Pandering Part 2
A little more than a week ago I wrote about When Pandering Takes the Place of Basic Economics. Sen. Clinton has indicated that if she gets elected she will place a five year moratorium on interest rates. Does she have any economic advisers? I thought maybe this was a spur of the moment statement from which she would quickly retreat. Not so. Sen. Clinton again proposed the "solution" for the mortgage crisis.
Tonight I read about how the credit crisis that is now upon us. Credit card companies are requiring a higher credit score to get a card. They are raising fees and tightening policies for repayment if there is any indication that the borrower may be in trouble. (A big change from a year ago when even your dog might get a VISA). Small businesses are having trouble borrowing to finance operations. So lending institutions are raising the bar - even though the Federal Reserve has been lowering interest rates.
Imaging what will happen if banks are forced to lend at artificially low rates. We will quickly return to the days where only people with high credit scores, lots of collateral and 20 percent down will be able to get a loan. In otherwords, a large percentage of potential home buyers will be out of the market. That means fewer houses will get sold, which means more foreclosures, etc., as houses sit on the market.
I am sure that Sen. Clinton means well and it is sad to see people losing their houses. However, governmental quick-fixes usually end up prolonging the agony and end up hurting others.
Likewise, Sen. Clinton claimed that she can provide universal health care for $100 Billion annually. Does anyone really believe that you can cover every man, woman and child in the United States for less than $300 per person per year? I guess its possible, you just don't get to see a doctor, have any tests or get any medicine. Sen Clinton has even suggested that her program will garnish the wages of those who elect not to participate. I remember reading this guy named Lenin who suggested the whole - we will compel you to join the workers Utopia - thing. Last I heard it did not turn out so well.
Tonight I read about how the credit crisis that is now upon us. Credit card companies are requiring a higher credit score to get a card. They are raising fees and tightening policies for repayment if there is any indication that the borrower may be in trouble. (A big change from a year ago when even your dog might get a VISA). Small businesses are having trouble borrowing to finance operations. So lending institutions are raising the bar - even though the Federal Reserve has been lowering interest rates.
Imaging what will happen if banks are forced to lend at artificially low rates. We will quickly return to the days where only people with high credit scores, lots of collateral and 20 percent down will be able to get a loan. In otherwords, a large percentage of potential home buyers will be out of the market. That means fewer houses will get sold, which means more foreclosures, etc., as houses sit on the market.
I am sure that Sen. Clinton means well and it is sad to see people losing their houses. However, governmental quick-fixes usually end up prolonging the agony and end up hurting others.
Likewise, Sen. Clinton claimed that she can provide universal health care for $100 Billion annually. Does anyone really believe that you can cover every man, woman and child in the United States for less than $300 per person per year? I guess its possible, you just don't get to see a doctor, have any tests or get any medicine. Sen Clinton has even suggested that her program will garnish the wages of those who elect not to participate. I remember reading this guy named Lenin who suggested the whole - we will compel you to join the workers Utopia - thing. Last I heard it did not turn out so well.
On top of all that I have to ask "what mortgage crisis?"
97% of Americans pay their mortgage on time and are not at risk of default.
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But wouldn't it be better to make it harder for everyone to buy a house so we can "help" the few who bit off way more than they could chew.
Of course we need to understand that this is all the fault of the greedy banks. First they were greedy for not lending to people with poor credit histories, etc., - Now they are greedy for having taken advantage of the people with poor credit histories by lending to them.
Maybe we should try this radical concept (that is really outdated) called personal responsibility.
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You'll bash Microsoft for unethical behavior but defend the banks actions?
Rand...buddy...we need to talk.
The banks make MS look like the Salvation Army.
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It all depends on what actions you are talking about. Some of the banks engaged in conduct which I think ought to land their officers in jail - adding fees that were not legitimate, refusing to accept or altering the date of payments to enhance the fees. I am not defending these crooks and think that heads should roll.
My comments were simply about banks offering sub-prime loans. If the terms of the loans are clearly spelled out, I do not think it is the bank's fault if someone takes a loan they cannot repay. Near my house there are multiple $1 million homes that were purchased on interest only loans by 20-30 somethings. Some of the loans are probably variable as well. I do not think it is unethical to make such loans - stupid yes, unethical no - unless you know that they people cannot repay. Some of those people flipped the houses and they made hundreds of thousands of dollars. They took the risk - they get the reward. Others are probably going to lose hundreds of thousands of dollars and put themselve into bankruptcy. These people took a risk and get the consequences They and the banks who were stupid enough to make the loans should suffer the consequences - not the tax payers.
The government should make sure that banks are honest and clearly disclose the terms of the loans - but you cannot idiot proof the world. Some people have become exceedingly wealthy by taking risks that the rest of us would consider foolish.
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I consult for a large regional bank that does mainly FHA-backed mortgages. Over the last 18 months I've dove deep into the world of mortgages and the secondary mortgage market.
Go out and search on all the lawsuits regarding ARM and subprime loans. They are numerous. Banks and brokers have violated RESPA, and Truth in Lending in almost every ARM transaction they performed. They got sloppy and careless and took advantage of a lot of people. Terms of the loans aren't (or I should say weren't) spelled out in many cases, which is a direct violation of federal and state law.
You say:
"The government should make sure that banks are honest and clearly disclose the terms of the loans" - you're a lawyer - take a saturday afternoon and go investigate all the regulations around mortgage transactions. I promise you'll get dizzy. Its one of the most regulated financial industries around. The laws regarding "disclosure of terms" are especially strict. Yet, with all that regulation we are still in the mess we're in.
Go figure.
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As I lawyer I appreciate that often the government's attempt to protect people actually makes things more confusing. I have purchased several pieces of property and sometimes the disclosure documents were so think that even a lawyer would fall asleep. However, when I took out loans with variable rates, it was always explained to me that the rate can - and would likely go up. If the banks broke the law, they should be punished accordingly. However, I also have little empathy for people who did not exercise common sense. If you cannot afford the house on a 30 year fixed rate, what made you think you could afford it on a variable rate? Likewise, if you cannot afford to put any money down - doesn't it cause you concern that the slightest hickup in your job situation? If you're 29 and making $80k a year is a $1M home really reasonable?
My overall point is that if the banks and the people are both acting stupid, why should the tax payers be punished. Part of the problem in our society is that we remove the consequences of bad behaviour and then we cannot figure out why the bad behaviour persists. If the tax payers or government bail out either the banks or homeowners who simply took unreasonable risks - don't be surprised when the behaviour doen't stop. Of course, trusting the government to set the good example is unreasonable. Both Republicans and Democrats think that they have the world's biggest VISA card and are leaving it to our children to repay.
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Amen!
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