Paul Krugman: Workouts, Not Bailout

Paul Krugman has a proposal to deal with the consequences of the mortgage market meltdown:

Workouts, Not Bailouts, by Paul Krugman, Commentary, NY Times: ...According to data released yesterday, both housing starts and applications for building permits have fallen to their lowest levels in a decade, showing that home construction is still in free fall. And if historical relationships are any guide, home prices are still way too high. The housing slump will probably be with us for years, not months.

Meanwhile, it’s becoming clear that the mortgage problem is anything but contained. ... Many on Wall Street are clamoring for a bailout — for Fannie Mae or the Federal Reserve or someone to step in and buy mortgage-backed securities from troubled hedge funds. But that would be like having the taxpayers bail out Enron or WorldCom when they went bust — it would be saving bad actors from the consequences of their misdeeds.

For it is becoming increasingly clear that the real-estate bubble of recent years, like the stock bubble of the late 1990s, both caused and was fed by widespread malfeasance. Rating agencies like Moody’s Investors Service ... seem to have played a similar role to that played by complaisant accountants in the corporate scandals of a few years ago. In the ’90s, accountants certified dubious earning statements; in this decade, rating agencies declared dubious mortgage-backed securities to be highest-quality, AAA assets.

Yet our desire to avoid letting bad actors off the hook shouldn’t prevent us from doing the right thing, both morally and in economic terms, for borrowers who were victims of the bubble.

Most of the proposals I’ve seen ... are of the locking-the-barn-door-after-the-horse-is-gone variety: they would ... have been very useful three years ago — but they wouldn’t help much now. What we need at this point is a policy to deal with the consequences of the housing bust.

Consider a borrower who can’t meet his or her mortgage payments and is facing foreclosure. In the past, ... the bank that made the loan would often have been willing to offer a workout, modifying the loan’s terms to make it affordable, because what the borrower was able to pay would be worth more to the bank than its incurring the costs of foreclosure and trying to resell the home. That would have been especially likely in the face of a depressed housing market.

Today, however, the ... mortgage was bundled with others and sold to investment banks, who in turn sliced and diced the claims to produce artificial assets that Moody’s or Standard & Poor’s were willing to classify as AAA. And the result is that there’s nobody to deal with.

This looks to me like a clear case for government intervention: there’s a serious market failure, and fixing that failure could greatly help thousands, maybe hundreds of thousands, of Americans. The federal government shouldn’t be providing bailouts, but it should be helping to arrange workouts. ...

The mechanics ... would need a lot of work, from lawyers as well as financial experts. My guess is that it would involve federal agencies buying mortgages — not the securities conjured up from these mortgages, but the original loans — at a steep discount, then renegotiating the terms. But I’m happy to listen to better ideas.

The point, however, is that doing nothing isn’t the only alternative to letting the parties who got us into this mess off the hook. Say no to bailouts — but let’s help borrowers work things out.

_________________________
Previous (8/13) column: Paul Krugman: It’s All About Them
Next (8/20) column: Paul Krugman: It's a Miserable Life

Comments

says...

The "borrowers" just lived through a bubble 6 years ago. They knew exactly what a bubble looks like and its consequences.

[prostratedragon]

I grew up in one of the zipcodes that made a recent list of 500 highest foreclosure rates; working to middle class, postwar bungalows and cottages. I rather doubt that most of those people (and I fear there are a lot of those medical refi tragedies among them) were focussed on the dot com bubble.

But it has occurred to me that maybe one avenue to get some help to people would be through neighborhood stabilization. Many refinance borrowers, especially subprime, were actually already paid off or nearly so, in homes that they'd been living in for years. The neighborhoods around them are quite stable as a result, but if board-ups start to multiply, that won't be the case much longer.

So that the workout could be made generally available the government would still probably have to buy the loans*, but many of these loans are smaller, since the houses are older, there was no purchase involved, etc. Lenders and servicers should be happy to get those costs off their books. And some policy segmentation would probably be a good thing, since I suspect that a reasonable solution for one class of borrower would be not so for some others.

-------
*Actually, the infernal yowling that would be set off if some jurisdiction tried invoking eminent domain because of the hazards to the community would have a certain entertainment value, but maybe it's a lesser battle to fight for now.

[Winslow R.]

Paul, "But I’m happy to listen to better ideas."

Great!

Your 'fix' may save the present system while 'saving' the over-leveraged homeowner. Why not revamp the entire system so we don't get in this bailout mess anymore? Why not make the entire system more robust?

Crazy as it may sound but I say give all these homeowners, along with all citizens, a line of credit at the Fed with the same capital ratio standards as any bank, along with the same access to funds. Allow those same homeowners to value their job as part of their collateral for further loans.

Only gate keeper is the person's social security number. Allow them to refinance their asset at the FF rate if they desire or go belly up and instead become renters with a damaged credit score/SSN.

Get rid of the roller coaster ride created by intermediators being squeezed by the Fed whenever the economic 'party' gets out of hand.

Now's the time to act to get the average citizen on board the Fed train as intermediators are feeling a bit queasy from the ride and are now trying to find the exit.

And I too am happy to listen to any better ideas :)

[Raghu]

The entire idea that Rating agencies connived with investment banks for marking an investment structure AAA or otherwise is like asking an intermediary who gave an opinion to take the blame for what is an investors decision to invest

The rating agency's ratings are a view on probability of default and while they may be experts, they do not determine or suggest the price at which such paper trades or should trade, nor do they ask investors to put money in such trades.

Informed decision making is prevalent even in the funds business who have a battery of analysts which determine what price is best to buy an instrument at.

Regulators have always provided liquidity cushions for handling unsteady markets, instead of focussing on what level of leverage is safe. If anything excess liquidity is what has driven growth of leverage to unsafe levels. If regulators had a view on what is the safe level of leverage in an economy, not unlike what each of us do with our respective incomes, the problem could have been wished away.

Multiple layers of leverage on instruments and funds is akin to a tree which has grown so large that people have forgotten that the roots were on marshy land and will give way when it rains. The roots of the financial system are developed and strengthened by regulators and not rating agencies.

The difference between Enron and Andersen and the like is that in these cases of yore, buy calls were being given by analysts in Investment banks which had other fees linked to their call. Accounting firms which were supposed to certify accounts were ignoring a duty of due diligence and failed to report on adherence to prudent standards.

[kett82]

Article ("One Family's Journey Into a Subprime Trap")
in the WSJ the other day about "average" folks getting hit by an ARM reset.

House for $567,000 (the picture shows a modest ranch house) Combined income $90,000

Sorry Paul...no workout in this world is going to make that affordable.

[ken melvin]

The lenders (with a little help from their friends the Ratings folks), and the Administration (with a little help from their friends at the Fed) facilitated this little bubble, which, as Stiglitz notes, was the only economy we had, so I say no bail out for the lenders. The deals they collectively made fueled the speculation. The lenders should be held to their partnership of the house and the house only. The buyers do need to learn that houses can go down and that they can go down a lot. The thing is that in locales such as SF things aren't going to change until a lot of buyers lose a lot of money.

[save_the_rustbelt]

From 2001- - 2006 there were record foreclosures in the rustbelt and no one gave a damn.

Now Wall Street is threatened and "wow" we have to fix this.

The biggest problem will be sorting our the fraud victims from the people with plain lousy judgment.

[privateed]

Now that we are in a financial mess, the economy should recover as it did in after October 1987. At least we hope so?
Nevertheless, no one is mentioning what kind of programs can be offere to borrowers to help them remain from being homeless yet alone jobless, as 100 lenders with hundreds maybe thousands on employess being let go by al the lenders seizing operrations.
I ask, why cant we set up programs such as FHA Streamline refinance? Where they are more flexible in credit under writing guidelines such as a mortgage only verication loan with slightly higher debt ratios(29/42) than FANNIE AND FREDDIE who are at (28/36). Perhaps a mortgage verification programs with fixed lower rates that borrower can pay.
When are we going to have someone step up to the plate with the right interest in mind??? Our Borrowers.

[ken melvin]

Krugman, Stiglitz, ... someone, needs to speak to the transfer of wealth. Beyond being the only economy, the refinancing that occurred is yet another case of the assets of the working class being appropriated by the wealthy class.

