TCS Daily

The Wrong Path to Sub-Prime Reform

By Desmond Lachman - November 8, 2007 12:00 AM

            Barney Frank's recently introduced mortgage reform bill demonstrates yet again Congress' penchant for indulging in regulatory over-reaction to crises without addressing their underlying causes. Sadly, it also underlines how little Congress seems to have learned about the costs of past excessive market regulation. This is particularly disappointing coming as soon as it does after the Sarbanes-Oxley fiasco, which was Congress' costly knee jerk reaction to the WorldCom and Enron crises.

One can hardly take issue with the stated motivation of Mr. Frank's mortgage reform proposal. After all, who could seriously object to legislation that purportedly aims "to combat abuses in the mortgage lending market and to provide basic protection to mortgage consumers and investors"? This is especially the case against the backdrop of US foreclosures now set to top a staggering 2 million homes in 2008. It is also the case considering that global financial markets are still reeling as a result of ever-mounting losses on a mountain of ill-advised sub-prime lending.

One must take issue, however, with Congressman Frank's fundamental approach to averting any recurrence of the sub-prime mortgage debacle. For rather than seeking to harness market forces and correct market failures, he chooses to rely exclusively on a regulatory approach to the problem. He does so seemingly disregarding the dismal record of past efforts down this well trodden path.

Mr. Frank plans to rely on regulation in three distinct areas. First, he proposes the establishment of a federal duty of care aimed at prohibiting steering and at requiring the registration and licensing of all mortgage originators, including brokers and bank loan officers. Second, he advocates the setting of a minimum standard for all mortgages, which would require that borrowers must have a reasonable ability to repay. And third, he seeks to attach limited liability to secondary market securitizers, who package and sell interest in home mortgage loans outside of these standards.

            The proposed heavy reliance on regulation to prevent any future recurrence of the sub-prime problem is curious to say the least. Was not a principal cause of today's sub-prime lending crisis precisely the fact that the regulators in general, and the Federal Reserve in particular, were fast asleep at the wheel as no less than US$1.3 trillion in sub-prime loans were made between 2004 and 2006. Does it now really make sense to put one's faith in the same regulators who, for whatever reason, chose to ignore blatantly abusive lending practices and the creation of a ticking time bomb for the financial system of grossly sub-standard loans that had little chance of being repaid?

            It might well be recalled that under the Home Ownership and Equity Protection Act, the Federal Reserve already had the authority to reign in the non-bank mortgage originators, who were the most culpable of bad lending practices. Yet, under Mr. Greenspan's leadership, the Federal Reserve chose not to exercise that authority as mortgage lending standards progressively deteriorated. Can we have any assurance that regulators will be any better at implementing Mr. Frank's proposed reforms?

            Reliance on regulation to address the sub-prime problem would seem to be particularly misguided when a more effective and market based remedy is readily at hand. Might not a more straightforward approach to mortgage reform be to harness market forces by aligning the incentives of mortgage originators with the promotion of the public good? One could do so by requiring that all mortgage originators be adequately capitalized and be forced to hold until maturity a significant portion of all mortgages that they originate.

            In recent years, poorly capitalized non-bank institutions originated almost 50 percent of U.S. home mortgages. Typically they sold in short order their full stake in the mortgages they originated for securitisation purposes. In this originate-to distribute model, they had little incentive to determine whether the loans they originated might perform well over the life of the loan. Rather, their sole concern was to be sure that the loan would not default during the short period that they held the loan before distribution and before they were paid their fees.

            By requiring mortgage originators to hold at least part of the mortgages they originate, one would be establishing powerful incentives for all originators to exercise better due diligence in making loans and to refrain from making loans to those borrowers who are most unlikely to meet the loan's terms. Such an approach would have the distinct advantage of obviating the need for the Mr. Frank's cumbersome regulatory approach to the problem. It would also be very much more transparent and very much less likely to interfere with the proper functioning of the US mortgage market than would Mr. Frank's proposed remedy.



People like Frank have two motivations.

First, they truely believe that businessmen are inherently evil, and that individuals are powerless (or not intelligent enough) to take care of themselves. Therefore govt must order even the smallest aspects of our everyday lives.

Second, they seek to so saddle the free market with regulations, so that when it collapses from this weight, they can step in and declare that the free market is untenable, and only total govt control can save us.

