Blinder: 'Fiddling on Foreclosures'
“The government’s continuing failure to do anything large and serious to limit foreclosures is tragic. The broad contours of the foreclosure tsunami were clear more than a year ago — and people like Representative Barney Frank, Democrat of Massachusetts, and Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, were sounding alarms. Yet the…
Nooo you don’t. Speculators brought up the price of homes for everyone and now that they are left holding the burning match they want help. No. I have to pay more rent because homeowners wanted to get greedy? My landlord doesn’t cut me a break. He was going to Atlantic City with my rent money now he wants help and money from my tax dollars. No There is plenty of room under the Brooklyn Bridge for him to live in a cardboard box.
Thank you all for your responses to my question. I learned a lot.
Iknow and Traveller;
I think we’re partly in agreement. Iknow is right about the economic impact of widespread foreclosures. I would counter that the entity that is most aware of this fact, and able to act on it, are the banks themselves. Banks lose alot of money if a house goes into foreclosure. They have to pay legal fees to proceed with foreclosure, money to maintain the property while it is waiting to be sold off and fees to dispose of the property. They lose even more money if the price they can fetch is depressed due to alot of foreclosures in an area.
It is for this reason that foreclosure is the last resort for banks. They could save themselves alot of money by renegotiating a loan, if it is possible to salvage the situation.
I would argue that it is for this reason that the banks themselves are the best arbiters of the “renegotiate versus foreclose” decision. They are incentivized to avoid foreclosure where possible, and have the means to judge someone’s ability to meet the new terms.
My fear is that if the government takes on this role, they will be ham-handed, and there will be a political dimension to their decision-making that will get us into further trouble down the road. Let’s no forget one of the largest roots of this housing bubble: Alan Greenspan kept interest rates low for too long in the years 2002-2005, because he wanted the banks to recover their losses and stimulate the economy after the dot-com implosion. He looked like a genius at the time, but now we know better. I’m afraid of a repeat of this situation.
Good debate.
Healthy debate – very cool.
Northsloperenter – I think we’re on the same page — so next comes the hard part. How to set up a system that excludes the gamers?
I’m not saying there’s an easy answer – but my problem is when people say gov’t shouldn’t get involved at all b/c any solution is bound to reward some people who don’t deserve it.
Apologies in advance if this doesn’t apply to you, but in my experience these are usually the same people who, up until the recent past, would have argued that the govt’ should take a totally laissez faire approach to the economy, b/c the hidden hand of economoic forces will lead to the most efficient allocation of resources, etc.
I understand where that frame of reference comes from, but I think it’s based on a critical flaw – it assumes that people make economic decisions rationally. I’ve never met anyone who makes decisions with 100% rationality (although we’d all like to think we do), and I’m sure that the people at these banks thought they were making decisions in their own best self-interest (i.e. do anything to make the y.e. bonus) — but all the while they were dooming their companies to failure.
That’s why I think gov’t should definitely have an active but limited role in 1) limiting the collateral fallout from the current crisis, and 2) enacting sensible regulations (yes, there are some that most people would agree on) to not let things get so out control again in the future.
Benson – It’s tough to argue w/a consistent p.o.v. (i.e. no bailouts whatsoever) – you could be right, but we only know what’s actually happened, not what might have happened. I do find it interesting that you mention JP Morgan though, because it seems to me that’s a good example of the gov’t stepping in in an appropriate way — having effectively taken over the JP Morgan role that you allude to — because right now even the few healthy banks are afraid to take over the unhealthy ones w/out some kind of gov’t guarantee.
The only people benefitting from foreclosures are the people who buy it from the bank at a great discount or at auction. If the home forecloses, the bank loses, the home owner loses, and usually the community loses. If all the houses around “your” house were foreclosing, the value of your house would end up taking a deeper dive. If people get in credit card debt and can make a deal, why shouldn’t homeowners be allowed the same “out.” Of course, some should foreclose since they just don’t have the income, but others are cutting it close and are paying way too much interest. If banks can lower their interest rate down to current going rate, some of these people will survive. That’s good for economy. And that’s the big picture.
Home sales are soaring in California. Properties that sold for $500,000 in 2005 are now selling for 50% to 60% less. Today’s buyers are making down payments (zero down is so yesterday) and have good credit scores. The chances of them being foreclosed on, or the chance of the bank taking large baths on foreclosures, are next to nothing.
Bottom line – the government should do absolutely nothing to stop foreclosures. Yes it is terrible for people to lose their homes. But long term this is the best approach to the problem.
Too much this and that. All these guys are fools.
Iknow;
I didn’t favor bailing out the banks either. This goes to Traveller’s point. I hear what you are saying, Traveller, but my belief is that the federal government has actually induced more of a panic and economic slowdown than would be the case if they had simply allowed the private market to settle this out. Their rash actions inspired a loss of confidence.
There are many healthy banks who didn’t participate in the reckless lending spree. These stronger banks should take over the weaker banks.
In the early 1900’s, there was a similar panic in the banking system. At that time, JP MOrgan sat the banking community bigshots in a room, and personally knocked some heads together. He literally commanded who was going to take over whom. The banking sector quickly emerged the stronger after this expedited shake-out.
I understand what you are saying traveller, and I’d be willing to consider supporting plans for easing the pain as long as they don’t reward people for not paying their mortgage.
That is, if you and I are both in trouble with our mortgages, but you scrimp and save like mad to keep from going into default and I don’t scrimp and save like mad and go into default, I shouldn’t end up getting a better deal than you.