E.g. F&F required 20% downpayment. The reason they are in trouble is the biggest bubble ever, which now eats up more than just 20% in case of a firesale.
Another problem is, that the borrowing of the gov will be more expensive, when taking F&F on its book. Your argument holds as long, as nobody expects the gov to default (and printing money directly is about the same). For a serious rating agency, counting money printing as default, the US would be in danger to loose AAA in the next years, when taking the full GSE debt.
But I dispute even the principal argument, that the gov should use its fiscal power to make mortgages cheaper. Built houses will become more expensive, if you have cheaper financing. That's a one of effect. As the housing stock is much larger, than the newly built houses and location is a dominant price determinant, I doubt, you get a lot of benefit for the general population. It is a subsidy for current owners of more housing stock, than they need. Housing subsidies, especially tax deductibility of mortgage interest is probably among the drivers of the current mess.
Subsidising electricial production is much more equal. As electricial energy is consumed, not bunkered, you don't get an old user/new user bias. There public financing makes a lot more sense. Der Amerikaner ist die Orchidee unter den MenschenVolker Pispers
(i) their leverage, which was incredibly high (and beyond anythign tolerable for a bank) (ii) their macro impact, which, by freeing capital for banks, allowed them to make more loans - and more aggressive ones.
So they kept the "safe" stuff, but on a highly leveraged basis (thus making themselves vulnerable to any down movement of the market), and allowed the bad stuff to proliferate on other banks' balance sheets (and then everywhere in the system thanks to MBS).
That's bad; bad, bad regulation, and they are a big part of the problem. In the long run, we're all dead. John Maynard Keynes
All who were involved should be treated by the same laws that would apply to those in receivership of properties obtained through fraudulent conveyance. The personal wealth of all who profited from this process, from Greenspan and the CEOs of Morgan, Citi, etc. down to the lowliest mortgage broker, should acquire a new debt in proportion to the damage caused by their collective actions. That debt should have the same status in law as credit card debt.
Of course that will never happen. Not at least until the whole system of campaign finance has been reformed. Until that happens, what has happened should be what is expected to happen again. Why not? Very few paid any real price for their actions. As the magnitude of the disaster continues to unfold there may be more support for true reform. Until that happens.... As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
When your biggest local real estate markets, such as Los Angeles Arizona and South Florida suffer declines of 30% in value and every loan made since 2004 is under water, there is no way for the whole system not to take a big bath.
The inverse pyramid of Credit which inflated property prices is held up by a base of Capital of "Credit Institutions". In recent years, through securitisation, credit derivatives, credit insurance and combinations thereof this Capital base has increased massively through being "outsourced" to Investors. The pyramid of Credit increased commensurately as a consequence, and the "Mother of All Bubbles" is the result.
Since the point of "Peak Credit" last year, defaults have been eating away rapidly at this Capital base. New Capital is both sparse and expensive, so that capital outsourcing no longer occurs, the cost of Capital for credit institutions is sharply higher and what they charge for credit is much higher. What all this means in practice is that new credit is not available to support anything more than the level of property prices that maintained at a time when credit institutions made prudent loans (eg low loan to income, and maybe 20% deposit). ie the 1970's or even earlier.
Lower Central Bank rates of interest are almost irrelevant as a "fix", since the problem lies in the borrowers' inability to repay the Loan Principal. Over a period of years, Banks will maintain high rates to customers using the lower Central Bank rates to increase their margins and slooowly rebuild their Capital base.
I would guess that reversion to a 1970's style (or earlier) Capital Base and regime will mean, in the US at least, anything between a 50% to 70% fall in property prices, and more in some places. This fall will occur once jobs really start to disappear, when even current reduced rental values and property prices become "unaffordable", and defaults go through the roof reducing Capital still further.
The cause of the forthcoming recession/depression is that the credit = money necessary for economic activity will not be deployed in productive activity but will be used to replace the money literally destroyed in defaults.
There is no way to put Humpty Dumpty back together again. Our deficit-based economy is finally finished, courtesy of the need for literally trillions of dollars worth of new Capital/ "Equity". We have Greenspan to thank for bringing the inevitable forward by a few years.
However, I believe that it is possible to approach the problem from the other end of the telescope and to recapitalise and reconfigure the system by reinventing "Equity" and indeed, "Capital" itself.
We may achieve this through extending by changing the form of Capital through the use of new legal frameworks, replacing the sociopathic "Corporation" with partnership and trust based alternatives, and replacing conventional "Shares" with new types of "Units".
Units redeemable against value such as energy or rental value are capable, I believe, of becoming the new forms of "asset-based" currency necessary, and exchangeable within a networked "International Clearing Union" similar to that proposed bY Keynes at Bretton Woods.
What is needed IMHO is to redefine "Equity" through a process of "Unitisation" and to execute a "Debt/Equity Swap" on a national and indeed international scale. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
That is the most maddening aspect of our current debacle. All efforts at present are directed towards preventing the inevitable losses to those who are most responsible for the problem. It is the most egregious example of which I am aware of throwing good money after bad. Well, to the extent to which there is any "good money" left in existence.
That response is entirely due to the nature of existing campaign finance. The authors of this disaster are still the dominant contributors to the process, so their interests will be protected first. The US government will suck dry all available wealth from those unable to protect themselves in a failed effort to save the un-savable. What a miserable bunch of dummies we all are. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
Ain't that the truth.
The problem, of course, as you point out is that
the organizations suffering the write downs have no direct relation to those originating the loans
not to speak of the mortgage brokerages which negotiated the mortgages and which no longer exist. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
Similarly, government support for nuclear power reduces the marginal cost of new energy sources. We would be better off if the current subsidies for oil and nuclear power were eliminated.
Or is "and since at the start of a mortgage almost all of the payment is interest," a sign, that there are still good reasons to pay down? Der Amerikaner ist die Orchidee unter den MenschenVolker Pispers
If you have an interest-only mortgage, then this incentive does indeed exist (assuming that interest-only loans are tax-deductible of course - I don't know what the situation is Stateside, but the UK no longer gives tax relief for any kind of mortgage interest). It's balanced by the need to have a chunk of ready cash available to pay off the principal at the point when the mortgage reaches term of course.
Regards Luke -- #include witty_sig.h
Over here, most mortgages are fixed payment for the entire term, typically 30 years. "Creative" mortgages have all sorts of variations, including several types where your payment can balloon up after a few years. These tend to be the ones that get people into trouble.