The Subprime Mortgage Crisis...Let's Not Only React to This Accident..Let's Prevent These Accidents
Everyone is overlooking a very important factor in this crisis. Nothing will work unless the present subprime borrower and future borrower get some vital knowledge on how to manage spending and credit card debt. Clearly, there were abuses by some lenders, but they should not be the only ones who should get the blame. All of the talk of loan modification and refinancing is useless because the borrower will still be like a boat without a paddle when is comes to managing his/her money. I believe that any legislation should also hold the borrower responsible to seek financial literacy guidance before he/she is given any loan. Without this guidance , we will go through this crisis again, even with the protections expressed in the proposed legislation. I must also add, that traditional financial literacy education is not working. The current form of FL education is "memorized, regurgitated , and forgotten"... We need a new and innovative FL delivery system that will help guide everyone as to how to manage their spending, saving, and credit card use.

I am saying that now is the time when we say to this borrower.."Let's make a deal, we will help you by loan modification, but you (the borrower) will commit to do your part by controlling your spending with guidance". We now have a unique opportunity to gently guide this financially illiterate borrower. That is the least that we can ask of him/her, especially since we are giving them a "gift" by lowering their mortgage payment. What is wrong with helping consumers be more responsible?. What are we waiting for? It seems that we are just sitting-by helplessly and awaiting the expected defaults and blaming everyone for this tragedy that is unfolding and may take our economy with it. I presented a solution to this crisis, at the Third Annual Subprime ABS conference on Sep. 19-20, 2007 in Las Vegas. My solution involves helping the borrower understand how it is possible to avoid default. There are millions at risk. Let's not think that the counseling agencies will be able to get to a significant portion of these borrowers who need help. Anyway, even if we modify some of these borrower's mortgages, it is wise to guide them not to make the spending and debt mistakes that got them into this mess in the first place.

You get what you measure for
Anyone remember the campaign by the quasi-government Freddie Mac/Fannie Mae consortium, where they equated increased home ownership with a stonger America? Management by objectives only works if you pick the right objectives. A wonton increase in home ownership statistics without underlying financial stability has put a lot of American dreamers in a bad spot. But keep in mind that it put a lot of people who moved up to larger, more expensive houses (but who could night afford them) exactly in the postition they should be - rethinking their actions and learning from them. In the end Fannie/Freddie will be right - we'll get a stronger America after this setback educates a lot of people.

Predatory lending
The reason we have usury laws-- or used to, at least-- is to protect ignorant people from slick predators. Simple people unfamiliar with numbers can readily be conned by sharpies into signing on to loans that prove burdensome.

Do the predators pay? Not under our current system. Unlicensed operators can push bad ,loans through, cash the origination fees and sell the bundled loans to somebody else before trouble starts. They make out like bandits.

A first step would be licensure. Then at least there's something to take away when someone doesn't play by the rules. And a second step would be to make some rules.

I don;t think you'd like caveat emptor in the realm of prescription medicine. Sure, it would work after a fashion if the doctors spent half their time anayzing the efficacity of junk cures. But that's a needless waste of their time and effort. Best to create an FDA to do that job.

The same goes for electrical appliances and the Underwriters' Lab.

So what's the problem with having regulations describing whether or not someone is credit worthy? You'd be doing a big favor to both the hapless borrower and the ultimate holder of the junk loan. Such a law would protect everyone.

You mean now anybody can start a lending business without telling ANY GOVAG
and following NO regulations?

Reams of Regulations already exist Roy.

What exactly you would like to add that has not already been on the books?

roy won't be happy until only the govt itself is permitted to loan money.

the reason we have usury laws is because some people like to run other people's lives
The only think usury laws do is prevent people with poor credit ratings from getting loans.

In roy's mind (if I can use the term that loosely), a preditor is anyone who does something roy disagrees with.

Person A loans money to person B. If roy disapproves of the terms of the loan, the person A becomes a "predator" (ooooh, scary word) and must be punished.

As for licensure. The mere fact that licensing has utterly failed to provide quality in ANY other field in which it has been applied is meaningless to people like roy.

To them, the stamp of govt approval is all they need to see. It beats thinking for yourself.

Protection under law
Actually we don't have very much in the way of usury laws now. They were dealt a death blow by that court decidion that allowed banks to use the rules in their home state-- not in the state where the loan originated. So now we're all subject to the laws of South Dakota-- in other words, no laws.

The result is a proliferation of bad debt and predatory lending. Which wa, of course, the point of the exercise. But the unintended result was to hurt not only the loan industry, but all financial markets.

Hurt, as in LOST MONEY. But that's good, right?

Licensing is in fact the easest way to enforce accoutnability in the professions. Without it you could lose a bundle going to Joe's Accounting Practise, or having your taxes done by Bill's taxes.

But feel free to use unlicensed practitioners next time you have surgery.

Virgin Money
"Our mission is simple: to encourage affordable and flexible private real estate financing that funds home buying dreams. Oh, and have fun while doing it. We love to talk about this stuff, so call us!"

