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Friday, September 19, 2008

Lunching on crow at the Free Market Café

The folks who like to tell us how wonderful the free markets are -- and how they mustn't be interfered with -- are nowhere to be seen on a day like today. The federal government just banned short-selling of bank stocks, and announced an ad hoc federal insurance program for money market funds. It's all to try to stave off the panic that we all know is inevitable. (I'm just hoping that the weather will be good the day I'm lined up outside the bank as if it were a soup kitchen.)

Remember all the talk about how "government is the problem"? We've been going with that mantra since Reagan. Twenty-eight years later, the verdict is in: He was wrong.

The other mantra was that "world trade is good for America." I believe that was Bill Clinton's favorite. Well, now that every industry worth a darn has left America, all we have left is finance. Oops -- all we had left, until now.

Comments (54)

The mendacity is really breathtaking.

And the line from the Republican ticket is: there was no government oversight...and government oversight is the problem, too! Fire everybody! Small government! Get off my lawn! Chewbacca!

The main course at the Cafe: Ross Perot bologna sandwiches.

When Bill Clinton touted the China trade agreement signed during his presidency, he claimed that the deal would be good for America.

Turns out the shipping containers were all full when they came to the US and empty when they went back to China.

It's time to upgrade that famous line by Senator Everett Dirksen: "A trillion here, a trillion there. Pretty soon it adds up to some real money."

It's times like these where I'm just so glad that Sarah Palin can field dress a moose. That's so reassuring.

Now the bad news: Since the free money started rolling in the Wall Street CEOs want to upgrade their golden parachutes to platinum.

Remember when "Have you hugged your child today?" was a sweet sentiment. We just hugged America's children and stole their wallets.

There's still hope though: Some of President Bush's religious right buddies are trying to bring about the End Times. You have to admit if we all die owing 20 trillion dollars that will be SWEET!

Have you mugged your children today?

There is plenty of blame for this to go all around the blocks of the broke banks and other financial institutions.
We will ALL just have to suck it up and pay the bills. What I really want to see is some of those Wall Street types that came up with this crap go to jail and be really stripped of their wealth, and have to live in a single wide in the same mobile home park, as and with, the rest of us.

So that's it? Crisis averted? The way everyone is talking, it would seem it is "all clear" for us and our children will have hell to pay?

That can't be correct...is there anyone here that can explain what just happened?

You seem to (conveniently) forget that it was government interference in the marketplace that got us into this in the first place.

"[G]overnment interference in the marketplace *** got us into this in the first place."

There are some other strong contenders, but surely that has to be the most laughably inaccurate statement that has ever appeared on this site.

Just exactly what "government interference" was it that forced banks to give mortgages to people who could not afford them, and then forced the banks to package those mortgages into mortgage-backed securities and sell them to other banks and financial institutions that had no knowledge of (and no interest in finding out) the credit-worthiness of the borrowers?

As I have said here before, the GOP apologists live in an alternate universe. Everything bad that has happened in the US for the past 28 years has been the fault of the Dems, even though they were in simultaneous control of the presidency and Congress for exactly two out of those 28 years.

Reading blogs during a national election cycle is almost a much fun as chaperoning a middle school field trip.

Or was the "governmental interference" the SEC caving to the requests of five brokerage houses to release them from the standard 12:1 debt-to-net capita requirements in 2004? I refer to the Consolidated Supervised Entities program which was touted as a better way to manage risk because the companies were in a better position to manage their risks than the SEC; in a word, deregulation. Let's see if you can guess the five companies.

The list: Goldman Sachs, Merrill, Lehman, Bear Stearns, and Morgan Stanley.

What do the majority of these have in common? Merrill, Lehman and Bear Stearns are all out, while Morgan Stanley is in talks with Wachovia and Goldman is nearly in free-fall.

Government had a big hand creating the current mess. Allen Greenspan, Fed Chief, kept short term interests unusually low from 2002 through 2005, and at one point, he advocated people enter into adjustable rate mortgages instead of conventional 15 and 30 year fixed rate mortgages. The Federal Reserve, Fannie Mae, and Freddie Mac (quasi-government agencies) encouraged speculation and the Republicans and demo's bought in too. So, I have to admit the Republicans had a big hand in helping cause a lot of this current mess.

