Opinion

The Great Debate

The Fed as lender of first and only resort

October 28, 2008

John KempJohn Kemp is a Reuters columnist. The opinions expressed are his own.

LONDON (Reuters) – The Federal Reserve has unveiled a dizzying array of new lending and liquidity support facilities over the last six weeks, but the diminishing law of marginal returns already looks to have set in. Each new lending and liquidity facility announced by the Fed is providing a smaller boost to confidence than the last.

The market is increasingly focused on how the Treasury and the Fed will fund the ever-expanding array of facilities, and the huge overhang of very short-term paper that needs to be rolled over into longer-term securities in a market that already looks queasy about the forthcoming flood of notes.
Rather than multiplying the number of acronymned facilities further, restoring confidence now rests on solving two issues.

First, the market needs to see buyers for all this new Treasury paper that will have to be issued in the coming year.

The government is under pressure to line up support from overseas central banks and other institutional investors to continue supporting the market by absorbing a large share of the new issuance that will be required.

A much higher share may need to be in the form of Treasury Inflation Protected Securities (TIPS) to reassure buyers the government will not seek to inflate its way out of the problem.

Additional commitments on exchange-rate stability may also need to be given, at least implicity, to solicit strong foreign participation.

Second, the market needs to see that the financial crisis can be contained by a stabilisation of home values, corporate cash flows and default rates.

Until collateral values and default rates stabilise, the steady flow of losses will continue to eat into even the banking system’s supplemented capital base.

The Federal Reserve System’s balance sheet has almost doubled since the start of Sep 2008, as the central bank has created or expanded a dizzying array of new lending facilities providing around $750 billion more support to the commercial banking system.

The chart here (https://customers.reuters.com/d/graphics/US_FEDCND1008.gif) shows the balance sheet expansion — with Fed lending (assets) above the line and sources of funding (liabilities) below.

The Fed is now providing extra credits through the Term Auction Facility ($263 billion); increased primary credits from the discount window ($106 billion); equivalent credits to other primary dealers and broker-dealers ($111 billion); liquidity support to money market mutual funds ($114 billion); and a variety of other uncategorised credit extensions including swap lines ($87 billion); as well as support for JPMorgan’s acquisition of Bear Stearns ($29 billion); and enhanced repo activity ($41 billion).

The Fed has run down its portfolio of Treasury securities as a result of lending operations, swapping them for other less liquid mortgage-backed securities, and has lent out about half of those which remain to securities dealers to provide temporary liquidity (https://customers.reuters.com/d/graphics/US_FDCND1.gif).

The attached graphic is an annotated version of the Fed’s weekly “Statement of Condition” showing the full array of new and enhanced lending and swap facilities (see chart https://customers.reuters.com/d/graphics/FEDBSH1008.mht).

Some of these extra credits have simply remained on deposit or flowed back into the Fed as member banks increased their reserve balances with the central bank.

Excess reserves held with the central bank above the minimum required for operational purposes have risen by around $289 billion in the past twelve months.

But the rest of the Fed’s balance sheet expansion has been funded from the proceeds of a massive US Treasury borrowing programme deposited into a special new account at the central bank.
The Treasury has borrowed $876 billion since the end of Aug (net of refunding).

In the first instance, most of the funding has been raised through the sale of an unprecedented volume of short-term cash management bills in Sep ($320 billion) and Oct ($520 billion).

Only a small proportion has so far been funded through the issue of bills, notes and bonds in the regular series to the public, leaving a massive overhang of debt that will need to be funded at longer maturities in the coming months.

As a result of this huge borrowing programme, the US Treasury now has a staggering $715 billion of cold hard cash and near-equivalents on deposit in various accounts:

(1)  Some $559 billion is on deposit in the Treasury’s new “special supplementary financing programs” account at the Fed to back increased Fed lending and credit facilities to the banking system.

(2)  Another $137 billion is being held in the Treasury’s regular account at the Fed. Presumably this money will eventually be allocated to another account. In the meantime it is a general deposit against which the Fed can lend.

