Paul Krugman has a useful and succinct description of the unfolding mortgage crisis. It’s worth a read just to get a grasp on what’s behind the problem. Yet, he has no real solution. This is why I am impatient with his snideness:
True to form, the Obama administration’s response has been to oppose any action that might upset the banks, like a temporary moratorium on foreclosures while some of the issues are resolved. Instead, it is asking the banks, very nicely, to behave better and clean up their act. I mean, that’s worked so well in the past, right?
He takes a shot at the administration for opposing a blanket moratorium, but he does so without even considering their motivation except to say that they don’t want to “upset the banks.” This is a repeat of Krugman’s behavior at the height of the financial crisis when he called incessantly for nationalizing the banks without the slightest regard for the legal and financial risks and barriers to doing so.
It’s an attitude echoed by digby. While I agree with her completely about the necessity of accountability and jailtime from the fraudsters, she’s way too casual in saying this:
There is not going to be any easy way out of this. The invisible hand may be working but it often works on a very, very long timeline and many bad things can happen to a society while it does its thing. Meanwhile, every incantation and folk medicine they’ve applied to this problem has resulted in another round of infection. It’s time to open up the wound and completely clean it out. The patient will heal much faster and it’s far less likely to die in the meantime.
I don’t mean to be insulting, but I don’t think digby has the information she needs to make an informed opinion about what will or won’t kill the patient. There is an enormously compelling sentiment in this country (not only on the left) to punish the banksters. But there’s not much consideration of the exquisite difficulty of doing so without punishing all of us. We lost seven million jobs in the blink of an eye when the banks were exposed as insolvent. We could have clawed back some executive pay and thrown some people in jail, and the vast majority of the pain would still have fallen on ordinary folks. We could have let the banks fail, and we probably would have lost another seven million jobs that may take decades to replace.
There’s no political will to do TARP II, so how eager should we be to prove the banks’ insolvency?
To be clear about what is at the root of my complaint, it’s easy to call for creative destruction from the sidelines but the people who have to actually make these decisions have a very weighty responsibility. As a matter of justice and political survival, they should absolutely start putting some people in prison. But as for how they should clean up this mess so that it both fixes the problem and doesn’t cause another wave of mass unemployment? Well, hell if I know. But I’m pretty confident that they aren’t operating on the premise that they can’t upset the banks. They’re operating on the assumption that we need a financial services industry to keep credit flowing and, therefore, keep the economy growing. Lazy snark about ‘extend and pretend’ might feel good, but the gravity of the problem is large and the potential consequences so grave, that calls to lance the wound and take the pain all at once are far too smug.
In the big picture, the moratorium is small potatoes. The real issue is how the document trail issue is resolved. If it is resolved in a way that forces the banks to eat their shitpile in one sudden burst, and there is no will to bail them out again, then we’re back September 2008. But, this time, the ship goes down to the bottom of the sea. So, I guess what I am saying is, be careful what you wish for and don’t be so quick to judge the people who are responsible for keeping us out of a true Depression.
Not to be glib, but when the Allies were rebuilding germany after WWII, there was a tricky problem of who to leave in charge, since the only experienced administrators and most of the successful business owners were Nazis or Nazi sympathizers. This is a more difficult problem because we haven’t fought, much less defeated, large banks or their major depositors.
I agree that people are far too quick to judge the WH, and also to call for policies or actions that would put us in severe financial peril. As much as the bankers are the problem, they are also a necessary bulwark against far worse difficulties. It’s a sticky wicket.
It’s a good analogy. And, remember, many principled people are still criticizing the inadequate denazification of the post-war years. Sometimes, you need the people you should be punishing. In this case, I don’t care about individuals, but institutions. And I don’t care about the institutions in the long-term. They can be broken up if they present systemic risk. But if the problem is risk, you don’t ignore the risk of doing things rashly.
I was going to answer elsewhere on this thread, but this:
This is a repeat of Krugman’s behavior at the height of the financial crisis when he called incessantly for nationalizing the banks without the slightest regard for the legal and financial risks and barriers to doing so.
Is just BS. I am sure Krugman knows what is involved. And what he sees, in our current course, is exactly what’s happening to Japan. They still haven’t cleaned up their banking sector. And we look to be following them so far.
It’s not b.s. at all. Unless you point me to where Krugman took the legal barriers to and financial risk of nationalization seriously, you’re talking out of your ass.
Sorry, nope. Read finance blogs, and read economics blogs, and it becomes apparent that Krugman knows jack shit about finance. He should stick to his trade. I’ve laid out the legal complications more times than I can count on this damn blog (and Tarheel just did it in the last blog entry!), and it’s like people come back acting as if I never said anything. Same for the financial complications that BooMan has laid out before.
It’s not BS at all.
I’m getting a little bit tired of these pundit and blogger fights about tone. It is distracting from good analysis of the real issue. A plague on all your houses.