Government, Government! Can't live with it. Can't live without it. Someone has to put things back inorder after the proverbial "poker game" has gone bad. Yet government is usually too slow, and somewhere down the line another "poker game" will break out. It's human nature and unavoidable.

Uh oh. For the first time about ten minutes ago, I realized what is going on with the markets. It's not the mortgages, it's all about derivatives.
Check out this paragraph:

"Since then, derivative trades have grown exponentially, until now they are larger than the entire global economy. The Bank for International Settlements recently reported that total derivatives trades exceeded one quadrillion dollars – that’s 1,000 trillion dollars. How is that figure even possible? The gross domestic product of all the countries in the world is only about 60 trillion dollars. The answer is that gamblers can bet as much as they want. They can bet money they don’t have, and that is where the huge increase in risk comes in."

In other words, these moves were made to protect a beast so big that it dwarves the economies of the world. If that beast isn't saved it will fall and crush the whole world. This is a beast so big that it dwarves the size of the world economy.

Suddenly, a one trillion dollar bailout looks like chump change. I see now why Congressional leaders left the meeting with shriveled nut sacks or whatever. This bailout still might not be nearly enough to maintain a shocking number at risk: 1 quadrillion dollars worth of risk.

Got to go now. I want to learn some campfire songs.

Just exactly what "government interference" was it that forced banks to give mortgages to people who could not afford them

How about gov't regulation forcing banks to lower lending standards? Like lending quotas for Political Correctness instead of lending on ability to repay?

Its simple kiddies:

Our financial system is insolvent, the american household is insolvent, and our government is most definitely insolvent.

Have a nice depression!

"Just exactly what "government interference" was it that forced banks to give mortgages to people who could not afford them

How about gov't regulation forcing banks to lower lending standards? Like lending quotas for Political Correctness instead of lending on ability to repay?"

Jon stop snorting aerosol cheese ok?

That law you speak of is the community investment act or CRA barring banks from "redlining" refusing to lend to entire zip codes. It was passed in 1977.

How is it the mtg crisis involves mortgages opened in the last 10 yrs but the CRA has been around for 31 years?

Go back and watch Fox/Listen to Rush and Hannity.

Here's one PC way Charlie - The "Community Reinvestment Act"

'The Community Reinvestment Act (CRA), enacted by Congress in 1977 (12 U.S.C. 2901) and implemented by Regulations 12 CFR parts 25, 228, 345, and 563e, is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate.'

Forcing banks to loosen loan qualifications

Well, government is indeed the problem. It is now. The republicans have worked very very hard since the days of Reagan to make sure that if it wasn't the problem, it would become the problem.

And boy have they succeeded! Yay us!

As a result, we have a voting population that really believes that republicans are the fiscally conservative custodians, even though the only time there was a surplus in the last 30 years, it was a Democrat that did it (well, sure, that Democrat was Clinton, who was a DLC Democrat (republican lite), but still, everyone won during the Clinton years).

Why is it that when Clinton provided the best business climate for America in the last three decates they hated him so much? There must be some sort of brain damage working there.

If actual republicans have provided such a business-friendly climate, why is it none of them are really complaining much that the biggest and most famous businesses, are epic failing?

It's a puzzle, that's for sure.

"greed, for lack of a better word, is good". Gordon Gekko

Now we finally know what it is good at.......

If the problem was caused by too much liquidity extended to too many borrowers at too low an interest rate....How are government guarantees and more liquidity at low rates going to solve the problem?

The critique of Fannie and Freddie was that they are too big and didn't sufficiently manage the risks of a falling housing market; so the government is going to make them bigger for the next 16 months and force them charge a lower risk premium?

Mister Tee is thinking about voting for Obama, for the first time.