THey already exists
The mortgage market is already heavily regulated and lenders are licensed and must comply with federal regulation.

In fact, it was the Federal Government pushing lenders to lend to everyone for housing.

As to Caveat Emptor, try buying a house in Alabama. 1 second after you sign, it is your. A far cry from medicine, does not the consumer have some responsibility to make sure they can actually afford a loan?

Underwriter's Laboratories, Inc...
...(UL) is an independent, not-for-profit product safety certification organization that has been testing products and writing Standards for Safety for over a century.

They receive their funding for doing testing of commercial products.

Mark it on the calendar - Roy has advocated private industry as a symbol of successful regulation!

Lost money, my a$$
No such thing exists, unless you are saying that the money went straight into the fire. They money found its way into other parts of the economy.

as I said before, roy defines usury as being any interest rate that he disapproves of
you have not demonstrated that usury laws helped anybody, nor that the lack of them has hurt anyone.

You have just, as you always do, declared that business people are evil and everyone else is stupid.

So you conclude that only the was mavens of the govt can protect us from ourselves.

As to licensing, it's sold as a way of ensuring accountability. But that's never the way it works out.
What it always becomes is a way for those in the profession to limit new members so as to decrease supply. Thus ensuring that those in the profession never need worry about too much competition.

I also notice that roy still takes the position that anyone who isn't endorsed by his local buearocrat must be incompetant.

That money is gone
It doesn't sound like you know an awful lot about the mortgage industry. When a homeowner defaults, and the house returns to the lender, several losses are incurred.

First, the costs of foreclosure. Then, winterizing the house and boarding it up. Then it starts immediately going down hill. The grass needs mowing. It starts to get graffiti and broken wondows. If it isn't resold within the next six months or so it turns into a slum, depressing the values of all the neighboring homes.

Lenders vastly prefer pulling in a monthly stipend to owning a stack of used bricks.

Another Pitch.. In the Dirt
A first step would be licensure. Then at least there's something to take away when someone doesn't play by the rules. And a second step would be to make some rules.

1.) Mortgage lenders, brokers, etc. are all licensed by state banking departments at a very minimum.

2.) There's plenty of rules already, what the hell are you talking about? There's state banking law at a minimum, but national banks have the federal reserve, office of the comptroller of the currency, the documentary rules of "Freddie" and "Fannie", the SEC, etc, etc.

Your ignorance knows no bounds, and no, I'm not going to treat you with kid gloves-if you rant devoid of facts-you should expect to be scorned.

Not hardly
"roy defines usury as being any interest rate that he disapproves of"

Having been in the business, my definition is much more pragmatic.

Lenders should maximize the return they get in exchange for putting their cash out on the street. If they weren't able to get a decent return, the cash wouldn't be there. Okay? That's Free Markets 101.

But there are times when the system breaks down. And that is when an unregulated loan officer can bundle investment money to put together packages intended for resale on the secondary market. They can gleefully cross the lines everyone in the business knows, and push mortgages onto unwitting families who are unlikely to be able to carry those mortgages.

They earn their take on the front end, from origination fees, and then cash out when they sell the loans wrapped up in pretty packages. The losers are the hapless buyers, when the loans reset and theyfind suddenly they can't continue to pay, and the purchasers of these loan packages, when they find they've bought a load of lemons.

This is an instance where the unregulated market DOES NOT WORK. The corrections required are easy ones to make.

Also, there should be sources for loans above the normal usury rate. And those loans should be under special wording that makes it apparent they are for professionals only. There are many instances of investors confidently making loans at 16, 20 or 24%. And when both parties are knowledgable, those loans tend to be safe ones. To make such loans illegal would indeed stifle the market.

"I also notice that roy still takes the position that anyone who isn't endorsed by his local buearocrat must be incompetant."

Off the wall stuff like this just makes you look like a dmaned fool. You should be embarrassed.

Also, flip spell check back on. It's bureau, as in bureau, followed by crat, as in crat. Bureaucrat.

Putting the onus on the consumer
"...does not the consumer have some responsibility to make sure they can actually afford a loan?"

Of course. But you can count on that not happening, given the intelligence level of half the population (below average). So there needs to be a backup plan.

Without an adequate firewall against massive loan failures, we are all losing. The ripple effect is rushing through all the markets like fires across the southern Cal chaparral. When you let people light matches, others who had nothing to do with it still get burned.

So it's not just a matter between consenting adults. It's a community concern.

"In fact, it was the Federal Government pushing lenders to lend to everyone for housing."

Right. These people are all dummies. So the feds told them to jump in a lake, and they did.

"The mortgage market is already heavily regulated and lenders are licensed and must comply with federal regulation."