[crack]

Raghu:

The rating agencies actually did connive with investment banks, at least according to Wednesday's WSJ. They were making 'no doc' ratings. They trusted the banks on default rates and the banks were feeding them cherry picked data.

[op]

the time for macro action is now

sort out
the who shot robin later
shit we have to put out the fire by any means availible

some of you guys are ordering new fire equipment

and others are deciding
who's houses deserved to burn down

[Winslow R.]

paine wrote:
"the time for macro action is now
sort out
the who shot robin later"

While I sympathize, crisis is the only impetus to real reform in our society. Let those that can act, act while we debate their actions and come up with alternate ideas.

Stocks Jump on Discount Rate Cut

The Fed cut the discount rate to 5.75 percent from 6.25 percent, declaring that "downside risks" to the economy have increased appreciably.

http://biz.yahoo.com/ap/070817/wall_street.html?.v=38

[save_the_rustbelt]

About those with "lousy judgment."

To be fair, in some areas inflated housing was the only housing.

This creates tough choices. Some tried to mitigate the pain with ARM financing, which now creates a bigger problem.

At least in the rustbelt we don't have to worry about high housing prices. Our market crashed in 2001 and stayed crashed.

[Winslow R.]

I'd like to understand why the distribution of money, a commodity probably only used a little less than water, is found by economists to be efficiently distributed by packing this monopoly system with as many wayward middle men as possible?

Money takes no effort to produce and should take almost no effort to distribute. It is not some rare item with only a few far flung buyers but rather a necessity without which life is hardly possible.

The only restriction to money should be one's willingness/ability to pay it back. I'm not one to excuse people from make bad choices as long as a real choice existed.

It is too easy for these middlemen to convince citizens they have no choice, citizens need direct access to the monopoly supplier.

[op]

"Now Wall Street is threatened and "wow" we have to fix this "

rusty
i know you're not surprised by this ....

unlike katrina
we can rescue the victimized homer owners
sleeping on the roofs
in an orderly fashion here

right now we need to put out the panic fires
raging thru credit markets globally
yes
that means plenty of fat rats
will not be righteously consumed
by their own nitemare
a self willed
easily avoided
potentially society wide
catastrophe

lets convict the proprietors
of
this
el greedo circus
after we've saved ....
the earth's economic system

or do you think this isn't
THE REAL THING
if so
how can you tell ???

[bullbust]

NEW YORK (AP) -- Stocks soared Friday when the Federal Reserve did what Wall Street was clamoring for and cut its key discount rate a half percentage point. The move propelled the Dow Jones industrials up more than 150 points.

Beg, borrow or steal and buy assets. The Federal Reserve is going to make sure that they never fall in price. If they do fall, the Fed will come to the rescue and bail you out with inflation.

The key is to get into the asset first, before the whole crowd gets into the act and asset prices inflate. So look out for the next bubble.

Work is for morons. Flipping assets is the new American ethic

[robertdfeinman]

The "panic" is not over a (still small) number of defaults by poor risk mortgage holders, but over the highly leveraged borrowing done by the hedge funds and private equity firms.

Compare the $100,000 or so a low income person borrowed to the mutli billion buyouts we have seen over the past several years. This is the same tactic that brought about the crash in 1929. If you borrow 90% of the funds and the asset drops 10% in value you are wiped out, but before that happens you will get a margin call. If you can't cover (and how could you, that's the whole idea of being highly leveraged) you will be sold out.

At a 10% margin rate it only takes a drop of 2-3% to trigger what we are seeing now. The SEC put rules in after 1929 to prevent this from happening again and the fact that they have explicitly exempted the hedge fund sector means that this was a deliberate policy.

There is no doubt that the rich will be bailed out. The US has been willing to send in the marines to protect investments by US interests they surely will do the less invasive things of financial support in this case.

Another example of how the deck is stacked so that the wealthy never lose.

[realpc]

I am not an economist but I have a theory anyway. I think bubbles are inevitable -- whenever there is something good, people rush into it, until it isn't good anymore. There is nothing anyone can do to prevent this cycle.

Real estate was good, people rushed in, lots of them did well. No one can predict exactly where a good thing starts to turn bad. It's an art.

Both the lenders and the borrowers are guilty, both were motivated by greed. Well, that's natural isn't it? If you bought a house for $150k and it has shot up to $300k and you expect it will keep shooting up, you quit your job and refinance.

And then get totally screwed when it shoots down instead of up.

You can't blame any political ideology for this. And you can't prevent it or fix it. Everyone living in a capitalist system should have learned by now that what goes up must come down. Everyone living on earth should have learned that.

[op]

win

'While I sympathize, crisis is the only impetus to real reform in our society"

indeed
lets trust in the pain
to awaken us
but we can be misled
even when fully alert

but for now
even if we minimize it
as much as possible
there will be
more then enough pain
to set in motion a serious reform
that is
unless "we" follow the voices
the polonian stuff shirts
blaming the victims
rusty points out had little choice
but to pay the price
a spec frenzied
over credit pumped
" reg freed market "
asked from them

[bullb]

rusty points out had little choice
but to pay the price
a spec frenzied
over credit pumped
" reg freed market "
asked from them

Poetry does not sanctify crap.

If it was beyond your means, you could always rent.

Remember all those people running around thundering there was no bubble - everyone was buying within their means?

So far nothing has changed. Wages are where they are, unemployment is where it was. So if everyone was buying within their means and nothing has changed, why this crisis now?.

whenever there is something good, people rush into it, until it isn't good anymore. There is nothing anyone can do to prevent this cycle.

Oh there is. It's called margin requirements. See robert above.

[op]

" No one can predict exactly where a good thing starts to turn bad"

that is the line of thought
we used after the fact
about our wmd invasion motive
well it won't wash out the obvious

as the interest raytes plunged
a few key
market wide
imposed
up front reg tightenings
could have pre-emptively
re-geared
the lot market
ie
simple stuff like
lower loan to income ratios
and higher down payment %
that would have made this
household false wealth /real debt
real estate bubble nearly impossible
instead we got lower rates and higher ratios
and lower down payments
and higher assesments and ..the beat goes on

this house lots
as beany babies scam
was the biggest "engineered"
rube rip
since granny sold the rights
to the oil pool
under her tomato patch
for a deck of playing cards
and
a bucket of kold beer

we got a house lot price bubble
not out
of ignorance
but out of reckless anti social con-ivory

[Lafayette]

WR: Only gate keeper is the person's social security number. Allow them to refinance their asset at the FF rate if they desire or go belly up and instead become renters with a damaged credit score/SSN.

Good stuff, this.

It makes the Fed the Bank of First and Last Recourse, responsible for managing mortgages and mitigating the risk of personal insolvency due to a job loss.

Some knee-jerker from the Right, however, likely will call it "socialized housing" -- which automatically scuttles any such idea in Congress.

[op]

the bulb seems to be dim today
blame the guys with the power to say no

not the nits that asked

the lending community
has the whip hand
in most versions of reality i've come across

the brokers " originated "crap
and the system
past it up the line
like little sally's
latest turd
was a gold bar

u get the polonius award

[Lafayette]

bull: whenever there is something good, people rush into it, until it isn't good anymore. There is nothing anyone can do to prevent this cycle.

Talk about crap.

This sub-prime mess was allowed by a lax Fed that had the institutional purview to prevent it. With more scrutiny of loan applications made to lending institutions it would have discovered the obvious fraud or the lax application of traditional risk rules.

Just because people go berserk over something that is "too good to be true" doesn't mean that there should be no oversight authority confirming that such is the truth and therefore clamping down on the practice.

The real laxity was allowing the risk to be hived off into instruments bought by international banks, which spread the infection like a virus worldwide. Now we are all standing in the sh*t.

Isn't globalization fun?

[op]

most 'umble borrowers
at the usury window
are not in their right mind

so like bar tenders
we need to hold their enablers responsible

when some credit beseeching fool
comes forth
the local broker needs to shut em off
or
lose his/her license to originate

and since boys will be boys
and in a system where
risk is tied to a kite
fashioned out of
guile and know nothingness

for that "industry "in that state
self reg is ultimately no reg at all

in times of manic money making
only uncle can play sheriff

uncle needs to both set
and ruthlessly enforce
restraining regs

but if uncle's agent
is alan greenspan.....

says...