Forget mortgages - think derivatives.
"In an article on FinancialSense.com on September 9, Daniel Amerman maintains that the government’s takeover of Fannie Mae and Freddie Mac was not actually a bailout of the mortgage giants. It was a bailout of the financial derivatives industry, which was faced with a $1.4 trillion “event of default” that could have bankrupted Wall Street and much of the rest of the financial world. To explain the enormous risk involved, Amerman posits a scenario in which the mortgage giants are not bailed out by the government. When they default on the $5 trillion in bonds and mortgage-backed securities they own or guarantee, settlements are immediately triggered on $1.4 trillion in credit default swaps entered into by major financial firms, which have promised to make good on Fannie/Freddie defaulted bonds in return for very lucrative fee income and multi-million dollar bonuses. The value of the vulnerable bonds plummets by 70%, causing $1 trillion (70% of $1.4 trillion) to be due to the “protection buyers.” This is more money, however, than the already-strapped financial institutions have to spare. The CDS sellers are highly leveraged themselves, which means they depend on huge day-to-day lines of credit just to stay afloat. When their creditors see the trillion dollar hit coming, they pull their financing, leaving the strapped institutions with massive portfolios of illiquid assets. The dreaded cascade of cross-defaults begins, until nearly every major investment bank and commercial bank is unable to meet its obligations. This triggers another massive round of CDS events, going to $10 trillion, then $20 trillion. The financial centers become insolvent, the markets have to be shut down, and when they open months later, the stock market has been crushed."

@ Bill:

What's brilliant about your explanation there is that even if you don't understand some of the terms you've structured it such that you can hear the dominoes falling (click, click, click).

That was valuable. Thanks for sharing it.

Here's something from another article about derivitives:

"Five years ago, billionaire investor Warren Buffett called them a "time bomb" and "financial weapons of mass destruction" and directed the insurance arm of his Berkshire Hathaway Inc to exit the business."

Here's an anecdotal bit: One deal involved a 340 thousand dollar annual fee just to guarantee a bundle of these mortgage-backed securities, which was free money as long as they stayed solvent.
However when they failed the tab was 100 million dollars.
This was so far out of control you can't even call it a bubble. This thing stretches into outer space.

Go back and watch Fox/Listen to Rush and Hannity.

I love it when liberals always go there.

You should know...a lot fair-minded conservatives dont listen to those idiots. Just like I am sure there are a lot of fair-minded liberals that dont listen to Randy Rhoads or read the bilge at the DailyKOS.

@ Jon:

I am sure there are a lot of fair-minded liberals that dont listen to Randy Rhoads

Speaking as a fair-minded liberal, I can say that's definitely true. While Rhoads was a technically brilliant guitarist and a standard against which many rock guitarists must be measured, To be honest, I never cared for all that Ozzy Osbourne/heavy metal/macabre metal music.

Me, I'm more of an ABBA/Electric Light Orchestra/The Outfield sort of music patron (there, I've said it, I feel much better now).

Samuel...I apologize for the mis-spelling. I guess its "Randi Rhodes". Maybe that happened because I am a fan of said guitarist.

And ABBA? c'mon. Nobody likes ABBA.
ELO & The Outfield are ok though I am more of a Yes/Asia fan.


LIARS Larson explained everything today, so simply: "The problem which caused this mess in the first place is too much regulation and public oversight, (of the criminals). Get rid of the regulation, and everything will be all right."

Parrot A: "...it was government interference in the marketplace that got us into this in the first place."

'Fair-minded' bandwagoneer: "...a lot fair-minded conservatives dont listen to those idiots."

Y'know, a big bit o' the problem is that too many fair-minded folks do ignore and are NOT listening to the idiot LIARS. If we all had'a tuned in and puked, he'd a been imprisoned years ago for fraudulent misrepresentation.

Meanwhile, the explanations of the causes which effected this end ruin of the dollar, is HERE. (Cook is not the only source, others say the same things. But NOthing said in massmedia is correct.) This is NOT a 'downturn' that is 'going to come back' (to 'normal') some day. This is the end -- end of the dollar, end of the Fed.Resrv. After this, the next Age starts, with a new definition of 'currency.' Something like: Labor hours. (As in: the youngest and the oldest lives, less able to labor, don't have much 'currency.') All told, in short, 'they' caused the crash on purpose, deliberately. And 'they' is mostly folks who got in office and power positions, as 'Republicans,' but 'they' are not truly Republicans.