It's not the weight of the current regs (which are not all that burdensome). It's their ineffectual nature. We have a situation that wasn't covered. So we need to revisit the regs and alter them. Disclosure rules, obviously, are insufficient for the purpose.

A free market solution
I like your idea. Let's try it out by privatizing the FDA.

If they were to be run on a for-profit basis, and were charged with regulating a nearly trillion dollar industry, how long do you think it would take before the Big Pharms bought seats on the board and started mandating the way the thing was run?

And would you still want to buy your drugs in this country?

roy assumes that people are too stupid to be allowed to make decisions for themselves
I'm still waiting for roy to support one of his pathetic assertions.

Things like everyone knows that unregulated markets don't work. Or that business are just waiting to take advantage of people who are too stupid too know what is best for them, unlike roy and your average boorocrat. (I mispelled it again so that roy can have something to feel superior about. Lord knows he has so few chances.)

which is where it belongs
once again roy demonstrates his belief that people are too stupid to be allowed to make decisions for themselvs. Which is why he has to do it for them.

I like your idea, the only thing the FDA has ever done is get people killed.
roy assumes that unless something is run by the govt it will instantly become corrupt, and that govt never becomes corrupt.

Tell us oh master of the painfully obvious, how long did it take for various manufacturers to take over UL?

Oh, they haven't? Maybe there is something wrong with your businessmen are evil myths?

Subprime Mess May Force National Licensing For Brokers
What on earth could all this be about?

"Congressional Democrats seem ready to bring mortgage brokers and non-bank lenders - both of whom are at the heart of the subprime meltdown - under some sort of federal regulation."

As for putting regulations into place, the traditional ones obviously haven't been getting the job done. Nor have loan guarantors like Sallie and Fannie had much impact on the subprime market.

So my conclusion would be that it would protect the economy as a whole from serious blowouts like the current one, to have a fresh set of federal regs designed specifically to short circuit this kind of lending.

Still wrong
Except in marginal ways, money is neither created nor destroyed. It just changes hands. From a macro perspective, it is still in the economy.

Sure, it's gone from the homeowner's hands - which makes for a painful lesson in money management.

Sure, it is gone from the lender's hands - but that is no more than a strong lesson in lending practices.

Nonetheless, it still exists - in the hands of painters, gardeners, glazers, advertisers, mortgage company employees, people and firms that provide services to mortgage companies and their employees ... the list goes on.

And what will those people do with the money? Live, spend, invest, maybe buy foreclosed homes and rent them out. But the money is still in the economy.

UL is a neat example
UL was started by one faction of the economy (fire insurance underwriters) to test products so they could accurately and effectively respond to another faction (manufacturers). This was done, in part, to assist in actuarial activities. In this case, use of "poor quality" components would negatively affect insurance premiums paid by manufacturers for liability bonds. The end result has been an overall improvement in safety.

So, would I support a free-market FDA following the UL model? Sure would! In fact, I already use one every day (as do you, most likely). Check out the US Pharmocopeia - they are the "USP" that you see on your vitamin labels. While they do not speak to the efficacy of products, they do certify (through sampling) that the content of the products meets various minimum for wieght, and they also measure uptake percentages and rates of various drugs and vitamins.

So, bits and pieces of our certification process are already outsourced and independent. As a nation, we could create a transition path, following the 100+ year track record of UL, that leverages existing facilities for free-market certification.

The government still must play a role in assessing labs' assertions of independence. But that is a) a smaller role for the USG than now exists and b) an appropriate role for the USG in implementation of our shared interests.

"home ownership"
I only take exception to the use of the term "home ownership". Being loaded up in debt 5x or more than your annual income does not constitute home ownership. It is debtor hell.

Here's a better idea!
Why doesn't Congress pass a law to set up a Federal financial education standard?

We could call it the "No fiNancially-INCOMPentent-fOOl-PoSessing-Money Left Behind Act".

It even has a PATRIOT Act-like shortened name:

(drumroll, please)

No NINCOMPOOPS Money Left Behind Act.

The value (demoninated in money) is gone, yes..but the money itself isn't.
Unless the person/company who originally sold the home burned the money that he/she/it got.

But the market DOES work
When people make stupid decisions and/or undertake stupid actions, the market punishes them just as it rewards those who make the opposite choices. It's called 'feedback'. And, the market is WAY more accurate and efficient of delivering adequate feedback than government bureaucrats are.

The market is NOT supposed to deliver certain outcomes that certain individuals favor (like Roy). Roy's assumption that that is what markets are for is thus flawed.

There is no need for a backup plan
"Of course. But you can count on that not happening, given the intelligence level of half the population (below average). So there needs to be a backup plan."