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—Robert Kiyosaki

Maybe if millons didn't buy the crap from RK they wouldn't be in this mess now. People have to pay for their mistakes. Otherwise why would they stop making them?

This might be an interesting read (found it in google)

http://www.johntreed.com/Kiyosaki.html

[Bruce Webb]

"House for $567,000 (the picture shows a modest ranch house) Combined income $90,000"

Anyone who has lived in California over the last couple of decades is probably rubbing their eyes in disbelief. They have been buying houses at that value for that amount of income all along. Granted if you have a 100% LTV and you can't get a bailout rate of say 8% or so, life could get pretty painful, these people could end up paying more than 50% of their income just carrying the loan, but the fact is that a lot of working renters are paying those percentages.

And you have to wonder about any household with that kind of income having to go sub-prime to start with? There is a little secret to getting a high credit score (mine was 792). Its called spending less than you make and paying your bills on time. I mean you have to feel these peoples' pain to some degree, but there are reasons why people have credit scores below 620, and most of those to a large degree are under their own control.

Moreover I am still leery of the overall storyline. They want to make it a story about the borrowers when really it is a story about lending and investing. As S-T-R points out nobody really gave a crap when foreclosures started rising in the MidWest (and by volume that is where most of the activity is even now). I am continuing to smell middle class bailout of the investor class, and just like the S&L imbroglio it is stinking out the joint.

The reporting to my mind is still anecdotal and too much focused on rate of change in foreclosures and not absolute level. That mortgage foreclosures are up at come particular percentage in some particular location may not in the end convey any useful information. Instead a panicky Wall Street seems intent on spooking Main Street, all enabled by the housing doom and gloomers. And doing a pretty good job.

[Lafayette]

BW: The reporting to my mind is still anecdotal

And the posts definitely sub-prime.

[James Killus]

As I read the Krugman post, he is suggesting that provisions be made for borrowers to negotiate with some entity that holds the mortgage which used to be the standard procedure, in order for the lender to maximize the value of their holdings, with the side benefit of not tossing a lot of people out of their homes unnecessarily and not causing further damage to the housing market.

Rustbelt is certainly correct that it's the threat to finance that is causing all the ruckus. Since financial panics spread to those not party to the original mistakes, this seems a reasonable response to me. I also rather suspect that if someone were to make the effort, they might find some words from Krugman about foreclosures during the time period Rustbelt references (the period when good Movement Conservatives were claiming that the Bush Economy was so well-managed by the Invisible Hand that anyone criticizing it was in league with Terrorists).

I can be convinced by a let's-make-the-idiot-bastards-pay argument, depending, of course, on who the supposed idiot bastards are. But Krugman is making a different case than just about anyone here seems ready to respond to. In fact, his argument seems remarkably...conservative. Yet Pavlov seems to have just rung the Krugman bell. Fascinating.

[bailey]

PK writes: "For it is becoming increasingly clear that the real-estate bubble of recent years, like the stock bubble of the late 1990s, both caused and was fed by widespread malfeasance."

"It is becomming increasingly clear"? PK, You should be ashamed of yourself! It was ABSOLUTELY CLEAR to Dean Baker and MANY others YEARS ago, where were you?

How can PK ask to protect a "homeowner" who put NO money down and lied about his income to buy a house at any asking price? What about protecting the future of all those who exercized financial discipline and refused to buy at ridiculous ponzi prices? Shouldn't their right to buy into the American Dream be protected against fast-pitch scam artists?

Way too many responsible young adults precluded from buying homes because of profligate programs & policies were forwarded by a corrupt Administration & signed onto by Congress, our GSEs and Wall Street. Our leading macro-Economics Academics who sat by & said nothing should not escape responsibility!

Shame on you Paul Krugman!

[bailey]

Excuse the obvious failings of my rant. I'm fed up with our "liberal" Economists who hide out when we need them, then jump on when the risk is gone!
"Way too many responsible young adults were precluded from buying homes because of profligate programs & policies forwarded by a corrupt Administration & signed onto by Congress, our GSEs and Wall Street. Our leading macro-Economics Academics who sat by & said nothing should not escape responsibility!

The time for PK to speak was when Bernanke said TWO years ago, that r.e. prices were driven by fundamentals. What did we hear from him then? NOT ONE SINGLE WORD, he was too busy bashing Bush on policies in which he had no influence.

[Conrad]

It's Smith's invisible foot, kicking us in the ass again.

[Bruce Webb]

Laf, if that was intended for me please point out the weaknesses you see. I throw the occassional elbow, certainly I can take one in return.

Snark is fun, but simple snideness is just rude.

I have been watching the reporting closely since it started and from the beginning the numbers have largely been cooked in one way or another. This is particularly true with the use of rates of change without proper reference to the absolute level. That the rate of foreclosures in LA is up 266% may mean nothing more than 3 going to 8, or it might mean 300,000 going to 800,000. Without the context you have nothing, and mostly I am not seeing context. Lets just say that it is a little disturbing to see the one and same article report of the increase in the number of foreclosures in one region (like the Mid West) and then shift to reporting the rate (like in So Cal).

Moreover everyone is insisting on using national aggregates. Aggregating prices and foreclosure rates on a national basis only really makes since if you are looking at this from the perspective of Wall Street. From the point of view of Main Street it is the local performance of housing, employment and wages that are important. Yet just about everything is being reported as if this would all unwind in precisely the same way everywhere.

And if you or anyone could point to some quantification of how much of the bad sub-prime and alt-A is really the result of poor borrowing or outright predation and how much the result of mortgage fraud by investors and speculators I would be interested. Because the firm I worked for used sub-prime loans in pretty aggressive fashion and out clients were not by and large actual credit risks. That is some people finance on a No Doc loan not because they can't document their income and assets, but because that documentation tells too much of a story. If you already are financing a house in a particular market you are not on paper eligible for most of these loans, and the financing you would qualify for, i.e. commercial loans, was a lot more expensive. Same with stated/stated. Our clients by and large had good incomes and real assets, but a little (or a lot) of exageration got them that second or third or fourth rental that much faster.

If this kind of activity was common in the suburban Northwest, I can only imagine what it was like in the white hot markets of So Cal, Phoenix and Miami. Lets just say that people buying blocks of condo units are not the type of people who will blanche at the prospect of some minor misrepresentation of their assets and incomes to get the loan. Nor for that matter are the people who lend into these markets. Lots of people who were gambling with other people's money now want to pocket all their gains AND have their last deal bailed out.

A lot of people made a lot of money during the bubble and now are trying to turn around and play the "poor borrower losing his home" card. Well as S-T-R points out foreclosures have been up in the Mid West for years and nobody seemed to care much. But Bear Stearns gets pinched and all of a sudden we have a national crisis.

There is a real story to be told here, it is just a lot more complex than the simple models are showing. Some substantial part of this will boil down to "rich people losing money" and as usual there will be the attempts to finance that loss out of workers paychecks. Some of us are getting a little tired of bailing out past rewardees every time the risk/reward ratio works against them.

"Too big to fail" was a travesty the first time. If LTCM had been allowed to go smash we might have avoided a lot of the excess we have seen over the last decade or so.

[realpc]

No one knows when a bubble will burst. We all know lots of people who did well in real estate, and some who got rich. Everyone thought I was crazy to rent but I actually saw this coming in my good old crystal ball.
But really, I was told that real estate will always go up, up, up, forever, because there are always more people crowding into the USA needing a place to live. That's true, but there is a limit to how much they can pay, and that limit is relative to income. A house used to cost one year's income, and now it's 20 times a year's income. Therefore, duh, you can't afford a house.
And not only that all the new houses are huge. So even if you can afford a small house, there aren't any.
I don't know if the borrowers are as responsible as the lenders. Is the bartender responsible or the drunk? The same person who wants all drugs legalized -- putting all the responsiblity on the addicts to resist -- wants to stop enabling compulsive borrowers.
And besides, how would you feel if you wanted to invest in real estate but the kindly care-taking government said no it's not good for you?

[Conrad]

Amazing to watch this huge downdraft moving through world markets. Trying to determine blame and soften the blow? That seems like trying to get Islamic radicals to like US foreign policy.