(3)  The Treasury also has $20 billion in its Treasury Tax and Loan (TTL) accounts with commercial banks and had as much as $80 billion in recent days.

The TTL accounts are a holding facility used for surplus Treasury funds which are left with commercial banks for short but fixed maturities to earn commercial rates of interest.

Normally, the Treasury tries to keep balances on both its regular account and the TTL loans to a minimum.
Surpluses are withdrawn to finance spending and reduce borrowing. But in the current climate, the Treasury has no difficulty borrowing overnight.

In fact, it is the only borrower able to do so effectively. So the Treasury is maximising its short term borrowing and depositing the money with the Fed and the commercial banks, in effect doing the borrowing they cannot do for themselves.

The higher than usual balance in the Treasury’s regular Fed account is a form of quiet supplementary support for the central bank.

The higher than usual balances in the TTL facility are a quiet form of support for the banking system.

The problem with all this borrowing is that it is now taking the Treasury perilously close to the statutory debt limit, which was only raised by Congress in July and then again in Oct, as part of the Emergency Economic Stabilisation Act. The statutory debt ceiling currently stands at $11.315 trillion.

The Treasury has already borrowed $876 billion since the end of Aug. Total debt outstanding is now $10.457 trillion, just $858 billion below the revised ceiling.

But the Troubled Assets Recovery Programme (TARP) will require as much as $700 billion worth of borrowing.

It is not clear from the Treasury and Fed accounts whether some of the borrowing already done and the money already deposited into the various accounts is to support the TARP in future. But it looks like those funds are already fully committed backing existing facilities — meaning the Treasury still has to borrow most or all of the TARP funding.

With just $858 billion of unused borrowing authority, and as much as $700 billion of that committed to TARP, the Treasury has just $158 billion of uncommitted borrowing authority left.

A substantial rise in the debt limit is now both inevitable and urgent.

The administration looks set to recall Congress for a special lame-duck session after the Nov elections to approve a further rise in the limit as part of a broader package of financial reform measures and help for homeowners and corporate borrowers designed to stem the rising tide of bankruptcies.

At the time of publication John Kemp did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.

Comments
18 comments so far | RSS Comments RSS

It’s the law of diminishing marginal returns, not the diminishing law of marginal returns

Posted by Alan Joy | Report as abusive
 

Here’s something from Soros that was published in the FT today.

It sounds like we need a TARP for emerging economies, too.

It may be that we could do more to save our own economy if we worked with other developed nations to save the developing economies who are being hurt by our crisis.

—————-
America must lead a rescue of emerging economies

George Soros

Published: October 28 2008 22:05 | Last updated: October 28 2008 22:05

The global financial system as it is currently constituted is characterised by a pernicious asymmetry. The financial authorities of the developed countries are in charge and they will do whatever it takes to prevent the system from collapsing. They are, however, less concerned with the fate of countries at the periphery. As a result, the system provides less stability and protection for those countries than for the countries at the centre. This asymmetry – which is enshrined in the veto rights the US enjoys in the International Monetary Fund, explains why the US has been able to run up an ever-increasing current account deficit over the past quarter of a century. The so-called Washington consensus imposed strict market discipline on other countries but the US was exempt from it.

The emerging market crisis of 1997 devastated the periphery such as Indonesia, Brazil, Korea and Russia but left America unscathed. Subsequently, many peripheral countries followed sound macroeconomic policies, once again attracting large capital inflows, and in recent years have enjoyed fast economic growth. Then came the financial crisis, which originated in the US. Until recently peripheral countries such as Brazil remained largely unaffected; indeed, they benefited from the commodity boom. But after the bankruptcy of Lehman Brothers, the financial system suffered a temporary cardiac arrest and the authorities in the US and Europe resorted to desperate measures to resuscitate it. In effect, they resolved that no other big financial institution would be allowed to default and also they guaranteed depositors against losses. This had unintended adverse consequences for the peripheral countries and the authorities have been caught unawares. In recent days there has been a general flight for safety from the periphery back to the centre. Currencies have dropped against the dollar and the yen, some precipitously. Interest rates and credit default premiums have soared and stock markets crashed. Margin calls have proliferated and spread to stock markets in the US and Europe, raising the spectre of renewed panic.

