices fall. I am fully in favor of all asset prices falling and rising without intervention. What is different right now is that I do want to avoid a depression; and, spending trillions of dollars of future generations of taxpayers money.

Let me add, this sure is a tough crowd. :)
First, we don't know that the only alternative to not using your strategy is a depression.

Second, of course a ponzi scheme will fall apart if someone eventually wises up and stops paying. But that isn't a reason to continue the ponzi scheme. The damage has already been done. Asset prices have already been severely distorted. I don't believe further distortion is the answer. The quicker we get back to actual value, the sooner we can move on and start over.
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EnlightenMe
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Post by EnlightenMe »

Rich Quote: Well if you want to avoid spending future generation's (mine) money, then I am not clear how spending a pile of money to bail out homeowners (of which I am one) accomplishes this goal. Also why do you assume that bailing out homeowners will ensure the US avoids a depression? Couldn't deficit spending tons of money bailing out homeowners actually cause a depression? Or why does there have to be a depression with/without a homeowner bailout? Can't prices just correct and hence the market will clear?[/quote]

I will not go into all of those questions, unless you really want me to. I'm not really proposing a government bailout as I see it, that is already underway. I'm proposing a private capital solution to the problem instead. I think that is pro-America and likely much cheaper for the taxpayer.

Thanks for your input.
Last edited by EnlightenMe on Tue Oct 21, 2008 9:14 pm, edited 2 times in total.
rich
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Post by rich »

EnlightenMe wrote: Let me add, this sure is a tough crowd. :)
Welcome to the jungle newbie. Bring your A game.
:D :D :D


(just kidding, seriously welcome)
Best regards, | Rich
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EnlightenMe
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Post by EnlightenMe »

Thanks for the welcome, I hope I didn't ruffle too many feathers with my idea.
rich
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Post by rich »

EnlightenMe wrote:Thanks for the welcome, I hope I didn't ruffle too many feathers with my idea.
Nah.. It is all in good debate.
Best regards, | Rich
grayfox
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Post by grayfox »

EnlightenMe wrote:It seems quite simple to me. If we can agree that falling house prices are the problem
The only people that say that falling houses prices are the problem are those that have a vested interest in having prices staying up, like the NAR.

Most other people seem to understand that the problem was created when housing prices rose.

You spent in an awful lot of time and effort on a campaign trying to convince everyone that housing prices have to stop falling. So what is your vested interest? Do you work in the real estate industry or something? Come clean.
justaworker2
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Post by justaworker2 »

What I am reading here is so typically American.....fix it and fix it now....and don't care about the consequences of doing the wrong thing. We do not want to really understand how we got here or really care or demand retribution...we just want someone else to do it for us....
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EnlightenMe
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Post by EnlightenMe »

[quote="grayfox
You spent in an awful lot of time and effort on a campaign trying to convince everyone that housing prices have to stop falling. So what is your vested interest? Do you work in the real estate industry or something? Come clean.[/quote]

I don't have any vested interest other than it upsets me to see the printing press running full speed. I can see some pretty bad things coming out of that over the upcoming years. If/when the negative results of that become clear, I predict we'll be looking back at this time and saying why didn't we do something else besides throwing tons of taxpayers money at the problem.

I own a house, it has already dropped, I can easily afford to hold on.
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EnlightenMe
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Post by EnlightenMe »

justaworker2 wrote:What I am reading here is so typically American.....fix it and fix it now....and don't care about the consequences of doing the wrong thing. We do not want to really understand how we got here or really care or demand retribution...we just want someone else to do it for us....
Isn't that exactly what the government is doing with trillions of dollars right now? I am proposing another way out.

Stopping the bleeding in the housing market is no different that when the government takes action to prop up stocks? (Such as putting together a deal on the bailout over a weekend before the markets open on a Monday morning.) Why do investors like to prop up stocks but feel housing doesn't deserve a little of the same treatment?

I think it would be fairly easy to stop the slide in housing, some may disagree. IMO stopping the slide would pay large dividends in stopping the crisis right now.
retired at 48
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Post by retired at 48 »

justaworker2 wrote:What I am reading here is so typically American.....fix it and fix it now....and don't care about the consequences of doing the wrong thing. We do not want to really understand how we got here or really care or demand retribution...we just want someone else to do it for us....

The dilemma of this posting thread is it really asks two distinct questions.