[bailey]

realpc. I'm all for letting the Gov't. (& everybody else for that matter) say whatever it wants. Just PLEASE, let's not forget it wasn't rhetoric that got us into the mess we're in, it was REAL Gov't. & GSE programs & policies. Many of the most harmful of these policies were destined to fail from their onset.

[Peter Schaeffer]

STR,

“From 2001- - 2006 there were record foreclosures in the rustbelt and no one gave a damn.”

Why should they? The Rustbelt makes stuff and that doesn’t count anymore. The ideology of free trade and Open Borders globalization says that actually producing goods, isn’t relevant. America can always pay its bills by borrowing. What better way to promote debt than asset (stocks, housing) price bubbles that make it all look cheap?

Of course, now that the sacred coasts are threatened we have a Crisis. When the rubes who can’t spell arugula get killed (financially), that’s just the inevitable progress of globalization. When Shiller’s cosmopolitans might suffer losses, government interventional is mandatory. Important people have to be protected.

Of course, in real life bubbles don’t last and an economy dependent on bubbles is headed for a fall. Sadly, the trade deficit has made the US critically dependent on serial bubbles to maintain domestic demand..

The Bush administration deserves plenty of blame for this fiasco. However, the trade deficit started mushrooming under Clinton. Worse, the ideology of Open Borders globalization is as much a mantra for Democrats as for Republicans. Note that most hedge fund money is going to the Democrats.

Midwesterners shouldn’t expect too much sympathy from this administration or from Democrats if they win in 2008. After all, they can always be replaced with people who don’t speak English and won’t mind having three families in a one bedroom apartment.

[Farrar Richardson]

Bailey -
"How can PK ask to protect a "homeowner" who put NO money down and lied about his income to buy a house at any asking price? What about protecting the future of all those who exercized financial discipline and refused to buy at ridiculous ponzi prices? Shouldn't their right to buy into the American Dream be protected against fast-pitch scam artists?"

If you'll read PK's column again, you'll see that this kind of borrower would not be eligible for the kind of workout program that he is proposing, because such a borrower would never be able to work himself out of the predicament (s)he got him/herself into. A traditional banker needs confidence in his borrower, before he signs off on a loan or even a workout.

From an ex-banker

[anne]

"Midwesterners shouldn’t expect too much sympathy from this administration or from Democrats if they win in 2008. After all, they can always be replaced with people who don’t speak English and won’t mind having three families in a one bedroom apartment."

Always lunatic meanness, always prejudice, all the time.

[sk]

I usually agreed with what PK says, but this PK piece is unbelievable. There are tens of millions of Americans who can't benefit from any asset value appreciation. In fact, they may have to suffer if asset prices go up because they have to pay more for their essentials.
There are millions of Americans who bought up houses for "investment purpose", consequently raised up the rent for the working-poor Americans.
Now, PK effectively says renters should subsidize the homeowners by tax money. Who is this PK?

[Cyrille]

"I'm fed up with our "liberal" Economists who hide out when we need them, then jump on when the risk is gone!"

Accusing Krugman of speaking after the battle is quite rich. You must not have read his columns with any regularity...

[anne]

Paul Krugman, as Dean Baker, has written and spoken about problems in the housing market and housing mortgage market for several years, so I have no idea why Krugman would be be subject to complaint now for not finding problems several years ago. The criticism and warning from Krugman began right after Alan Greenspan spoke of the advantages of adjustible rate mortgages, and before the Federal Reserve began to raise short term interest rates.

[anne]

SK, please explain your complaint in more detail because I do not understand where Paul Krugman's suggestion will present any problem for renters.

[op]

here's where the rubber meets the road
"My guess is that it would involve federal agencies buying mortgages — not the securities conjured up from these mortgages, but the original loans — at a steep discount, then renegotiating the terms."

how steep ????

an inquiring securities owning superstructure
wants to know

let the holders of these securities take the loses
not the public thru its uncle sam

ie
offer a mortgage buy out
that puts a hole thru the MBSs's
big enough
to teach don't touch these again
lessons to most naked apes

[James Killus]

This is pretty much what I meant by the Pavlovian "Krugman bell." Ann is quite correct, Krugman has been writting about the dangers of the housing bubble for years now. Hell, The Economist has been writing bout the dangers of the housing bubble for several years.

Similarly, others are criticizing Krugman for things that he simply has not said. A bailout by taxpayers? Krugman is specifically arguing against it. Harming renters? What planet did that come from?

[knzn]

Everyone please read the comment by James Killus about 15 or 20 comments above this. He seems to be just about the only commenter here who understands what Krugman is saying.

The argument that Krugman’s idea is unfair, or that it encourages moral hazard, is based on misunderstanding. A more valid objection (made by Felix Salmon elsewhere, although he also throws in the “no bailout” nonsense) is that it is impracticable. I’d say, if anyone can come up with a workable implementation of Krugman’s idea, then I’ll support it. At present, the idea is more like wishful thinking.

[James Killus]

op,
Krugman is pretty clear that he's advocating the repurchase of the mortgages and not the securities that have been based on those mortgages. The question of "how steep?" should depend on whether or not the mortgage in question has any chance of being repaid, on whatever terms, though I appreciate your concern that there may be some surreptitious bailouts flying those colors. That's hardly Krugman's fault, however.

The securities far downstream of the "leverage chain" are worthless, no matter what the repayment terms turn out to be. The owners of those securities are already twisting in the wind and the necrophages are having a nice lunch.

[Peter Schaeffer]

LOA,

The truth is painful, isn’t it?

[anne]

Thank you, James Killus and KNZN.

There is no bailing out and no playing to moral hazard in Paul Krugman's suggestions. What bothers me, though no fault of Krugman is the distance between mortgage holder and home owner may present problems of complexity that are not readily overcome. Krugman's column is excellent, however.

[anne]

"When the rubes who can’t spell arugula get killed (financially), that’s just the inevitable progress of globalization."

Always crazed rubbish.

[billy]

Krugman is pretty clear that he's advocating the repurchase of the mortgages and not the securities that have been based on those mortgages.

Sure. But that's another way of saying let the buyer who bought what he could not afford, be forgiven part of his debt and be allowed to stay in the house.

The unsaid things in PK's article are
- rights to future appreciation in the house, if any.
- rights to stay in the house.

Will the borrower so forgiven give up rights to future appreciation to the lender?

Does the borrower have to give up his right to stay in the house, (and the loan also) if the Fed agency can find a better buyer? That would be just to those of good credit, who did not play in the bubble but chose to rent.

As for Pavlovian, you miss the mark.

From "liberty or death", we have come to "they were extending those loans, you cannot blame me if I took it".

What is Pavlovian there?

[kthomas]

Usually, I agree with Prof. Krugman.

Not on this issue.

This market needs to bleed. The bad blood should not be retained, in any manner. Affordability is out the door (Who the hell called this the "ownership society"?), and the scum-bags on Wall Street and Main Street that pushed these garbage loans and securities should be left in the sun to dry and shrivel like worms.

If anyone needs some help, I would agree to helping first-time buyers only. Everyone else, they can dig their own graves.

[prostratedragon]

If anyone is still interested or should refer back here, this article has been picked up over at Calculated Risk, who links it up with an earlier article there about the difficulties of doing workouts when the servicer that the borrower would deal with and the investor who owns the loan are different entities. I think that although he doesn't go into it in his column, these might be some of the difficulties Krugman was thinking to work around by having the government actually buy the loans.

The whole issue really has a great many technicalities that would have to be thought through, but that graph that everyone talks about (we're at month 8) suggests to me that somebody needs to start thinking, because leaving it up to the Fed to patch things up on the fly is not going to do it.

[Bernard Yomtov]

James Killus is correct that this post has set off the "Krugman bell" and people are simply not paying attention to Krugman's actual suggestion, which seems to be a reasonable idea that bails out no one and benefits both homeowners and holders of mortgages.

Suppose you are having trouble paying your mortgage. You would like to renegotiate the terms and the lender would rather renegotiate than foreclose. (Have you ever foreclosed on mortgaged property? I have. It doesn't turn out to be a wonderful solution.) Well and good, but now suppose that for some institutional reason you cannot communicate with the lender, so renegotiation is impossible. Wouldn't it be nice if someone came along and opened up the communication lines, so you could possibly work something out? Wouldn't that benefit all concerned?

