The latest news is that Bernanke and Paulson believe that ad hoc, "one time" bailouts of failing firms isn't going to work. So they have proposed a plan to to buy $700 billion worth of mortgage-linked investments. As best I can understand it, the idea is that being relieved of these bad investments will allow banks to start lending again, which will hopefully put a stop to falling housing prices, which is causing this whole mess. Here's some analysis from NYT.
http://www.nytimes.com/2008/09/21/business/21econ.html?pagewanted=2

But what I would like to know is....WHAT CAUSED HOUSING PRICES TO BECOME SO INFLATED IN THE FIRST PLACE???

[Edited on September 21, 2008 at 1:13 AM. Reason : ``]

9/21/2008 1:10:33 AM

personally, i'm down with a shitty housing market and not bailing people out on the taxpayer dime

you know, because taxes suck, and i don't own a house, but i probably oughta buy one (even if it's just rental property)

9/21/2008 1:25:40 AM

^^ one analysis that I casually heard (IOW I don't stand by it) was that lenders were advertising easy-to-get loans and encouraging people to by houses as investments (which is easy to believe when you consider the ridiculous amounts of advertisements about "no credit, no problem!"), which increased the demand for houses, without a corresponding increase in supply, which caused the prices of houses to increase too.

9/21/2008 1:33:43 AM

Quote :

"WHAT CAUSED HOUSING PRICES TO BECOME SO INFLATED IN THE FIRST PLACE???"

We got lucky here in that they never shot up, so they had no where to fall. I have heard people attribute it to the more restrictive laws that apply to mortgage lending in NC. That may or may not be true but it is one explanation I have heard.

There were mortgages in some other states (cough, florida) where your payment did not even have to cover the monthly interest so every month that went by the loan balance would go up. This was done on the pretense that values would continue to climb as they had been.

Needless to say when the values dropped these people had to cut and run. They did not qualify for the payment to begin with. To make matters worse some of these loans had a baloon payment or a rate increase after two or three years.

9/21/2008 3:45:50 AM

Quote :

"WHAT CAUSED HOUSING PRICES TO BECOME SO INFLATED IN THE FIRST PLACE???"

one analysis i've heard was that Greenspan kept the prime lending rate so low for so long in 2001-03, in order to try to keep the American domestic economy moving after 9/11. But that made it so foreign investors started looking for new investment options, and they found new investments in real estate, indirectly at least through new securities like CDOs and credit swaps. So all of a sudden there was a demand starting from the top for these investments, which trickled down to the mortgage companies then down to the mortgage brokers, etc, and at each point the lending criteria was loosened because of all this demand at the top for these investments. So by the time it got to the bottom, they were practically giving money and houses away, of course driving up the demand, and the prices, for houses

9/21/2008 10:07:22 AM

Quote :

"But what I would like to know is....WHAT CAUSED HOUSING PRICES TO BECOME SO INFLATED IN THE FIRST PLACE???"

http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act

and

http://en.wikipedia.org/wiki/Commodity_Futures_Modernization_Act_of_2000

Those two little bits of deregulation made the mess we have today possible. In case your curious, here's the voting record for the Gramm-Leach-Bliley Act.

http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=106&session=1&vote=00105

Quote :

" Biden (D-DE), Nay McCain (R-AZ), Yea "

Also, the guy who spearheaded that bill happens to be John McCain's economic advisor. The more you know.

9/21/2008 10:30:43 AM

It all goes back to illegal immigration. See, who built all these houses? Mexicans. Without those darn Mexicans, not nearly as many new houses could have been built, sub-prime loans wouldn't have been given out for these new houses, and the world would be a better place. Mexicans are destroying our Economy!.

9/21/2008 10:48:34 AM

Quote :

"If the plan works, it will attack the central cause of American economic distress: the continued plunge in housing prices. If banks resumed lending more liberally, mortgages would become more readily available. That would give more people the wherewithal to buy homes, lifting housing prices or at least preventing them from falling further. This would prevent more mortgage-linked investments from going bad, further easing the strain on banks. As a result, the current downward spiral would end and start heading up."

This is just wrong. The plunge in housing prices didn't occur because people couldn't get loans. The plunge occurred because homes were speculatively priced due to cheap and easy money meaning they were set for a fall. The continued buildout of more and more inventory all across the country exacerbated the problem. Coupled with loan resets, and ultra high energy prices, it was only a matter of time before the house of cards started to fall.