And the reason why the intelligence level is below average and will only get worse is because the Nanny State protects the stupid from the consequences of their actions. Implementing any more market-distorting 'backup plan' will only make things worse.
Has anyone seen the movie Idiocracy? Nuff said.

Betting on the wisdom of the American people
"roy assumes that people are too stupid to be allowed to make decisions for themselves"

Omigod, Mark. Read a newspaper.

Foreclosures are going through the roof now. Aren't those all the result of stupid people making decisions for themselves? Didn't they all sign ARMs, never thinking for a moment that the rates might actually go up when they reset? And did any of them ever think those prepayment penalties were there for a reason?

And all that "smart money" that got into bundled mortgages, using them as securities. Nothing could possibly go wrong there, right? They were solid gold.

Of course I think people are too stupid to be allowed to make their own decisions. The proof is all around us.

A big mistake
This is a very old, very simplistic and very misleading notion. That no money can ever be lost. Even when you break a window, the glass company makes money off you, etc.

It's a dumb idea. When a family loses their home and their credit, that's a real loss. And when an investor puts out $200K in cold cash, and all he gets back is a nonperforming loan and a bunch of deteriorating bricks, that's another real loss.

No one wins in that equation.

When financial markets soften and start to sag like a badly baked souffle, money actually disappears. People put actual dollars into some investment vehicle, scarcely realizing it is dependent on the health of the home mortgage industry. Then the markets take a tumble. When they pull their money out, there isn't as much there as there was before.

Who made the money that was lost?

No one. It is really and truly lost.

Scant satisfaction there
The point you're making is peurile. It's unimportant that someone now has the money that was paid on sale of the house. The point is that money only has existence because it is worthwhile to people. It is not a value in and of itself. And when things go this badly astray, millions of people are hurt.

Not only the homeowners who lost their homes and their credit. And not only the investors who bought bad investments, and now have empty wallets. Look at the people who had investment money parked in the financial markets generally-- far away from mortgage-backed securities. They're still seeing their store of value erode. When they liquidate their investments, in many cases they'll see less money than they put in originally.

Let's go back in time to 2002, when all the big outfits like Global Crossing, Enron and the rest of the daisy chain collapsed. Who lost?

On one level you can say that for everyone who sold, there was a buyer. So that whether they sold at a loss or for a gain, all the numbers balanced out. But that's limited thinking.

Value disappeared. Between seven and eight TRILLION dollars vanished in a puff of smoke. It went the same place the light in your refrigerator goes when the light goes out.

I anticipate your argument that what vanished wasn't actual money, it was only the denomination of some investment. But that's baloney. It's just like paying a million bucks for a fast horse. Then your horse dies. You are out real bucks.

I know you still don't see it. Let's go back to your home seller. He traded a home worth $200,000 to someone for $200,000 in cash. The transaction is a wash.

Now the lender who gave $190,000 into the deal finds he's getting zip for a return, because his buyer defaulted on the loan. That transaction is not a wash. And even if he pays out $50,000 to carry the place for a year or two, and finally sells it after bums have broken in and peed on the carpet, for $125,000, he has lost a lot of cash and a lot of income it failed to generate.

Nobody makes the money that was lost there. Your equation doesn't balance in the real world.

The wisdom of the markets
Markets do not exist just to be magnificent edifices in themselves. They exist merely to serve us, and to allow us to prosper.

When they malfunction, and we don't prosper, we need to fix them. The argument you're making is that if they work the way they work, and everyone loses money, that's still fine. It's just "the wisdom of the market".

But the market isn't wise. It isn't even alive. It's just a creation of ours-- one we need to keep tuned to maximum performance.

A man walks into a police station, shouting "I've just been robbed".

The desk officer pulls out his pad and asks "How much was the loss?"

"Oh, there's no loss, Officer. The thief still has the money."

Fixing a broken market
The message to be gleaned from this whole sorry event is that the government did NOT protect people from the effects of their own ignorance. Nor did any magical market. And not only did things bounce back to bite them, they bounced in such a way that all of us are sharing some degree of loss.

The system needs repair, in that it did not function to our benefit. If you think it's okay just to let broken things be broken, because God wants them that way, fine. I don't live in that kind of world. I prefer to fix them so the same thing doesn't continue to happen.

It would be really nice if people could learn from their mistakes, pick themselves up and say "Well! I won't ever do THAT again." But they don't. If you examine human nature you'll find the same mistakes keep happening. Maybe this batch of people get sadder but wiser. But the next generation just falls into the same old hole, until someone fixes it.

Better to put a sign in front of the hole, saying "Do not enter". Or even fixing the hole, so you can use the street again. But just to stand there shaking your head, saying they should have known better while more people fall in... that's not the smart approach to take.