That's what Krugman is proposing, writ large. What's wrong with it?

[anne]

http://thecaucus.blogs.nytimes.com/2007/07/27/obamas-down-on-the-farm/

July 27, 2007

Obama’s Down on the Farm
By Jeff Zeleny

ADEL, Iowa – In the wide field of Democratic presidential candidates, Senator Barack Obama is the only one who represents the nation’s heartland. Illinois ranks fifth in overall agricultural output, producing more corn, soybeans and hogs than most states in America.

That, of course, does not make Mr. Obama a farming expert. He said so himself, moments after arriving here this afternoon on the Van Fossen Farm, where he stood between a tasseling corn field and a soybean field with leaves slowly rippling in the breeze.

“Although there are an awful lot of farms in Illinois, in the neighborhood where I live, the main livestock is squirrels,” said Mr. Obama, who lives on Chicago’s South Side. “So I don’t pretend to know everything there is to know about agricultural issues.”

So the Obama campaign convened a Rural Issues Forum outside this central Iowa town, about 30 minutes from Des Moines. For more than an hour, he took questions about a smattering of issues. When the conversation veered away from farming – as it often did – Mr. Obama sought to steer it back to agriculture policy.

In case you’re wondering, yes, Mr. Obama did reprise the ongoing exchange he has been having with Senator Hillary Rodham Clinton over whether they would agree to meet with foreign leaders.

\Weaving it in a larger message of change, he said: “Some of you noticed that this week I got into a debate with one of my colleagues who is also running for the presidency. The debate was about whether or not we talk to world leaders even when you don’t like them. My theory is you do and you do it without preconditions.”

Hearing that, the crowd applauded. And the conversation returned to food and farms, including a question from one man at the back of the crowd who extended an offer to Mr. Obama.

“You can come and help me load hogs in the morning,” he said.

“You can tell that I’m dressed for it,” replied Mr. Obama, casually dressed in slacks and a pressed shirt.

Again, the crowd applauded and laughed. One line that landed a little flat, though, was when Mr. Obama sympathetically noted that farmers have not seen an increase in prices for their crops, despite a rise in prices at the supermarket.

“Anybody gone into Whole Foods lately and see what they charge for arugula?” the senator said. “I mean, they’re charging a lot of money for this stuff.”

The state of Iowa, for all of its vast food production, does not have a Whole Foods, a leading natural and organic foods market. The closest? Omaha, Minneapolis or Kansas City.

Mr. Obama, perhaps sensing a lack of reaction from the crowd, moved along to the next topic. After all, he never claimed to be a farming expert.

[anne]

So, we understand all the deceiving allusions. Barack Obama was pointing out to farmers what can be the difference between wholesale and retail price of the produce they raise. That farmers know is of little consequence and no offense, but there are those who care only to destroy Obama.

[billy]

That's what Krugman is proposing, writ large. What's wrong with it?

That sort of thing you talk about "renegotiate the terms and the lender would rather renegotiate than foreclose" happens in a sane world, where the differences involved does not materially affect the loan.

We are talking big haircuts here. The income/payment disconnect implies big haircuts. If big haircuts happen, then see my post above.

Far better for a Fed Agency to buy the loans and rent the house out to the current owner in trouble.

All of you are hiding behind "homeless people on the street" excuses. So, rent it out to the current owner.

This is either an attempt at bailing out reckless borrowers, or keeping prices from falling, by keeping houses off the market.

By the crowd who post here, I would think it was the latter - most of you own, and do not want prices to fall.

It has nothing to do with homeless people. That's just a cover.

[ilsm]

op,

"lets convict the proprietors
of
this
el greedo circus"

Madam Guillotine is appropriate here.

"after we've saved ....
the earth's economic system"

Nothing short of Madame Guillotine will work here.

[Peter Schaeffer]

LOA,

From "Home foreclosures hit record" (http://money.cnn.com/2007/06/14/news/economy/mortgage_foreclosures_deliquencies/index.htm)

"NEW YORK (CNNMoney.com) -- Home foreclosures hit record levels the first quarter, jumping sharply from a year ago level due to economic weakness in the Midwest and the battered housing market in the overbuilt Sunbelt.

The report is the latest look at the hit to the home loan market caused by the problems in the subprime mortgage sector that first started getting national attention early this year. Those problems have led to bankruptcies and tighter lending standards, which in turn have hit the sales of both new and existing homes."

But your portfolio is still doing great, at least that is what you tell us.

[Peter Schaeffer]

All,

Wonkette caught this perfectly over at http://wonkette.com/politics/barry-hussein-obama/?view=full

"Barry Hussein Obama is not like Regular Americans — you know, the 95% of Americans who aren’t wealthy, good looking, slim and fancy eaters. All the presidential candidates are pretty well off, except for bankrupt Mike Gravel and (allegedly) Joe Biden, so Obama shouldn’t get any special trouble for being a super rich Ivy League elitist … unless he brings it upon himself.

Campaigning in Iowa this weekend, Obama asked the crowd, “Anybody gone into Whole Foods lately and see what they charge for arugula?”

He might as well have said, “Anybody here getting their hedge fund portfolios screwed by excessive exposure to these Collateralized Debt Obligations since Moody’s started rebranding Triple A’s?” Iowa doesn’t have a Whole Foods Market, not in the whole state. The cuisine of Iowa consists of Corn Dogs and “funnel cakes,” which are a kind of home-made grease donut rolled in sugar.

For those who remember such things — we don’t, but this blog pretends to — Michael Dukakis enraged Iowa farmers when he suggested maybe they should consider not all being industrial agribusienss monocrop farmers and maybe try diversifying into fancier produce that could get a better price."

Alas, not even Wonkette is perfect. She meant "to CDOs".

says...

Krugman is suggesting the feds buy the mortgages of those in trouble at a discount (how will they be priced and how will all the parties that hold interest in them find agreement?) and offer those homeowners new loans on better terms that they could get in the market. Unless they pay holders of the mortgages what the market would be willing to pay, which would remove the need the feds, that is a bailout for them. It's definitely a bailout for the borrowers who won't be subject to market lending standards that face those who haven't borrowed foolishly. This bailout will slow the drop in the prices of housing, which he right notes is too high, by some amount, which bails out everyone who owns real estate at a cost to those who don't. The people who don't have real estate assets were already hurt by the run up in prices as a result of the demand created by the easy credit frenzy, and what Krugman proposes will keep more of that pain in place. This proposal limits the pain of people who behaved foolishly at the expense of those who haven't, a moral hazard.

The only thing the feds should do is to encourage all these divergent parties to come together so they can find what deals are possible that are in their mutual interest and help provide information so everyone can make informed decisions. If the parties aren't willing to make deals where values and terms get reset, then they can go though the foreclosures and bankruptcies that many will face.

[anne]

Notice, please notice, the crazed viciousness in the use of Barack Obama's name. Always prejudice, always viciousness. Always destruction.

[anne]

Me, I think Trader Joe's and Whole Foods the finest markets I have even found in this country, and from what I hear only occasional co-ops are as attractive for consumers and interestingly enough for farmers.

Me, I think this sentence is simply more crazed viciousness:

"The cuisine of Iowa consists of Corn Dogs and 'funnel cakes,' which are a kind of home-made grease donut rolled in sugar."

[dd]

"My guess is that it would involve federal agencies buying mortgages — not the securities conjured up from these mortgages, but the original loans — at a steep discount, then renegotiating the terms."

There is no process through which the agencies could buy the mortgages as ownership has been parceled to thousands of different investors. The impact would be similar to trying to sell a resort property that has negotiable multi-year time share interests; clearing title would be a nightmare.
Second, for anyone following the saga, what has truly seized markets is that portion of subprimes that were incorporated into asset back commercial paper (and also the worry of the credit card debt and auto loans/leasing that are a part of this market). Those instruments were issued through special investment vehicles with the SIV consortium agreeing to provide liquidity if the products became illiquid (an impossible event up until a couple of weeks ago). Those liquidity calls came and the consortiums were forced to supply huge infusions of capital that taxed their resources (hence the Feds action today to provide the demanded liquidity at a cheap rate).
Subprime is the tip of the iceberg as anyone who could obtain a suprime could also obtain credit cards and car financing.
My personal solution would be to simply halt the ARMS resets, fix credit card interest rates to the short term fed rate plus a percent or two, eliminate all credit card fees relating to late payments, etc, and reset leasing rates. At the same time, realign borrowing ability ie peg the credit lines to the current lines and then begin to lower those lines as the borrowers pay the debt.
Peonage Joe needs a global solution, not just for subprime, but all his debt and yes investors will take it on the chin; me included :)
But then we can right the ship and dispatch the nonsense of self-regulating markets as Mr. Smith's invisible hand will have picked all of our pockets.