9/21/2008 10:55:08 AM

Quote :

"“It’s easy to forget amid all the fancy stuff — credit derivatives, swaps — that the root cause of all this is declining house prices,” Mr. Blinder said. “If you can reverse that, then people start coming out of their foxholes and start putting their money in places they have been too afraid to put it.”"

This guy is brilliant! Sure, if we give people that can't afford loans a house with no money down, they'll continue to fuel the economy buy buying TVs and other luxuries on credit. This takeover of the toxic debt should ease the credit crunch, and people that deserve a loan will be able to get it, but it's still going to take some time for this shock to the system and further bleeding to occur before we can emerge from the rubble and start to rebuild. If oil goes back down to the $50s due to demand destruction, this might help us move out of the mess sooner than later. At this point, I think it's a real possibility.

9/21/2008 10:58:36 AM

^^^^ Explain how the repeal of the Glass-Steagall Act led to rising home prices.

[Edited on September 21, 2008 at 11:00 AM. Reason : .]

9/21/2008 10:59:54 AM

I'd just like to point out that falling housing prices are not a problem, they are the solution.

There are a lot of reason why housing became inflated, but a big cause is the combining of loose credit given to people who didn't reserve it and a general attitude among the population that housing was an investment.

In fact, the very precence of Fannie and Freddie, which were established with the goal of promoting affordable housing, had in fact the complete opposite result. By promoting home ownership and extending credit at extremely low rates, they are increasing the demand and thus the price of the very item they are trying to make affordable.

And now that housing prices are dropping, and thus the supply of affordable housing is increasing, everyone freaks out.

9/21/2008 11:16:16 AM

Investment insurance.

Coming soon from AIG.

9/21/2008 1:21:31 PM

Quote :

"WHAT CAUSED HOUSING PRICES TO BECOME SO INFLATED IN THE FIRST PLACE???"

I have a brief article on the subject

http://www.sog.unc.edu/pubs/electronicversions/pdfs/2008090ELB.pdf

9/21/2008 1:33:20 PM

Damn, I hope this bailout doesn't pass.

In a bit of breaking news I just heard Obama in Charlotte say 'No to blank checks' about 5 minuts ago. That's a pretty bold position to take and I hope more follow suit to squash this bullshit payout. Most dems are for moving this through, I just heard Chris Dodd support it on TV.

9/21/2008 2:09:19 PM

There have been a couple good blogs of economists who are having some reservations about this thing. Evidently Bush's plan "give me $700 billion without any conditions and I'll do the best I can with it" is not good economic policy.

9/21/2008 2:16:44 PM

With these lenders being bailed out by the government, I wonder if they are going to bail out the people who owe them money in the future when they can't pay.

9/21/2008 2:33:51 PM

I think I read (pls. correct me if I'm wrong) that the bailout, in its current form, would make actions by Paulson completely free of judicial and congressional oversight.

Yeah, from the bill:

Quote :

"Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

WTF

9/21/2008 2:37:08 PM

yeah, we don't need a financial Patriot Act

9/21/2008 2:43:35 PM

Considering the Fed shouldn't exist according to the Constitution anyway, giving them that kind of power would be the absolute stupidest move possible.

I'm sure some of you have heard of this movie, but it has a huge part of the Federal Reserve and what it's true purpose is. http://www.zeitgeistmovie.com/ Some of you probably hate that movie, but it's got some really good points.

9/21/2008 3:39:53 PM

Ha, that movie is so stupid

http://www.twcenter.net/forums/showthread.php?t=160597

9/21/2008 6:04:16 PM

kwsmith2

Thanks for the article! It goes a long way in answer my question. However, there are still a few things I don't understand.

1) Was securitization what drove the rise in housing prices (being able to pass-off mortgages to other institutions allowed banks to make more loans which allowed more people to buy houses which pushed home prices upward)?

If so, why are housing prices falling now?

2) I imagine that the answer to the first question has something to do with people defaulting on subprime mortgages, raising the supply of available homes and also reducing the demand for homes by making banks less willing to make loans. If that is the case, why are all these people defaulting at once? And if giving these people mortgages was such a bad idea, why would banks make the loans in the first place???