Creating a new breed of rent-seeker
Requiring that the borrower "get advice" means that every borrower will have to pay someone. And that someone will have to be "qualified." And the people who prove they are qualified will form a professional association, which will be regarded by the legislators as the body of experts, to whom they will defer.

And we will have created a new class of people with the right to demand fees from the public, setting their own rules, without regard for the value that they do or do not add.

With "professionals" giving "advice" the lenders will be free to make the contracts as complex and as tricky as they like; we will trust the professionals to protect our interests, right? But there are many fewer lenders than individuals, and the lenders enter the system for many more transactions. Who will have the skill and opportunity to influence the "professionals"?

No, the point I'm making is that you don't get any special treatment for using incorrect terminology
Please use the term 'money' appropriately.

"I anticipate your argument that what vanished wasn't actual money, it was only the denomination of some investment. But that's baloney. It's just like paying a million bucks for a fast horse. Then your horse dies. You are out real bucks."

No. You are out the value that is denominated in 'bucks'. Paper value is not the same as actual monetary value. In investment jargon, the ability to switch from one to the other is called 'liquidity'. That is a basic Investment 101 concept and so when providing examples to others involving investing to make your point, you don't serve your cause at all when you do so inappropriately.

Or, to refer to your example with the horse: The money was GONE the moment you shelled out the million for the horse. The previous horse owner now has it. Whether you got the bad end of the stick or he did doesn't matter. The horse still is there and the money is still there.

"Your equation doesn't balance in the real world."

It's not an equation, but a fact of investing. If your investment is not very liquid, you had better factor in the risk appropriately to your investing decision. The 'equation' is what you figure to be your appropriate comfort level in this regard. And, if you are not educated or even lucky about what you are investing in, you can get burned. Welcome to Speculation 101 (another course you should take).

And yes, people speculated in their houses, whether they were aware of it or not. Thanks to distortions in our tax code, they will continue to do so as well, I am afraid.

And using appropriate terminology and/or insisting others do so is not 'baloney' but rather 'competent debating skills.' Having said that, I screw up on that myself. It is a continuous learning curve.

Incorrect beliefs about the Market
The following statements are incorrect in the context that you state them in relative to your other statements posted as well as simple reality:

"They exist merely to serve us, and to allow us to prosper."
"When they malfunction, and we don't prosper, we need to fix them."
"The argument you're making is that if they work the way they work, and everyone loses money, that's still fine."
"the wisdom of the market...It's just a creation of ours-- one we need to keep tuned to maximum performance."
Your entire police station analogy

Now, here's why:

Markets are not there to 'allow us to prosper'. They are there to provide us with information, to do with what we will. For most of us, we do make choices that attempt to position ourselves into a prosperous outcome. For others, they screw up. If something is distorting the markets so that they provide incorrect information, then all of us make distorted decisions.
Given the fallacy exposed in Point #1, you can't 'fix' markets so that we 'prosper'. You can only fix the distortions so that individuals participating or contemplating participating in the markets can make better decisions as capably as they are able. Again, some will prosper and some won't. It's not the market's function to determine the outcome of trades made one way or another. Soviet Five Year Plans attempt to do that, but markets don't. So, if you hold (what I suspect) the incorrect assumption that markets are merely better substitutes for "outcome-oriented" central planning, then you are always going to consider markets to be flawed and always will be disappointed in them.
Please provide proof that 'everyone' is losing money. First, the definition of 'everyone' is 100% of market participants. Second, money is cold hard cash. And, I've already called you on your inappropriate use of the definition of money in a previous thread, so I won't go into it again here. I suspect that you are simply using incorrect terminology here with the word 'everyone'.
I never claimed nor even insinuated that markets were 'wise'. Furthermore, improving the information that markets tell us by removing distortions is how you 'tune them', not trying to make the markets achieve a set socio-political outcome (i.e. 'prosperity') like you do.
All you've done with your police station analogy is prove that you can't apply logic to your own analogies. The man's last statement proves that he doesn't understand the difference between apples and oranges himself, for he lost not something else denominated in money, but actual money. So, there is a loss. Furthermore, it was an involuntary taking. Participating in all properly functioning markets is strictly a voluntary action, so your entire use of this analogy is flawed on that point as well.

I can argue the regulations brought this on so we need less not more regulation.
Why should the mortgage or housing industry be any different than lets say, groceries? It is still a commodity. If rates were not so tightly regulated then banks could actually compete on rates much more realistically offering money based on credit worrthiness as it should be.

This is exactly the type of problem that happens when government tinkers with the market.

And the solutions proposed? More tinkering...