[James Killus]

Consider a borrower who can’t meet his or her mortgage payments and is facing foreclosure. In the past, ... the bank that made the loan would often have been willing to offer a workout, modifying the loan’s terms to make it affordable, because what the borrower was able to pay would be worth more to the bank than its incurring the costs of foreclosure and trying to resell the home. That would have been especially likely in the face of a depressed housing market.

I will amend my previous conjecture that the oblivious arguments here are the result of the "Krugman bell." I think that we must also consider the possibility that 8 years of relentless attack by the Right Wing on the legitimacy of the Clinton administration, followed by 6 1/2 years of the Bush administrations direct attack on the integrity (in every sense of the word) of government, has rendered a large number of people incapable of imagining a federal agency pursuing a reasonable goal by rational means. The mere fact that something worked in the past is no longer a guarantee that it will work in the future, because there are people who are committed to making it fail.

In the U.S., politics has become war carried out by other means (to turn Clausewitz's famous dictum on its head). The populous has become shell-shocked and falls into despair. Can Depression be far behind? Must we stock up on gold and canned goods? And where is the ghost of Huey Long?

[dd]

Just one addition; only owner occupied housing gets the the reprieve. Speculators can sink and learn.

[bailey]

Anne, You'll have a very tough time finding a PK criticism of BB's statement back in the Spring of '95 that r.e. prices were being driven by fundamentals. What's so terrible about his silence is that the evidence directly supported PK's well argued contention that the Bush Administration NEVER plans for its programs to succeed, in fact, when Gov't. programs fail I sense Bushies taking glee in reporting we can't trust Gov't. to do any social programs effectively. So, misapplication of Gov't. resources to advance Bushies r.e. "ownership" agenda provided a great example for PK to use to support his thesis. Did he reference it, where (pre-July, '05 of course)?

Regarding PK's present idea, ANY plan that delays or deters r.e. prices from reverting to historical trend growth rates is clearly not a resolution, it's a subsidy and should be considered a plus for the few at a cost (monetary & social) to the many. There are companies falling over each other to help mtg. holders who still have equity in their homes "work" out a solution. Countrywide is cash poor ONLY because it refuses to markdown its rapidly growing reo inventory.

The problem from sub-prime to prime (& the numbers will continue to expand for the next year plus) needs to address those with NO remaining equity & NO earnings ability to cover mkt. rate int. levels for the loan size.
Isn't it ludicrous to suggest subsidizing those who are in homes now because they made an unsound investment decision when doing so is penalizing those who were smart enough & disciplined enough to not make the same stupid decision?

[Gene O'Grady]

My grandmother was born in Davenport Iowa and I still have family there (on the Illinois side of the river). When I had the good fortune to visit them nearly twenty years ago, in addition to the wonderful homecooked meals, we were taken to a traditional cafeteria in Davenport with the most remarkable variety of fresh vegetables and real quality meat -- not fancy stuff, and cooked in anything other than a bicoastal manner, but wonderful.

I have no idea where funnel cakes are from, but I suspect it's Southern California!

[save_the_rustbelt]

Peter: great insights

Anne: Peter and I agree - he was being ironic and sarcastic, two qualities I love, and he is right about the illegals.

Obama has tremendous talent and intelligence, but I think he is too early to the dance, but an up and comer.

[Winslow R.]

Mr. Krugman is coy as he offers a renegotiation between borrower and lender to dissipate some of the pain. A small improvement in the system to negate the need for 'political' action.

In theory the Fed is quite capable of bringing the market price of all assets to zero. Is the Fed prepared to end its inverted yield curve once these negotiations are complete?

Heck no!

Not as long as inflation is lurking in the shadows. There will be pain, and the more distributed it is the longer that pain will be tolerated and the better able the inverted yield curve will be in limiting the consumption habits of middle America.

Come out and say it Mr. Krugman, at a minimum the Fed system needs some fine tuning, I say a complete overhaul. The fine tuning is taking place as the Fed becomes the market maker of last resort. Any bailout says overhaul.

All you small thinking tinkers make this world a hard place to change, though we head in the 'right' direction in small baby steps, which is what this proposal is.

[anne]

Thank you, Gene O'Grady. Apparently, funnel cakes are a Pennsylvania Dutch "invention." Interesting.

Thank you, Bailey. I just do not understand what is happening now well enough to argue with Paul Krugman, but my sense is that Krugman does not feel confident about analyzing what is happening yet. Krugman however did expressly and several times warn about the gradually mounting economic and investment weaknesses as the Federal Reserve raised short term interest rates. So too, Brad DeLong.

[im1dc]

I think everyone here would greatly benefit by daily reading of:

http://calculatedrisk.blogspot.com/

[sk]

Paul Krugman will need to speak more about this workout program. Workout first for the homeowners. Then workout for the renters who have little money to save for homeownership and/or have difficulty paying for the rent. Then workout for the homeless people who were evicted. methinks this is what PK intends to achieve based on fairness argument later. Krugman is always right and anybody who criticizes him is a Republican jerk, right?

Anne, I believe other commenters already mentioned what I would otherwise say. I find the CR article and comments linked above by prostratedragon interesting.

[billy]

Regarding PK's present idea, ANY plan that delays or deters r.e. prices from reverting to historical trend growth rates is clearly not a resolution, it's a subsidy and should be considered a plus for the few at a cost (monetary & social) to the many.

Historical trend growth? then, prices would fall! You are blaspheming.

This is not about people who have individual problems such as divorce, medical issues, job loss etc. Here, the problem is systemic. Of course workouts are good for both sides when the owner could normally could afford the house, but is under a specific individual problem. But in majority of cases, it's the house itself that is the problem. We are not dealing with the case where paying the mortgage is difficult because of the afore-mentioned difficulties. The mortgage payment itself is the difficulty.

All one has to do to understand this is to look at affordability numbers under the new sane lending standards - fixed, sane rates - PK is proposing. Majority of the people in trouble would not qualify under current prices.

What PK is suggesting has nothing to do with homelessness. Its an elaborate scheme to prevent prices from reverting back to normal. Lower housing prices for incapable borrowers surreptitiously, without ever establishing the price in the market.

In scenario 1, you have

- houses foreclosed.
- houses sold at auction/ REO at price P1
- new buyers get in at P1
- market price established
- existing homeowners selling will not get more than P1

In scenario 2, you have the PK scheme

- houses subsidized, kept off market
- existing pre-bubble homeowners demand bubble prices, because houses don't come to market
- existing owners selling will get more than P1. (which is why you see a lot of crocodile tears in the comments here)

So what PK is proposing - irrespective of how efficiently it's executed - is a price fixing racket benefiting existing capable homeowners and a subsidy for existing incapable homeowners. It is a scheme to defraud new buyers and lenders.

I don't have any problems with keeping people off the streets. Let a Fed agency buy the loan and rent the house out. Let reckless lenders lose. But whatever scheme proposed has to
(1) establish market prices for all future buyers and
(2) be open to ownership from all capable buyers at those prices. (There should be no squatters rights for incapable owners)

Yes, there are a few in old-fashioned difficulties like illness/divorce/death. But that's just a few. This is not about them.

[op]

" though no fault of Krugman is the distance between mortgage holder and home owner may present problems of complexity that are not readily overcome"

paul proposes cutting the gordian knot
the hi fi ers
challenge to this
brute force severation
ultimaetly
will come in federal court

fun fun fun

[op]

billy
beware this vision....

robust black hat guy
surrounded
by mob of torch baring
taundry spendthrift pleb
house loan defaulters
and
forced to eat such phrases like

"It is a scheme to defraud ... lenders"

"no squatters rights for incapable owners"

enscribed on balsa wood plaques

[dd]

oh my, then Krug proposes undermining property rights and all hell breaks loose.