9/21/2008 8:03:29 PM

seems like people being able to buy houses by means of relaxed credit would necessarily drive the price of houses up, because demand is higher.

prices would then fall once the defaults started. it's no secret that there are tons of homes for sale right now, and many of them are defaults. so, now we have way too many houses, so the price drops drastically.

why the sudden defaults? Mainly cause the ARMs all just reset to ridiculously high rates, at about the same time.

and finally, why would the banks make the loans? From what I understand, it wasn't banks making the loans. It was other shady kinds of lenders who would then pass the loan on to someone else. There was no risk involved for those lenders, because they would get their money almost immediately. If you could get a loan from a bank, then your credit was probably fine, so you didn't get any bullshit ARMs. My folks have an ARM, but their rate just reset down, because they had their loan from a credit union.

[Edited on September 21, 2008 at 8:20 PM. Reason : ]

9/21/2008 8:17:14 PM

Quote :

"I imagine that the answer to the first question has something to do with people defaulting on subprime mortgages, raising the supply of available homes and also reducing the demand for homes by making banks less willing to make loans. If that is the case, why are all these people defaulting at once? And if giving these people mortgages was such a bad idea, why would banks make the loans in the first place???"

I think the answer to this one has been eluded to in this thread: people took out mortgages (and banks made loans) on homes on the premise that the declared value would go up. Thus, when home prices took a dive, many mortgage holders ended up upside down on homes, financially stuck - they couldn't afford the payments, they couldn't get rid of them, and even if they did - they'd take a tremendous loss (i.e., be unable to actually pay off the outstanding balance).

Hence, as prices fall, an avalanche effect occurs - people default, home prices fall, more people end up upside down on mortgages they can't afford and can't get out of, more people default, and the cycle continues.

There was an interesting article in Sunday's WaPo from an economist who proposed that the crisis was really set into motion by the emphasis on the momentum of collateral (i.e., the upward direction of prices) rather than the ability to pay for homes themselves. (He made the argument far more eloquently than I am now, but the point remains). In essence: banks started loaning more and more on margins of investments, rather than the intrinsic value of the investments themselves.

The securitization of this debt simply is what allowed individual banks to take these risks, as the risk was parceled out among many investors, which left no individual bank on the hook for any given bad loan. The problem, of course, is that a critical mass of bad loans occurred - namely, because there were far too many of them, and few people had a reckoning of their size until the market itself collapsed.

Quote :

"and finally, why would the banks make the loans? From what I understand, it wasn't banks making the loans. It was other shady kinds of lenders who would then pass the loan on to someone else. There was no risk involved for those lenders, because they would get their money almost immediately"

Banks routinely sell mortgages - so it doesn't really matter of this was an intermediary or not. When you walk into any given bank and take out a home loan, chances are very good that loan would be sold off immediately after you signed the papers and serviced by someone else. It makes sense for smaller banks - it enables them to make some profit off the loans while keeping liquidity to broker other loans.

[Edited on September 21, 2008 at 8:27 PM. Reason : .]

9/21/2008 8:25:25 PM

i kinda wish the housing market would suck until i buy a house on the cheap etc

9/21/2008 8:44:48 PM

Private profits and public risk...the Bush economic policy.

9/21/2008 8:50:51 PM

^ Its disingenuous to equate the bailouts with either Bush or republicans simply because Bush is our president. If the majority of democrats were voting against the bailouts, then your depiction would be accurate. Otherwise, like the most polices that are enacted, this one is bipartisan.

[Edited on September 21, 2008 at 9:09 PM. Reason : .]

9/21/2008 9:08:37 PM

Quote :

"the guy who spearheaded that bill happens to be John McCain's economic advisor. The more you know."

9/21/2008 9:09:07 PM

^ Can you explain how this affected house prices?

[Edited on September 21, 2008 at 9:11 PM. Reason : .]

9/21/2008 9:11:13 PM

^ The deregulation of the mortgage industry led to an unusually high demand for housing (people who were not previously "qualified" for loans were now able to get them. see: supply and demand.)

This is one of many factors, but I think the majority of the experts agree that it was a key contributing factor.

[Edited on September 21, 2008 at 9:17 PM. Reason : .]

9/21/2008 9:16:53 PM

I apologize. That was kind of snippy.

