Maybe this is what I feel now after the ups and downs these past weeks:
1) I got a loan, a fairly sizable one, by putting my house up as collateral (and I have more equity than I asked to borrow), and by producing a pay stub proving I make enough money to pay it back. It took about 48 hours to get it approved.
This would indicate to me that the credit market is working. Perhaps I couldn't have borrowed twice the equity in my home at 28% interest. I can probably live with the idea that I couldn't have gotten that loan.
2) There is no such thing as "deregulation". There is such a thing as freeing up the banks to do strange things. The "deregulation" that people are talking about is just a change from allowing a 12:1 leverage to a 30:1 leverage. It's the 30:1 that was one component to how this all got out of hand. I can live with re-regulating us back to 12:1.
3) I think banks going bankrupt because they did irresponsibly dumbass things is probably a good thing.
4) I think people losing homes they can't afford is probably a good thing.
3&4 combined) It would be nice if 3 & 4 combine to create an environment where banks make people prove they can afford loans before they issue them loans.
5) I think the government deciding what a private company can pay its CEO is a dangerous, dangerous precedent to set. It will not end (because it never does) with just that. In a few short years the government will be setting all sorts of rules about what kinds of work deserve what kind of compensation. Then we're in a world of hurt.
6) Giving individual humans in government economically-significant sums of money with which they are to start speculation-style buying and selling with the intent to manipulate the market is the scariest thing proposed here. Impositions into the market is exactly what makes financial systems fail.
7) I am a moron who knows nothing.
7 comments:
1) What's your credit score? Probably pretty high -- 800 maybe? Of course you can get a loan. Lower-rated consumers are less able to, I would guess. From my understanding, though, the real crunch is the unavailability and huge expense of interbank loans, because banks don't know if they can be paid back. They used to be nearly free and universally available. Now they're not, and that is really gumming up the works of the financial system.
3) I think it would be better for them not to go bankrupt. It would be better for the government to take ownership (which is the same thing as bankruptcy as far as the shareholders are concerned, so there is no moral hazard). That way the bank's creditors (i.e. depositors) are not injured, and the government may even see a return on the investment. Implicit in this is that the government should not plan on retaining ownership, but to re-privatize the banks once the crisis is passed.
4) Yes, but if there is an alternative, it is better than foreclosure, because foreclosures drive down the price of other houses and hurt the market. If you have a house you can afford, but you signed onto a dumb loan that you can't, a renegotiation of the loan is in everybody's interest.
3&4) I have a buddy who's a mortgage originator, and he says this has already happened (albeit too late)
5) Agreed -- but if a company has to come to the feds for a bailout, I have no qualms about forcing them to take some austerity measures to get back in the black.
6) Agreed it's scary. But recognize that the market *is* failing, and there are many examples of smart intervention saving a market.
7) Me too. I am so over my head.
1) I don't think Matt should disclose his credit score, but I join Liam in thinking that Matt getting a loan is wholly uninteresting. I just tried to think of a comparison, and I cannot think of any trait held by any member of sally that is as significant as Matt's creditworthiness.
2) There is no such thing as eliminating regulations, I suppose. But, we have seen twenty-five years of the conventional wisdom being any regulation of industry is bad. The trend in that direction is very real, I think.
5) This measures strikes me as spiteful. It doesn't really address any problem. It's mob mentality. That said, I think there is a purpose to compensation; namely to ensure the needs of society are met. I think the free market does a pretty shitty job of it. I'm not saying that if we all voted on it we'd do better, but the solution generated by the market is not great.
6) Why is it more scary for government officials to do it than private sector people? Is it because the government people have no skin in the game? I don't see that much difference between the two classes of people to be terrified when one or the other has control.
7) This is a big deal for me. This doesn't seem like the place for direct democracy. This seems like a place for expertise to go to work.
From the WSJ MarketBeat Blog:
If you only watch the stock market, where the Dow was recently up more than 250 points, you might get the mistaken impression all is well with the world on the Tuesday after the latest Black Monday.
