Okay, so standards haven't declined that far. Yet. However, the Powers That Be seem to be willing to lower standards as far as is necessary to sweep the whole credit crisis under the rug--to say, in essence, we weren't really playing for keepsies, that these millions of loans were just pretend mortgages.
The part of the bailout plan that really stinks is that Joe and Jane Taxpayer are going to get snookered twice. First, we're on the hook for the umpteen billion dollars (700, and if the politicians are saying 700 it's at least 850 and quite possibly over a trillion). What we don't pay back directly in the form of higher taxes, we'll pay in the form of inflation and eroded paychecks. But it doesn't end there. Just because the banks get to settle their books with virtual Monopoly money doesn't mean the banks will in turn allow us plebs to pay our mortgages with phony paper. Certainly not! We have to have standards and integrity, after all.
So while the banks get bailed out, homeowners in over their heads get foreclosure notices, evictions, and sacked credit scores for seven years (ten if they are unfortunate enough to have to file bankruptcy, and the same politicians that want to engineer this massive bailout made that more difficult a couple years ago).
There is, however, a silver lining for homeowners...at least some homeowners.
What the bailout essentially has done is to remove moral hazard from the mortgage loan underwriting business. When a bank places "bets" on the table by loaning consumers money, historically the banks had an incentive to be cautious. While frustrating for some consumers (especially those with marginal credit), this caution helped to limit the amount of money on the "table," which in turn kept housing prices in check.
Along about the year 1999 or so, that train left the track, banks began loosening standards, and more and more money sluiced into the housing market. Prices began their epic, irruptive rise to where they were last year. Trouble is, a lot of the money placed on the table by the banks was on bad numbers: people who couldn't pay it back.
What was supposed to happen next--what was in fact beginning to happen--is that the man overseeing the table (the market) reaches over with his croupier stick and pulls all the losing chips off the table. Those players whose resources are exhausted leave the table (go bankrupt), and the rest who placed wild bets...well, they learn a serious lesson about prudence and likely don't repeat their mistakes again. Those who placed rational, responsible bets profit, and become stronger and able to place more such bets in the future. With less money on the table, housing prices fall--which is what was happening.
But many of the players have a big, beefy, Nicky Santoro-type friend named Uncle Sam, and they get him to muscle the casino manager to not collect. So the players get to keep all their chips after all, even though by all rights many should have left the table poorer or downright broke.
What do you suppose happens after that? Anyone with even an associate's degree in human nature can tell you: the players are going to just throw out even more chips than before. Why shouldn't they? When it's "heads I win, tails the house loses," why not just throw those chips out there? The element of risk has been removed, so anything goes.
We'll hear a lot of noise about how standards for lending are being tightened and we're not going back to NINJA loans and blah blah blah. But politicians and laws and regulations can't change human nature. Only that fabled School of Hard Knocks and enforcement of risk can, and school's out. So the players are going to do what they believe will lead to the most profits, and that's going to be to place as many chips out there as possible.
If this bailout is approved, and the economy in general is at least well enough to fog a mirror, look for the housing market to reflate over the next year or two, as money pours back into it. We're essentially going to at least attempt to rebuild the housing bubble. How far we get depends on how long foreigners are willing to loan Uncle Sam the money to cover everyone's bets. When that lifeline disappears, we're in a world of hurt...
1 comment:
I have been telling people since the early 1990s that when you compare house prices with incomes that prices are getting out of hand. What good does it do to have house prices skyrocket if nobody can afford to buy the houses and/or nobody could afford to pay the rent that a buyer planning to be a landlord would charge? This has to lead to downward pressure on prices. I mean, Hong Kong and Tokyo notwithsatnding (where properties have been locked up for years and you have to buy subleases on subleases), if nobody can afford to pay for the property, it is worthless. What kind of sense is in force when the market in San Francisco makes it so a small two-bedroom cottage costs a million dollars? What teacher or firefighter will be able to afford that? It is sad to see people who work for a living, and then have to retreat to substandard living conditions just to survive, but that will eventually correct itself (to the detriment of the speculators)
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