But opening a bunch of high-risk borrowers to a new market, with a limited ability to grow supply in a short period of time (like how long it takes to build a house.)

Also the banking crisis is tied to this act, in the way some of the futures markets, and other investors were taking capital, that was from a bad loan, putting it down as a down payment on another loan, which was then invested in other places in the market.

To be fair, that's about 50/50 hard facts mixed with a relatively widely held opinion among the money experts.

9/21/2008 9:26:27 PM

It were the I-banks, not the retail banks, that have failed, so if the repeal of Glass Steagall caused the housing crisis, would you not expect the retail banks, who were most affected by the repeal, to be the ones failing?

[Edited on September 21, 2008 at 9:36 PM. Reason : ']

9/21/2008 9:29:00 PM

True, but:

Quote :

"Also the banking crisis is tied to this act, in the way some of the futures markets, and other investors were taking capital, that was from a bad loan, putting it down as a down payment on another loan, which was then invested in other places in the market."

The "other investors" I was referring to were largely the investment banks.

9/21/2008 9:37:11 PM

SteveChaos,

Quote :

"I think the answer to this one has been eluded to in this thread: people took out mortgages (and banks made loans) on homes on the premise that the declared value would go up. Thus, when home prices took a dive, many mortgage holders ended up upside down on homes, financially stuck - they couldn't afford the payments, they couldn't get rid of them, and even if they did - they'd take a tremendous loss (i.e., be unable to actually pay off the outstanding balance)."

But this doesn't really explain why housing prices started to plunge to begin with.

9/21/2008 9:39:03 PM

sounds like a great time to get a new house.

9/21/2008 9:45:10 PM

Quote :

"But this doesn't really explain why housing prices started to plunge to begin with."

They dove because the financing dried up and therefore demand went away. No financing = no buyers = lower demand.

9/21/2008 9:52:10 PM

Quote :

"Its disingenuous to equate the bailouts with either Bush or republicans simply because Bush is our president. If the majority of democrats were voting against the bailouts, then your depiction would be accurate. Otherwise, like the most polices that are enacted, this one is bipartisan."

I haven't followed the news real closely this weekend, but aren't some of the dems the ones questioning giving this much sweeping power to a handful of people without taking a more careful look at it? I might be way off with that one.

Quote :

"But this doesn't really explain why housing prices started to plunge to begin with."

You seem to be looking for silver bullets in this thread. It simply isn't one thing that caused this mess. It's a whole host of missteps and screwups. It takes a little bit of time for thousands upon thousands of people who don't belong in the homes because they can't afford them to do something stupid and not be able to make payments. ARM resets and high energy costs started breaking folks backs, I think this precipitated the bubble pop. Then you had the morons that bought multiple high priced investment properties (no doubt helping to drive already too high prices higher). After awhile, folks started asking themselves, did I really just pay 1.1 million for this 800 sq ft shithole in the hills? And so on and so forth. It was all a perfect storm of partial lack of regulation and partial outright greed fueled criminal behavior. I don't see how you can't throw the SEC boss in jail for relaxing leverage rules on 5 of the i-Banks. There is probably a money trail there. I don't see how you don't throw folks from Moody's in jail for giving favorable ratings to the toxic junk that was getting passed around everywhere.

9/21/2008 10:00:51 PM

http://www.amazon.com/Free-Lunch-Wealthiest-Themselves-Government/dp/1591841917

9/21/2008 10:31:14 PM

again, the prices plunged because people defaulted on their loans. you then had more way more supply than you had demand.

9/21/2008 10:40:53 PM

Quote :

"http://www.thisamericanlife.org/Radio_Episode.aspx?sched=1242"

Click on "Full Episode" on the left column. Lasts alittle over an hour - gets very interesting after the first ten minutes. The first eight minutes are questionable and can be skipped if you're feeling more to getting straight to the meat (skip to minute 8).

You'll never question why this housing crisis happened again even if you're an MS Economist (like my friend whom I forced to listen to this and respond to it) or a simple Computer Scientist such as myself whom has only a basic grasp of economics and economic theory. Interviews of real people at every level of the chain of greed and why things have gotten so out of hand despite that greed.

TAL is often criticized irrationally as a 'liberal' show despite the whole point of the show being to relate to the American public (and others) the stories of real American individuals in their everyday lives: Journalism nearly at its finest. Give this episode a shot so you can at least understand the crisis - you'll thank me no matter what your political leaning.

