What Should Obama Do? (WSOD?)

Does the person who bought a home priced at 6x their annual earnings share any blame? ....should all blame be cast on the bank who lent the optimist (sucker?) the $ ?

Note: I assume a 3% down payment

How does one go about removing the incentive to separate a sucker from his/her money?

....in this case, money that the sucker never even had.

If I really want to buy a house, it is the government's responsibility to tell me I can't borrow that much for THAT house?

Weren't many of these policies born from attempts to get rid of past redlining?

"Gasp, redlining was bad. Let's make up for it by giving everyone the opportunity to own a home." (um, ok. how?)

....coming our way soon: The Student loan crisis.

"Let's give everyone the chance to go to college" (sounds great!)

Let's ignore the fact that they may never be able to pay it back and that the banks are profiting from their government backed debt, and colleges are increasing tuition in lock step with the availability of PLUS loans.

When it fails, lets blame the banks and the colleges. Sound familiar? .....the student loan scheme preys on 18 year old "victims" and their un-college educated parents.

Who is to blame? The person who created the terms on the loan application or the person who signs the application?

But, wait, aren't we all entitled to it all as Americans!?

Perhaps it is time to wonder if we can realistically have every household in america populated by a private college educated person who eats on granite countertops?

Perhaps it is time to wonder if we can not "spend our way out of this recession" and instead realize that we are merely "a powerful country with resources", as opposed to "THE powerful country with resources in the world".

Adjustment to the new world will be painful, but so far it does not look like the populous ever be "too big to fail" ...the suckers won't be billed out, but those who profit from them will be.

...and the suckers (aka taxpayers) will pay in the end when this house of cards crashes down.

What Should Obama Do?

Of course there is an incentive to separate a fool from his money. There is another word for that. It's called fraud. And since when has the government told anyone they are paying too much for any asset? Was that proposed by anyone? Is that your interpretation of regulation? The suckers were on two sides of the spectrum. On the first side, unsophisticated borrowers, who were in many instances signing up to refi their homes at fixed (and reasonable) rates and were then pressured (or scammed) into going for another type of loan. Usually subprime and variable. Is this a sound business practice? What happens if a large percentage of the legitimate housing market simply stops trusting banks and brokers? Talk about disintermediation.

The second side of the spectrum of suckers was institutional buyers (so called "sophisticated investors"). This is where the money was (not those who overpayed for homes and overextended on mortgages). These people I don't feel sorry for, but I have a question: what happens if they pull their money? Then we go from disintermediation to disaster (we got a taste of that, and it wasn't pretty). There is a reason that Adam Smith didn't trust the corporate entity (and his intuition was entirely correct). A pure libertarian (Lockean) market is not the way to go. Caveat emptor is not a viable business model for the U.S. economy. Too many inocent casualties. No growth. Economic disaster.

One can argue for a third type of sucker. The institutions that employed these bankers. Intermediaries who hired intermediaries as employees. Willing to sell out their own firm for their outsized bonus. And then the institution goes south, crashing the money supply with it, and we all suffer. Great model. Surely this can benefit from regulation, right?

Obama knows exactly what is happening in the student loan market, and has taken steps to stem the problem (mitigating for profit colleges, eliminating for profit lending, etc). He is still fighting the fight. Not likely to be enough.

Was redlining a good policy? While the probability of default was certainly higher in some areas (poor local economies, etc), many banking policies were nothing more than institutional apartheid. This could be demonstrated by the fact that interest rates charged were, far and away, higher than the associated risks. And the new banking system (post redlining) was fine well into the 90s (the S&L crisis was commercial real estate related). Not sure how you think this was a bad thing.

Who is to blame when you have for profit colleges which scam potential students? How about the colleges? Are they not to blame? It’s fraud. U of Phoenix (Apollo), Kaplan (Washington Post), and others make many promises that are not remotely attainable. And they prey on young, naïve, very unsophisticated (financially), people. Is this a legit business model? Are you saying we shouldn’t regulate? How about finance companies who have sugar coated deals with the admissions offices of schools, so that they can “skim” a bit more off the top (principally from higher fees). Is this a good business model? In fact this is in part a well understood economic problem, called asymmetric information. The college (and finance firm) have far more information than the applicant. But if it persists, you get a very inefficient market for lemons. That can’t possibly be good. We’ve been de-regulating since Carter (starting with the Airline industry, I believe). It was good, but there are some elements of our mixed economy (capitalism and some socialism) which benefit from government intervention. In the left v right, capitalism v socialism debate we forget that how a market works, how competitive it is, is a matter of public well-being. Perhaps we’d be better off if we simply asked, “what works best” instead of “what do I believe.”

Damn Water Ice, great posting (even if you need a couple more paragraph breaks )

you distilled a lot of more detailed reasons for the massive crisis and near-failure of the global banking system.

I agree with a lot of your analysis.

CTK wrote:

If we just make some basic changes (effective regulation to start), we can do a lot... but politicians on both sides of the isle are gridlocked by special interests and bullshit....

completely agree

it's infuriating, especially when people try to defend or lambast either party

yeah but you have to be careful that what you think of as "the mess" might be defined very differently by someone else. I think "our mess" is far more than economic or financial industry issues.

And as I said, there are many things in "the mess" that I feel very confident in placing largely at the feet of Republicans.

And trust me, I'm no lover of the Democratic Party either. Which is why I strongly agree with your first part.

CYM, what do you do then when Comcast becomes the only provider of broadband Internet... no other option at all... and decides to impose a rigid limit on download speeds for everything except it's own program content?

Or when the drug companies offer the newest drugs for auction to the highest bidders... And you cannot compete at the requisite level?

Without government to protect us against monopolies, to enforce net neutrality, and to impose some limits on human and corporate greed, we're all toast.

You're right. I was looking only at his most recent comment. Sorry CTK.