Union of Soviet Socialist Republics

[Shadow]

It's not "to good to be true". It is actually viable, convenient and profitable to both borrower and lender if borrower is worthy of repaying the debt. It is when they are not qualified that creates a bubble.

Any worthiness that is based on future income of the borrower creates a bubble, no matter how low the risk may seem at the time.
If the borrower is worthy based on present means one might ask if its mutually profitable.

[Faux Pas]

Any worthiness that is based on future income of the borrower creates a bubble, no matter how low the risk may seem at the time.
If the borrower is worthy based on present means one might ask if its mutually profitable.

I can only assume you are looking at the arrangement with a pessimistic view and dogmatic. Neither the lender nor the borrower has a crystal ball. Worthiness is based on history and calculated with present circumstances. The bubble is created when the borrower cannot repay the loan, not just merely getting the loan. All calculated risk. When the loan is granted and repaid, how does that create a bubble?

[Misha]

Any worthiness that is based on future income of the borrower creates a bubble, no matter how low the risk may seem at the time.

No, a bubble is created when an individual calculates that the item bought will be worth much more in the near future and that they will be able to sell it quickly, make a profit and pay off the loan that was taken out to buy the item they could not afford (house, tulip bulb, dot.com stocks, etc...).

Taking out a loan to buy a car when you know that you can pay off the monthly payment and expect that the car will not be worth more than what you paid for it does not create a bubble, buying a house knowing that you won't be able to sell if for years without incurring a loss will not create a bubble, taking out a loan to start or expand a business knowing that you will be lucky just to break even for a few years, does not create a bubble....

Buying a house and expecting to flip it in a few weeks or months and earn tens of thousands of dollars makes a bubble. Starting an internet company and become a multimillionaire before your company even sells anything is a market bubble  :evil:

[Lit_1nce]

So in a "tit for tat" deal, Bill agreed to twist the lending institutions (FM & FM) arms to loan money to people who have NO BUSINESS borrowing money

I keep hearing this over and over.. Exactly who has business borrowing money for a house ? .. I mean other than the homeless, doesn't everyone have a monthly expense for the place they live in ?.. Should renters be forced in perpetuity to be renters ?

If I am to believe the rhetoric, then all these home loans must have been made to people who didn't have jobs. Although, I am fairly certain that the vast majority had a job that paid enough to make the mortgage payment. (but probably with little left over). All it takes is to lose that job and be forced to either live off unemployment or a lesser paying job, and there is foreclosure in their future.. Now the  finger pointers will say that no loan should have been made.. but you can not say that as a generalization, as you do not know how long each was employed or any of the particulars of their situation. I am pretty sure that most never saw this coming, and fully intended to make the payments and buy their house. Who the heck wants to go through losing their investment ? .. nobody had a crystal ball to know they would be in a financial predicament, that would lead to losing their home, otherwise they would not have done it in the first place..

To quote Homer Simpson.. "Kids, you tried your best.. and things didn't work out.. The lesson is.. Never try."

This seems to be the prevailing attitude now..  nothing will work.. do nothing.. You can't buy prosperity (although isn't that what investing is all about in the first place ?) .. It's all such a doom and gloom defeatist attitude.. and mostly by people lucky enough to still have a job. Everyone should look at it this way.. The government has enough faith in turning around the economy to invest in it.. When things turn around, AND THEY WILL, This money will come back.. But bitching about it, and wallowing in despair is more fun I suppose.. eventually it'll get old, and people will see some good deals in the market and get back to taking risk.. and as the governments investments start coming online, things will perk up... Argue against it if you want, but you should hope you are wrong.

[GoodOlBoy]

If I am to believe the rhetoric, then all these home loans must have been made to people who didn't have jobs. Although, I am fairly certain that the vast majority had a job that paid enough to make the mortgage payment. (but probably with little left over).

No Bitching. Just the facts.

And they are as follows:

When you "loan" money to people who live in Section 8 housing (low income housing) to buy their own houses and also loan money to people who have "unverifiable incomes" (cutting trees and trimming lawns for cash, etc.) than you have what we have today.

A real frickin' mess perpetrated by Bubba Clinton and company.

We have so many abandoned and vacant houses in South Florida that we now have another type of epidemic: "Homeless people living in these deserted houses." 

This is our reality in South Florida.

Should I go on any further or would it be a little too depressing to hear any more?


