Letters to the Editor
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@ Anonymous
So people need to hire a lawyer to get a mortgage? Are you serious? Did you hire a lawyer to get your mortgage? Are you a lawyer? Lawyers without financial training can't understand a lot of the terms in these deals. I'm sorry, but that viewpoint is just unrealistic.
Regulation is meant to prevent predatory lending, which means targetting a certain class of consumers with a lure (initial low interest rate). They prey on everyone's desire for a home, knowing full well that there is a high probability that the borrower will be unable to cover payments at the higher variable rate when it kicks in.
The solution is simple: judge a borrower's ability to make payments on the higher, variable interest rate terms.
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Deregulation didn't work
Of course, if the regulatory agencies refuse to regulate, then surprise, regulation doesn't work. That's the way free market nuts run things. So now we have a mess and everyone is paying for Greenspan's fanaticism. The Banks will have to be bailed out because we can’t afford to let them fail.
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"The verdict is in on 30 years of "radical economic regulation.""
Isn't that backwards, hasn't it been 30 years of deregulation? 30 Years of loosening the New Deal laws that held speculation in check? S&L Crisis, Bond Crisis, LTCM, 2000 Stock Bubble and now the Subprime Crisis which is really a Mortgage Meltdown that is a Solvency Crisis.
The fact that Greenspan failed to enforce regulation is also a problem, but that is a failure of leadership, not a legislated failure.
Greenspan did his job. Twenty five years ago financials in the S&P accounted for 6% of the profits of the S&P. As of 2006 financials accounted for over 30% of the profits of the S&P. A truly astounding rise thanks to Uncle Alan. We have now become a country that trades ever more pieces of paper and calls it growth.
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@ New Deal Democrat: Sometimes you can have it both ways.
You write:
"Those of you arguing for more regulation can't have it both ways. More regulation will likely equal more conservative lending, meaning that many people with less than stellar financial histories will be shut out. That won't sit well given that Americans seem to think they have some sort of right not just to be home owners, but to own as big a house as they want."
I agree that many people make bad homebuying decisions, stretching their budgets to get the biggest house they can afford. However, they can only do this when loan products that cater to them are readily available. Those loan products became readily available because investors were willing to buy them. What was lacking was transparency regarding their risk. Regulation can make it a goal to address this deficiency, thereby promoting a market where consumers and investors alike can make informed buying decisions.
Moreover, don't neglect to consider the way cheap credit contributed to driving up home prices so that even modest homes became out of reach without so-called creative financing. Not everyone stretching to buy a home exemplifies the conspicuous consumer.
I work for a nonprofit developer, lender and educator. We create first-time low and moderate income homebuyers through a smart and sustainable approach that emphasizes budgeting and financial fitness. Over 20 years, our "conservative" approach has created more than 13,000 new homeowners and our delinquency rates with this "high-risk" population are well below the average.
It is certainly true that not everyone can afford a home, but you might be surprised how many low-income families can and do succeed at homeownership when best practices are applied.
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-- bdop4
No. No. Yes (spouse is an attorney). I'm a mere economist. A home is the largest purchase most people ever make. For a few hundred bucks it pays to hire an expert. My last ReFi our red pencil changes ran to several pages. Seriously, if you have a few hundred thousand dollars and not enough common sense to spend a few dollars to have someone who knows look after your interests or at least explain to you what they are then you're not long for keeping that money no matter what. You are, to be kind, an idiot.
Sorry but no amount of regulation is going to protect everyone from their own stupidity and greed, all of the time.
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Speaking of the Finacial Times...
Check out this little doozy:
http://www.ft.com/cms/s/0/50d659d2-c1f3-11dc-8fba-0000779fd2ac.html?nclick_check=1
Whew! I nearly fell off the floor.
P.S. It's really interesting how it is only now that we're finding out about all these cool and wonderful "finacial instruments". Wanna play air guitar anybody?
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Credit default swaps
Finacial Times makes you register, so here are the mind-blowing paragraphs of Wolfgang Münchau's column:
"The CDS market is worth about $45,000bn (€30,500bn, £23,000bn). This is not an easy figure to imagine. It is more than three times the annual gross domestic product of the US. Economically, credit default swaps are insurance. But legally, they are not, which is why this market is largely unregulated."
"It is not difficult at all to see how the CDS market has the potential to cause serious financial contagion. The subprime crisis came fairly close to destabilising the global financial system. A CDS crisis, under a pessimistic scenario, could produce a global financial meltdown."
"This is not a prediction of what will happen, merely a contingent scenario. But it is contingent on an event – a nasty and long recession – that is not entirely improbable."
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regulation/ (de)regulation
For anyone who was confused earlier, in my initial headline I inadvertently wrote "regulation" instead of "deregulation" in the phrase "radical economic deregulation."
I think most of you understood it anyway, but I regret causing the mixup.
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self-perpetuating cycle
One thing that I find maddening about all these newfangled loan options is how they made themselves necessary by encouraging madly escalating prices. Think about it: as these loan options hit the market, more and more people are qualified for loans, and demand goes up, and prices go through the roof. After a few years (or months, in some cases), people who may once have qualified for normal loans in a reasonably priced market now have only two options: take a ridiculous, unaffordable loan, or stay out of the market altogether. It's not necessarily "stupidity" that drove people into these loans. It was the prices that these loans engendered.