The real issue is indeed how the document trail issue is resolved. A general moratorium is the only way you can begin to answer this issue. The bad loans on mortgage holders balance sheet are only bad when the foreclosure happens; carrying paper losses through a moratorium is easier to do than foreclosing and forcing more people into real homelessness. The first step is that simple.
We are now at the point at which the bad mortgages are bad because of the delay in dealing with severe and now chronic unemployment.
And we now know that there have been a non-trivial number of cases of fraudulent filings for foreclosure and criminal evictions of homeowners (including theft of their property). These are serious law-enforcement issues that require a moratorium to investigate before any more instances happen.
We are not back in September 2008 unless the mortgage holders are still slicing and dicing mortgages into credit default derivatives and third-party credit default swaps. And if banks have not learned their lesson and are incorrigible, then allowing them another cycle of craziness will not solve the problem.
The “extend and pretend” label was applied to the HAMP program and accurately states what that program was and why it failed.
We need a financial industry to keep credit flowing, but the current way the financial industry is structured has meant that bailout has not resulted in credit flowing. Meanwhile, small community banks have been failing and resolution carried out by the FDIC, resulting in more concentration even among small banks. More concentration moves towards too big to fail.
The banks have been insolvent in real terms for some time, especially considering that there were an estimated $100 trillion in credit default swap obligations for substantially less value than that of mortgages. The house of cards has been coming down for three years now. It is time for individual and corporate investors to take the paper losses for that collapse (it is a paper tax cut) and freeze transactions in the financial sector (a more complicated form of a bank holiday) until actual positions are determined. It is much better for investors to lose paper profits for a short time to sort things out than for homeowners to lose all of their equity and their home because they have failed to pay a mortgage because of unemployment produced by the bubble that the banks themselves created.
It is time that someone in politics said very clearly that people are more important than paper and human persons are more important than corporate “persons”.
The rich have to take the haircut on this crisis. No one else has any hair left to cut.
And Republicans should not be rewarded for perpetuating this situation (as they likely will be). Down that road lies unemployed, homeless, formerly middle class people willing to follow any “strong” leader. The world has been there before. It isn’t pretty.
We’re back to September 2008 if this happens:
It’s probably too expensive in terms of legal fees for individual homeowners to avoid paying their mortgage servicer, even though I’m pretty sure that I could do so legally since our mortgage has sold three times and the paperwork is probably not in order. But people with investment properties might find it economically attractive to simply stop paying their mortgage since no one can legally prove their own it. The immediate problem is hedge funds and pensions. If they claw their money back, then we’re back to Sept. 2008.
Which they have every right to. Or does rule of law not mean anything any more? Wait!! Don’t answer that, because the past 10 years have shown it doesn’t. Have you read Barry Ritholtz the past week?
If the Rule of Law says that we have to go through a Great Depression, then what do you want to do? What do you think mortgage forgiveness is? It’s the recognition that things will be better off overall for everyone if the banks forswear the full measure of what they owed under the law.
Where does the Rule of Law say that? It doesn’t. But since it’s not being followed, we are at the mercy of the banksters. What do you think the point of cramdown was/is? It’s part keeping people in their homes, and it is part cleaning up the banks. Is cramdown not a good idea? And if so, why not?
I guess I wasn’t clear.
A lot of people are appealing to the Rule of Law (the contractual language on mortgages being honored) to argue that people should be able to keep their homes without paying for them, and screw the banks because they didn’t follow the law.
Okay.
But what about cramdown? That is equally a matter of not following the contractual language on the mortgage. In that case, the bank agrees to (or is compelled to) renegotiate the terms of the mortgage and take a loss. They have an interest in doing this in many cases, but that goes to the macro level, not the one-on-one terms of contract.
If cramdown is a good idea, then so, too, can other forced renegotiations of contract be a good idea.
Basically, you tell Hedge Funds that, no, they can’t get their money back just because the letter of the law wasn’t followed when transferring mortgages. No fraud was perpetrated against them (at least, not in the transfers). The fraud that is going on is aimed at entirely different victims.
Unless, that is, you want another massive bank failure.
A lot of people are appealing to the Rule of Law (the contractual language on mortgages being honored) to argue that people should be able to keep their homes without paying for them, and screw the banks because they didn’t follow the law.
I am not arguing that people can stay in the home scot-free(meaning welch completely on the mortgage). I don’t know where the hell you got that idea.
As to the rest of your comment. Do you know anything about bankruptcy law? I am not a lawyer, and I don’t know much about law, but I do know how vacation/2nd homes are treated in bankruptcy court. Might it have something to do why I think cramdowns are a good idea on the primary home? Either way, the law is going to get changed. Either change it to favor the homeowner, or change it to favor the banksters. Your choice. And finally, this:
If cramdown is a good idea, then so, too, can other forced renegotiations of contract be a good idea.
Didn’t you notice what happened as part of the auto bailout?
Booman, if I’m reading Felix Salmon at Reuters correctly, there’s a 2nd issue involved.
Issue #1 is foreclosure fraud—banks foreclosing without having the legal right to do so, often because they can’t legally document their ownership of the mortgage.
