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Letting the banks go under and more   (June 30, 2008)

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You say; "The number one cause of poverty in the U.S. is housing prices and rents which have risen three times faster than income since the 1960s."

I would consider this one leg of the stool that includes health care and eduction costs which both have outstripped housing increases.


Let's give the current tenant or former homeowner first dibs.

You have never been more wrong!

Bypass the banks - yes. And give the houses to the OWNERS - the pensioners and whoever else holding deed, full or partial. It was their sweat, time, and work represented as bonds that hold their retirement hopes.

You keep saying the money has already been lost, or, 75% lost. That is not true. What has been lost are 4 different things. Bank earnings, stock prices, house prices, and bond values. I agree with fuck the banks (and prosecute the bankers). And non-insider stock players are always meant to be fleeced eventually because it's a Ponzi scheme anyway. Bond holders are real people (and the only people), represented by institutions, who have indirectly put their life sweat into these houses, deferring present spending to provide for later. These houses are theirs, not the tenants who have put out nothing. The houses should be auctioned immediately and all at once and proceeds go to the bond holders. Only that will determine what the houses are worth and how much they have lost.

You are very good but this one made me ill.

Michael Goodfellow

Houses should sell for whatever they can get in the market, not be handed out as political gestures by government. As I understand it, there are several problems:

- Banks don't want to recognize the loss, so they don't foreclose. Some kind of regulatory pressure would solve this, but the government does not want prices to fall any faster than they are now.

- Foreclosures take too long, so that houses sit empty and decay. Again, changes in regulations to speed up foreclosure would help, but that's a political nonstarter.

- Banks don't sell the houses they own at a market price. Again, they don't want the losses. They were praying for a quick recovery. At some point, they will decide that's not in the cards. The houses will be dumped for whatever they can get.

- Banks don't rent the properties out, because they've never been in that business, and can't estimate the costs of insurance, cleanup, property management, etc. A useful government program would buy foreclosures and rent them out, just to clear the market. They should buy them at fire sale prices though, and they won't do that.

If and when these prices do come down, realize you still have problems:

- A foreclosed house that has sat empty for a year is not a place to live. It will take thousands of dollars to clean it up, replace missing appliances, plumbing, wrecked walls, etc., and make it livable.

- Condo fees, insurance costs (in flood, earthquake and hurricane areas) and taxes may be prohibitive for current renters, even if they got the house for free, and the repairs for free.

- Many houses are outside of reasonable commute distance, now that gas is expensive. Second homes in vacation areas were never within commute distance.

- If a house is in an area of trashed houses, it won't be attractive even if sold cheaply, and repaired, with affordable taxes. When the neighborhood is blighted, the houses are all worthless.

- A fire sale of all foreclosed houses is fairly impractical. The government (no one else could do it) would have to force transfer or auction of all these houses. As soon as a new market price was established, another wave of banks would collapse due to their revised asset prices. No one wants to be blamed for all that. For better or worse, you are going to have to let this process go at its own pace.

Finally, there is a shortage of housing, which is one of the things that drove up prices in the first place. There's especially a shortage in the coastal urban areas. This is because that is NIMBY land, where you can't build anything cheaply, or sometimes, at all. Cities have to slice their planning processes in half or more to make affordable housing possible there. Even after a 50% drop, the SF Bay area will stil have $400K average house prices.

The bottom line for me is (again) that government helped make this mess. The answer is less regulation, not another government program to force auctions or hand out foreclosed houses.

As for banks, I assume you want to keep your savings and so on? If banks are dropping dead all over, I doubt the FDIC is going to be able to handle the load. A bailout there would be inevitable, but it's still not going to be fun.

Without functioning banks, you don't have functioning businesses. No business nowadays runs out of cash on hand. They all have financing loans that cover the time between when parts are purchased (and salaries paid) and when product is sold. Cut that loan and the company dies.

An economy reduced to lending out our currently very small pool of savings is a much smaller economy.


Was this a tongue in cheek? It's not April 1st.

I'm going to assume you are serious. Moral hazard does not apply to deadbeat fools wanting something for nothing? It applies only to the filthy rich who don't deserve their ill gotten gains? The socialist ideal of equality of results of course does not mean equality of consequences.

How do you allocate the $1.00 houses? A lottery? (another something for nothing) Nobody would make payments on their house if they knew that they could then get it for $1.00 and sell it later, for a very handsome profit.

I can't believe someone as intelligent as you obviously are would come up with this! Surely you jest!

Jim S.

Imaginative, constructive, practical, just, and based on careful consideration of data and facts synthesized into a well presented solution to a vexing national problem extending to worldwide proportions, your beautifully presented case has one MAJOR actually offers a solution.

The Congress is not interested in an effective, practical, easily understood and applicable solution. Both thrive in the manipulation of chaos and continual damaging situations of the utmost degree to engineer profit and power generating benefits for themselves and their corporate and banking allies in an ever inflating sphere. Inflation is definitely not limited to currency and commodity issues. Any benefit to the public is often an accident of small proportions in regard to legislation named in its interest. It is evident in the solutions offered, for example, in the last week by the Congress, that this is the case.

Nevertheless, I, for one, appreciated the time you took to present your cogent suggestions. Bloggers are now recognized as having an effect out of proportion to their numbers, which is necessary for our national health to combat an unequal situation emanating from a few media companies and entrenched politicians with undue influence on our present and future as a voting public. Bloggers are becoming the publics' megaphone, and have been engaged with some energy by the opposition...Google, e.g. is censoring blog sites not favorable to Obama, for sites. No telling what else they censor. Anyway, I enjoyed the piece and hope it has some legs.


I really do like your idea about letting the lenders fail. They are the culprits in my book (I'm a lawyer and I've seen the damage done - while there are culpable borrowers, I think the majority of homeowners in bad loans were mostly unaware of the mess they were entering). However, one thing bothers me about a simple auction of empty homes or homeowner homes. I would say there has to be some sort of limitation on bidding by foreigners. If your plan is to work, it should be benefitting those who live here, and not others from outside the country who would suddenly find big bargains in US real estate. That sort of thing is happening enough already.

I believe that eventually we are going to have to deal with foreign ownership of our debt and our physical assets, especially because so much is held by the Saudis and the Chinese. Some day, when the US finally defaults on its notes, I don't look forward to having Chinese receivers say "look, you have all of these people in prison doing nothing; put them to work - we have work for them to do." In spite of our revulsion to slavery in this country, I wonder just how firmly we could stand up to such a demand. It is not a pretty thought. It gets uglier when they start looking around at all the children being badly cared for by a broken foster care system. Our debt could force us back into a pre-Lochner world.

Harun I.

Outstanding post. Jim Rogers agrees with you and so do I.

But don't forget that our government is on the hook for promises it cannot keep. We have allowed it to be perceived as omniscient and omnipotent. The collapse of this illusion reveals the Emperor has no clothes. But there is nothing inherently wrong with a naked Emperor. It was the collective acceptance of the illusion that prevented a real solution. No matter how naked we become all we have to do is believe and get everyone else to believe that we are adorned in the finest garments. This is the illusion which prevents real solutions.

Those who represent us in government believe (mostly for political expediency) that we should be insulated from unpleasant consequences of poor policies and actions. But every moment is perfect. The universe is never wrong. Therefore, if we remove the adverbs and adjectives (perception) we simply are left with the reality of "what is", the moment, neither good actions or bad actions, only actions. This will lead us to understand that we have come to believe that a man should be separated from the consequences of his actions. Nonsense. Eventually we will noticed that not only does the Emperor have no clothes but that he is not even the Emperor.

Thank you, readers, for such thoughtful contributions.

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