GOB

BTW... You might want to practice addressing your friends and associates as "Comrade", because our new glorious leader is preparing to NATIONALIZE all of our financial institutions, automobile industries and everything else.

Remember Obama's words: "I want to spread the wealth around".



The GoodOl' USA will see Socialism/Communism soon enough.

GOB

[Faux Pas]

I keep hearing this over and over.. Exactly who has business borrowing money for a house ? .. I mean other than the homeless, doesn't everyone have a monthly expense for the place they live in ?.. Should renters be forced in perpetuity to be renters ?

If I am to believe the rhetoric, then all these home loans must have been made to people who didn't have jobs. Although, I am fairly certain that the vast majority had a job that paid enough to make the mortgage payment. (but probably with little left over). All it takes is to lose that job and be forced to either live off unemployment or a lesser paying job, and there is foreclosure in their future.. Now the  finger pointers will say that no loan should have been made.. but you can not say that as a generalization, as you do not know how long each was employed or any of the particulars of their situation. I am pretty sure that most never saw this coming, and fully intended to make the payments and buy their house. Who the heck wants to go through losing their investment ? .. nobody had a crystal ball to know they would be in a financial predicament, that would lead to losing their home, otherwise they would not have done it in the first place..

To quote Homer Simpson.. "Kids, you tried your best.. and things didn't work out.. The lesson is.. Never try."

This seems to be the prevailing attitude now..  nothing will work.. do nothing.. You can't buy prosperity (although isn't that what investing is all about in the first place ?) .. It's all such a doom and gloom defeatist attitude.. and mostly by people lucky enough to still have a job. Everyone should look at it this way.. The government has enough faith in turning around the economy to invest in it.. When things turn around, AND THEY WILL, This money will come back.. But bitching about it, and wallowing in despair is more fun I suppose.. eventually it'll get old, and people will see some good deals in the market and get back to taking risk.. and as the governments investments start coming online, things will perk up... Argue against it if you want, but you should hope you are wrong.

IIRC the acceptable debt ratio is 40% of ones gross income. Which in essence means all of the borrower's combined debt plus their new mortgage payment cannot exceed 40% of their total income or they would not qualify for the loan. Those standards were (and still are for the average borrower) established because if the borrowers debt doesn't fit in that ratio, they can't afford to repay the loan. Those are the people that have no business borrowing the money.

Those guidelines were relaxed through acts of congress for lower income applicants. The initial idea was to allow lower income families home ownership. Great in theory, a colossal failure in practice. Extending someone a loan for a house they cannot afford is not doing them a favor. Even if they waive the down payment, raise the debt ratio or offer them a low flexible interest rate that skyrockets later it doesn't get the principal or interest of the loan repaid. The debt ratio formula was in place for a reason. If you can't fit into those parameters with your current income, you can't afford the house.

There are ways around that for those lower income families that are devoted to home ownership. Cut back expenses, save your money, increase your down payment to the degree that it does fit on your debt ratio, find a house you can afford. In other words, work for it like the rest of the wage earning general public. BTW it wasn't just lower income families that caused the bubble. It was also middle class buying houses they couldn't afford the same way the lower income applicants did. The loophole was designed for the lower incomes but taken advantage of buy everyone on the food chain.

GOB, the Carter administration actually started it but it was the Clinton administration that used the strong arm and gave Fannie an Freddie some teeth. Allowing complete and total free fall of lending requirements.

[Lit_1nce]

No Bitching. Just the facts.
And they are as follows:
When you "loan" money to people who live in Section 8 housing (low income housing) to buy their own houses and also loan money to people who have "unverifiable incomes" than you have what we have today.

I don't think that your facts, are facts.. Someone living in low income housing would get a loan based upon low income and what they could afford to pay.. If they went from low income, to no income then your theory would make sense. (but that is less likely).. I think the majority of these foreclosures are people that had modest income, and then became low income.. and probably often in situations like where there were 2 incomes and suddenly there was only one income... Someone that got a loan with "unverifiable" income as you say.. would last how long ?.. a month, two ? who knows, but I doubt this is a significant chunk of the pie... I just can not buy that 2.2 million people foreclosed on, are all deadbeat welfare recipients.. more likely they are regular hardworking people who took the plunge to have the American dream of home ownership, and were caught up in high mortgages in overpriced homes, so that when income reduction hit, they couldn't afford it...

