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Originally Posted by Army_of_One  Everyone has pretty much chimed in on the mortgage subject but the bottom line is that if somone makes a stupid decision the tax payers shouldn't bail them out. A. They won't learn from it and 2. It's not fair to the people that DO make good decisions or have learned from their mistakes. |
Or maybe you and the others are taking a narrow view of the situation and the macro economic risks associated with a failure to act. It was the Federal Reserve Bank's failure to act when the markets crashed that led to the great depression. Even with the subsequent actions of the Roosevelt administration it took six years and the industrial reaction to the Japanese laying waste to Pearl Harbor to climb out of it.
While it easy to point fingers at the people who took a chance to buy a house using little, no, or even negative equity during a time of cheap interest rates as now reaping what they sowed let's look around at the big picture.
-Those people stretching to buy houses and qualifying at the time when housing prices were rising and interest rates were stable were helping drive the economy in spite of the other negative indicators that have been hashed and debated time and time again. People buying houses meant someone was making refrigerators, washers, dryers, stoves, carpet, flooring, hiring painters and carpenters, etc. In turn those people doing those tasks were supporting their local economy, including the people who service computer equipment, deliver the goods, and wait the table. Their bank deposits were being used to provide start up capital for small businesses which led to more jobs and wealth being created. If the housing market dries up as it appears to be happening, many major segments of the economy will slow down. Maybe the washing machine dealer has to lay people off or the painter gets fewer jobs. Either way the computer repair guy and the lady serving coffee suffer along with the person getting foreclosed on. They go on unemployment, medicaid, and food stamps. Who pays for that?
-The financial markets trade mortgages as investment vehicles and they become part of their portfolio. If the pool of mortgage money is finite, once bank A used up it's pool of money in home loans, it either has to wait for loans to get paid off or stop loaning money. By selling the loans to investors who would receive a periodic cash flow, the banks could replenish their cash flow to further fund other projects. If the pool of loans becomes tainted, like any other investment then no one wants to buy them and the price drops. If the price drops then the value of the market drops then the available capital starts to drop off. If the capital drops off then the local hospital can't get the money to expand cardiology and more people in SW Kansas end up dying in an airplane en route to Wichita. If people are going to Wichita anyway then they by pass their local hospital who soon has no need for an information service department or fewer high paying nurses and xray techs. They either have to move or .....go on the tax rolls.
-The current mortgage crisis has led to decrease in the amount of houses being purchased. That decrease in many areas of the country has lead to double digit declines in the value of the property owned by everyone. To the point that some people who did not stretch their finances to buy a house, are now in a similar situation because the value decline means they have less equity and in many cases, have mortgages in excess of their house value. And they did things the "responsible" way. So if Mr and Mrs Homeowner in that situation has a chance to obtain a new job or is unfortunate to work at the shut down washing machine plant and needs to move to find employment, they now face the fact that they can't move because they can't sell their home. They either have to walk away too, or stick it out and guess who suffers with them?
This situation isn't about people stretching to buy a home they shouldn't have in retrospect. It's about a bunch factors, many outside their control, that conspired to create a perfect storm that now threatens the stability of the economy at a time when it does not need another crack and it impacts people all the way to Dodge City in ways they can not see.
So thump the chests and get all holier than thou if you'd like. That giant sucking sound you hear next might be your job getting bounced by some dudes in Vegas and Miami who overspent five years ago. this isn't about bailing out bad decisions, it's about providing stability and confidence and protecting the flow of capital.