Old News on the Current Financial Crisis

How did we get into this mess in the first place, you might be asking. I was thinking about what I had heard about federal intervention in the past months and years, since foreclosures started showing up on the "there's a problem" radar.

This article, from February's New York Times, talks about two (highly ineffective) programs floated by Paulson and Bush, Project Lifeline and Hope Now. These meager attempts to help homeowners facing foreclosure negotiate with their banks on their subprime loans failed, obviously.

And look at this quote from NPR back in December 2007, which shows how disgustingly filthy Wall Street is and why it super sux that we taxpayers are left with the burden of paying for it:

Most of the loans that will reset [from fixed rates to variable--and much higher--rates] in the next two years were long ago bundled into securities and sold to investors. The value of these securities has already fallen. A freeze in interest rates would reduce the value of these investments even more. [This is my emphasis, because it is the key. Because Wall Street didn't want to lose money on their investments, they wouldn't negotiate mortgage interest rates. If they had, then we would not be in the mess that we are in today. We would not have this burden on our hands.] So some investors will consider going to court in order to stop the plan to freeze rates. Other investors have decided that fighting the freeze will only lead to more foreclosures — and an increased chance of recession. And that, they have concluded, isn't good for anyone. [And that's EXACTLY WHAT IS HAPPENING because the OTHER investors who fought the foreclosure relief WON that fight. And now we all loose!!!!]

And finally, there is this article, also from NPR from late November of 2007, discussing whether homeowners should get a federal bail out for their mortgages. The federal government considered bail outs for them--for the people won live on "Main St" or at least a left turn off of it. But the Bush Administration was against a bailout for homeowners who'd taken risky loans. They didn't want to "reward risky behavior". But now that it's the ENTIRE BANKING SYSTEM that is failing, they're ready to put that burden on the taxpayer. It's so so so lovely!

Here's some fun quotes in this article:

[Past bail outs were good for the propping up the economy.] That's the same
argument made by some economists now, but not everyone is buying it. "The
banking system is in difficulty, but it's not in danger of collapse by any
means," says credit analyst Stracke. "It's not as if this is a true emergency."

OOPS!!! I guess you can send hate mail and "I told you so emails" to Christian Stracke, a senior credit strategist at the research firm CreditSights.

...the 1980s to rescue the failed savings and loan industry. That bailout
involved taxpayer money; this one does not. Rather, under discussion are changes
to the bankruptcy laws, the rules that govern the Federal Housing Administration
or action by the Federal Reserve.

Look! We could have avoided a whole bunch of this mess altogether by simply changing the law. Wouldn't even have needed to have a 700 million, nevermind billion, dollar package. Just a change in the law...

This one is a longer excerpt, with some quotes from Robert Reich, my economic hero (link to the left).

What about homeowners who signed on to loans they couldn't afford in the first place? Should they be bailed out as well? Should banks renegotiate the mortgages so these troubled borrowers can afford their monthly payments? The answer, some say, is an emphatic no. The concept of moral hazard applies to borrowers as well as lenders, they say. Why should taxpayers foot the bill for homeowners who took out loans they knew they couldn't afford?

Because those borrowers didn't necessarily know what they were getting into, argues former Labor Secretary Robert Reich in his blog. "Many of the mostly poor home buyers who got into trouble did NOT in fact know they couldn't afford the mortgage payments they were signing on to," Reich writes. "The banks and mortgage lenders that pulled out all the stops to persuade them to the contrary were in a far better position to know; after all, they had lots of experience at this game."

Besides, says the Center for Responsible Lending's Day, foreclosures hurt more than simply those who lose their homes.

"Foreclosure depress the value of all surrounding homes, so you end up with this spiral effect," she says.

A little under a year ago, this monster began rearing its head. If we had bailed out the home owner who'd wrongly taken out bad loans, this whole thing could have been fixed. Had the federal government bailed out the homeowners, the debt would have been more profitable and secure for the government, but hedge funds, where that upper crust got lots of it's crusty-ness, wouldn't have made that extra bunch of millions or billions more then charge the taxpayer for it when the bottom dropped out.