Good Layman's guide to the financial crisis

[CloseDanger]

The idea of bailing out a company really p----- me off.

Except:

1. We're in this mess because of the changes, in the 1990s, to force lenders to finance housing to low income borrowers. As anyone with a grain of sense could, and did, predict at the time:

a. housing prices in general would escalate
b. people would wind up in houses they could not, in reality, afford

2. The above required (again, thanks to Congress), a dramatic change in lending. "No-doc" loans, "low doc" loans, games with FICO scores, radical ARM mortgage loans, etc. I probably don't know all the games played. The bottom line is, to comply with the new federal requirements, lenders had to get very creative.

3. The killer, I think, was when the ARMs adjusted. Upward. In a sinking market. At that point, people started to default.

4. As they got close to default, they tried to sell their homes. And prices plummeted.

5. When prices began dropping, eventually financial institutions had to begin taking the losses.

6. To make a long story short, the losses piled up until the Federal Government had to step in to prevent a complete melt down.

No one has yet stepped up to suggest any of the actions that could allow the private sector (read "Market") to fix the problem. For example, reduce the reserve requirement on commercial banks. Or eliminate capital gains taxes on mortgage securities containing x percent sub-prime loans.

But then, that might involve, or lead to, the public actually figuring out who created this mess.

Not gonna happen.

And you had mortgage companies that found it cheaper to foreclose on a house and would not put it back on the market.

There are alot of good assets out there, they just need revaluation. The Government could even make money in this.
(which we don't want as a general rule) but short term with profit and they get out as soon a possible.

You could repeal Sarbanes Oxley. That may force liquidity in. You could also pass the fair tax, that would flood wall street.

Just saying.

[J Wolfsberger]

And you had mortgage companies that found it cheaper to foreclose on a house and would not put it back on the market.

There are alot of good assets out there, they just need revaluation. The Government could even make money in this.
(which we don't want as a general rule) but short term with profit and they get out as soon a possible.

You could repeal Sarbanes Oxley. That may force liquidity in. You could also pass the fair tax, that would flood wall street.

Just saying.

I had suggested "No one has yet stepped up to suggest any of the actions that could allow the private sector (read "Market") to fix the problem. For example, reduce the reserve requirement on commercial banks. Or eliminate capital gains taxes on mortgage securities containing x percent sub-prime loans."

Your points, which would involve having the banks voluntarily forego adjusting the interest upward on ARMs, or converting the mortgages to fixed rate at an affordable payment schedule, are also good.

And all of these would have required a bit more intelligence than the banking/finance community seems to possess.

[Ken White]

And all of these would have required a bit more intelligence than the banking/finance community seems to possess.

sums it up...

[Rank amateur]

I had suggested "No one has yet stepped up to suggest any of the actions that could allow the private sector (read "Market") to fix the problem. For example, reduce the reserve requirement on commercial banks. Or eliminate capital gains taxes on mortgage securities containing x percent sub-prime loans."

Your points, which would involve having the banks voluntarily forgo adjusting the interest upward on ARMs, or converting the mortgages to fixed rate at an affordable payment schedule, are also good.

And all of these would have required a bit more intelligence than the banking/finance community seems to possess.

Again, faith in market solutions has caused the problem. There are no capital gains, only capital losses. Therefore, tax rates are irrelevant; there's nothing to tax.

Anyone who wants to can ask to have their rate adjusted. (Or as pointed out, stop payments all together and stay in the house.) The problem is the value of their house has dropped so much that the rate is irrelevant. When you owe $300,000 on a house worth $200,000 the market solution is to walk away from the mortgage. When the bubble bursts, millions of people make the same rationale economic discussion and billions of dollars of wealth disappear.

None of that is up for debate. It's happened. The problem is how to keep the problem from spreading. Because when no one is buying furniture anymore it's rationale for furntiure manufacturers to lay off people. And it's rationale for people who think they're going to lose their job to stop spending money, which means sales drop even more, which means companies lay off even more people...... and you have a vicious circle ala the 1930s.

Vicious upward cycles always in vicious downward cycles unless the government breaks the cycle.