Like the SO act after Enron and Finance Reform (AKA the incumbent protection act).

I have a novel idea, why don't we teach things like math and economics in school instead of multiculteral diversity outcome based feel good crap?

Imagine a nation where students actually had to learn something that bettered them instead of turning them into future democrats (AKA dependant classes).

Unless it is the Bush Administration
Unless it is a Republican. Democrats, despite Jefferson, LA, Clinton, Pelosi, Reid, ad nasium of course are above corruption regardless of what they actually do. Remember, with liberals it is do as I say, not as I do.

But to fix the market, one has to understand what markets are for and what they do first.
"The message to be gleaned from this whole sorry event is that the government did NOT protect people from the effects of their own ignorance."

The government's previous attempts to rig the market, as mentioned at length by others on this thread, only distorted the information the market was giving and thus contributing more to that ignorance you are so concerned about.So, reading what you say I have to ask:What LOGIC is there in having the government continue to distort the markets, distort them even more and thus exacerbate your aforementioned ignorance AND the expect the same government to protect people from that ignorance on top of that? How is engaging in such idiocy going to 'fix' the 'problem' (even by your particular definition and assumptions concerning this 'problem')?

"Nor did any magical market. And not only did things bounce back to bite them, they bounced in such a way that all of us are sharing some degree of loss."

Seeing how you think markets are magical or expect everyone else to hold that assumption goes a long way to explaining why you also erroneously think markets should also guarantee prosperity. Also, we can fix the problem of 'all of us sharing some degree of loss' by simply banning any tax-payer funded bail-outs and more market-distorting government regulation.

"If you think it's okay just to let broken things be broken, because God wants them that way, fine. I don't live in that kind of world. I prefer to fix them so the same thing doesn't continue to happen."

Given your incorrect understanding of what markets are for and how they operate, what you really want to fix are problems that live in fantasies in your head. Also, I agree that the markets are broken. But, because I know what markets are for and how they are supposed to function, my remedies won't fit in your very elitist fantasy world.

"It would be really nice if people could learn from their mistakes, pick themselves up and say "Well! I won't ever do THAT again." But they don't."
Fine, then I recommend fixing our crappy public education system so that history is taught as it should. That will directly deal with the problem you are so concerned about where people can't learn from either their mistakes or those by others in the past.
We also have to stop tax payer bailouts, so that people pay a very distinct price for not bothering to learn/remember history so they will make better market decisions. Whereas, screwing up the markets even further will not. You can start with your own education in history, so you won't fall into these fallacies any more nor continue to do so in public.

ahh yes, the classic liberal line
some people make mistakes, therefore I must control the decisions of all people.

The liberal never entertains the notion that since he too is human, it's possible that he can make mistakes as well.

For a liberal to contemplate his own falability is a logical impossibility.


I thought public schools were actually suppose to teach something..
Yet proof of another big government liberal failure.

Always on the lookout
You don't reign in. You rein in.

according to roy: people are too stupid to be allowed to run their own lives.

roy's solution: have govt make all the big decisions for them.

problem with roy's solution: govt is made up of people.

quandry: If people are to stupid to run their own lives, how the heck can they be smart enough to run other people's lives?

Words of wisdom
That seems to me an awfully pompous way of putting it. But you are correct. Yes, I can speak your special language, not putting deep subjects in the language of the commoners.

What was lost in the ongoing decay of investments holding bundles of subprime mortgage-backed securities was *value*. When one trades "money" (meaning unbacked paper currency rather than specie) for an item of value, one expects that that value, over time, will increase. Or if it doesn't, that it will at least hold its own.

My point, in this language, was that merely being prudent and well informed didn't save the world's smartest minds from disaster. The reigning Boy Wonder over at Bear, Stearns dropped about six billion in the plunge. And if anyone should have been expected to know better, it would have been him.

But naturally, no actual money was lost. Only value. I'll keep the distinction in mind.

On a lighter note, here's a good tip to keep in mind if you're ever tempted to use your home as an investment. I say this from experience.

In normal times people think of their homes as a store of value. They've heard all the Realtors say that home values are the one thing that reliably outpaces inflation. So that's where they put most of their savings, into building up equity.

When the market starts heating up homes go at a premium, and people start buying more house than they really want or need, just to have a "safe" place to stash their excess money. Then it's not even a matter of parking their excess spendable... they're going short on basic consumption, just to put more moolah into their great new piggy bank.

Finally it becomes a full orgy of speculation, like Dutch tulips. Wheeler dealers are flipping properties immediately on purchase, and speculation drives up the cost of every home. That's when you want to make sure you're comfortable right where you are. Because those who put every dime they had into an overpriced stack of bricks need to take a deep breath... it's going to sag. And when it does, and they need to relocate, they'll have to wait three or four years until they can even pull out eighty cents on the dollar selling the old house.