The IMF is discussing a new credit facility for countries at the periphery, in contrast to the conditional credit lines that were never used because the conditions attached to them were too onerous. The new facility would carry no conditions and no stigma for countries following sound macroeconomic policies. In addition, the IMF stands ready to extend conditional credit to countries that are less well qualified. Iceland and Ukraine have already signed and Hungary is next.

The approach is right but it will be too little, too late. The maximum that could be drawn under this facility would be five times a country’s quota. In the case of Brazil, for example, this would amount to $15bn, a pittance when compared with Brazil’s own foreign currency reserves of more than $200bn. A much larger and more flexible package is needed to reassure markets. The central banks at the centre should open large swap lines with the central banks of qualifying countries at the periphery and countries with large foreign currency reserves, notably China, Japan, Abu Dhabi and Saudi Arabia, ought to put up a supplemental fund that could be dispersed more flexibly. There is also an urgent need for short-term and longer-term credit to enable countries with sound fiscal positions to engage in Keynesian counter-cyclical policies. Only by stimulating domestic demand can the spectre of a world-wide depression be removed.

Unfortunately the authorities are always lagging behind events; that is why the financial crisis is spinning out of control. Already it has enveloped the Gulf countries, and Saudi Arabia and Abu Dhabi may be too concerned with their own region to contribute to a global fund. It is time to start thinking about creating special drawing rights or some other form of international reserves on a large scale, but that is subject to American veto.

President George W. Bush has convened a G20 summit for November 15 but there is not much point in holding such a meeting unless the US is serious about supporting a global rescue effort. The US must show the way in protecting the peripheral countries against a storm that has originated in the US, if it does not want to forfeit its claim to the leadership position. Even if Mr Bush does not share this point of view, it is to be hoped the next president will – but by then the damage will be much greater.

The writer is chairman of Soros Fund Management and author of The New Paradigm for Financial Markets

Posted by Fred Beshears | Report as abusive
 

I’m not so certain. It is an apt description of the “asset” in question, as well as a pun on the phrase.

Posted by Richard Dikin | Report as abusive
 

I don’t know? It may be the diminishing law of marginal returns, and Kemp got it right after all! The laws and regulations have certainly dimininsheed into nothing or rather zero! And for that reason the marginal returns can not be actually calculated! No one knows what laws they are following or where they are going.

I love John Kemp, he “puts it out there in the same fast rate, dizzing fashion as does the Stock Market and the Fed, a rather Atlas Shrugged method and weaving of sentences and words. But, Kemp is no Ayn Rand, (thankfully, or I can’t see it). When I had to read Atlas Shrugged I stopped because I found myself chasing my tail… in Randian Fashion. So, assuming that Kemp tracks it right down to the truth, then we know that no one knows what is going on.

I am certainly no neo-classical economist or even a very good capitalist. But, I cannot find it within myself to believe in the totalitarain rambles of an Ayn Rand. And why is she still be considered??? Because she believes in private or inividuals owning everything??? Maybe! But, if so she fails at “Existentalism.”

Now then, another conumdrum… Why would any individual who has studied Rand, think that the Fed is a great “Fascists” takeover by the government. The Fed is loved by Ayn as it is privately owned and its “leaders” get great take home pay and give out huge packages of money but to individuals. And, to make sure that they own most of the wealth from banks to cadillacs, they have talked the US Congress out of billions And here is where Kemp does such a grande job at telling this tale. But, they may have to leave out the abosolute monarchs here say as The Prince.

I had been thinking about where the 700 billion went off too? Then I understodd that Bernanke of the Fed had not only been forcing “money” on indiduals who did not want a buy out, he had also made several deals with other Countries, like New Zealand last night. He also may have insisted that they take the money and the loans, after all, the US Economy is considered by some to be causing the Republicans to loose this election.

