Alright I've railed against the bailout quite a bit and I have tried to shed a little light on how we ended up in this mess in the first place. So to recap I have presented exactly dick for useful information for the average person and for their future. Sure maybe I have had a positive impact on how you might vote against the scummy dirtbags that voted to piss away your money, but as of now I have presented next to no real advice.
So here it is.
DONT PANIC...
In case I wasn't clear I'll repeat
DONT PANIC...
Alright now that I know you have ignored that advice here's a little more. If you absolutely need complete liquidity in the next five years, if you will completely divest yourself of your stock portfolio due to some overwhelming liquidity need, then get out of the stock market right now. I'm not arriving at this decision by myself, in fact I may have been swayed by Jim Cramer. Cramer has to be smarting in part due to his massive public attempt to draw attention to this impending financial crisis in August of last year. It must be the hardest time to find out you were completely right.
With that said and out there, if you do not need to completely liquidate your portfolio in the next five years, DO NOT PANIC. Stay right where you are and take a very long hard look at the holdings in your portfolio. If you own stock in the specific institutions that are going bankrupt, you will likely lose money. If you have high risk venture capital in your portfolio you will probably lose money. Now is the time to pay very close attention to the stable choices in your portfolio and reinforce them. If you own stock in well established, long standing companies with substantial physical resources, stay put, do not bail on those investments. If anything pull together liquid capital and standby to move into markets where the index driven market fears have driven prices to unusual lows but where balance sheets remain intact. This can be the best opportunity for substantive growth in your investment based income you will ever see if you have the time, the patience and the fortitude to ride this out.
Remember if the worst fears come true, which they wont, then it doesn't matter what you do with your money. If they don't come true, which they won't, then the best thing to do is find shelter in long term stable investments, with companies that have real property. Don't invest in companies that make money by moving money, don't by shares in your bank. Soon we will see lows that we haven't seen in years and that's the right time to buy good strong companies. If you do own high risk stocks in financial institutions, take a very long hard look at them and if you need to take a loss to get out before they fall apart then do it, but by all means do not put the cash under your mattress, there are plenty of good companies with a history of weathering storms to shift into at a lower cost than you might ever see again.
As for Congress, we have a bailout allocation and while I'm going to continue to call for their resignations for this massive socialist takeover, now is the time for forward thinking. What do we do now, not last week, but this week? The FED is out of control and needs to be reigned in and while I don't trust a United States Congressman and further than I can throw him, the Congress is the only body in a position to implement some oversight into our currency policy. There's no time like the present. We must find a way to tie the FED's currency decisions to the market in order to prevent bubbles like this in the future. Next, and I am completely stealing this idea from Cramer, if we are going to spend $700b at a time buying these bad assets, then the government needs to renegotiate them one by one and find acceptable terms to keep people paying them off, and then needs to involve private businesses in buying the rebuilt mortgages for a fair price. There is room for the market to actually grow with this new process and if we let private business participate we may yet see an overall gain from it. I doubt highly the balance sheet at government program level will turn a profit here, but they may at least be able to break even while pumping positive growth into the economy. So while I oppose buying the debt in the first place, the government has the unique ability to bend the rules, adjust the value of the mortgages and resell them at real value instead of panic value. Lets all sit back and see if that's what they do. And pay attention this program will need to be revoked at some point. We pass this garbage and then forget about it, we need to keep tight watch over it. Remember the income tax was originally designed to pay back debt from the Spanish American War. I'm not sure but I think we payed that back, but the tax is still going strong.
The next step, and one that congress should take seriously in it's lame duck session in November is to restructure the lending laws to allow institutions to implement any form of lending discrimination they see fit and let the market pick which banks get the loans. Work to find a way to make sense of bundled debt and if any new regulation is required, let it be that risk assessment criteria must be included with each individual debt bundle when it is resold.
And finally we need to make damned sure that Washington feels in it's pockets the hard hitting disapproval of their constituents. If you can't vote for your sitting Congressman's opponent because his party or policy disagrees with your ideology then by all means under vote the slot. Cast a ballot and don't mark a choice in that race. If you can vote for a third party, do it. If your Congressman or Senator made the right choice in this case, call them and let them know, then vote for them in Nov. We may not shift the outcome of the election cycle drastically this year with this effort, but we can shift the debate and we can get them running scared.
And by all means...
DONT PANIC
Showing posts with label mortgage. Show all posts
Showing posts with label mortgage. Show all posts
Tuesday, October 07, 2008
Friday, September 26, 2008
To Own a Home in the State of Nature
Why isn't anyone anywhere looking at the fact that housing prices were becoming irrationally, and unreasonably high in the first place?