[OlgaH]

"It’s going to be a tax revolt. We’re going to start seeing a tax revolt in the United States".
Gerald Celente, founder of the Trends Research Institute

[youtube=425,350]9nJ7LM3iyNg&feature=channel_page[/youtube]

[Shadow]

I can only assume you are looking at the arrangement with a pessimistic view and dogmatic. Neither the lender nor the borrower has a crystal ball. Worthiness is based on history and calculated with present circumstances. The bubble is created when the borrower cannot repay the loan, not just merely getting the loan. All calculated risk. When the loan is granted and repaid, how does that create a bubble?

Me being dogmatic ? 

The bubble is created when the loan is given on future income, as that means the borrower can not repay the loan at present.
If at any moment the income of the borrower falls away, that means it creates a loss for the lender and the borrower.

While the market trend is upwards and there is no crisis, the calculated risk is minimal. When however there is an imminent crisis the number of 'good' borrowers requesting loans will dry out. As banks need to circulate money in order to exist, this will lead to a increase in risk taking, which in times of crisis will lead to a collapse of the market.
Similar is the stock market. I have witnessed prior to all collapses increased marketing directed towards the general public, sometimes in combination with getting a loan to support the stock investment. Reason is clear. As the sources of money from the big investment companies dry out, the market needs money in order to continue running, and small private investors are requested to bring inthat money. However usually that dries out quickly as well, leading to a collapse of the stock market, with the private investors losing out most as they got in last.
The current crisis is a combination of both the bank lending and the stock market collapsing due to lack of funds.
This will lead to a large cut in the 'virtual money' that existed after which things will be restored to upward trends.

Advice for the future: as soon as the private investors are marketed to invest, pull out of stocks.

[BC]

I don't think that your facts, are facts.. Someone living in low income housing would get a loan based upon low income and what they could afford to pay.. If they went from low income, to no income then your theory would make sense. (but that is less likely).. I think the majority of these foreclosures are people that had modest income, and then became low income.. and probably often in situations like where there were 2 incomes and suddenly there was only one income... Someone that got a loan with "unverifiable" income as you say.. would last how long ?.. a month, two ? who knows, but I doubt this is a significant chunk of the pie... I just can not buy that 2.2 million people foreclosed on, are all deadbeat welfare recipients.. more likely they are regular hardworking people who took the plunge to have the American dream of home ownership, and were caught up in high mortgages in overpriced homes, so that when income reduction hit, they couldn't afford it...

I wonder if there is a breakdown somewhere showing what portion of the loans were given to whom.  Sure, low income was part but I also don't believe was the straw that broke the camel's back.  Others probably used a second mortgage to buy/build other home(s) for speculative purposes.. when the bottom fell out of the housing market and demand dwindled such owners probably lost all their homes.  There are probably a hundred different scenarios that together caused the housing crash.  Bankers, did not risk their own money giving loans but instead simply offloaded them to larger financial institutions for a decent commission, no risk and no need to provide customer service down the line.  Using inflated values, loans were given not only for a home, but 'between the lines' folks squeezed in new furnishings and a car or two on top with no down payment.  Any sense of equity that might help out during tough times was thrown out the window.

In any case, as it pertains to RU, there was a splurge of easy credit available, but guess that has probably dried up now.. - maybe a good thing.. some probably got their toes scalded instead of overheating the market with the whole population diving head first into boiling waters.

Those countries with greater exposure will suffer the worst while those with less exposure get a good 'heads up'.  Lending in general will not be a good business in the next decade(s) with the neighborhood loanshark making the greatest profits.. a new generation of 'home banking' with personalized service and excellent risk profiles.

Interesting that absolutely nothing was lost....  Only dreams sold for cold hard cash..  every dollar bill that existed before the crash still exists today.

Market corrections on a global scale.. maybe that's not a bad thing after all.

Which is more in line with reality.. a small apartment that is paid for, or a large home with huge mortgage?

[Wienerin]

The problem with central planning socialism is that the planners no
matter how hard they try, no matter how clever, or educated or
honest make mistakes. When Central Planning socialists make mistakes
people die

Not so awful for the most part, but shortages of some stuff and overproduction of other certainly follow. Also terrible waste - because of this and the "socialist competition", when people who, say, can produce 700 turned parts during one shift were hailed as heroes, lionized in the media and even really granted the medal of Hero of Socialist Labor... Now tell me, please, who needs these 700 hundred of something per shift when the machine or whatever where these parts have to go are produced at the rate of 300|shift?