First, whether or not there is a good strategy or scheme to stop the decline in home prices. The second, whether from a policy aspect the country should even go down that path.

Regarding the first question, I provided a plan for the fed gvt buying up foreclosure homes. Not much in responses whether this tool would work or not, as most responses focused on the policy question. Kept hearing one thing:
why do you assume that bailing out homeowners will...
One can only reiterate that my plan had not one dime going to homeowners. Kinda like saying the gvt. bailed out Lehman Bros. shareholders, (who have about zero left).

Regarding the second question, should this be the policy path to take, the vast majority of responses are against this, perhaps summarized by a few selected quotes:
Unless you want an essay on "what" the problem is I wont get into it, but it's not falling home prices.
so typically American.....fix it and fix it now....and don't care about the consequences of doing the wrong thing.
The only people that say that falling houses prices are the problem are those that have a vested interest in having prices staying up, like the NAR.
Second, of course a ponzi scheme will fall apart if someone eventually wises up and stops paying. But that isn't a reason to continue the ponzi scheme. The damage has already been done.
If you're planning on staying in your house for a decade or so, then why care?
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.
Well, I'll put my head on the chopping block and provide an alternate viewpoint of why you should care about falling home prices.

We have all seen films of airplanes in a steep dive, spiraling downward, sometimes not pulling themselves out, hitting the ground. There's even a worse case...submarines. If a submarine gets itself into too steep a dive, it CANNOT pull out. It hits the ocean floor, or if the waters too deep, it is crushed by the increasing pressure. So regardless of incriminations, who caused it, reasons why, the sub commander must, at all costs, avoid getting into such a downward spiral.

So I submit that the country faces a bigger issue or concern, than "fixing the bad credit situation." Heck, that's easy, let the bankruptcy courts handle it completely, let those bad borrowers wither on the vine, it'll work itself out. But what about the economic effects, going forward?

Talk is abuzz about "depression." Herein lies the concern. A study of past depressions seems to show that those in power who "did nothing" got themselves into an economic downward spiral from which they could not recover. Oh, let the market forces work, was the mantra.

Furthermore, that economic spiral was mostly attributed to falling prices, yes, deflation. So much so that economists want to have a buffer, say prices rising at 2% a year, to make sure deflation is avoided. I submit that what could take the economic engine to the bottom of the ocean is deflation, and forward going, avoiding it has to be "job one" of various people in power.

And if we get into deflation now, the biggest contributors will be the great credit unwind, falling stock prices, and declining home prices. Let's focus on home prices. The past decade, Americans saved zero percent. Much added spending came in the form of home equity loans. Not only are declining home prices affecting this amount, but many banks are not lending HELOCs anyway.

Secondly, some say, let’s have home prices come way down so I can buy one (cheaply). Well, if prices come way down, homebuilders can’t compete. The homebuilding industry greatly shrinks. Think that won’t have long term consequences. Existing homeowners raising prices as no competition from homebuilders.

And yes, why don’t construction workers take pay cuts to become competitive? Yes, but therein is the deflationary spiral. Those workers now have lesser wages to support the economy, including buying homes.

And with the deflation comes bosses calling employees into their office, saying, gee John, but times are so tough, that with falling prices, we need to either let you go, or take a 10% pay cut to stay. Oh, the spiral is never ending.

Why, the simple hunkering down effect, and the loss of wealth effect, alone is severe with falling home prices. My wife and I are hunkering down, and we don’t need to.

Couple all this with the loss of stock market savings, and the shrinking money due to the credit unwind, and deflationary forces abound. Senior citizens delaying retirement. Can only get 1% safely on their bonds. Prices keep falling.

So here’s the deal. I submit all of you have a stake, going forward, in mitigating the severity of the upcoming poor economic environment, and that stabilizing home prices could be a primary factor. And if we spiral downward, the ocean depths are pretty deep because the entire world seems to be facing the same “falling prices” dilemma. Standby.

Retired at 48
Last edited by retired at 48 on Wed Oct 22, 2008 1:56 pm, edited 1 time in total.
rich
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Post by rich »

retired at 48 wrote: Regarding the first question, I provided a plan for the fed gvt buying up foreclosure homes. Not much in responses whether this tool would work or not, as most responses focused on the policy question.
As I have pointed out above, you have posted your "plan" in several threads. People have clearly responded with reasons why this won't work. Your response is to move on to another thread and post the plan again.
Best regards, | Rich
grayfox
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Post by grayfox »

This economic crisis is a direct result of the government trying to fix the last economic crisis. In 2000-2003 the market was in the process of correcting the stock market bubble when the government stepped and inflated the housing bubble. Each time the government interferes in the market, it sets the stage for the next crisis which is bigger than the previous crisis.