No matter, we have individuals who have gained great wealth in the private sector and Ayn would be proud. Meanwhile, the people of any given place or nation are either in a refugee camp, without a house to live in, being forced into jail by the US, being murdered on the Syrian border, or being raped by the US Fed. And here is where John Kemp comes in so smartly… His statements follow:

The Federal Reserve has unveiled a dizzying array of new lending and liquidity support facilities over the last six weeks, but the diminishing law of marginal returns already looks to have set in. Each new lending and liquidity facility announced by the Fed is providing a smaller boost to confidence than the last

The Fed is now providing extra credits through the Term Auction Facility ($263 billion); increased primary credits from the discount window ($106 billion); equivalent credits to other primary dealers and broker-dealers ($111 billion); liquidity support to money market mutual funds ($114 billion); and a variety of other uncategorised credit extensions including swap lines ($87 billion); as well as support for JPMorgan’s acquisition of Bear Stearns ($29 billion); and enhanced repo activity ($41 billion).

The Federal Reserve System’s balance sheet has almost doubled since the start of Sep 2008, (says Kempo) as the central bank has created or expanded a dizzying array of new lending facilities providing around $750 billion more support to the commercial banking system.

So, I must say”

The people who are worried that we are getting “socialism” can stop it. As, I don’t think many working class people have received a dime. They are just thinking about not having any Christmas. I wonder if Ayn Rand ever missed a Chritmsas?. Thank you John Kemp.

 

And we haven’t even mentioned the credit card debt that is about to go into catastrophic melt-down. The recent strength of the dollar is likely to be the death bounce. You can’t get to stability by going in this direction. So let’s follow the money. Who does massive world instability favor? Clue: the last one standing loses. That means some very big players who can disrupt the world and then pick up the pieces for peanuts. You know, corner commodities markets, draw in the suckers and dump your holdings at the top. Sure wish I was Bill Gates or Warren Buffet. But maybe even they don’t have deep enough pockets. How about Exxon or Chevron, the private equity guys, the Carlyle group?. They sure did pile it up in the last year or so. And guess who’s best friends with the White House? Hm-m-m-m!! Of course this is all speculation, America’s favorite pastime in recent years.

Posted by Jonathan Cole | Report as abusive
 

Why did the government bail the corporations out by “borrowing” the money from the Federal Bank. Why didn’t the Federal Bank bail them out instead?

Don’t we have the Constitutional right to coin our own money? Why aren’t we doing it?

Didn’t America say a BIG NO to the bailout? Why did Congress disobey the desire of the people?

Are you going to vote for the same people that voted against your wishes on the bailout?

Do you really think they are that much smarter than you?

Do you still really trust them?

Posted by Lisa W | Report as abusive
 

The financial crisis is “spinning out of control” not because “Authorities are behind” but because the top messed with the shelter of the bottom. It’s one thing to hike prices with low interest rates on luxury items, but it’s quite another to cause price bubbles on homes and food.

If you think the Govt is responsible for bailing any of you out, think again. We are not responsible for your mess. Step up to the plate and take your wild swings George, I’m tired of watching this game, I’m going home.

Posted by Lisa W | Report as abusive
 

The workers have been done again.
A larger portion of workers are finding it harder to protect themselves from the doer’s. They realize that every time they accumulate any type savings (& loans) the doer’s find a way to harvest it. And they suspect the doer’s are holding the money the top doer’s gave them lately until they can figure out a way to reinvest it to make themselves a few more billion.Then the doer’s will wait until the workers can save them some more money.

Posted by John | Report as abusive
 

I think it is ironic that:

- Congress didn’t regulate these government-sponsored enterprises
- Fannie and Freddie were exempt from Sarbanes-Oxley
- The Government then seizes the company – takes the shareholders stocks away
- Allows people to buy more stocks as if they (Congress) want to rebuild these two government-sponsored enterprises to prove to the world that capitalism really does work

Now I understand what Federal Reserve Chairman Ben Bernanke is leaning towards when he spoke to an economic symposium in Berkeley, Calif., Bernanke yesterday. It was written that he said there are many alternatives that need to be considered but that all will involve a role for the federal government and federal guarantees for securities backed by mortgage loans”.