Issue #2 is securities fraud—banks knowing that mortgages were of inferior investment quality, securing a discount on their purchase price from the mortgage originators, and then not disclosing that information to investors (hedge funds, pension funds, Fannie & Freddie, etc) to whom they sold bonds backed by the mortgages.
You’re correct, so far as I know, that hedge funds can’t get their money back because of Issue #1. Issue #2 may be a different matter.
Yes. Kind of.
It’s three things.
The Hedge Funds absolutely are trying to use #3 to get their losses back. Number two would be justified. Number three would force an immediate accounting that we can’t afford.
Let the hedge funds go under if they are pushing to transfer the paper losses to them (which is what they are seeking in an ironic sort of way). Bail out the pension funds instead of the banks or hedge funds; those funds represent a real impact on actual (as opposed to fictional) people.
If the actions taken after September 2008 did not succeed in changing behavior in the mortgage market, let those who failed to change their behavior fail. That eliminates moral hazard real quickly. And bail out the innocent bystanders.
The paper trail issue can only be solved through a moratorium on foreclosures. Then, adequate investigation can be done to triage those mortgages into those with clear ownership, those with a clear paper trail, those with a complicated but discoverable paper trail, and those with a potentially fraudulent paper trail.
Given the nonsense on Wall Street, it might be necessary to suspend trading in the affected companies until the issue is settled. Let the bears take a hit on their creating panic in the executive suites of these institutions that motivated these sloppy foreclosure proceedings and the unwillingness to write down principal.
you are misinterpreting a couple of things.
The Hedge Funds and Pensions are trying to invalidate trades that wound up costing them money. They aren’t attacking the real fraud that may have occurred, which is the bond rating they were provided. They are attacking a technicality that is being used by others to defraud others. The papertrail problem is twofold. It creates a legal problem for justified foreclosures and opens the way for fraudulent or errant foreclosures. That’s one problem. The other problem, and the one that poses systemic risk, is that it potentially invalidates millions of trades over a decade.
Calling for a moratorium to deal with the first problem makes sense. It’s what it means for the second problem, and for the housing market as a whole that is worrisome.
If we declare a decade of common practice mortgage trading to be invalid, and everything stops until accounts are balanced, the banks are going under.
To wit:
what I wrote in the bobswern panic diary on Daily Kos:
There are more people running around making wild ass assumptions about mortgage titles and transfers who know little to nothing about how it’s been done (the same way for over 25 years) than there are mortgages. Krugman, bobswern and most of the commenters do not have the detailed understanding of MERS, mortgage transfers and/or the impact to banks on any stoppage of foreclosures. By writing about it with only a little bit of knowledge and a whole lot of assumption is completely irresponsible.
I think we’re already quite a ways down that road.
It’s a complicated issue and lord knows being president is a thankless, hopeless job, but I have to think that if the president wants to halt his slide into status-quo irrelevance, he’s going to have to stand up and really stick it to the moneymen. Morally, legally, economically, politically it is necessary. Not saying it’s easy, but sometimes a leader has to do more than accommodate and pragmitize and appease. Sometimes some eggs need to be broken and some heads need to be cracked and damn the torpedoes.
The problem is that a general moratorium brings the housing market to a screeching halt. It affects the small banks and the big banks equally, even when the problem is really with the big banks. My mortgage is with a bank that models itself after an old-style bank – make loans to people with good credit, keep the mortgages within the bank, and plan to make money off the actual repayment of the loan with interest. They’re not going to have these kinds of problems because they did everything right – and a general moratorium on foreclosures could possibly kill their business. And yet big banks like Chase and JP Morgan would suffer not a bit – oh they’d have lower profits for a while and possibly would “be forced” to lay off staff to keep their numbers up. But they have cash on hand to “limp along” until the moratorium is lifted.
The moratorium is the wrong way to go. The right way to go is to get rid of this whole “don’t have to show paperwork to a judge to start a foreclosure” mess, cramdown to help the home owners, legal action by the pension systems and hedge funds and possibly to the DOJ to bring justice to the banks that have been committing fraud, and exercising the new financial regulations to takeover banks that fail because it turns out that they were violating hundreds of years of contract law and the pension funds and hedge funds get to cripple them by forcing them to take back their toxic assets because of that.
The new financial regulations are supposed to prevent a new TARP-like situation because they’re supposed to allow for an orderly dissolving and sale of assets of banks that pre-finreg were “too big to fail”. And that’s a good thing, because there is zero chance that another TARP will pass Congress no matter who gets voted in this time around. The Congress-critters are going to be more inclined to just let it all crash than to risk their political necks with another “bailout”.
There has to be a general moratorium long enough to triage the institutions and mortgages, letting the clean ones begin operations again as soon as possible. The model of FDR’s bank holiday is a good one.
Many of the banks have adopted self imposed moratoriums. They seem to appreciate their legal exposure to some degree and my read is that their motivation for their current moratorium is pretty solid. The DoJ is investigating. AGs from all 50 states are coordinating efforts.