If they manage to re-inflate the housing bubble again, the next crisis will make the crisis of 2008 look like a picnic. I can only imagine what it will be.

The only prudent course of action is to let the markets correct the excesses of the past 15 years.
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EnlightenMe
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Post by EnlightenMe »

grayfox wrote:The only prudent course of action is to let the markets correct the excesses of the past 15 years.
I 100% agree, that is the prudent thing to do. We are not doing it however, we are creating money at a horrendous rate and trying to buy our way out of the problems once again. Another bubble is likely to ignite, I'm thinking the money will end up flowing into stocks eventually but the jury is out on that.

Letting it run its' course may cause a depression. It has been said many times by people a lot smarter than me. Is it worth the risk? We are being told no.

If the answer is no, then why not try to do something about housing price declines? R48 and I have shared a few ideas on how ro do that. I think there will eventually be a plan to stop the housing slide. I hope it doesn't cost trillions more for the taxpayers.
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astroturf
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Post by astroturf »

I don't think there's a direct way to prevent price declines short of reducing the inventory of houses by demolition.

The problem with house price declines is the adverse feedback loop that it creates for those who have a mortgage and their loan to value ratio is close to 100%. Any price decline will put the mortgage holder into negative equity territory. The number of negative equity mortgage holders is already about 1 in 6. That number is likely to increase as prices decline further and the economy worsens. So this situation increases the number of expected defaults and eventual foreclosures, which in turn depresses house prices further.

I hear 2 approaches. One is to let the government subsidize the purchase of foreclosed homes. The other is to prevent foreclosures by having the government provide low interest recourse loans (up to a maximum amount) to homeowners with or near negative equity that will be used to prepay the principal on the original mortgage. To me foreclosure prevention makes more economic sense.

The Problem Is Still Falling House Prices
http://online.wsj.com/article/SB122307486906203821.html
retired at 48
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Post by retired at 48 »

astroturf wrote: I hear 2 approaches. One is to let the government subsidize the purchase of foreclosed homes. The other is to prevent foreclosures by having the government provide low interest recourse loans (up to a maximum amount) to homeowners with or near negative equity that will be used to prepay the principal on the original mortgage. To me foreclosure prevention makes more economic sense.
How about a combination of both?

Paulson says the problems they are encountering is that banks have reported to him that a certain percentage of mortgage holders won't even answer the phone, a percentage is holding on until eviction, not wanting to refinance in any regard, and on and on.

By having a federal government presence in buying some forclosures, you create increased market demand, to bring buyers to the table. Now, with everyone hearing homes will be 10-20% less next year, who is buying? I wouldn't.

Here's my feeling. Give me two of the best real estate agents in my community, and the backing of some federal money, acting as agent for, and we will bring an instant buzz to the housing market. With some rules changes for feds only, I could renogiate mortgages, work out deals with potential buyers...maybe even subsidize some, make competing bids to a point price, etc.

For example, let's say a house that sold for $270,000, with construction price estimated at $225,000, is in foreclosure sale. Fed target price is construction minus 10%, or $202,500. Let's further say two private bidders exist, one having bid $$185,000, highest. Fed bids $190,000. One buyer counters at $192,000. Fed then meets with buyer, showing fed is allowed to go to C - 10%, or $205,000; HOWEVER, if buyer goes to $195,000 he can have the house at that price, no further bidding by fed. Buyer ponders, and accepts. Fed has accomplished goal...got a buyer at a reasonable market price. One less foreclosure on the market.

On to the next foreclosure house, me and my two real estate agents, acting for feds.

Take both approaches!

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grayfox
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Post by grayfox »

astroturf wrote:The Problem Is Still Falling House Prices
http://online.wsj.com/article/SB122307486906203821.html
Martin Feldman is a broken record on this subject. Now he may be a smart mainstream economist, but you know what? Mainstream economists like him didn't see any of this coming. Can you now trust that they know how to fix things? They don't understand what is happening. Feldman, Paulson, Bernanke are not as smart as they think they are. They pretend like they understand what's going, but they don't. Know one does.

