There are some many things about this situation, how we got here, the current situation, and where we go from here. I personally believe that this began in the 80′s with the deregulation of banks and lending institutions, was exacerbated by the giant push for home ownership starting in the 90′s and continuing in to the 00′s and the tech boom in ’01 set up the final blow by making housing the only place left in the economy where you could be “guaranteed” to make money. You add to that the relabeling of a 2nd mortgage (which was the butt of the joke for at least one episode for every major sitcom up through the 90s) as a Home Equity Loan or Home Equity Line of Credit, and encouraging everyone to use that to “live it up”, and you’ve got a crisis in the making.

For those who are interested, information on mortgage equity loans as a percentage of the US gdp and what the “growth” looks like without it.

But I’m sure everyone on this forum has looked into what caused this crisis, so I’m not going to ramble too much on it. Why am I sure, because everyone here is a friend of Paradox and therefore must be a thinking individual who cares. The big question on everyone’s mind is, now what?

The bailout. I’m not too thrilled with it, although I am happy that some Senator had the wherewithal to add a provision to allow the Treasury to purchase equity shares in banks and other lending institutions behind the backs of the Republicans (who had been fighting against it), which is the solution the plurality of economists had suggested. But it’s the bailout (rescue, whatever) that we have. This NEEDS to fix the commercial paper market first. If it doesn’t, we will see some major layoffs and companies like GE shutting doors because it doesn’t have the capital on hand to run. If you don’t know or understand the commercial paper market, listen to the first of the This American Life articles listed above. Once we get that solved, next is the banks. The banks have two problems, 1) credit loss swaps (aka complex insurance policies) and 2) the housing crisis. The first of those, I’m still baffled on what I think should be done. It scares me. It scares me bad.

The housing crisis. This is a catch 22. A lot of people bought houses that they SHOULD NOT HAVE BOUGHT. But bought them they did. And in the new neighborhoods, it could be a rather sizable percentage of the population. In older established neighborhoods, it’s more of a shotgun pattern. If we bail them out, we create a moral hazard and we prop up overvalued housing, making it harder for people to enter into the housing market. If we don’t bail them out, then neighborhoods will be destroyed due to falling house prices, which hurt people who did purchase within their means, and could lead to more jingle mail. Falling housing prices will continue to bring the rest of the economy to its knees.

Buying up the loans from the banks is difficult, since the loans have been sliced hundreds if not thousands of times, so you have a lot of paper to buy. You can’t just ask a bank to allow for settlement of a loan, because in a lot of cases they don’t own enough of the loan to be able to make that decision. So you have to ask a lot of groups, and hope they agree. Those that do own whole cloth loans aren’t about to let them go either, as they hope they can suck as much income out as possible while the person is still paying (a Damn the Torpedoes! Full Speed Ahead! approach).

Here’s what I think should happen.
1) We need to change the bankruptcy laws so that courts can change the value of the loan. This was changed during the past 7 years, it used to work that way. What this will do is allow people who have jobs, and could potentially keep paying for a house if the loan is reset to what the current housing value puts it at, the ability to keep paying, but only after realizing that they will have to declare bankruptcy and would normally foreclose. The banks now are still getting something, not as much, but something. They don’t have to send out people to check on the house to see what needs to be done to resell it. They don’t need to worry about trying to sell it, or the tax liabilities if it stays in their hands. The neighborhood benefits because it starts to stabilize the housing prices there, and they don’t have another see-through house. It helps the couple, as they don’t have to move and can keep some semblance of dignity, but they didn’t get off scott free, as bankruptcy is a difficult thing to go through.

2) If a bank has controlling interest on a rental property, DON’T KICK OUT TENANTS THAT ARE STILL PAYING YOU. This is what doesn’t make sense to me. The banks seem to think it it’s in their best interest to avoid paying property tax by vacating a house with paying tenants and hoping it sells in time for not too much of a loss. This causes a see through house, which makes it ripe for vandalism, which costs the bank, and devalues the house because it devalues the housing market in that area. Something needs to be done to force the banks to make a good faith effort to keep tenants in a place while they attempt to sell it. If they don’t, well, this will start to spread and mutate.

3) Places like Countrywide were creating a workplace that encouraged predatory and “lier loan” lending. The people who initiated it (including some CEOs) need to be thrown in jail for market manipulation, racketeering, predatory lending, and hostile work environment.

I have a lot more to say, but I don’t have time to write it out. The above won’t fix it. I do believe it will help. We do NEED to fix the commercial paper markets first though. As for letting the “markets correct themselves”, these aren’t ideal markets, cow’s aren’t spherical, elephants aren’t frictionless, they won’t fix themselves.

ParadoxDruid is a bad bad man for getting me started on this.