In the Richard C. Cook collection, the latest entry is a good start. Impacts of the Financial Crisis: The U.S. Is Becoming an Impoverished Nation, by Richard C. Cook, Global Research, September 19, 2008.

Everything the Federal Reserve and the U.S. Treasury Department are trying to do to stem the tide of the self-destructing U.S. financial system is a stopgap. They are locking the barn door after the horse—many horses—have already escaped, and they know it.

They also know the cause of the crisis is not subprime mortgage lending—that was just the trigger. Cries to re-regulate the failed financial industry are coming from Congress, the media, and investors around the world. But lax regulation is not the cause of the problem either.

I also thought about Aaron Russo today, the filmmaker who made “America: Freedom to Fascism.” It describes the unconstitutional concept of turning control of our currency over to a privately owned bunch of banks that leads out of this country. We have been paying for the privilege of producing our national currency ever since, and the Federal Reserve has been slowly enslaving us with a mountain range of debt. Had Russo lived, he would have gotten what this crisis was about.

But there was another clue today that slithered out from the rocks for a second. That’s one of the truly remarkable things about big crises - the ordinary lids on our national discourse can be blown off.

Did you hear CNBC host Jim Cramer - a guy who can actually make financial advice entertaining - fire off this little comment: “Traditional people who are allegedly shorting are not….it could be financial terrorism, what a great way to take down America….maybe they want to find out who is doing this shorting like in 9/11, remember the airlines went down first and people thought it was Bin Laden,” said Cramer.

Ahh, the stock market moves prior to 9/11. They were investigated and they led straight to a bank in Europe(Alex Brown/Deutsche Bank) that had been chaired up until 1997 by the executive director of the CIA, Buzzy Krongard.
At that point the commission decided there had been no anomalies in the short options after all. The 9/11 stuff disappeared into an endless debate about the method of the buildings coming down, and nothing more was said by the national media. Anyone who questions 9/11 now is pre-branded as an unhinged malcontent.

So it was damn interesting to hear Kramer bring this up again, like a truth ghost from out past. It's the first mention I've heard of the 9/11 shorting in the MSM in years. Kramer said, “To ban short selling is wrong, unless you had reason to believe that it was a force who would normally use physical terrorism that is using financial terrorism.”

What’s my point? A lot of people inside the financial markets must know that the official 9/11 story does not add up. Kramer knows damn well the shorting of stocks that day was real, so he knows the official story is a crock. Of course he couldn’t or didn’t want to look into it himself. Like the media and most Americans he didn’t want to know enough to risk his job and possibly his life. But today’s emergency shook him up to the point of referencing that again without really thinking it through. The corporate filters were deactivated by the magnitude of today’s turmoil.

On top of that, 9/11 was one thing - but this was our entire economic system on the line and Kramer's suddenly really interested in getting to the bottom of it. Interesting. So he actually spoke from what he believes.

That allowed the truth zombie to walk out of the graveyard, tip his hat and say, “Hello, remember me?” But only for a second.

You can hedge s*** with a swap but you've still insured nothing more than s***. You can use an option to bet on the price of s*** in the future but its still s***.

The debate here reminds me of the endless posturing about education -- its the government, its teachers, its drugs, its teevee etc. Nope...its the dumb as a sack of pertaters parents. The bleeting about republicans, democrats, regulation, deregulation, derivatives, investment bankers, realtors is just a scape goat. The real problem is YOU, your children, your partner, your relatives, your parents, your friends.

AMERICANS HAVE INDULGED IN A DEBT DRIVEN ORGY OF CONSUMPTION. The party is over and its time to pay up mother f*****s.