In 1995 Bill Clinton and the 104th congress pushed through legislation altering the Community Reinvestment Act, in essence to promote more home ownership in what were considered to be overlooked, poorer and often minority neighborhoods. A1992 Federal Reserve Bank study on lending determined that a disproportionately small number of minorities were being approved for loans. The first instinct of Washington politicians was not that we as a country needed to address the potential issue that a disproportionately large number of minorities in America were needlessly poor and had bad credit; no the response was predictably that the banking industries method's for calculating lending risk were hopelessly outdated and wildly racist. The result was well over a decade of public policy aimed at forcing lending institutions to adopt low income and high risk neighborhoods. In order to maintain a favorable ranking with the Federal Government (a CRA ranking as came to be called) lenders had to comply or face fines, loan penalties and major roadblocks in deals like mergers and acquisitions. In order to assuage the risk that banks knew existed while complying with federal regulations and HUD policy, banks did two main things. The first was to offer mortgages at variable interest rates in order to ensure that if the cost of federal loans went up they wouldn't lose money. These adjustable rate mortgages (ARMs) meant that they could offer reasonable rates to attract high risk borrowers, as long as the FED did the same, but then they could raise rates to cover potential losses when FED rates rose. This as a banker seems like a reasonable idea until you factor in massively inflated home prices (due to too much lending) and stagnating wages.
The second thing the banking institutions did was to package extremely risky debt with extremely safe debt and sell it to larger lending institutions under the average overall risk ratings. The problem with this is of course that risk factors on main street are easier to observe in person than they are from thousands of miles away based only on a few numbers. The Federal Government added to this lending trend with the heavy the handed promotion of HUD's government backed lending institutions like Fannie May and Freddie Mac. These government backed lenders worked hard, and were encouraged by the Federal Government to promote and purchase as many of these complicated risk balanced debt packages as they could acquire. In essence the government was creating a giant banking competitor with a virtual guarantee that drove the market to deeply invest in these debt packages with no real understanding of the street level risk. There's no way the market can, by itself, escape a predatory competitor as large and unwieldy as the Federal Government and the government systems within which banks are required to operate. The result when coupled with the low interest rates and loose lending policy in a post 9/11 panic economy, is not simply the collapse of the system we are seeing now, but the precipitation of this collapse by the drastic and unrealistic increase of home prices. Take a look at every aspect of the housing market, from sales to renovation, over the last ten years and you will see the bloody opportunistic profiteering that can only occur in unrealistically sharp market increases. Entire cable TV channels sprung up over night, devoted to flipping houses in what many believed was a magically growing housing market. Prices just couldn't seem to stop multiplying.
The problem is that more and more people, responsible workers, middle class families, and careful investors went looking for that first home and saw a market that had vastly out-priced their stagnating wages, and had inflated beyond the means of their hard earned savings. What had begun as a program to promote increased lending to high risk mortgagees became the only game in town with home prices soaring to astronomical levels.
To put it another way, bad mortgages and bad mortgagees are and have been preventing responsible savers and wage earners from paying the right price for a home. When too many people move into a market with money no one should have lent them, and when at the urging of the government they overextend their reach, they compete with people who live responsibly and who do not overextend their reach. Hard working middle class Americans have been bamboozled by the entire length of this process, not just this end of it. And when we use tax dollars that come from the middle (and yes the wealthy) classes to 'bail out' these institutions, we are in actuality punishing the same people who are already being punished by higher home prices. Whats more the punishment comes in the interest of saving a system that will continue to lend irresponsibly to the segment of the population who, for better or worse, doesn't pay much if any income taxes and who will continue to buy beyond their means.
It's time for the banking industry to take it's own knocks, to tighten it's own policy, and to make the kind of guarantees that investors need to put actual capital into shoring up these ugly debts. Loans from the government can only serve to increase liquidity in these organizations which will only allow them the time they need to sell off what good assets they have left at more appropriate prices. These loans will not make good debt out of bad, and they will not save dying institutions. Every investor knows that you don't make money buying bad debt, but you do make money buying stock in a good company in times of misfortune. Private investment and sensible lending policy is the only recipe' for success in a situation like this.
A better use of the Federal Government's time and money would be to address why we are a country that isn't friendly to the businesses that would hire the poor and less fortunate. To the market, people are not races they are resources. If we foster private business in this nation, we will encourage businesses to take advantage of every available resource. A person with a good job, in a strong community is a responsible lending choice. There is no way to turn an irresponsible lending choice into a responsible lending choice simply by making them a loan recipient. And there is no way to turn a bad lending choice into a good lending choice by shifting the cost of those choices onto the middle class which is already stretched by unrealistically high home prices. This is a time not to look to the government, or the giant government protected corporations. This is a time to look at private business, and encourage it's growth and prosperity, because in that prosperity lies the answers to our 'credit crisis'. The answer isn't more fake money from Washington, and more loose lending on 'main street'. The answer isn't more taxation on the working people of this nation. The answer isn't simply $700b in 'liquidity'. The answer is capital, and that only comes from work. Work comes from jobs, and jobs don't come from Uncle Sam.