Or - how come that only one dairymaid in a collective farm gets (I don't know the exact figures, do not laugh please ) gets 4 pails of milk from each of her 8 cows, and is comngratulated, feted, decorated, elected to the Supreme Soviet, etc. - and the rest of the cows give less than a half of this? A good farmer will try to teach the others to get similar results, otherwise he'll kick out the lazies and|or take the cows to the butcher.. well, he'll DO something. Not so in a socialist economy. You cannot fire anyone for being lazy, shiftless, stupid, incompetent, etc. - "everyone has a right to work"...

PS also asz rumored and even reported - rarely - these outstanding achievements were somewhat fictishional in many cases. A machine-shop or a dairy-farm or a construction firm would give their all not to the production as a whole, but to boost the productivity of their one star performer. To get cudos from the Center.

The next thing - the sheer size of the Soviet Union. Not everywhere did socialist models or trends in production fail so miserably as in that enormous country (1|6 of the whole land surface of the Earth) with poor commucations and transportation problems.

Also the characteristic totalitarian mania for the grandiose - building of enormous factories|plants in the middle of nowhere, then bringing a railway there, bringing people to work there, bringing there all the raw materials - timber, ore or metal, coal, you name it, then taking out the product by the same one railway... maybe to another factory all accross the country to be incorporated into something else, or to be shipped somewhere.

Hence the misery of these industrial cities erected around one giant plant when something went wrong and the whole mechanism came to a halt. And these plants and factories were not flexible, - no more than the4 central planning and governing authorities were. They couldn't change their production lines in a short time, when it was needed.

I had a friend in an industrial committee in a district soviet in the part of Leningrad where the giant (of course!) shoe factory Skorokhod was. She told me that their meetings were for the most part concerned with finding more storage space for the outmoded product which the factory was unable to sell.

Everyone who lived as an adult during the USSR existence can remember the racks of awful winter coats with beautiful silver fox collars - nobody wanted to buy them, and they discounted those once a year, but... they couldn't discount the fur collar, only the coat itself, so insted of 180 roubles it'd cost on sale 160, next year 140, then maybe 120... you get the picture

It wasn't the fault of the store manager - the directors of the retail company had to go first to the consumer goods committee of the city soviet AND party Komitet, who would in their turn consult the central Committee and Deaprtment of Commerce, who maybe would allow to discount the labor of hundreds honest and productive workers who manufactured the atrocity in the first place.

[Wienerin]

What's the point if they were/are all crap.
Russian auto industry is a brilliant example of a product of a planned economy that can't compete even after the planned economy has been scrapped.

this is not exactly true. Pobeda was an excellent car - my uncle sold his 25y.o. Pobeda (and still running greatly) for a sum sufficient to buy 2 of new Zhiguli.

Some models of Zhiguli|Lada are OK. GAZ or later Niva - were good "jeeps" or 4wheelers, excellent in rural areas with Russian horrible road conditions (with spectacular wins BTW in Sahara races). There were also very good and even excellent heavy trucks.

The thing is that as far as I know none of the designs were originals - as Pobeda was copied from Opel, Gas - Landrover or Willis, Zhiguli were based (and the plant itself built by Italians) on FIAT, etc. One of the reasons - the copyright on parts of the design, etc. that Russian cars couldn't be exported to any country which sold the original models.

[SANDRO43]

IIRC the acceptable debt ratio is 40% of ones gross income. Those standards were (and still are for the average borrower) established because if the borrowers debt doesn't fit in that ratio, they can't afford to repay the loan. Those are the people that have no business borrowing the money.
Those guidelines were relaxed through acts of congress for lower income applicants.

I know little/nothing about the US loan market, so allow me a naive question: did the new guidelines make it mandatory for lending institutions to accept loan requests from those low-income individuals, or were those loans somehow guaranteed by the US Government in case of default?

From afar, it looks more like the lenders saw substantial profit opportunities with the constantly rising real-estate values: in other words, give them the money, who cares if they default, we'll repossess the property and sell it at a higher price - it's a win-win situation either way .

And what about the derivatives blithely floated on those supposed credit 'assets'? All in the expectation that real-estate values could rise forever, I'd guess.

[Misha]

Not so awful for the most part, but shortages of some stuff and overproduction of other certainly follow.