So why is a government moratorium required right now? Keep in mind that it can still be imposed later if it is needed.
THANK YOU TARHEEL DEM.
I get the sense that Krugman thinks all this is as easy as writing a few squares and lines on a chalkboard. My usual disappointment with Krugman is that on economic matters he is very insightful but I find his grasp of the political components very weak.
His “Obama won’t upset the banks” is not only snide but a bit unfair. I would have thought that as a liberal he could have thrown one sentence out that gave Obama a small bit of credit for his recent veto.
He does offer one interesting idea at the end of his piece. But I don’t think it sounds easy to implement legally or politically.
And why did Obama veto it? Because people found out about it and raised holy hell just in time. After all, it passed by a voice vote in both the House and Senate, and since the Pukes are the Party of No, what does that tell you? Something awfully fishy was going on.
Booman, your post is a thing of beauty.
One thing is the new finreg bill prevents a TarpII. No bail out and if I understand it correctly, the big bank that fails, gets liquidated.
Mortgages were first securitized in the late 1970,s and early 1980’s. The information about this is in Liar’s Poker by Michael Lewis.
The FBI was taken off finding out about the mortage fraud and what was going on with the securitized mortages in 2002 by Bush and put into anti terrorism.
This a big ball of wax and it is so complicated that I have no idea how things are going to turn out.
We all know that the laws have to be in place to procecute. The emotional ‘lock them’ up is nonsense. It won’t help the mess the banks have gotten into.
Krugman is a Hillary supporter. I didn’t agree that the US should nationalize the banks and I don’t agree that Obama has handled this wrong.
Obama likes to get the facts and then find out what can be done. This doesn’t satisfy the tizzy crowd.
I have to say about the finacial sector, they really did it this time.
Too big to fail means that too many people in the country would be seriouly harmed if the banks had been allowed to collapse. That goes for AIG as well.
I’m tired of the whining about this.
The mess isn’t simple. It isn’t going to be solved quickly. I think we are still walking in the dark about how far reaching the foreclosure situation is going to be.
The bears are attacking the banking sector as illustrated by the KBW Bank Index US ($BKX),this seems to be the preferred method to bring down the market at this time as it was during the last take down of the stock market. Google had blow out earnings and was up $60.00 at the open and the market sold the news; AAPL is on Monday and if the tech sector doesn’t hold the market up it will come down hard, it can absorb one of these two sectors under performing but not both. When the market has no appetite for risk or financials the big boy’s money becomes in jeopardy,the bears smell blood in the water. There are many levels of good support just below the current price but fear trumps greed every time and the support levels can fall when fear rules the decision making process.
When corporate leadership is underperforming, he market will be underperforming. And we’ve had three decades of stupidity from corporate leadership.
The market is underperforming because the bears are shorting the entire United States of America. They are creating a self-fulfilling prophecy of collapse that will endanger even their holdings.
Yup, this is what short sellers do. But as far as endangering their holdings, not really. The perfect short sale tuns into a out of business company so the buy back is zero. They keep the money taken in at the sale so the total collapse of the companies is the goal, see Bear Sterns. That’s the perfect short sale.
Except, the total collapse of the companies in this case means the total collapse of the financial sector–once again. And that will eventually come back to bite them.
These are the big hedge funds (strong hands) doing the selling, you need massive amounts of margin to short many shares of a high dollar stock GS. The deal is that that huge fast profits are made by shorting after every last one of the general public (weak hands) dollars are long and going to the point that all the general public dollars are all short and then buy back the surviving companies, like Goldman,JP Morgan, Wells Fargo. It’s not a racket it’s the way the market functions, it goes on in varying degrees day in and day out.
“B-52” is propping up the market. What do you think QE2 and the POMO auctions are all about?
That should be “B-52” Ben Bernanke
If you want true nonsense, here it is from the New York Times:
Persistently low inflation is not an problem, but persistently high unemployment is. It is an article of faith among neoliberal economists that keeping people unemployed is necessary to holding down inflation. That conflates labor price increases because of supply and demand with the devaluing of money through a mismatch of the available money supply and economic activity. If unemployment is necessary to avoid inflation, I volunteer the neoliberal economists to be the unemployed.
I don’t think that Bernanke shares the view of the reporter, but I also don’t think that monetary actions can solve the economic crisis (including the mortgage crisis).
The more I think about it, the more it makes sense for the government to spend money to bail out the homeowners with the provision that that money pay off the back debt on the mortgage plus some of the future payments, that the government make whole all of the folks who have already lost houses through foreclosure.
The moral hazard argument does not work in this case any more than it would in the case of the TARP bailout. Most folks who lost their homes were not chronically delinquent payers because they blew off their obligations.
But this is impossible because the Republicans want to capture the Presidency through a coup instead of through honest elections (which they would lose).
“Persistently low inflation” is a code phrase for the risk of deflation.
Deflation really means that money is too tight for existing production (including the cost of continuing business, profit). It can be handled through monetary means. The difficulty in this case is that the monetary remedies are not reaching the folks who could create the demand for the existing production.