The big mistake they all are make, including EnlightenMe and R48, is thinking that this can be fixed without pain. It is too late for that. In the past 15 years all of American's accumulated savings was wasted on excessive consumption like SUVs and TVs and iPods, and malinvestment in stupid ideas like pets.com. That money is gone. Then America borrowed from foreigners and wasted that money on more consumption and a trillion dollars worth of McMansions that no one needed. Now that money is also gone and can't be paid back.

The pain is inevitable. There will be a long and deep recession. Maybe a depression for a decade. It is unavoidable. But the longer the inevitable is delayed the longer and deeper it will be.

But there is hope. There is one thing can fix this problem: the market can make things right if left alone. But not without pain.
retired at 48
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Post by retired at 48 »

Gee, I just watched some testimony:

Sheila Bair (FDIC Chairperson)..."preventing home foreclosures".. must have more emphasis, as well as "renegotiating mortgages."

Greenspan..."Stabilization of house prices...but unlikely for months" was his first priority theme in mitigating economic downturn.

Perhaps Feds to date are kinda like the commander of a submarine with an external water leak in the engine room, who has implemented fixes like: sealing off the engine room, surfacing and using bilge pumps, assessing abort ship strategies, etc, until one submariner finally says, why don't we dispatch a team to go fix the leak. Hmmm.

So could the free market place fix the leak? Perhaps. But the black swan is: What if it doesn't, and house prices keep going downward. Then it may be too late for mitigating action.

R48
rich
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Post by rich »

retired at 48 wrote:Gee, I just watched some testimony:

Greenspan..."Stabilization of house prices...but unlikely for months" was his first priority theme in mitigating economic downturn.
Yeah Greenspan has a lot of credibility. We should listen to what he says because he did such a great job. (not)
:roll:
Best regards, | Rich
grayfox
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Post by grayfox »

retired at 48 wrote:Perhaps Feds to date are kinda like the commander of a submarine with an external water leak in the engine room, who has implemented fixes like: sealing off the engine room, surfacing and using bilge pumps, assessing abort ship strategies, etc, until one submariner finally says, why don't we dispatch a team to go fix the leak. Hmmm.
Compared to the economy, a submarine is a simple machine. It was designed by engineers and everything follows laws of physics and chemistry. It is understandable.

If only fixing the economy was as simple and strait forward as fixing a leaky boat. But unfortunately every action the government takes has unintended consequences that nobody foresees.

Example: Greenspan's Conundrum. Back on 2003 when Greenspan lowered short-term interest rates to 1%, he expected long-term rates to rise. But they went down, the exact opposite of what he intended to make happen.
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EnlightenMe
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Post by EnlightenMe »

I'd just like to note that Don Luskin on The Kudlow show tonight proposed my idea as a "simple" "smart" way to end the housing crisis. He called it a "Big Idea". Maybe he read the thread :)

I predict it's coming...........
retired at 48
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Post by retired at 48 »

grayfox wrote:
retired at 48 wrote:Perhaps Feds to date are kinda like the commander of a submarine with an external water leak in the engine room, who has implemented fixes like: sealing off the engine room, surfacing and using bilge pumps, assessing abort ship strategies, etc, until one submariner finally says, why don't we dispatch a team to go fix the leak. Hmmm.
Compared to the economy, a submarine is a simple machine. It was designed by engineers and everything follows laws of physics and chemistry. It is understandable.

If only fixing the economy was as simple and strait forward as fixing a leaky boat. But unfortunately every action the government takes has unintended consequences that nobody foresees.

Example: Greenspan's Conundrum. Back on 2003 when Greenspan lowered short-term interest rates to 1%, he expected long-term rates to rise. But they went down, the exact opposite of what he intended to make happen.
grayfox would be an excellent name for a submarine :!:

But as commander, grayfox would be advised to realize that a leak on a submarine, to the sailors on board, is much more serious than a financial meltdown/depression, thus one learns to get to the heart of the problem.

Your post suggests because the problem is large and complex it is not solvable. Maybe you imply do nothing. But here's the point. It is against human nature to do nothing. Those in authority, (like fed reserve, congress, treasury) feel they must act, and they did. TARP, and a variety of related remedies.

So if people are going to "do something", then my problem solving training says go to the source of the problem, and remedy it. One can argue whether from a policy standpoint this should be undertaken. But I gave a personal input that would get to the OP's question, and the heart of the matter: stopping the downward spiral in home prices.

retired at 48
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