[dd]

the right of the property owner to encumber his land is indeed a property right (that he was defrauded into the bargain is a different issue); but if Krug is proposing what is implied this would be dare one say a constitutional crisis as property rights are fundamental.

[dd]

Then again there are now so many Constitutional Crises that this is just one more in a long line and ultimately one that only is merely about money, as opposed to life and liberty.

[billy]

forced to eat such phrases like
"It is a scheme to defraud ... lenders"

I suppose it was no accident that you changed it "defraud new buyers and lenders" to just "lenders".

Is it the incapable borrowers that want this racket desperately? No way. He can declare bankruptcy,walk away, rent, and buy back later at a lower price.

It is the capable borrower who does not want to give up his phantom equity that is screaming for this.

[gordon]

At least the EU seems to be doing something about the behaviour of the ratings agencies. From The Independent (17/8/07):

"...the [European] commission said its review of the sector would focus on a range of issues, including potential conflicts of interest the agencies may have with rating the products of fee-paying clients, their internal governance, and their apparent slowness in reacting to the deterioration of the market for securities made up of risky loans in America...

"The European Commission inquiry will revolve around how the agencies came to grant ratings to securities that were comprised of loans granted to American borrowers with poor credit histories at the same level, in some cases, as US Treasury bonds...

"Credit rating agencies worked closely with the banks that devised these investments, commonly called collateralised debt obligations, or CDOs, to ensure that they got the highest ratings possible.

"Agencies garner much higher fees from rating these investments than more traditional corporate bonds. That lucrative arrangement has raised the spectre of a conflict of interest. According to Moody's, $520bn (£263bn) of new CDOs were rated last year alone..."

And I must admit to being gratified that a commentator as eminent as Prof. Krugman agrees with me about the need to do something for the borrowers.

[anne]

"Krugman is always right and anybody who criticizes him is a Republican jerk, right?"

Ah, always answer a question with insulting idiocy. Got it.

[sk]

"Ah, always answer a question with insulting idiocy. Got it.
"
i'm not sure how many times I answered your questions. Not many, probably. Always idiocy?
The sentence you quoted from my comment was not specifically directed at you. I answered to your specific question after your quotation. I said others already answered to your question and suggested you read the Calculated Risk article.
I admit I was sarcastic on people who play politics on this issue but I don't think i was insulting anybody.
When I hear such words as "lunatic", "idiocy", "nonsense","meanness", and etc., it is sometimes difficult for me to use nice words only.

In PK's and your world, the (relatively) rich people always get priority?
You guys are talking about subsidizing the homeowners and don't talk about how to help more-depressed renters and homeless people who were already kicked out of their home.
Anne, do you still not understand what I mean by "subsidizing", after reading all these comments in here and CR? Then, please think about who deserves the word "idiocy".
Just to make myself clear, I am not "attacking woman".

[cm]

realpc: "So even if you can afford a small house, there aren't any."

Well, I don't know your definition of "small", but I can can assure you there are plenty of houses hereabouts that fit my concept of it. Much of the housing stock is 50+ years old, and during the frenzy days we had a good number of apparently quite minimally maintained properties on sale where the sellers didn't put much bother into sprucing them up.

As a mirror side of James K.'s "relative bidding position" argument, with the availability of generous "low end" loans we saw price range compression on the "low" end, with said properties starting around $700K, and more habitable without cleaning and fixing up at $800-900K+.

Overall and with a large caveat about luck and circumstance, the market in a given region will match the scales of loan/funding ability and property desirability (with the latter having many dimensions besides size and fancyfulness). If most people can fund $700K in any which way, the least desirable houses will cost just that much.

[cm]

And one could perhaps well let "condo" stand in for "small house". Condos didn't start at $700K of course, having no yard, attached garage, etc.

[anne]

SK, thank you. Now, I am beginning to understand your complaint, but the complaint is one that takes me in a completely different direction and the direction is starkly political.

This Republican Administration and the Reublican majority Congress have for years fought to limit development of housing or provision of rental subsidies for lower income individuals. Also, Republicans have long fought to limit the role of Fannie Mae in extending relatively lower cost mortgages to lower income individuals. Fannie Mae has been effective but limited in making housing more affordable, while Fannie Mae has recently offered to purchase difficult mortgages to no avail.

When there is time I will look to references to the limit of housing or rental subsidies, this is a real problem but not a new problem. Though I am not familiar enough with the extent of the housing problem for renters, nor with the broader problem of lower income housing, I know for sure there has been a long political struggle between Democrats and Republicans over the issue with Republicans as usual on such domestic social benefit programs having "won."

[anne]

Paul Krugman for years has written of the extent to which this Republican Administration and the Republican majority Congress have fought domestic social benefit programs both in terms of funding and in federal oversight. We are currently in the midst of a struggle over a budget that involves a typical ramatic increase in military spending (not including spending for Iraq) and cuts in domestic social benefit spending.

Yes; housing issues for lower incomer individuals is a problem, there extent of which I do not know but will look to, but Republican philosophy has done everything possible to undermine any New Deal legacy in social benefit spemding and Paul Krugman has continually pointed to this. The problem is starkly political.

The problem of sub-prime mortgage extension has exploded during the current Administration. Where was "Housing and Urban Development? I do not know.

[anne]

Notice the date of the column:

http://www.nytimes.com/2005/05/27/opinion/27krugman.html?ex=1274846400&en=ee73a2cdc5c35710&ei=5090&partner=rssuserland&emc=rss

May 27, 2005

Running Out of Bubbles
By PAUL KRUGMAN

Remember the stock market bubble? With everything that's happened since 2000, it feels like ancient history. But a few pessimists, notably Stephen Roach of Morgan Stanley, argue that we have not yet paid the price for our past excesses.

I've never fully accepted that view. But looking at the housing market, I'm starting to reconsider.

In July 2001, Paul McCulley, an economist at Pimco, the giant bond fund, predicted that the Federal Reserve would simply replace one bubble with another. "There is room," he wrote, "for the Fed to create a bubble in housing prices, if necessary, to sustain American hedonism. And I think the Fed has the will to do so, even though political correctness would demand that Mr. Greenspan deny any such thing."

As Mr. McCulley predicted, interest rate cuts led to soaring home prices, which led in turn not just to a construction boom but to high consumer spending, because homeowners used mortgage refinancing to go deeper into debt. All of this created jobs to make up for those lost when the stock bubble burst.

Now the question is what can replace the housing bubble.

Nobody thought the economy could rely forever on home buying and refinancing. But the hope was that by the time the housing boom petered out, it would no longer be needed.

But although the housing boom has lasted longer than anyone could have imagined, the economy would still be in big trouble if it came to an end. That is, if the hectic pace of home construction were to cool, and consumers were to stop borrowing against their houses, the economy would slow down sharply. If housing prices actually started falling, we'd be looking at a very nasty scene, in which both construction and consumer spending would plunge, pushing the economy right back into recession.

That's why it's so ominous to see signs that America's housing market, like the stock market at the end of the last decade, is approaching the final, feverish stages of a speculative bubble.

Some analysts still insist that housing prices aren't out of line. But someone will always come up with reasons why seemingly absurd asset prices make sense. Remember "Dow 36,000"? Robert Shiller, who argued against such rationalizations and correctly called the stock bubble in his book "Irrational Exuberance," has added an ominous analysis of the housing market to the new edition, and says the housing bubble "may be the biggest bubble in U.S. history" ...

[anne]

http://www.nytimes.com/2005/08/29/opinion/29krugman.html?ex=1282968000&en=d7ca49c4bc602b0f&ei=5090&partner=rssuserland&emc=rss

August 29, 2005

Greenspan and the Bubble
By PAUL KRUGMAN

Regular readers know that I have never forgiven the Federal Reserve chairman for his role in creating today's budget deficit. In 2001 Mr. Greenspan, a stern fiscal taskmaster during the Clinton years, gave decisive support to the Bush administration's irresponsible tax cuts, urging Congress to reduce the federal government's revenue so that it wouldn't pay off its debt too quickly.

Since then, federal debt has soared. But as far as I can tell, Mr. Greenspan has never admitted that he gave Congress bad advice. He has, however, gone back to lecturing us about the evils of deficits.

Now, it seems, he's playing a similar game with regard to the housing bubble.