Given the logic of central planning, shortages were inevitable as all factories and producers did their best to hoard all the raw materials and workers that they might need at some point to meet the plan.  

[Wienerin]

I wonder if there is a breakdown somewhere showing what portion of the loans were given to whom.  Sure, low income was part but I also don't believe was the straw that broke the camel's back.  Others probably used a second mortgage to buy/build other home(s) for speculative purposes.. when the bottom fell out of the housing market and demand dwindled such owners probably lost all their homes.  There are probably a hundred different scenarios that together caused the housing crash. 

Analysis of Chicagoland foreclosures shows that 75% borrowers took high-risk loans - 0% down, only-interest payments, 3- and 5-yrs ARM, etc. 86% of borrowers "bought" their homes in the last 3 years. And we didn't have housing prices skyrocketing when compared top CA, FL, Nevada etc. - we also do not see the prices plunging to the same degree... 3br condo still sells (only slower) for around 300K in a decent but not upscale area.

So your take on the present mess is somewhat off-kilter. Yes, "buying" and lending - for people that never have proven their ability to maintain an income and pay their debts, also "buying" (with 0% downpayment and interest-only payments) - in the hope of flipping quickly.

We have bought our 3br condo 10 years ago for 152K (on an old formula of 3year income of one), it rose steadily to 310-330K in 2007, now it stands at around 290K. Twice in the previous slumps either the Boatswain or I were out of jobs - i.e. living on 1 salary - and we didn't default on our mortgages.

Even then we were approved for a loan on a very desirable Gold Coast condo for 350K - we still dream about that one, but we are never sorry that we didn't go for it. Quite a different mentality from the people, who overwhelmingly go into foreclosures now, isn't it?

[BC]

Waste in government is present in almost every country..  Remember the hundred dollar hammers or the bridge to nowhere?  Ever gone to a government surplus sale and see all the brand new stuff they are selling at pennies per pound?

Logistics and 'just in time' concepts are not words from the 60's 70's.. more like late 80's and 90's.. when digital communications really came into play.

Yes, commercial enterprises probably do much better than government enterprises.  I'm sure that RU could do it much better today.

[Gator]

I think the majority of these foreclosures are people that had modest income, and then became low income.. and probably often in situations like where there were 2 incomes and suddenly there was only one income...

This happened later and was not the fundamental reason for the problem.  

For you and others (Sandro, BC) not hearing this story everyday, this is the sequence of steps with the subprime mortgage problem:

1.  Unlike past decades, relaxed guidelines required that buyers needed no downpayment (or a minimal amount), enabling them to buy a home IF they could meet the income requirements (income vs. monthly mortgage payment).  

2.  A buyer with low income could still qualify by getting an adjustable rate mortgage (ARM). An ARM starts with a low interest rate, thus the monthly payments are so small for the first few years that the subprime buyer's income, albeit low, is deemed sufficient.  

3.  One BIG risk.  After a few years, an ARM balloons to a much higher interest rate, requiring a much higher monthly payment.  

4.  The future monthly payment would be too high, of course, for a low income buyer.  At that point, the plan would be to refinance and get another ARM.   That would be possible IF interest rates had not increased, money was available to lend, and the prices of homes had increased. 

5.  WRONG!   The housing bubble burst and houses declined in value.  Refi was impossible.  

6.  When that happened, the buyer's original mortgage became greater than the value of the house. In addition, the buyer's monthly payments were unaffordable when the mortgage ballooned.  The buyer is now underwater.  The buyer defaults (stops paying the mortgage).  The lender forecloses or the buyer vacates the house.

7.  Some buyers did not want to vacate their house and made the payments even though it was a struggle.  However, the economy started to decline (largely in part to nonpayment of mortgage derivatives).  Buyers lost their job and were unable to make payments.


There were many other factors with enough blame for everyone:  

-  the Democrat policy to facilitate the ownership of homes by low wage earners (mentioned earlier).
-  the Fed not raising interest rates when the lending accelerated to a rampant pace (Greenspan did not take away the punch bowl when the party got wild)
-  the lenders bundling subprime mortgages as derivatives to raise more money to lend to more buyers.
-  agencies rating the mortgage derivatives as investment grade.
-  institutions buying the derivatives believing them safe.
-  oversight committees and regulatory agencies not stepping in.
-  some banks selling insurance against default (credit default swaps) and sold much more than their available assets to cover losses (e. g., this led to the collapse of AIG and Lehman).