Deflation also means drops in prices, home prices, stock prices and wages.
I’m just saying that “persistently low inflation” is most definitely a problem if one understands from that phrase the real concern: a growing risk of deflation.
This was a serious concern in early 2009 and is becoming one again. Bernanke and others are trying to avoid the 1990s Japan scenario – or worse.
Prices drop because supply exceeds demand. One of the reasons is people unwilling to buy or locally cannot afford to buy. Another is because the money supply has been so constricted over the entire economy that the value of money has essentially appreciated to the point that prices have to be bid downwards. The situation over the entire economy is deflation. And it does not affect all prices equally. Some are contractually stuck, like mortgage payments and supply chain contracts. Stock prices deflate in response to money supply movements in anticipation of other price moves. Wages deflate not because of money supply movements but because of rising unemployment.
Persistently low inflation does not equal a risk of deflation unless there are other things going on, such as unemployment or overproduction of goods and services.
I think that you are right however. The press is not reporting it using the “D” word because of the expectations that would set in the market.
“Persistently low inflation does not equal a risk of deflation unless there are other things going on, such as unemployment or overproduction of goods and services.”
We pretty much agree on all this. And since unemployment is very high right now…
The risk of deflation is very real. Yet the “D” word only appears once near the bottom of the NYT article you mentioned.
I apologize for not laying it out more clearly before.
So the way to deal with it is to deal with the unemployment, something that Bernanke does not have the tools to do. It is a demand problem, not a monetary one. That is, it is a distribution of money problem, not a size of the money supply problem.
Amen. Bernanke’s new round of quantitative easing can only buy a few months delay unless employment trends improve significantly.
Thank you for articulating so well what I’ve felt for months about some of the critics of the administration’s actions.
Many of the critics follow the same pattern. Point out a problem, a bad consequence, and using it to prove that the decision was bad, that the motivations for the decision were questionable, evil even. Moreover, never consider the feasability, the consequences (good AND bad), of the alternative.
you know what?
I don’t mean to be insulting, but I don’t think YOU have the information you need to make an informed opinion about what will or won’t kill the patient either.
Your essay seems to boil down to “stop pointing out the emperor’s new clothes.”
lazy snark about “extend and pretend”? Dude, that’s not lazy snark: HAMP has ruined a number of households, putting homeowners in worse shape than they were before. All it did was lengthen the foreclosure process, while telling homeowners a lifeline that was never going to appear was on the way. IT HASN’T WORKED.
I have a lot of sympathy for Obama: he’s trying to clean up Bush’s mess. But from what I’m reading it looks like the banks really really fucked up everything to the point where there’s going to have to be a lot of pain.
It’s as if you’re arguing that no one should point out the gangreous limb, because amputating it will be horrible. I don’t think we’re going to have a choice soon, this isn’t going to fix itself.
Chris Dodd to the rescue!
It’s a huge, serious problem but this just makes me laugh: Chris Dodd will start hearings on this in one month.
http://www.marketwatch.com/story/dodd-hearing-on-mortgage-foreclosures-on-nov-16-2010-10-08
L. Randall Wray in Time for a Moratorium on Mortgage Fraud has some specific proposals. I present them here because they are similar to what I have been arguing:
These are much more specific and helpful that the argument that Krugman makes, which is much too general.
that will almost certainly cripple the economy. And it’s not politically feasible.
He wants to balance the books in one fell swoop. They won’t balance. They will suck everything in like a black hole.
Is he in denial that we’re papering over several trillion dollars of debt held by the banks?
Pull that money out of the economy all at once?
Is he in denial that we’re papering over several trillion dollars of debt held by the banks?
What do you think Bennie and the Fed are, and have, been doing? Why are interest rates basically at zero?
I am completely aware of what Ben is doing, and why do you think he’s doing it? It’s as if people think the problem went away. It didn’t. You know how we have those commercials where they offer to help you pay the IRS or the credit card companies back? That’s what Ben is trying to do for the banks. He keeps the system propped up until it can get back on its feet again. Only, in this case, rather than charge exorbitant fees, he’s giving extremely favorable terms. That’s because the faster they recapitalize the better. Is it a rancid business? Yes. But no one really has an alternative. All I see is these calls to pay the piper today, which is exactly what has to be avoided at all costs.
Then say hello to Japan of the past 20 or so years. Would you prefer that?
In case you haven’t noticed, BooMan, the economy is crippled and has been for over two years.
Which several trillion of dollars of debt is he papering over, the mortgage itself or all the derivatives sold off of the mortgage? If it is the first, then massive foreclosures don’t help preserve the bank’s position, just hides it a little longer. If it’s the second, then what TARP was supposed to do didn’t happen. And if that’s the case, there has to be a different response this time.
All of that debt doesn’t get written off at once, it gets held on the books until the resolution of mortgages occur. If the fraud is as widespread as some blogs are asserting, we’re cooked one way or the other. My suspicion is that it is concentrated in only a few institutions and few contractors of those institutions and that it will be very easy to give a clean bill of health to a large number of financial institutions and get them back in the market.
