"Is Everything we Know About Subprime Wrong?"

Richard Green says that some worries about the subprime crisis such as the risk that mortgage rate resets will bring about higher foreclosure rates may be misplaced:

Is Everything we Know About Subprime Wrong?, by Richard Green: Yesterday I saw a great talk by Paul Willen of the Boston Fed. An earlier version of the paper he gave is here.

I don't think I am caricaturing what he said to say when I describe the following takeaways from his talk:

(1) Falling house prices lead to defaults more than defaults lead to falling house prices. In the early part of the decade, when delinquencies reached record levels, default rates remained extremely low, because house prices were rising (see his graph on Page 48). [Note: graph added:]

(2) Interest rate resets have little of anything to do with the large number of defaults we are observing. For the vast majority of subprime loans, defaults or refinances happen before resets take place. It is moreover the case that the size of the resets is smaller than most of us think, because the initial teaser rates are pretty high.

(3) While ARMs have higher default rates than FRMs, putting ARM borrowers into FRMs will not necessarily reduce defaults. In the first place, as people move out of ARMs into FRMs, the denominator in the default proportion ratio will decline for ARMs, while increasing for FRMs, meaning that if the number defaults stay constant, the default share in ARMs will still rise.

Beyond this last point, a working paper I have with Cutts and Ramogopal shows that ARM borrower are fundamentally more likely to be risk-takers than FRM borrowers, so the difference in loan performance between the two products may say more about the distributions of the different borrowers, rather than the products themselves.

In any case, all of this means that many of the policies being pushed at the moment (such as interest rate freezes) may not be particularly helpful in resolving the crisis.

Comments

[esb]

This is just another bit of evidence that the United States of America is operationally disfunctional in the absence of inflation.

The financial system is not only designed to implode with declining prices, but also with stable prices.

Thanks Mr. Greenspan.

[dd]

ARM borrowers perhaps share much with lottery players: limited financial resources, a desire for wealth and an inability to do mathematical probability computations.

[Wiley E Coyote Time]

The end of all bubbles. At some point, people realize the absurdity of prices. In CA, $700,000 used to buy a dilapidated 2 bedroom cottage with no yard.

Its just a shame that this bubble was of an essential item. If tulips or nothing.com become overvalued, it doesn't generally prevent new home buyers from having an affordable place to live.

[esb]

For those of you for whom the following has meaning (probably most of you) ...

... the behavior of HABDX is starting to scare the holy hell out of me. Run by the inimitable "gnome of Newport Beach," Bill Gross, it has just gone to moderate leverage. Gross is rarely wrong and if this is signalling what I think it is, then the "Anne of this site" has been right all along in her worries.

And that really scares the hell out of me.

[Andrew]

Sara over at The Next Hurrah has an informative historical perspective on the subprime fiasco. While I am generally adverse to long posts which many people will simply skip, her insight deserves dissemination:

"Way back when I was teaching, I used to give students zerox copies of the forclosure and bank sale notices from the local papers from the early 1930's, and send them out to map and describe what they could actually see as the indications (in an almost anthropological sense) about the impact of the Great Depression of the late 20's and early 30's. What I wanted them to comprehend was less the arguments about what was done about those times, but more about what really went wrong, and ultimately how things were fixed. In essence, I wanted them to have good pictures in their heads as we evaluated what FDR actually did, and the results, and how we should evaluate those results.

Virtually every city in the US has an architectual line between late 1920's domestic construction, and what was built in the late 1930's. Most of the lines are mixed constructions -- you will find 2 story houses with gables and creative lines, mixed in with small, well-built, what we today call starter homes, single story, cape cod or ranch styles, rather simple in design. This is where the speculative builders of the 20's left lots in between their offerings, and then in the late 30's, with land released by the banks, those who were following the modest income and credit codes of FDR's FHA Mortgage program, built the next generation of houses. Between the houses of the 20's, and the late 30's is a revolution in Housing Finance as well as ultimately, a considerable cause of the Great Depression.

Prior to the Depression, the majority of homes were purchased on a short term note. You got a note for 5 years, with a balloon payment at the end, and then one negotiated with the bank for a new note covering the balloon. Of course the rate of interest would be adjusted with the new note. But what happened in the 1920's, at a time when commercial and investment banking were not seperate, was that Banks moved assets into the attractive stock market which was zooming, and then, after 1929, when they went bust in the market, the liquid cash available to re-finance the balloons simply disappeared, and the Banks took back the housing where owners could not meet the balloon or had cash to cover. It was not at all unusual after 1929 for Banks to repossess homes that were nearly 2/3rds paid up, with all owner-equity being lost. So families doubled up, tripled up, and tried to keep one note paid up. None the less the Banks, repossessing acres of property, mostly failed by the dawn of the FDR Administeration. As an example, the Bank of Akron President Wendell Willkie, eventually, after reorganization, paid .07 cents on the dollar for savings accounts when it became Second National.

The New Deal contained three elements of a solution to this problem. First, the division of Banking into two segments, Commercial and Investment, with only small accounts in the commercial segment insured. In addition, the Savings and Loan segment was created, which advantaged small savers with insured accounts, and a small advantage in savings interest rates, but a clear restriction on lending -- limited to local housing that met FHA standards.