I've heard not word one from any of these ass clowns about the fat cat CEO's, etc. who created this mess giving back their bonuses. Martin Sullivan the former AIG CEO was paid a bonus of $47 million when he was fired in July, Lehman Brothers CEO Richard Fuld's '07 bonus was $22 million, Merrill Lynch's CEO and two of his associates anticipate receiving a total of $200 million in golden parachutes after its shotgun wedding to B of A, Even the lowly CEO's of Fannie Mae and Freddie Mac respectively received compensation of $12.2 million and $19.8 million in 2007.

I like this twist on "derivative" liability, so as to apply a ten year statute of limitations.

Given that one third of home "buyers" in the last two years (data now a couple months stale) are upside down in their mortgages one might at least ponder whether appraisers (individually, even if not as a conspiratorial-class) should face federal criminal charges for willful over-valuation of the collateral. See, 18 U.S.C. 1014.

An extraordinary number of residential real estate transactions are amenable to being voided.

Should a poor minority that was encouraged to pay more than top dollar for a home be required to spend the balance of their life paying off the debt . . . just so as not to upset the expectations of the seller who got excess loan proceeds by reason of a knowingly bogus appraisal?

Many poor borrowers would not be in their present predicament (nor the whining lenders, nor the FDIC, . . .) but for the bogus professional appraisals.

How many of the roughly 1,700 appraisers licensed in Oregon do you think ever prepared and submitted a companion appraisal based on rent-justified capitalization rate (to isolate out the cost of money) along with a comparable-sales derived appraisal for submission to a lender for a residential owner-occupied loan? I would guess that not a single one did.

If you represented a seller, and you knew that a sale might be subsequently voided by reason of a bogus appraisal, wouldn't you want to insist upfront that the lender be presented with an investment-property type appraisal so that you could defeat any effort to void the transaction? I would. But then, this places an upper limit on the amount to be lent, and the seller's net, doesn't it? What it would do is to limit any of the benefit of easy money lending terms to result in higher sale prices, and would actually help the poor obtain a lower payment rather than turn them into debt slaves on over-priced homes.

This one single issue, and enforcement of existing criminal code as to over-valuation, would have been sufficient to avert all this so-called credit crisis. I do like the idea of a ten year statute of limitations.

There are a near infinite variety of diversionary explanations (and remedies) from this central issue, one for every pundit, but none that I believe are as crystal clear as the one that I present.

How is it the appraiser's fault that your home declined in value?

It was worth what you paid for it two years ago, based on the fact that you paid for it (as did all the other "comps" in the neighborhood). Nobody forced you to buy the house: certainly not the appraiser.

This reminds me of the asshats who bought a tech stock with no profits and no real business plan (think "justballs.com") and then complained about the stock market being rigged against them.

If you want a guarantee that your investment won't lose value, buy a bank CD (not a house or a stock). Suing a real estate agent or appraiser is pure douchebaggery if your only complaint is the price decline.

@ Jon (sorry, taking this off topic just one more time)

Samuel...I apologize for the mis-spelling. I guess its "Randi Rhodes". Maybe that happened because I am a fan of said guitarist.

Actually, true story, Randi adopted the air-name "Randi Rhodes" because she was a fan of Randy Rhoads too.

No apology necessary. I'm obliged for the straight line. B-)

And ABBA? c'mon. Nobody likes ABBA. ELO & The Outfield are ok though I am more of a Yes/Asia fan.

Yeah, isn't it strange ... ABBA is a pop culture lodestone, spawned oddly successful tribute bands, a stage show, and a major motion picture ... but somehow nobody anyone knows owns an ABBA album.

Well, I do. Besides me, I mean.

And Yes/Asia. Of course you realize that Asia is in fact the poor man's Yes. This is not a problem in as much as I am a poor man, and am not real big on Yes but love Asia (at least the early, more commercial stuff).

;-) backatcha!


You sound like an unhinged malcontent (but I still hope you're wrong).

I think Bill is much closer than most in a fuller understanding of what has happened (is happening).

Deregulation has allowed much, if not all, of this to come about.

"Deregulation has allowed much, if not all, of this to come about."

Again - What specific rules to you want put in place? If you have re-fi or bought a house lately, the stack of paper if 4 inches deep and all of it is due to regulations.