Banks quickly became leery of lending money to anyone, and the economy slowed at an accelerating rate.  Recovery/stimulus plans were too little, too late, ill-advised.  

Where are we today?   I find it deplorable that the Democratic administration is focused more on social engineering, thus diluting and deferring the stimulus.

[SANDRO43]

For you and others (Sandro, BC) not hearing this story everyday, this is the sequence of steps with the subprime mortgage problem:

Phil, that still doesn't answer my basic question, resulting from many here blaming your Democrats only for the resulting mess.

No Republican bankers now in trouble ?

[GoodOlBoy]

This happened later and was not the fundamental reason for the problem.  

For you and others (Sandro, BC) not hearing this story everyday, this is the sequence of steps with the subprime mortgage problem:

1.  Unlike past decades, relaxed guidelines required that buyers needed no downpayment (or a minimal amount), enabling them to buy a home IF they could meet the income requirements (income vs. monthly mortgage payment).  

2.  A buyer with low income could still qualify by getting an adjustable rate mortgage (ARM). An ARM starts with a low interest rate, thus the monthly payments are so small for the first few years that the subprime buyer's income, albeit low, is deemed sufficient.  

3.  One BIG risk.  After a few years, an ARM balloons to a much higher interest rate, requiring a much higher monthly payment.  

4.  The future monthly payment would be too high, of course, for a low income buyer.  At that point, the plan would be to refinance and get another ARM.   That would be possible IF interest rates had not increased, money was available to lend, and the prices of homes had increased. 

5.  WRONG!   The housing bubble burst and houses declined in value.  Refi was impossible.  

6.  When that happened, the buyer's original mortgage became greater than the value of the house. In addition, the buyer's monthly payments were unaffordable when the mortgage ballooned.  The buyer is now underwater.  The buyer defaults (stops paying the mortgage).  The lender forecloses or the buyer vacates the house.

7.  Some buyers did not want to vacate their house and made the payments even though it was a struggle.  However, the economy started to decline (largely in part to nonpayment of mortgage derivatives).  Buyers lost their job and were unable to make payments.


There were many other factors with enough blame for everyone:  

-  the Democrat policy to facilitate the ownership of homes by low wage earners (mentioned earlier).
-  the Fed not raising interest rates when the lending accelerated to a rampant pace (Greenspan did not take away the punch bowl when the party got wild)
-  the lenders bundling subprime mortgages as derivatives to raise more money to lend to more buyers.
-  agencies rating the mortgage derivatives as investment grade.
-  institutions buying the derivatives believing them safe.
-  oversight committees and regulatory agencies not stepping in.
-  some banks selling insurance against default (credit default swaps) and sold much more than their available assets to cover losses (e. g., this led to the collapse of AIG and Lehman).

Banks quickly became leery of lending money to anyone, and the economy slowed at an accelerating rate.  Recovery/stimulus plans were too little, too late, ill-advised.  

Where are we today?   I find it deplorable that the Democratic administration is focused more on social engineering, thus diluting and deferring the stimulus.

Excellent Post Comrade Gator! 


Comrade GOB


PS....(Just practicing for the future.)  :evil:

[Gator]

Phil, that still doesn't answer my basic question, resulting from many here blaming your Democrats only for the resulting mess.

No Republican bankers now in trouble ?

Sandro, I did write, "There were many other factors with enough blame for everyone"  I even blame European institutions for buying the crap (mortgage derivatives).

My number one culprit:  Greenspan (neither Democrat or Republican)

Essentially all banks are troubled.  Some not as bad as others. Yet, there will be many nonperforming loans (e. g., loans not to subprime buyers but owners of commercial real estate as stores close, credit card issuers, etc).  This is DEFLATION and it is ugly.

It has spilled over to developing economies of Eastern Europe, where European banks have loaned a lot of money.   So that shoe will drop on Europe.

The government will have to print money.  The US has some capacity but to indicate how rapidly we are using that capacity consider that America at the end of September had a debt-to-GDP ratio of about 40%.   A lot has changed since then, and the Congressional Budget Office now estimates the U.S. debt to GDP ratio will climb to about 70% within three years!!!

We are not the weakest.  Japan's debt at the end of 2008 stood at 170%. "Italy comes in second-worst at 117%."

I don't see how socialism is the answer. I assert that it helped to get us into this mess.  And to do social engineering now rather than concentrate on the economy is a big mistake.