\”Government likely has a role to play in supporting mortgage securitization, at least during periods of high financial stress,\” he said.

This I get. What I don’t understand is how he plans to let the free market concept drive the housing market. It appears that he wants Fannie and Freddie to be another misfit likened to the post office – which over the years continues to lose money. Basically, kill the stock again, robbing the stockholders AGAIN and putting these businesses on a shelf , next to the post office.

I can understand that Congress trying to destroy any trace of their misgivings – this will be more apparent November 20 when the hearings begin. Finger pointing, cover-ups and probably amnesty here and there for the good of the people. Make note of who made the most millions in the last ten years off of Fannie and Freddie – Republicans or Democrats. Oh and don’ t forget to find out what political affiliation these previous Fannie and Freddie execs had during their tenure at these two these two government-sponsored enterprises.

Sorry to deviate so much – I must have a passion for the soapbox.

Can the be the solution:
- don\’t take the stocks away
- rebuild Fannie & Freddie and let America help fix this situation
- Again, keep the stocks alive
- REGULATE these two government-sponsored enterprises the way that they were suppose to be regulated.
- Oh, as long as you want to regulate –send the auditors to banks. Before sending the auditors, train them what to look for!

You can help.

Please don’t let the Government control us by taking Fannie and Freddie in as their business. We are the Boss – we oversee what Congress can and cannot do. It started this way in England some time ago – and ended with “no taxation without representation”. After that, we built one of the greatest societies the world has come to know. It was based on capitalism and only ran into trouble (repeatedly) when the same people who are elected to protect us sanction greed.

I remember when dereliction of duty got the guilty party in some serious trouble – now it appears that we have embarked on a new value system of manipulation and cover-ups. Ask for the Almighty’s help and contact your Congressperson to help save Freddie and Fannie – BY MAKING THEM PUBLIC without destroying the stock again! Stock means confidence that the enterprise is worth something.

Thanks – TH

Posted by TH | Report as abusive
 

Fannie and Freddie aren’t the solution, they are a part of the problem. They are the mechanism, purposely and explicitly set up by congress, to allow and encourage making loans to people who cannot get them from banks who expect to get paid back. Local banks were strong-armed to make such loans. Freddie and Fannie buys those loans that the bank, when the loans were made, expects to eventually go bad. The bank gets a cut for making the loan but is relieved of responsibility. Fannie and Freddie were able to raise money to buy loans because of the implicit guarantee from the US Government. Initially, this guarantee was used to encourage folks to buy their stock. This wasn’t enough, so they involved Wall Street investment banks in creating securities which consist of mortgages. The rating services were paid to give AAA ratings to these securities so that they could be sold to pensions and similar organizations that are supposed to only buy solid investments.

So Fannie and Freddie, as well as the investment banks, need to be shut down, using a bankruptcy model. We don’t need them, unless the idea is to create yet another bubble….

Mortgages should ideally be made by local banks that know the local situation. The current situation makes it difficult for home owners who want to negotiate with their mortgagee to even talk to the right person, and the person they are talking to has no way to know if an offer is reasonable.

Posted by BH | Report as abusive
 

Saving Detroit/Stimulating the Economy

It’s been all over the news, putting money into Detroit for the auto industry, trying to save it and help it convert to more hybrid production. Probably preferred stock or warrants.

OK – here’s the benefit for the whole economy now.

How old are the fleet vehicles in the federal government? Why not place an order to buy all new hybrids from Detroit now – and let the states buy off that contract too through GSA – even give them the money as a stimulus to do it too, letting them save local tax dollars to avoid budget cuts.