Making any purchase includes assuming some risk and no law can make anyone immune from that. Problem is even the big boys did not shelter themselves from enough risk on leveraged investments like derivatives. Barely qualified home-buyers did not undertand the risk either of taking on mortgages which assumed house prices would go straight up.

"and the Federal Reserve has been slowly enslaving us with a mountain range of debt."

Ahem, on the govt side, I think you should look closer at Bush and congress.

How about the role Phil Gramm played in this? If he ends up in a McCain cabinet running what’s left of the treasury, it will be the quintessential result of these times: The guy who did so much to bring down the temple named later as high priest.

It’s reminiscent of the media before Iraq. If you were a little wrong, you got a little promotion. If you were a lot wrong you got a bigger promotion. And if you were catastrophically and perhaps even criminally wrong, you got the biggest promotion of all. That’s why columnists who opposed Iraq disappeared and Bill Kristol wound up in the New York Times. Do you see a pattern here? We need a term for this. How about Treachery Inflation?

Tenskwatawa - Besides cribbiong whatever notes from a bazillion different sources and blames Lars for everything, can you attempt ot make a coherent point besides the end is now.

That's a really responsible way to provide a solution for the next generation.

"and the Federal Reserve has been slowly enslaving us with a mountain range of debt."

Ummm...if this is remotely true then why is the federal government bailing out mbs. Last I heard the federal government did not force joe/jane6pac to sign for a mortgage they could not afford.

This talk of derivatives is hilarious. Most of you would not know a derivative if it bit you on your buttocks. The only derivatives that have contributed thus far are slice and dice debt derivatives, such as, cdos. (mbs are *not* formally derivatives.)

An idiots guide to cdos:

These structured debt obligations are a drop in the bucket in comparison to the ~60 trillion (notional) credit swap market. If we see cascading cross defaults in this market the resulting chaos will make the GD look like a walk in the park.

Gretchen Morgensen (not the brightest bulb mind you) wrote a good idiot's guide to swaps and derivatives:

McDonald's right. It's the derivatives stupid. It's going to be fun watching those unwind.

"Derivatives are financial instruments whose value changes in response to the changes in underlying variables. The main types of derivatives are futures, forwards, options, and swaps."

The definitions I read include credit swaps as derivatives.

And yes, I'm just learning about this stuff. That's part of my resentment. I'd prefer living life doing the things I'm interested in, and financial chicanery is not on the list. There's 2 parts to how annoying this is:

1. Being forced to try and learn about it, because it's a threat.

2. Listening to the experts cop an attitude about how little the rest of us know when we just spent a trillion dollars propping your sorry asses up.

Mister Tee,

There is a difference between dropping in value and never having had the high value in the first place. I can today look back and review what a contemporaneous appraisal should have been with the facts known back then. I have been making my own assessments of the sanity or insanity of appraisals and sales prices over many years. I even noted my concern to the host of this blog site back when he purchased his home. There is no change in the concern.

The bill that is now due is the direct result of legislators buying votes by perpetuating the fiction of wealth through home price appreciation, obtained through debt. That is one heck of temporal political hedge. Let's call the appreciation a capital gain, when sold to the next pyramid participant through borrowed dollars, and then go one step further and exempt it from taxation . . . just because it was a conveniently describable category for the tax code and fit within the political theme of cutting capital gains taxes generally (making even Warren Buffet blush, and buy Brazilian real). Then let's modify the once in a life time exemption to a once every two year thing, etc etc etc . . .

Even Ryan Frank at the The Oregonian is noting a pertinent relationship:

In the Portland-area, median household incomes rose 10 percent in the period between the Census reports of 2000 and 2006. But the median home value rose 72 percent, . . .

but then with a classic leap of logic continues

. . . a sign that fewer people can afford mortgages at today's prices.

When an economist would instead see the dramatic departure from the normal relationship of home prices to income. Isolating out the cost of money. The word mortgage has no business being in that last phrase.