[ConnerVT]

A little more insight to the US housing lending crisis.  From someone who was in the industry as a residential mortgage broker from 2002-2004:

-- The relaxing of lending guidelines was pushed onto the banking industry.  It wasn't decreed by law, per se, but implemented by the technocrats from the Federal Reserve and other government agencies.

The original purpose was to prevent "redlining", to prevent lenders from not making loans in economically depressed areas.  Typically, people who try to purchase loans in these neighborhoods are hard pressed to meet established good lending guidelines.

-- How you look at the statistics will shape how you see the problem.  Well over half of the homes at risk of foreclosure (by %) are in four states: California, Florida, Nevada (Las Vegas), and Arizona.  This is also where the majority of new home construction took place.  For the most part, these homes were purchased by people who wouldn't of met lending guidelines previously, and new homes typically aren't built in redline areas.

Some of these homes are foreclosures that have never been occupied -- Builders' inventory that hasn't been sold, and now can not be sold without taking a loss.

-- Many areas of the country have very low foreclosure rates.  Most everyone is seeing destruction of wealth, be it lower equity in their home, or the precipitous loss of retirement assets from financial instruments (Citibank traded near $1.00 yesterday, was $55.00 a share less than a year ago).

-- So, SANDRO's question: "did the new guidelines make it mandatory for lending institutions to accept loan requests from those income individuals, or were those loans somehow guaranteed by the US Government in case of default?"

Banks in the US require a constant infusion of borrowed $$$ from the Federal Reserve.  Mortgage lenders were pressured to relax their lending guidelines, or else their lines for credit would be cut off by the Fed.  The result was they made a lot of money in the short term.  It is like telling an overweight person that unless they have two more slices of chocolate cake, they will never get any more cake ever again.  Should they have had more willpower?  In hindsight, yes.  But at the time, most people will eat the chocolate cake at gunpoint.

Are the loans somehow guaranteed by the US Gov?  The word "somehow" is the important one in that sentence.  Freddie Mac and Fannie Mae, while not actually government agencies, are government sponsored enterprises.  Which means that they are private companies that the US Congress creates, and sets operating guidelines.  Freddie and Fannie don't actually insure loans, but rather promise to buy the notes if, at the time they were written, they met their guidelines (and many of these no down payment, interest only loans don't).

Freddie and Fannie have as much (if not more) bad loans on their books as other lenders.  The US government started bailing them out first.

-- So where are we now?  There is a lot of cheap mortgage money out there.  If you meet the guidelines, the way they originally stood.  But that makes for fewer buyers, and fewer buyers mean lower prices on homes.  And intelligent buyers are waiting for prices to go as low as they will go.  Depending on the area of the country, that will be late 2009-early 2011.

I'll attach an interesting chart.  Many believe that the market will "bottom out" once home prices return to their inflation adjusted price that would of existed if the housing boom never happened.  The chart shows how rapidly home values rose during the time of relaxed lending practices.

[Faux Pas]

I know little/nothing about the US loan market, so allow me a naive question: did the new guidelines make it mandatory for lending institutions to accept loan requests from those low-income individuals, or were those loans somehow guaranteed by the US Government in case of default?

From afar, it looks more like the lenders saw substantial profit opportunities with the constantly rising real-estate values: in other words, give them the money, who cares if they default, we'll repossess the property and sell it at a higher price - it's a win-win situation either way .

And what about the derivatives blithely floated on those supposed credit 'assets'? All in the expectation that real-estate values could rise forever, I'd guess.

It gets kind of hairy. Most of the lending institutions stayed away from these loans preferring to instead keep with their own qualifications. They were not required to make the loans but they were required to underwrite a percentage of their assets in these high risk loans mandated by law. This created a market of mortgage brokers. Who, using the laws enacted would lie, steal and cheat to write any loan to anybody. They would write the paper and sell it to banking institutions and investment groups and make a killing on points and closing. The paper on these loans were sold, bought and resold until they were virtually worthless. The housing market has since WWII been a wise safe investment to these type groups which include not just American banks but many foreign investment groups and consortiums.

[Faux Pas]

A little more insight to the US housing lending crisis.  From someone who was in the industry as a residential mortgage broker from 2002-2004:

-- The relaxing of lending guidelines was pushed onto the banking industry.  It wasn't decreed by law, per se, but implemented by the technocrats from the Federal Reserve and other government agencies.