So, invest in Detroit to convert it, buy all new vehicles and give Detroit some profit, all the vehicles are green, the public’s investment gets paid back, and states get stimulated too.

David S, Bail, Ed.D, MBA
Corinth, KY

 

Our ‘world financial system’ would appear to be a bad idea.
If continents each had their own system and attempted to be self-contained, there would be less connection and fewer problems when ‘leaders’ of one area decided to throw sensible rules [such as creating 'moral hazard'] in the basket and create a ‘financial crisis’.

It appears people who opt for power can never get enough.

The people who grow the food, build the houses, and pave the roads just want to keep on working to better themselves and their families. It’s the people at the top who keep on screwing things up.

Posted by James Elasmar | Report as abusive
 

There is nothing we can do to save the auto industry in the USA. Nothing short of disbanding the UAW. The UAW has a deathgrip on the auto industry, something that Honda, Hundayi, and Nissian do not have to deal with. It is insame to think that a company can compete against another with the same technology with much higher labor and operating costs. It just wont work. GM will continue to have to sacrifice quality to pay their workers. then people will do what I have done. Buy a Honda. Its a better car, better reliabilty better price. Why??? because Honda can invest their money correctly, investing it in makeing their product better as opposed to compensating overpaid union workers. I think they should through all of those union labors out and make them renegoiate their contracts. oh well. maybe I am just a fool, and dont reallize that the government can fix everything. But has that ever worked before????/

Posted by Benjamin Burkley | Report as abusive
 

Am I the only person in the world that thinks the narrow columns and small print here make this tedious reading? I set the text size to largest. Give us a break, please.

 

The strongest possible form of business regulation is bankruptcy. Let the reform begin. What the treasury is doing is trying to put a feeding tube into a dead man on life support. Pull the tubes out. By the way, roll back the bankruptcy law the Bush Administration and the Congress passed to save the banks from bankruptcy so we can clear out the poison debt and start over.

“Democracy must be something more than two wolves and a sheep voting on what to have for dinner.”
– James Bovard, Source: Lost Rights. The Destruction of American Liberty (St. Martin’s Press: New York, 1994), p. 333

If you had a bag of potatoes with a couple of bad potatoes in it, would you leave the bad potatoes in the bag to infect the rest of them or would you pull them out to save the rest of the good potatoes?

The politicians are busy blaming deregulation for the current financial crisis. This is partly self-serving, but it’s also due to a defect in the way politicians think. Often, the repeal of a government regulation will result in the restoration of free market regulations that are far stronger.

Free market regulation comes in several forms. One involves customers taking their business elsewhere when a company fails to provide a good product at a good price. Businesses are regulated by their customers.

Please notice that the government operates under different rules . . .

If the government charges you too much to do too little, then too bad. The government continues to extract money from you, even when it performs poorly.

* You can’t fire the government!
* You can’t take your business elsewhere.

In this sense government is almost completely deregulated.

But the free market also regulates businesses in other ways. Indeed, the free market imposes the strongest possible form of regulation . . . bankruptcy.

 

In responce to Benjamin Burkley coments on Union workers…
Did you know that the UAW builds the Toyota Corolla and the Pontiac Vibe in California at the NUMMI plant, a joint venture between General Motors and Toyota, is one of the most profitable. The UAW does not design and market the cars they build, yet why does one plant prosper and another fail? It is the product the plant makes and the consumers willingness to purchase that product.
GM was the leader in developing Fuel Cell cars. But how do you fuel them? They make alternate fuel cars and trucks for the Federal and State governments who have their own filling stations in their corporation yards. The problem is, the GASOLINE ONLY infrastructure our country has and our Republican Government officials, under pressure from BIG OIL, are unwilling to make the Changes needed to give us a muli-fuel infrastructure. A Car company can not make cars that the customers can not fuel!!!
Boon Pickens, the oil billionaire, wants to have “liquefied Natural Gas” cars and filling stations across the country but that requires a large investment that OIL companies will not make and car companies can’t afford. So now it will be up to our political leaders to make the change.
Obama was the only one who promised to make sweeping changes that could make this happen, not just drill, drill, drill. Unions backed Obama because he made the best argument to keep America’s Industry moving and hiring and not go off shore. He also promised to reverse the BUSH executive order, anti-labor, enacted policy’s that has hurt American Labor’s ability to make a living wage. Who do you think shops for American Goods? It’s Joe Plumber, UAW Fred, IBEW John and Teamster Bill. Not the CEOs, they buy Mercedes or Lexus and Imported Italian Suits.
Blaming the Unions is the LIE of big business CEOs That want it all for themselves and to shift the blame for bad business decisions, they have made. Any school child can see this through the “smoke and mirrors” show yet biased Adults are the talking Blind.