Netting the claims between financial institutions would allow debt to be written off for all of the institutions without it impacting the reality of their position. It is only the holders of debt outside the tight network of cross-trading institutions that would continue to have claims on the debt of the institutions. This winds down any derivatives and mortgage reassignment issues.
Continuing to go down the same road of trying to keep the financial institutions whole and allowing innocent bystanders to continue to be driven into default is what will destroy the economy and very rapidly. That is, in the absence of some bold government policy — and more tax cuts and deregulation is not it.
C’mon Tarheel. The economy is not crippled. We have nine straight months of private sector job growth that could be wiped out many fold by what you casually propose. Hard to get credit is better than no credit, slow job growth is better than massive colossal job loss.
And here is what I think you are missing. I’m not focused on the fraud part of this even though it is very important and must be dealt with in some way. I am focused on the integrity of the securities themselves. If those securities are invalid, then all the tranches have to be unwound, the mortgages have to put back together, and the true worth of them must go on someone’s books. That’s exactly what we can’t afford. that would probably require a bailout ten or twenty or a hundred times bigger than TARP.
There’s no way around it. All of the tranches have to be unwound. That’s what the netting out process is about.
Any credit provided to the economy should bypass the major lenders who have made the wrong decisions in this mess. Have the Fed finance low interest loans at community banks instead of trying to prop up the major banks. That will come back to help the major banks in not to long a time. A top-down bailout did not work; try a bottom-up bailout. It might just have the byproduct of creating the demand that the economy is lacking.
The fact is that when there is a trillion dollars of cash on the table waiting for the economy to pick up, it is not the uncertainty about mortgages that is slowing private sector job growth. And credit is not hard to get because of bank balance sheets but because of bank concern about risk as identified by their computer algorithms.
As long as there is not the demand that takes that money off the table, the economy is crippled.
In order to solve the problem of whose books take the hit, millions of homeowners are being evicted. That is crippling the economy. And that is what must be addressed. And it won’t as long as the banks who got us into this mess are driving policy.
I’m not saying we can’t do things to keep people in their homes or to change how credit is obtained in this country. There are things we can do that we’re not doing to ease the pain. But what we can’t do is let the financial system collapse again. And that is what you are calling for when you say that the tranches should be unwound in one big process.
Imagine if we just decided that everyone’s mortgage is paid off. Let the banks eat the losses. How much money would that be? Where would it come from?
That’s just an exaggerated version of unwinding those tranches all at once. Only, in that case, the people don’t get the money. They pay it to bail out the banks, again. Except there is no political will to do that. So, we have no financial sector anymore. That’s a Depression. I would much rather tackle the problem in a much more cautious way.
The difference is that the tranches are trades between a limited number of institutions and the trades of different tranches go in the opposite direction. What is being carried on the books is the sum of all those transactions for a single institution. Having institutions net out their obligations reduces the financial exposure of everyone.
Having all mortgages forgiven does not do the same thing; it triggers the execution of the hedges on all of those tranches, which ripples out through the system and indeed is a repeat of September 2008 on a more absolute scale. That would destroy all of the value underlying all of the securities; that would be the perfect storm that folks were fearing when they heard that the total exposure in 2008 was some $100 trillion.
And not all institutions are invested in those tranches. It is a mistake to think that unwinding the tranches destroys the financial system completely. It creates a major crisis, but there will be a lot of institutions still standing. The major Wall Street players are the ones that won’t be left. Or at least the ones who got deepest into the game.
Where will that money come from is a difficult question only because of the tranches, which had the effect of creating money beyond sovereign control — funny money. Paying off the principal on the mortgages of all mortgages in trouble probably would come to a lot less than trying to compensate banks for their hedge exposures. Why? The conditions that would trigger the reverse hedge transaction never occur, as is the case in most normal hedges.
There is a triage process that must be followed one way or the other. Halting all transactions until one sorts out which assets are good from which that aren’t is a necessary part of that process. It is exactly the same process that was applied during FDR’s bank holiday and it began to get the country out of a Depression. That is what unwinding the tranches is about; the complexity of some of the tranches means that it won’t happen all at once anyway. And the institutions involved in the most complex tranches will be among the last to have this resolved.
You are using an odd terminology. The tranches are not equal to the mortgage backed securities, but what makes them up.
If the securities are invalid then they have to be dissolved, and that means picking them all apart and dissolving the tranches. It also means giving over the mortgage to the last rightful owner, which may often be the originator.
Now, given the lack of papertrail, I don’t even see how this could be done, but it may explain why JP Morgan just set aside over a billion dollars for legal fees.
But, let’s say it was done. Would we have a bank holiday while it was done? Would we have a foreclosure moratorium while it was done? So no banks for a year or more? No foreclosures?
And, forcing people to realize the full impact of their losses within a short period of time in an economy with 10% unemployment? And the uncertainty about who is going to wind up going under as a result?