The original purpose was to prevent "redlining", to prevent lenders from not making loans in economically depressed areas.  Typically, people who try to purchase loans in these neighborhoods are hard pressed to meet established good lending guidelines.

-- How you look at the statistics will shape how you see the problem.  Well over half of the homes at risk of foreclosure (by %) are in four states: California, Florida, Nevada (Las Vegas), and Arizona.  This is also where the majority of new home construction took place.  For the most part, these homes were purchased by people who wouldn't of met lending guidelines previously, and new homes typically aren't built in redline areas.

Some of these homes are foreclosures that have never been occupied -- Builders' inventory that hasn't been sold, and now can not be sold without taking a loss.

-- Many areas of the country have very low foreclosure rates.  Most everyone is seeing destruction of wealth, be it lower equity in their home, or the precipitous loss of retirement assets from financial instruments (Citibank traded near $1.00 yesterday, was $55.00 a share less than a year ago).

-- So, SANDRO's question: "did the new guidelines make it mandatory for lending institutions to accept loan requests from those income individuals, or were those loans somehow guaranteed by the US Government in case of default?"

Banks in the US require a constant infusion of borrowed $$$ from the Federal Reserve.  Mortgage lenders were pressured to relax their lending guidelines, or else their lines for credit would be cut off by the Fed.  The result was they made a lot of money in the short term.  It is like telling an overweight person that unless they have two more slices of chocolate cake, they will never get any more cake ever again.  Should they have had more willpower?  In hindsight, yes.  But at the time, most people will eat the chocolate cake at gunpoint.

Are the loans somehow guaranteed by the US Gov?  The word "somehow" is the important one in that sentence.  Freddie Mac and Fannie Mae, while not actually government agencies, are government sponsored enterprises.  Which means that they are private companies that the US Congress creates, and sets operating guidelines.  Freddie and Fannie don't actually insure loans, but rather promise to buy the notes if, at the time they were written, they met their guidelines (and many of these no down payment, interest only loans don't).

Freddie and Fannie have as much (if not more) bad loans on their books as other lenders.  The US government started bailing them out first.

-- So where are we now?  There is a lot of cheap mortgage money out there.  If you meet the guidelines, the way they originally stood.  But that makes for fewer buyers, and fewer buyers mean lower prices on homes.  And intelligent buyers are waiting for prices to go as low as they will go.  Depending on the area of the country, that will be late 2009-early 2011.

I'll attach an interesting chart.  Many believe that the market will "bottom out" once home prices return to their inflation adjusted price that would of existed if the housing boom never happened.  The chart shows how rapidly home values rose during the time of relaxed lending practices.

YEAH, what he said 

[Faux Pas]

Me being dogmatic ? 

The bubble is created when the loan is given on future income, as that means the borrower can not repay the loan at present.
If at any moment the income of the borrower falls away, that means it creates a loss for the lender and the borrower.

While the market trend is upwards and there is no crisis, the calculated risk is minimal. When however there is an imminent crisis the number of 'good' borrowers requesting loans will dry out. As banks need to circulate money in order to exist, this will lead to a increase in risk taking, which in times of crisis will lead to a collapse of the market.
Similar is the stock market. I have witnessed prior to all collapses increased marketing directed towards the general public, sometimes in combination with getting a loan to support the stock investment. Reason is clear. As the sources of money from the big investment companies dry out, the market needs money in order to continue running, and small private investors are requested to bring inthat money. However usually that dries out quickly as well, leading to a collapse of the stock market, with the private investors losing out most as they got in last.
The current crisis is a combination of both the bank lending and the stock market collapsing due to lack of funds.
This will lead to a large cut in the 'virtual money' that existed after which things will be restored to upward trends.

Advice for the future: as soon as the private investors are marketed to invest, pull out of stocks.

Shadow, it's a pretty safe bet that most ALL loans are given on future income.

[Misha]

The housing market has since WWII been a wise safe investment to these type groups which include not just American banks but many foreign investment groups and consortiums.

Yes, but the housing market was always a very long-term investment. At best, the prices of houses would go up at best just slightly more than the inflation rate, and in 20 or 30 or 40 years you had paid off your house and could sell it. In effect, your house had been a forced savings program. Other investments would have produced better results, but most people chose to buy a house for reasons other than making a quick buck. The last decade produced an aberration and now prices are returning to what they should have been (i.e. if the prices of houses had followed a normal growth curve).