In 1995 Bill Clinton and the 104th congress pushed through legislation altering the Community Reinvestment Act, in essence to promote more home ownership in what were considered to be overlooked, poorer and often minority neighborhoods. A1992 Federal Reserve Bank study on lending determined that a disproportionately small number of minorities were being approved for loans. The first instinct of Washington politicians was not that we as a country needed to address the potential issue that a disproportionately large number of minorities in America were needlessly poor and had bad credit; no the response was predictably that the banking industries method's for calculating lending risk were hopelessly outdated and wildly racist. The result was well over a decade of public policy aimed at forcing lending institutions to adopt low income and high risk neighborhoods. In order to maintain a favorable ranking with the Federal Government (a CRA ranking as came to be called) lenders had to comply or face fines, loan penalties and major roadblocks in deals like mergers and acquisitions. In order to assuage the risk that banks knew existed while complying with federal regulations and HUD policy, banks did two main things. The first was to offer mortgages at variable interest rates in order to ensure that if the cost of federal loans went up they wouldn't lose money. These adjustable rate mortgages (ARMs) meant that they could offer reasonable rates to attract high risk borrowers, as long as the FED did the same, but then they could raise rates to cover potential losses when FED rates rose. This as a banker seems like a reasonable idea until you factor in massively inflated home prices (due to too much lending) and stagnating wages.
The second thing the banking institutions did was to package extremely risky debt with extremely safe debt and sell it to larger lending institutions under the average overall risk ratings. The problem with this is of course that risk factors on main street are easier to observe in person than they are from thousands of miles away based only on a few numbers. The Federal Government added to this lending trend with the heavy the handed promotion of HUD's government backed lending institutions like Fannie May and Freddie Mac. These government backed lenders worked hard, and were encouraged by the Federal Government to promote and purchase as many of these complicated risk balanced debt packages as they could acquire. In essence the government was creating a giant banking competitor with a virtual guarantee that drove the market to deeply invest in these debt packages with no real understanding of the street level risk. There's no way the market can, by itself, escape a predatory competitor as large and unwieldy as the Federal Government and the government systems within which banks are required to operate. The result when coupled with the low interest rates and loose lending policy in a post 9/11 panic economy, is not simply the collapse of the system we are seeing now, but the precipitation of this collapse by the drastic and unrealistic increase of home prices. Take a look at every aspect of the housing market, from sales to renovation, over the last ten years and you will see the bloody opportunistic profiteering that can only occur in unrealistically sharp market increases. Entire cable TV channels sprung up over night, devoted to flipping houses in what many believed was a magically growing housing market. Prices just couldn't seem to stop multiplying.
The problem is that more and more people, responsible workers, middle class families, and careful investors went looking for that first home and saw a market that had vastly out-priced their stagnating wages, and had inflated beyond the means of their hard earned savings. What had begun as a program to promote increased lending to high risk mortgagees became the only game in town with home prices soaring to astronomical levels.
To put it another way, bad mortgages and bad mortgagees are and have been preventing responsible savers and wage earners from paying the right price for a home. When too many people move into a market with money no one should have lent them, and when at the urging of the government they overextend their reach, they compete with people who live responsibly and who do not overextend their reach. Hard working middle class Americans have been bamboozled by the entire length of this process, not just this end of it. And when we use tax dollars that come from the middle (and yes the wealthy) classes to 'bail out' these institutions, we are in actuality punishing the same people who are already being punished by higher home prices. Whats more the punishment comes in the interest of saving a system that will continue to lend irresponsibly to the segment of the population who, for better or worse, doesn't pay much if any income taxes and who will continue to buy beyond their means.
It's time for the banking industry to take it's own knocks, to tighten it's own policy, and to make the kind of guarantees that investors need to put actual capital into shoring up these ugly debts. Loans from the government can only serve to increase liquidity in these organizations which will only allow them the time they need to sell off what good assets they have left at more appropriate prices. These loans will not make good debt out of bad, and they will not save dying institutions. Every investor knows that you don't make money buying bad debt, but you do make money buying stock in a good company in times of misfortune. Private investment and sensible lending policy is the only recipe' for success in a situation like this.
A better use of the Federal Government's time and money would be to address why we are a country that isn't friendly to the businesses that would hire the poor and less fortunate. To the market, people are not races they are resources. If we foster private business in this nation, we will encourage businesses to take advantage of every available resource. A person with a good job, in a strong community is a responsible lending choice. There is no way to turn an irresponsible lending choice into a responsible lending choice simply by making them a loan recipient. And there is no way to turn a bad lending choice into a good lending choice by shifting the cost of those choices onto the middle class which is already stretched by unrealistically high home prices. This is a time not to look to the government, or the giant government protected corporations. This is a time to look at private business, and encourage it's growth and prosperity, because in that prosperity lies the answers to our 'credit crisis'. The answer isn't more fake money from Washington, and more loose lending on 'main street'. The answer isn't more taxation on the working people of this nation. The answer isn't simply $700b in 'liquidity'. The answer is capital, and that only comes from work. Work comes from jobs, and jobs don't come from Uncle Sam.
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