I ceased real estate activity in late 2002, with minor exceptions. I won't help someone buy a home unless they can cover payments as if the loan is at ten percent and the repayment period is no longer than ten years. I look at the payments (and other debt payments) that they could handle for an FHA conforming loan then use it to place my own maximum price for any home that they would buy. I then look at homes that are in that price level, and then ask what would be the rent for that home, so as to note (calculate) the downside price risk to the potential buyer if the only buyers left are investors. Needless to say, I had to find something else to do with my time while this price bubble shaped up and then crashed. It still has some serious crashing to do.

I have absolutely no qualms about personally challenging the appraisers and the membership of the Oregon Association of Realtors. Nor demanding that a previous seller cough up their unjust rewards, and redirecting such sellers toward the so-called "professionals" that facilitated the game. It is the seller that got cash out as they exited the pyramid scheme. I have been consistent on this point for several years now.

If I have any sour grapes in this it has been vented at the folks who benefit from PERS, which is certainly not exclusively the "beneficiaries" but also the recipients of the investment dollars as a reward for getting cozy with the Oregon Investment Council. Capitalism without risk of loss is not Capitalism.

You note rhetorically: "If you want a guarantee that your investment won't lose value "

I guess we should be on the same side? But, would you want the federal government to actually set a policy that home prices shall not fall to some natural equilibrium price in relation to incomes? That sort of price support scheme (immunity from risk of loss) is too expensive, particularly given its symmetry to a classic pyramid. The scheme here is far less disguised even than the one rooted out in Nielson v. Myers. ("All operate in essentially the same way. At the bottom of the pyramid are new investors, who pay for the right [insert scheme]" Here the right to ride the abnormal asset inflation train, by not renting but by buying in, even at crazy prices using borrowed dollars, as glorified renters.)

Search on "Albanians Clash in Pyramid-Scheme Protest" for a January 10, 1997 article in the NYT that describes what might happen if the federal government does not directly guarantee the value of home prices (even though the sub-prime borrowers represented the very last rung of new entrants to the current round of our repeating price bubble/home price pyramid.)

"Riot policemen clashed with some of the hundreds of Albanians who demonstrated today in the center of this capital to demand that the Government reimburse them for money lost in pyramid schemes."

If you were one of the last folks to buy in to a illegal pyramid scheme one of your remedies would be to get your money back from the seller. Is the housing overvaluation pyramid scheme so conceptually and fundamentally different that it warrants a broad exemption? Residential real estate is a dead investment anyway, a consumption item, but for the opportunity to serve as useful vehicle to extract interest payments. The fiction that it represents wealth is one of life's great mysteries, where one can claim their reward on their investment only when they no longer need a home to live in.

My current public interest agenda is to see if I can convince Multnomah County to update their appraisal of taxable real property from January 1 of this year to July 1 of this year to reflect the downward move in prices of homes, for purposes of assuring that public debt that is limited by our state constitution to a fraction of such valuations remains within those limits. I would not even demand that they modify their appraisal methodology. It is a very limited argument that should have merit in an Oregon court.


I don't think it requires a conspiracy or a Ponzi scheme to get Americans to pay too much for anything.

People paid too much for their properties because there was a speculative frenzy that ignored the historical relationship between personal incomes and house price appreciation.

People paid too little attention to the sales prices of the home they were bidding on, and focussed exclusively on the cost of the monthly mortgage payment. With rates at historical lows (and teaser rates even lower), and relaxed underwriting standards, they were able to qualify for more expensive houses than ever before.

The banks/GSE's/Wall Street simply gave them enough leverage at a low enough carrying cost to permit many borrowers to overpay for their properties without feeling overwhelmed by the size of the debt. But it was still the bidder's decision to offer the "excessive" bid: if they failed to do so, the house was sold to somebody who was.

It was a free market system that required a willing buyer and a willing seller to determine the market price: you can't blame the appraiser or the mortgage lender for following the market price up to the level at which it reversed, and then falling it back down.

"falling" should be following.