And, to go back to the issue of securities trading. What about all those millions of trades that were made? Do we unwind them as well, since the trades were invalid?
I’m hoping that the Courts do not go down the route of ruling the securities themselves to be invalid. If they do, I think we’re totally screwed.
The full impact of the losses is overestimated because of assuming all of the securities to be toxic when only a few of them are and because of the transactions among institutions. Some institutions might have bought the same mortgage several times and not know it. And in most cases the tranche was packaged in a security that was discounted for risk (maybe not always accurately) and thus the loss is less than the sum of the principal of the mortgages. Likewise for every derivative of a tranche of mortgages.
The issue is still the underlying mortgages. If they are good, all of the derivatives operate as in a normal transaction.
The issue about unemployment is separate from this. And the uncertainty was uncorked when it became known about how messed up the property recording was and the presence of various frauds in the system. That uncertainty will not go away. Somebody will take a haircut. The taxpayer has had a turn. The homeowner has had a turn. Is everyone else held harmless?
The fact remains that the securities promised more return than they could ever deliver and that was leveraged multiple times through derivative trades. There is no way that all of that promised return will be realized.
Regardless of what happens going forward, we are totally screwed. The MOTU always make out like bandits.
I agree. Tony Blankley said something that I think is right (yes yes, I know: he’s usually a complete shill), and that’s that, for the housing market to recover, it needs to be able to find the bottom. And having millions of homes in foreclosures that have been stayed prevents that “bottom-finding” from happening.
And I would add: Keeping people in homes that they can’t afford doesn’t help anyone — not even those people (except for the period of time they manage to live there for free).
But I heard something else the other day that I thought might hold some promise (I wish I could remember who said it — all I remember is that it was a Democratic politician, I believe running for office) and that was that we need to find creative solutions such as: Instead of simply fining the banks that committed the various fraudulent acts, why not require that they write down the principal owed on the mortgages (and, of course, sign on to a reasonable fixed rate or something)? That way, not only would the banks be punished, but the folks living in the homes would have an increased chance of being able to continue living in them.
Would this be workable?
People are now in homes they can’t afford because they have been laid off, lost health insurance or other reasons. We are not longer into foreclosing subprime mortgages; we are in foreclosures of mortgages that were prime mortgages in September 2008.
And in other cases, the owner could avoid default completely if the principal (and monthly payments) were adjusted to the current value of the home. And then they would be able to afford to live now in the same home they could afford to live in prior to the crisis.
We are close to having a general crisis of homelessness because of continued foreclosures and evictions. And the properties cannot be resold because there are no buyers at the value the bank wants to get out of them.
The foreclosure process is now creating the insolvencies that will produce the next round of foreclosures. It’s a mad process, and it must stop.
Quote: “People are now in homes they can’t afford because they have been laid off, lost health insurance or other reasons. We are no longer into foreclosing subprime mortgages; we are in foreclosures of mortgages that were prime mortgages in September 2008.”
Good point. What do you suggest for stabilizing the housing market? I’m guessing that some people who are currently in homes they can no longer afford (because of lost jobs or any other reason, in fact) would sell the houses if they could. But the instability of the market makes that a much less desirable option.
What is the answer?
Massive national infrastructure investment that will put millions back to work. Then, the income and employment would ripple through the economy and people could afford to pay mortgages again.
Trying to stabilize the housing market by forcing foreclosures further destabilizes the housing market and exacerbates unemployment.
The first step to that is defeating the Republicans in the midterms, defeating them solidly, and defeating some of their symbolic leaders. To break the logjam in Congress.
Otherwise, the Obama administration is going to look like the Hoover administration. Kicking the can down the road.
You’re saying then that the housing market simply remains unstable until unemployment is lowered?? That doesn’t sound promising to me. I don’t think we want to have millions of homes in stayed foreclosures while we wait for employment to come up.
Well, hopefully we have all our experts working on the problem.
That is the point for the rethugs let everything go to shit and blame Bo and the dems. They will erase the scourge of Hoover and think they will be in control for same amount of time that FDR post dems were.
How are going to prevent future foreclosures until people have the means to pay? And foreclosing just makes real what to the bank is just a paper loss before foreclosure.
We won’t have millions of homes in stayed foreclosures if there is an honest process of examining each default to determine the best way to proceed. Foreclosure is the way that the housing market is re-establishing the market value of a house under current market conditions. There are a lot of foreclosures that would not be necessary if the banks could reduce the principal of the mortgage and refinance at current interest rates on a fixed rate basis. The principal would not need to be reduced to market value but to a value that makes it easier for the homeowner to pay. But mortgage banking executives are not willing to make that accommodation. So they will foreclose and in the long run lose more money for their institutions. It is the inflexibility (and fraud) in dealing with homeowners that is the problem with mortgages.
Outside of foreclosed properties, the supply and demand characteristics will keep housing markets unstable until employment returns. In the 1920s, it was the foreclosures on farm property that drove the economy into the ditch finally. Today, it’s suburban real estate primarily. The urban subprime real estate has already been foreclosed on and stands vacant.