To tide themselves over the bad years they give the unsalable mess to me, to put tenants in it. Then I have to explain to them that the rental market is saturated, and they'll be lucky if I find decent tenants to pay a rent that's sadly hundreds of dollars lower than their monthly mortgage.

Best to be a contrarian. When everyone knows a market is going up, turn your back on that sure thing and hunker down. A hard rain is a-coming.

Fixing the markets
It's the old struggle of ideas between the economist and the humanist. For you, the financial markets are a construction worthy of reverence and awe. For me, they're tools of utility. To the degree that they allow us humans to prosper, they're good. And to the degree that they get us into trouble we can't readily get ourselves out of (say, the Great Crash) they are in need of retooling.

To a degree, I agree with your comment that "you can't 'fix' markets so that we 'prosper'. You can only fix the distortions so that individuals participating or contemplating participating in the markets can make better decisions as capably as they are able."

Greater transparency is certainly useful. And must be mandated by law, which comes from the dreaded government. Otherwise what takes over is the normal criminal intent to obfuscate and to deceive people whose money you desire to obtain.

But beyond that there is a greater sense in which markets must be constantly improved. And that lies in the prevention of calamities that engulf everyone... so that value is not merely traded unexpectedly, but lost to all.

For instance it's possible we have a difference of opinion in the matter of unbacked currency. How stodgy of us to ever have demanded that our paper be backed with gold. Unless one liked to prance about bedecked in glitter, it's just a metal.

But what it provided was discipline. The USA in 2007 is an object lesson in what befalls a nation that borrows too freely against its own borrowing power, and spends its worth on items instantly consumed and pissed away.

Our competitors gladly suffer us for a time, loaning us back the money they made from our addiction. The deeper our hole becomes, the easier it gets to gain advantage over us. Because we haven't evolved that far yet; behind all the commerce there's still a war for primacy going on. Something, IMO, needs fixing. Perhaps my use of the term "markets" is inappropriate in your world.

Regarding your analysis of my jest, watching your explanation in lieu of laughter is a painful experience. But then, I'm the humanist of the duo.

(This, BTW, is becoming a useful dialog.)

Our question of the day is...
"What LOGIC is there in having the government continue to distort the markets, distort them even more and thus exacerbate your aforementioned ignorance AND the expect the same government to protect people from that ignorance on top of that?"

Let's take a look. When we seek to invest our "gold" we look at the financials being divulged by our prospective investment. We know these to be a true and accurate statement of worth because they have been derived by GAAP-- generally accepted accounting practises.

This transparency is supported by the august self interest of each member of the accounting profession. Because if they customarily lied, it would be the profession itself that was flawed. And presumably people would no longer trust numbers put down by accountants.

And so a professional code is created, one that assures us of the probity of everyone wearing a green visor.

Of course that paradigm doesn't actually work. The meltdown of 2001-02 was largely created by the tendency of accountants in search of really grand emolument to squirt black ink like a squid, where some shade of red might have ben more appropriate.

So who suffered? Of their number, a single sacrificial lamb was designated to go under the knife. And Sarbanes-Oxley became the law of the land, assuring us that the remainder of the flock had been so sufficiently chastised that nothing like the Grand Debacle could ever, ever happen again.

Meaning, of course, that it was all investors, both wise and foolish, who lost. And that a gresh variant of the old con game was in time bound to return, sneaking up on the market in stealth.

Is all this in need of a more fundamental level of repair? Or is it sufficient that we, the investors, merely retool. That we become yet more diligent, yet more learned, yet more cynical, only to be sunk anyway by the next wave of general disaster.

I share your cynicism that a government of the sort that we currently endure is quite up to the task of fundamental correction. Yet I do deeply feel the need for some correctional authority above and beyond the market's usual players.

In the land of thieves, everyone bumps along stealing from one another until one bright thief comes up with the idea of instituting law and order. From that point, I'm suggesting that a rising tide may lift all ships.

raoy was in what business?
roy's too ignorant on the subject to have an informed opinion.

all mortgage broker loan officers in the U.S. are licensed except in Alaska.

this bill's primary goal is to put mortgage brokers out of business. the bill's sponsors biggest contributors are competing mortgage banks like BofA who would like to get that other half of the origination pie.

sheilding borrowers from responsibility will reduce mortgage availability which will take eligible buyers out of the market on a mass scale. this will accelerate the problem and cause the biggest real estate crash since '87.

roy and barney frank's plan is to prevent people from failing by denying them a chance to succeed in the first place.

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