You have a predatory loan originator (broker or sales associate); a generous appraiser (maybe getting a little back end on the deal); the original loan servicer and lender packing this up into a pool of securitized mortgate debt; and, buyers of these mortgage backed securities. Everyone has their money but the buyer/investor whose security has decreased in value and the collateral is insufficient to pay the debt. The collateral owner/debtor is in foreclosure and possibly bankruptcy. When all the collateral is liquidated, the investor receives 50 cents on the buck. Instead Uncle Sam steps up, purchases these securities at 50 cents on the dollar and liquidates the collateral. The prior sellers who rode the wave of steadily increasing property values have an iron clad defense to an unjust enrichment claim. The resulting crash was unforeseeable.

Does Wall Street get to isolate on the credit characteristics of the borrowers, as if the debt was unsecured, rather than on the real value of the collateral . . . when they have themselves sold their securities buyers on the notion that the debt was backed by collateral?

It is a pity when the investors that escape SEC regulation by asserting that they are sophisticated (i.e. not a dumb peon retail investor) while simultaneously claiming to be even dumber than the peon buyers who borrowed the money when it comes to valuing the collateral.

It is free market principals that dictate that the government should step aside and let the "sophisticated" investor remain free to lose everything down to the shirt on their back. The big household names in our financial system should not be preserved like some sort of prohibited class of Nobles. I owe them no fealty, so as to grovel for a mortgage. They are naked.

The moment is ripe for the true egalitarians to rise to the occasion.

The sales price on the house was not established by the loan originator or the appraiser or the collateralized debt issuer.

The sales price was determined by the home buyer (who is self-motivated to offer the lowest price possible) and the home seller (who is self-motivated to negotiate the highest possible price).

Have you ever bought a house? The appraisal is only executed after the buyer/seller have determined the price. The appraiser's task is to provide an objective analysis of the market price of the home, basically to ensure that the collateral is enough to justify the size of the loan.

If the bank's underwriting standards were diminished to the point that they would lend more than the appraiser said it was worth, then the bank committed fraud when they sold the mortgage. But I don't believe that's what happened to the vast majority of people who are now delinquent: most people are delinquent because they borrowed too much money, and can't afford their current mortgage or qualify for a refi. Staying current on your mortgage payments has nothing to do with the market price of the home.

Hey Bill ?
Do you know how to field dress a moose?

You may want to learn.
Cuz you may be the first victims and the last to know how to feed their family asuming you have one.I have a family and a gun and a fishing pole what are you gonna do tough guy

The deregulation of the market has lead to a bunch of stupid, obese companies killing them selves off. As far as I can tell, in theory, that's a good thing.

The only reason it's hurting as much as it is, now, is because government protection helped these companies all get far bigger then they ever should have in the first place.

The free market works. Carelessly deregulating a distorted market does not. The government is doubly responsible for this mess.

Mister Tee: Staying current on your mortgage payments has nothing to do with the market price of the home.

Apparently, you've never heard of the buy and bail tactic.

Bill, Ignorance is not an excuse. The "people like you" commment brought a smile to my face. I loathe american capitalism. It was a real pleasure to short financials. I am now short treasuries and the US peso.

"The government is doubly responsible for this mess."
You've sucked the tit of debt dry and now its the fault of the government that *you elected*. I *love* the way americans take responsibility for their actions.

"The prior sellers who rode the wave of steadily increasing property values have an iron clad defense to an unjust enrichment claim."
Oh I know this defense!
Its the defrauding people is cool defense.

"The resulting crash was unforeseeable."
I guess the money I made shorting homies and banks was due to my oracular skills. This mess was predicted by dozens of economists and bloggers. The only surprising thing about it was that it took this long.

And what did you hear, my blue-eyed son?
And what did you hear, my darling young one?

I heard the sound of a thunder, it roared out a warnin',
Heard the roar of a wave that could drown the whole world,
Heard one hundred drummers whose hands were a-blazin',
Heard ten thousand whisperin' and nobody listenin',
Heard one person starve, I heard many people laughin',
Heard the song of a poet who died in the gutter,
Heard the sound of a clown who cried in the alley,
And it's a hard, and it's a hard, it's a hard, it's a hard,
And it's a hard rain's a-gonna fall.

"Apparently, you've never heard of the buy and bail tactic."

Explain the connection, I don't see it.

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