This is a situation in which there really are no experts, or better said, the experts are captives of the interest they represent.
Your last paragraph is exactly what cram-down is. It’s what Atrios has been advocating. And it’s what the House/Senate failed to pass and for which Obama didn’t give any push to, even though he claimed to be for it.
Yes, it is cramdown. But perhaps more palatable to those who might otherwise oppose it if it’s done specifically in those cases where the banks have engaged in fraudulent activities.
This is a tough problem. The going down the drain aspect of whole communities in foreclosure is heartbreaking.
My problem with this is I understood the moral hazard of borrowing more than was truly affordable. I didn’t use my house equity like an ATM machine with cash out refi’s. My family lives in a modest house that is within our means. Even if we loose our jobs for awhile our mortgage payment is low enough to get by unless true armageddon occurs.
That said I know their are a lot of people out there who are getting foreclosed on 600K houses when they make 100K or less ( when they signed the papers. ) Those people, a cousin of mine in Lake Forest CA included, were basically renting those homes for awhile waiting for the 5 year recast on their option arm teaser rates to expire ( the ugly thing is those were actually 5 years of negative amortization which increased the principal balance ) These people don’t deserve to keep/squat in their homes. My cousins house was a 3 br nice place but 600K huh maybe 300K but that was just crazy in the first place.
A side note the peak of the market was 2006 into 2007 when the Fed actually started raising rates. The 5 year recasts on the Jumbo loans really haven’t happend yet. There is a lot of sh*t waiting to happend in the upper end still to come.
I have a lot of sympathy for the homeowners who like me tried to do the right thing and then their version of fiscal armageddon happened. I can see the need for helping these people in the ways mentioned. But how do we figure this out? Countrywide did a million mortgages a year during this time and Wamu wasn’t far behind.
A note on HAMP, my wife who is a bankruptcy lawyer in the Philly area does pro-bono work and has been successful via her zealous advocacy to work out a number of loans in Judge Rizzo’s Program
Of course, we already did TARP II. And it has done nothing to ease liquidity which was the stated purpose of TARP I and II. Remember? These have permitted the banks to continue to cover Big Sh*tpile with their fat asses.
So, which is going to hurt the common folks less – letting servicers seize our homes based on legal fiction and government complicity, or collapsing the banks and the economy with it? Which is the easy answer?
There isn’t any good answer, but 50 attorneys general (and the DC Corporation Counsel) see a problem that cannot persist, but somehow Obama continues to maneuver Democrats into looking as if we are on the side of the malefactors of great wealth here. Smells real bad.
This is what I just wrote on Daily Kos in Bobswern’s panic diary:
There are more people running around making wild ass assumptions about mortgage titles and transfers who know little to nothing about how it’s been done (the same way for over 25 years) than there are mortgages. Krugman, bobswern and most of the commenters do not have the detailed understanding of MERS, mortgage transfers and/or the impact to banks on any stoppage of foreclosures. By writing about it with only a little bit of knowledge and a whole lot of assumption is completely irresponsible.
I had posted this but it doesn’t look like it went thru so my aologies if it shows up twice now.
The debilitating assumption is that the worst case will indeed happen. But worst case assumptions are the Wall Street bears’ stock in trade. Krugman and bobswern are reflecting the Wall Street view.
And the worst case is that everyone is going to default on their mortgage or walk away from devalued property. If we don’t come to grips with unemployment in the US, that will be true.
But in fact, it is not operating now like it has for 25 years or state attorneys general are just getting up to speed on the fact that their state laws have been occasionally or systematically (they don’t know which) violated. And it is clear that some foreclosure courts have not taken sufficient time to review cases before issuing court orders. And that some local foreclosure officers of lenders have jumped the gun in sending out eviction agents. And some third parties have successfully gotten foreclosure orders on property that was clearly owned without obligations. But these, as troubling as they are, don’t mean that it is either widespread or characteristic of the industry.
What is true is that there are so many mortgages in default from the bad economy that it is difficult to sort through all of the information, which has become unnecessarily complex because of all of the repackaging for resale. And it is this lack of detailed information that is fueling both the crisis and the worst case scenario analysis of the crisis. Any moratorium is to permit individual states (and banks) to sort out the situation.
If there are indeed $1.3 trillion of mortgages in default, the simplest, quickest, and best public policy move would be to appropriate $2 trillion to (1) backfill state budget deficits and (2) invest rapidly in new infrastructure and training that creates new manufacturing competencies.
Exactly. I get so frustrated with those who are taking a very complex issue and a)assuming worst case scenario applies to it and b)not researching the complexity more before jumping to conclusions.
Namely, the people, when the real threat is because of the financial/legal system that has been built over the last several decades to acquire and sustain wealth. It won’t matter if every banker disappeas from the face of the Earth overnight because the business artifice they manipulate remains to be used by whomever mans the levers.
Go after the armor, not the knight wearing it.