Posted by Edward F. Dijeau | Report as abusive
 

A 1921 Bailout eventually caused the crash of 1929.

Let the law of supply and demand work. Money is just
another commodity let it rise or fall without government
intervention. The markets need to find their own bottom
without intervention. Sure, things will get worse but
then will recover quicker.I am a small businessman and
I have no trouble getting money. Why, because I have a
track record of paying my debts. If big business has done things to get themselves in this shape, let them go broke. I have been broke twice in my life and did not
file bankruptcy. I worked until I paid my debts. Can you
imagine why I don’t feel like bailing someone else out.
I don’t care if it is Fannie Mae; Freddie Mac; brokerage
firms; banks; mortgage companies or insurance companies,
if they are broke, they are broke, let them fall and let
someone stronger take over. Yes, I agree that we are a
disgrace to other countries. But it is not me but the
greedy predators that got themselves in that shape and
I have no feelings of mercy to them or the stockholders
that let them do it.

This country became great because of private enterprise.
So, for God’s sake leave it to private enterprise.

Posted by Tom Bosse | Report as abusive
 

“Absolute Power Corrupts Absolutely” is the phrase that James Elasmar should of used. He’s absolutely correct. You can’t blame the little guys who took the loan thhe couldn’t afford. They needed to house his family in a market that was being price gouged by real estate agents fattening their wallets, supported by the mortgage originators who would add on extra points for themselves to get the sub-prime rates even lower(which most of these originators can’t even be found these days-chew n’screw). They were being offered amounts that were double, even triple of what they could actually afford.

Most level headed folks would recognize that the can’t swing a $300,000-400,000 note on $20/hr. wage, but they make it look so feasable on paper. Of course the real estate agents and the lenders are pushing you to go ahead and sign, but don’t explain that what you were signing, most likely a 3 yr. ARM, would double your interest rate in three years, probally doubling your monthly payment.

Most people who are defaulting on their mortgage are not folks who were intentionally trying to screw themselves out of a prized asset, their family on the street, and their credit in ruins. It was new Mother & Father who needed to provide shelter for their family and were chasing the American Dream of owning your own home. These people are victims of circumstance. In a time when land and homes were flying off the shelf and the market only showed signs of increasing, many couples were left whithout a choice but take what they could get. Many people couldn’t take what they had saved as a down payment for their home and put it aside and save it for when the market dropped and rent a property in the mean time. Who knew when that would that happen. How long would you have to pay someone elses’ mortgage for? Could you even get approved at another point in time?

If the people who had the most to lose, the banks, are telling you that you can afford the house no problem, why would you not believe them, especially if you are a first time home buyer. Anyone who has bought a home can recognize that buying your very first home is very confusing and often seems to happen in a whirlwind fashion and you are trusting those around you involved in the deal.

Of course, everyone should realize their financial limits, but these people should not be baring the burden of the current crisis. If anything, we should have sympathy and empathy for many of them. They were taken by the real estate companies and the mortgage originators. It is these people that should be held responsible, not Joey Homeowner who had grand dreams of providing for their family and working their tail off to make it all work out only to have their world come crashing down on them. Losing your job and your home at the same time? I am sure that is exactly what they intented when they invested in a roof over their head.

Posted by T.S. Reed | Report as abusive
 

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