At the conference, Mr. Greenspan didn't say in plain English that house prices are way out of line. But he never says things in plain English.

What he did say, after emphasizing the recent economic importance of rising house prices, was that "this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent." And he warned that "history has not dealt kindly with the aftermath of protracted periods of low-risk premiums." I believe that translates as "Beware the bursting bubble."

But as recently as last October Mr. Greenspan dismissed talk of a housing bubble: "While local economies may experience significant speculative price imbalances, a national severe price distortion seems most unlikely."

Wait, it gets worse. These days Mr. Greenspan expresses concern about the financial risks created by "the prevalence of interest-only loans and the introduction of more-exotic forms of adjustable-rate mortgages." But last year he encouraged families to take on those very risks, touting the advantages of adjustable-rate mortgages and declaring that "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage."

If Mr. Greenspan had said two years ago what he's saying now, people might have borrowed less and bought more wisely. But he didn't, and now it's too late. There are signs that the housing market either has peaked already or soon will. And it will be up to Mr. Greenspan's successor to manage the bubble's aftermath.

How bad will that aftermath be? ...

[anne]

Again, when Alan Greenspan spoke of the benefits of adjustable-rate mortgages, Paul Krugman quickly wrote of the need for long term fixed-rate mortgages. (I must find the ater of Greenspan's speech and Krugman's response, which likely were in early 2004. Please point to dates if available.)

[anne]

http://www.nytimes.com/2005/08/08/opinion/08krugman.html?ex=1281153600&en=5712579cabaf3faa&ei=5090&partner=rssuserland&emc=rss

August 8, 2005

That Hissing Sound
By PAUL KRUGMAN

This is the way the bubble ends: not with a pop, but with a hiss.

Housing prices move much more slowly than stock prices. There are no Black Mondays, when prices fall 23 percent in a day. In fact, prices often keep rising for a while even after a housing boom goes bust.

So the news that the U.S. housing bubble is over won't come in the form of plunging prices; it will come in the form of falling sales and rising inventory, as sellers try to get prices that buyers are no longer willing to pay. And the process may already have started.

Of course, some people still deny that there's a housing bubble. Let me explain how we know that they're wrong.

One piece of evidence is the sense of frenzy about real estate, which irresistibly brings to mind the stock frenzy of 1999. Even some of the players are the same. The authors of the 1999 best seller "Dow 36,000" are now among the most vocal proponents of the view that there is no housing bubble.

Then there are the numbers. Many bubble deniers point to average prices for the country as a whole, which look worrisome but not totally crazy. When it comes to housing, however, the United States is really two countries, Flatland and the Zoned Zone....

[anne]

http://www.nytimes.com/2005/08/08/opinion/08krugman.html?ex=1281153600&en=5712579cabaf3faa&ei=5090&partner=rssuserland&emc=rss

August 8, 2005

That Hissing Sound
By PAUL KRUGMAN

This is the way the bubble ends: not with a pop, but with a hiss.

Housing prices move much more slowly than stock prices. There are no Black Mondays, when prices fall 23 percent in a day. In fact, prices often keep rising for a while even after a housing boom goes bust.

So the news that the U.S. housing bubble is over won't come in the form of plunging prices; it will come in the form of falling sales and rising inventory, as sellers try to get prices that buyers are no longer willing to pay. And the process may already have started.

Of course, some people still deny that there's a housing bubble. Let me explain how we know that they're wrong.

One piece of evidence is the sense of frenzy about real estate, which irresistibly brings to mind the stock frenzy of 1999. Even some of the players are the same. The authors of the 1999 best seller "Dow 36,000" are now among the most vocal proponents of the view that there is no housing bubble.

Then there are the numbers. Many bubble deniers point to average prices for the country as a whole, which look worrisome but not totally crazy. When it comes to housing, however, the United States is really two countries, Flatland and the Zoned Zone....

[anne]

(Darn, please forgive the double post of the last comment which was simply me being careless in clicking post.)

Paul Krugman has however been concerned with the errors we have been making in domestic fiscal and monetary policy for years, and as far as I can tell has been continually correct both in pointing to the problems and in pointing to Republican philosophy as underlying the problems as Republican philosophy has undermined our New Deal legacy and stresses unregulated markets everywhere and always. There is and has been a political problem.

[anne]

http://www.nytimes.com/2004/04/20/opinion/20KRUG.html?ex=1397793600&en=b76f384741a7b890&ei=5007&partner=USERLAND

April 20, 2004

Questions of Interest
By PAUL KRUGMAN

A number of analysts have accused Mr. Greenspan of fostering a debt bubble in recent years, just as they accuse him of feeding the stock bubble during the 1990's. Just two months ago, Mr. Greenspan went out of his way to emphasize the financial benefits of adjustable-rate, as opposed to fixed-rate, mortgages. Let's hope that not too many families regarded that as useful advice.

[Notice the date of the column. Also, Paul Krugman had written of personally moving to a fixed-rate mortgage though at higher monthly payments on March 11, 2003.]

[anne]

So in March 2003, Paul Krugman was anticipating higher interest rates and moved to a fixed-rate mortgage. But in February 2004, Alan Greenspan spoke to the benefits of adjustable-rate mortgages and was criticized for doing so by Krugman in April 2004. Krugman has been continually right on the housing issue as far as I can tell, and the issue has everything to do with fiscal and monetary policy that reflects political philosophy.

[anne]

http://select.nytimes.com/search/restricted/article?res=F40C1EFF3C5A0C728DDDAA0894DB404482

March 11, 2003

A Fiscal Train Wreck
By PAUL KRUGMAN

With war looming, it's time to be prepared. So last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I'm terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.

From a fiscal point of view the impending war is a lose-lose proposition. If it goes badly, the resulting mess will be a disaster for the budget. If it goes well, administration officials have made it clear that they will use any bump in the polls to ram through more big tax cuts, which will also be a disaster for the budget. Either way, the tide of red ink will keep on rising.

Last week the Congressional Budget Office marked down its estimates yet again. Just two years ago, you may remember, the C.B.O. was projecting a 10-year surplus of $5.6 trillion. Now it projects a 10-year deficit of $1.8 trillion....

[bailey]

Anne, Nice references & nice try, but ....
Not once do I see where PK addresses the role of our GSE's or other Gov't influences played in directly creating the housing bubble. I've read PK for many many years & he's best when he deals with specifics. For some reason he kept mumm about obvious & significant Gov't. influences of the housing bubble. It made no sense to me at the time as Dean Baker was all over the issue. The housing mess we're left with in the bubble states (40% of the country's transactions) now threatens our local economies & I'm befuddled to see PK throw out an easy resolution. There is NO easy answer for this problem. Too many borrowed & spent too much of their homes proportional value to their income prospects for the FED to sit by & watch a quick price retracement. At the same time too many of our youngsters ready to take on the world are effectively locked out of the American Dream.
CA prices tripled in 10 years, from 200+ to 600+. The significance of a 2% drop in Mtg. rates over 30 years for a 200k house pales in comparison to the increased borrowing needed for the elevated principal. So, the issue wasn't the FED's monetary policy, it was the Gov't.'s (including our GSE's) role in forwarding the "ownership" society, including 100+% no-doc loans.
BB's statement in the spring of '05 was outrageous, NO ONE could argue at that late point in the game that prices were being driven by fundamentals. Yet BB did, & what response did his absurd statement receive from pk & bdl?
As the last two weeks clearly illustrat, the single driving force behind financial transactions is borrowing power. Access to free credit caused this bubble, not free money. The distinction is critical because our FED refused to consider credit's role in bubble formation.

[bailey]

I recommend Dean Baker's post of 8/17/07, "Bernanke bails out the banks, where's the ridicule?" http://www.prospect.org/csnc/blogs/beat_the_press

[anne]

Bailey, thank you.

Please explain though because I do not find a problem with the mortgage extending roles of Fannie Mae or Freddie Mac. Also, we do not have an asset price control policy and I do not understand the specific refence to selected California housing prices which have long been significantly driven by state-wide limits on property taxes and tax increases.

[anne]

Dean Baker is quite a fine economist, with whom I generally agree, but I find no references in Baker's warnings about problems in the housing-mortgage market that would change my stance on Paul Krugman's warnings. What am I missing?