[Edited on September 21, 2008 at 11:37 PM. Reason : Hey Global Pool of Money ... Screw You. -- Basic Synopsis by Ira starts at 13:40 and ends at 15:15.]

9/21/2008 11:23:54 PM

^listening. so far it sounds like people got HUGE loans from shady banks with no income verification


and we have to bail that shitstorm out?? wow. hopefully there's some better news in this program

9/21/2008 11:35:58 PM

^keep listening

9/21/2008 11:39:31 PM

^^ I certainly hope you didn't get the impression from this program that it was promoting the theory that bailing out those loans is the best way to go. I certainly didn't. I certainly don't think that is the best way to go (I'm a big L Libertarian). The ridiculous greed at even the bottom of the system is shown at 23:40-26:40.

Just listen to the rest without any jaded view upon it (please) and just respond with what it told you about the current crisis. Maybe you fully understood this background, which is possible, but maybe you're like many Americans who don't fully understand the entire global financial system (which is much more likely if you're a simple technical Engineer, Medical provider (such as my wife), or blue collar worker such as many of my friends).

[Edited on September 21, 2008 at 11:42 PM. Reason : ^^]

By the way, thanks for taking the time to listen to something posted by someone else about a third party report on the WolfWeb Soapbox.

[Edited on September 21, 2008 at 11:49 PM. Reason : We are telling you to lie to us, basically, and I wish we had never done it. -- 23:40 - 26:00]

9/21/2008 11:40:10 PM

1/2 million dollar no income verification loan


yeh i'm gonna go get one. brb. LOL

9/21/2008 11:50:45 PM

why cant the gov just pay 0 dollars and 0 cents and let this just correct itself the regular way?

9/21/2008 11:56:02 PM

You'd be surprised how many people did that exact same thing thinking it was a good idea. The entire time the higher ups in the system were thinking "Hell yeah, there's another guy who is going to give us 5% average return on our investment".

Then they all "suddenly realized" how they got duped by people you just impersonated 'in jest'. All of a sudden these mortgage loans that everyone down the chain for years had realized were bad investments actually became bad investments (read: Moody's, S&P, etc). Suddenly the average American taxpayer has to 'bail out' these multi-billion dollar corporations and even go further and 'bail out' regular mortgage loans (in the most recent bi-partisan bill) to save the financial system.

9/21/2008 11:59:07 PM

^idk.

but i went to the car dealership this weekend to test drive a car at leath audi...

the guy ran my credit and his eyes got real big and he says "damn son, you could buy this whole lot if you wanted"

i lold

9/21/2008 11:59:11 PM

i mean shit...700 billion?

give me like 1 percent of 1 percent or something, shit...

9/22/2008 12:00:57 AM

^^ But yes, you're a sane person so you got the lulz...

You know how many people are not sane out there.. when they hear that shit they don't get the lulz and the first thing they think is "get me into the first Escalade you have in stock".

700 billion? I doubt that will scratch the surface once everything is actually uncovered. I sure hope it's an accurate number... actually I hope against all hope that it is. If it isn't, then we're going to be having a conversation on a whole different level here in a few more years.

9/22/2008 12:04:10 AM

it's called "price correction"

i can't wait to score a million dollar home for 400k in a few months. lol

9/22/2008 12:06:14 AM

Quote :

"1) Was securitization what drove the rise in housing prices (being able to pass-off mortgages to other institutions allowed banks to make more loans which allowed more people to buy houses which pushed home prices upward)? If so, why are housing prices falling now? 2) I imagine that the answer to the first question has something to do with people defaulting on subprime mortgages, raising the supply of available homes and also reducing the demand for homes by making banks less willing to make loans. If that is the case, why are all these people defaulting at once? And if giving these people mortgages was such a bad idea, why would banks make the loans in the first place???"

The CDO market collapsed when it became clear the models didn't work. This is why banks are stuck with tons of MBS that they cannot get rid of. This is the stuff Paulson wants to buy.

Without the CDO market there is no supply of subprime loans, hence all of those buyers drop out of the market. Housing prices should then revert to pe-CDO boom trends. I believe this is the path we are on now.

9/22/2008 12:08:31 AM