Right now, the main problem cited in news reports is that all mortgage lenders are requiring bigger down payments and better proof of income.
Isn’t that a good thing? Keeping speculators and “overoptimistic” from overextending, and making it harder for salesmen and loan agents from talking the unsophisticated from going beyond their means?
The downside mentioned is that everyone’s valuation for existing homes is going down. But that’s just deflating the bubble caused by excess loans, returning to true valuation. Can true value for money be that bad?
It’s only good in the sense that once it’s over, things are going to be a lot less bad than they were during it. With any luck we’ll get some reasonable regulations out of it, so it could have some good consequences.
Who says this is the main problem? AIUI, the main problem is that there are millions of sketchy loans out there, foreclosures are rising, and everyone involved in this market is at risk of losing a lot of money. The market is big enough that problems can easily bleed into other markets and take the whole economy for a spin.
Yes, it’s a good thing if it’s allowed to proceed without government interference. It will weed out bad lenders (since they will go bankrupt through their bad loans), it will move people who can’t afford their houses into more reasonably priced lodging, and it will lower the sky-high home prices that exist in many areas of the nation.
Of course, the government will likely step in and bail out irresponsible borrowers and lenders, which will only prop up those who caused this problem in the first place. It will also try and prop up home values which will continue to mean that home prices are out of reach for many people. It will also likely lead to stricter regulations, which will raise the price of loans and put American investment banks at a disadvantage in global commerce.
Yeah, government interference like the Fed, which lowered interest rates to bail out Bush, which led to the housing bubble. We can get rid of that and go back to the pre-1911 economy, where there weren’t hardly any panics. :rolleyes:
And a good thing like the cities investing in a higher yield bond market that was supposed to be good as cash (in order to keep taxes down) and now, because of the liquidity crisis, are having a hard time getting their money out.
I agree that the good thing will be increase regulation of lenders, in order to make them actually check the creditworthiness of those they lend money to, and to report the risk accurately. This will keep people who can’t afford houses out of the market and keep them from bidding against those who can, but just barely. This will decrease demand and lower prices, a good thing. But this could have been done years ago to assist in a soft landing, but that would go against the Holy Writ of deregulation.
They already have. The Bear Stearns stockholders.
You mean the guys who lost 95% of their stock value in 2 weeks? That’s some bailout.
Indeed. Who they actually bailed out were the banks who owned Bear Stearns paper.
If someone considering an investment knows only one thing, it should be that risk correlates with reward. “Higher yield” + “As good as cash” = Fantasy. I’m not going to shed any tears for the investors who were making “great” returns on their “safe” investment, even if they were state governments.
Apparently the irony of the government rushing to protect Bear Stearns while ignoring the plight of common mortgage holders has caught some people’s attention.
My stock broker friend says wordwide only about 10 percent of the impact has been felt. It will get uglier. How can that be a good thing.
If we start to regulate the financial industries that will be a good thing.
I don’t think you understand the nature of the business. Everybody bought bad loans. I worked for Bear Stearns. We were one of the more “conservative” lenders.
Here is a blog with a short discussion of the problem. How nice of you to give this innovative advice to the top financial officials of several states, who I suppose have never heard it before. As noted in the blog, investment pools offer better returns for equal risk, by a larger pool of investors. I would guess that the pools had rules about the investment grade of its bonds - and no doubt didn’t know of the hanky panky with the ratings.
The big problem wasn’t that the values went down, it was that they stopped trading because of the liquidity crisis. Perhaps the states should do the equivalent of hiding their money under a mattress, but like I said the pressure on budgets from tax cutters gives them incentives to make a bit more money in something that seemed reasonably safe.
Something just struck me. Remember how lots of people were ranting about putting Social Security money into riskier investments because in the long term they always did better, and nothing could go wrong, go wrong, go wrong…?
I wonder how that advice sounds now?
Actually, the irony is that if the government’s “protection” of BS was applied to homeowners, there would be rioting in the street. Bear Stearns isn’t getting anything out of this bailout other than a 95% drop in company value, and being sold to JP Morgan. The only companies who benefit from the “bailout” are companies who are owed money by BS, and JP Morgan.
The homeowner equivalent is having the government guarantee the total value of your mortgage, as long as you sell your house and move in with your parents. You, like Bear Stearns, are still screwed, but your creditor is made whole.
I’m really tired of the press calling this a bailout of Bear Stearns. Bear Stearns is dead, all the government is doing is spraying stuff on the corpse so it doesn’t stink up the whole country.
Probably just fine. Remember, long term does not mean 6 months… or even 3 years. When people say “long term” in this context, it’s more like 20 or 30. I think even these risky real estate investments will be up consierably in 20 years (not that people are even talking about that kind of risk wrt SS).
Additionally, any workable FICA plan must include enforced divesification; not just of securities, but of asset types and classes. It must also use absolutely no leverage. What is killing hedge funds and others locked into mortgage investments is a lack of diversification (the whole portfolio is mortgage securities, with the thought that the risks are spread out across multiple securities) and that firms are borrowing to invest in the securities.
Attempts to increase the return on FICA assets does not mean engaging in a crap-shoot. While all investors are adversely affected short term by the fallout, strong, diversified investment portfolios will have the best short-term retention of value and the stronger longer-term prospects.
The next question should be, “Well that is great, d_odds, but what if I’m retiring today?” Many 401k plans, in an effort to make decision-making easier for the masses, are adopting “Lifestyle” plans. The idea is that as you age, the fund will automatically shift funds into theoretically more stable, more liquid investments.* Without incredibly strong provisions to protect people from their own stupidity, such as enforced diversification and “lifestyle” options, I would be strongly against any self-directed FICA plan.
*For now we shall not tackle the small number of money market funds whose investments were foolishly tied to subprime mortgage-backed securities, and who needed to be bailed out by their parent companies in order to avoid breaking the buck.
I’m well aware of what’s going on. Whether or not the top financial officials of several states have heard of the correlation of risk and reward (which I never claimed was “innovative”, but, rather, the opposite: so basic that it astonishes me that so many people in charge of so much money ignored it), they did make bad decisions.
As for the “higher returns at equal risk” remark, I’ll quote from your own cite:
Oops! I guess they didn’t count the risk that the investment pool would seize their deposits. Added efficiency through pooling your money with other investors implies added risk because there’s an additional layer of infrastructure you have to rely on to get your money.
Sounds like good advice.
Not everyone knows the details about what went on. And it is easy to criticize decisions in hindsight. Do you have any money in uninsured money market funds? They can go under at any time. I assume you are willing to assume that risk to improve on returns vs T-bills or Passbook savings accounts.
Up until the point of the freeze, these pools were very liquid. There are certainly some risks that are foolhardy, like Bear Stearns 30 - 1 (or was it 300-1) leverage. But this didn’t seem quite that risky. I’m actually all for totally minimizing risk, but that can only be done if taxpayers are willing to pay more to allow it. If the financial officers were faced with cuts in services or taking what seemed like a reasonable risk at the time, I think maintaining services was very sensible. Nothing I’ve heard indicates that these people were going overboard the way Orange County did.
The problem with this is that long term increases include short term fluctuations. Hitting retirement age during a down period is going to be painful. Wanna bet if this happens a bailout is going to be politically necessary?