But, as has often been the case during this crisis, credit markets are singing a different tune. Overnight dollar Libor rates more than doubled to 6.875%, as banks hoarded cash for the quarter end amid signs the financial crisis was spreading. It’s more than a little ironic that while investors are buying banks’ stocks — shares were up sharply across the sector — banks themselves were unwilling to buy each others’ shortest term debt. Banks are so desperate for funds that they paid 11% for $30 billion in overnight funds from the European Central Bank, up from 3% just Monday.
Now I don't really understand all this -- it's highly technical (LIBOR??). But this is the sort of thing I read which indicates the awfulness of the credit markets.
I'm so over my head.
And from the NYTimes and article on the collapse of the municipal bond market, and how it is preventing local and state governments from undertaking infrastructure building projects:
Cities, states and other local governments have been effectively shut out of the bond markets for the last two weeks, raising the cost of day-to-day operations, threatening longer-term projects and dampening a broad source of jobs and stability at a time when other parts of the economy are weakening.
[...]Analysts said the dysfunction in the municipal bond markets appeared to signal the end of an era of relatively cheap money for governments and, probably, the start of an era of tough choices for communities. When the market starts moving again, they said, it will look a lot like the municipal bond market of 10 years ago, before the arrival of financial wizardry in the form of structured-finance products, which lowered borrowing costs but added big new risks. Instead, governments will probably be issuing plain-vanilla bonds with fixed rates of interest, higher than they are accustomed to.
Again, this is all over my head, but I am starting to get a feeling for how systemic this problem is. I have come to believe the bailout is a stinker, but I am less inclined to just "let them all burn."
Not that my opinion matters for jack squat.
Aiiee. And hedge funds, too:
What happens when investors decide to take their money out tomorrow, as they're generally allowed to do on the first day of any quarter?
Sources said they expect the body count to total as many as 2,000 hedge funds and 500 hedge funds of funds between now and the end of March...
Most hedge funds operate on an end-of-quarter deadline for requests from clients to have their money returned. If experts' predictions of very large collective redemptions come true, managers will have to liquidate their holdings en masse, pushing down prices and forcing many smaller hedge funds or those with poor returns out of business.
Not that I have a heck of a lot of sympathy there -- from what little I understand, hedge funds are a pretty shady game run by some smart scammers. (This opinion may be tinged by a little envy, also.) But still, it sounds bad to me.
In the comments for "Yet another bailout post", Jim asked what I didn't like about the bailout, and I just added a long comment there that is my summary.
I will comment on the "I don't know squat" thing. I started with that, but I think we are underestimating ourselves. The more I read and think about it, the more I think the plan put forth by our leadership is a bad one. I'm not saying I could formulate a good plan, but I don't have enough faith in the Administration and Congressional leadership enough to say, "Hmm, that sounds dumb to me, but you probably know better."
I don't recall my credit score, but yes, it's very high.
Liam, when you say "it's probably better for them not to go bankrupt", you need to define better than what? Better than not going bankrupt? That's entirely what I was thinking I disagreed with. I think it is probably good that unwisely-run companies that are underperforming spectacularly don't continue to do that. Having them fail is better, maybe, than perpetuating them as entities.
On your point on foreclosure alternatives, if the lender and the borrower want to strike a better deal, fine. But making an artificial net is just spreading the problem around and causing more unintended consequences, like weakening the dollar further.
Liam, I just don't believe letting the market fail is as bad as creating a financial autocrat.
Jim, Pat's abilities in Math clearly outstrip my creditworthiness.
Jim: the solution [of wage levels] generated by the market is not great.
There is simply no better way. You might as well say that oxygen is a shitty biological catalyst because of all the ancillary damage it causes.
Why is it more scary for government officials to [wield $700B to buy mortgages] than private sector people?
Because central planning an economy is a recipe for total death. Every country that has ever tried it has failed in a long, drown-out way that does damage beyond just the economy.
Liam, LIBOR is the British interbank lending rate. So their fed doubled the rate, imagine what that would mean in the US... it means the world is reacting to this crisis in their own individual way like we are. In fact this is probably a good thing in the long run, it will be a little experiment in recovery strategies. Of course there are interactions to this, what is a great strategy for one country in the midst of a global failure may not work if everyone implements it at once the next time around.
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