What FHA offered was pretty simple, an inspection system that validated whether the construction of a house met all codes, local, and their own, and insurance to the lender if buyers met credit standards. FHA had a cap on the amount of loans, which was what forced the change in design from the gargoyles of 20's style, to the cape cod or ranch design of the late 30's. Porches, sun and front were eliminated, Entry Halls disappeared, rooms got downsized, and kitchens became streamlined with the efficent work triangle, but became much smaller. Compared with the 1920's nothing anticipated having household help.

But financially, these new houses, and all that came after them with VA and FHA insured mortgages, offered relatively low down payments, and 20 year or later 30 year mortgages at a fixed rate. Over time the cap on loans was raised to accomodate inflation and some additional expectations in what was a basic house, but until the late 1970's the early 1930's reforms held. Local savings converted into local mortgages, with the lender insured.

In his second Inaguaral Address, FDR's famous words were about one third of this nation being Ill Housed, Ill Clothed and Ill Fed. FHA which was on the books, but had not yet kicked in, began to deal with the housing problem on the margins. That's what those older "Starter Homes" really represent that I taught my students to find and mark on maps as an indication of the impact of the Great Depression. But what made that recovery possible was not white lightening or political rhetoric, it was something we hate to discuss -- pure and simple regulation of the banking and financial sectors of the economy.

While FDR died in early 45, and Truman retained all his regulatory policy well into the 50's, and Eisenhower did not change much, nor did Kennedy or LBJ, it began to change with Nixon, with moving up the cap on FHA loans beyond the rate of inflation, and then following the Carter inflation, the regulation of Savings and Loans was eliminated, leading to the crash of these institutions in the late 1980's. Without understanding cause, or the reason for these plain jane savings organizations in sustaining middle and working class home ownership -- Congress just bailed out the lenders who had the wit to reorganize, and let it go at that. Essentially they financed the next bump in housing inflation, whether it be in inflated prices for existing homes, speculation in lots for tear-downs in good areas, or McMansion housing far from jobs and culture in the exurbs, that requires vast investment in infrastructure on the part of existing home owners and the states. Essentially we are back to 1928 what with ARM Mortgage arrangements (like the old Balloons) that can be massively increased without any relationship to wages or salary or the economy, and the "right" of the financial institutions (probably foreign speculators in our Real Estate Market) to again foreclose acres and acres of housing.
[...]
Pre FDR and the emergence of FHA, when housing was financed with renewable short term notes, investment in those notes which generally ran 5 years would have been considered a medium term investment. Bankers would have looked at such investments in terms of profit in comparison to, for example a stock or bond investment, or city bond issue, or any other investment vehicle, and made a housing loan if the likely profit from the loan compared favorably with other possibilities.

In the 1920's, with the Stock Market on Speed, banks shifted cash into the market -- which offered excellent short term returns between about 1926 and the early fall of 1929, but then came the crash, and they lost their shirt, tie, pants and underwear. Thus funds for renewing housing notes dried up, and banks stopped renewing notes. Since the notes were short term, by about 1931 half of the outstanding home mortgages were being called.

What FDR did, by establishing the Savings and Loan Financial Industry as seperate from Commercial and Investment banking, allowing it to pay a slightly higher interest rate to small savers, but regulating it so that it could, for all practical purposes, invest only in housing that met FHA, and later VA quality standards, was to create a housing finance institution that was NOT directly in competition with other investment vehicles.

Until the mid to late 1970's, the Savings and Loans were strictly regulated. They had a cap on the size of Mortgage they could write, (which essentially put a cap on the size of middle class houses), and both the rate of interest they could pay savers, and the rate they could charge borrowers was regulated. For the most part Savings and Loan companies served their local area -- or possibly a region, thus capital created in a community more or less stayed there in the form of investment in new housing sold to people who likely also put their small savings into the local Savings and Loan Company.

With deregulation, Savings and Loan companies could invest outside the housing sector, and outside their region, and in the 70's you began to see the results of this. They looked for greater and faster profits, financing resorts, tennis clubs, commercial facilities (malls for instance), and they competed with each other in the CD market (Certificate of Deposit) -- selling this Government insured paper on medium term basis at higher and higher interest rates. (and not to forget the free toaster that went along with buying a 2000 dollar CD). It took a little less than ten years for the Savings and Loans to crash and burn in this deregulated market -- The end of the Reagan years and the Bush I administration saw the Government have to bail out the S&L's, at the cost to the taxpayers of billions. (Afterall, the paper they were selling was insured up to a hundred thousand.) In the meantime, the Housing Market inflated, in part as a function of putting Housing back into the same financial market with all other potential investments. So -- back to square one, in a way -- back to the situation that existed pre-FDR in the 20's and early 30's, except this time the Government (taxpayers) were on the hook to cover the insured savings.

The last stage of de-regulation took place under Bush II. The seperation of Commercial Banking from Investment Banking ended when Congress was persuaded to abolish the Glass-Stegall Act of 1933, meaning that Commercial Banks could now play in the more risky Investment Banking arena. And yes, one thing they did was to create mortgage backed securities that could be traded on the National and International Market in the same way stocks in widgets are traded. The end result is really no different from the late 20's and 30's -- since the value of low or non-performing loans has crashed, and since the value of the underlying asset is no longer increasing (housing prices dropping), Capital in the hands of Banks is simply leaving the housing sector, not unlike the instinct of Banks in the late 20's not being at all interested in renewing mortgage notes. "

[Dean Baker]

I thought WE knew that falling house prices led to foreclosures and not the other way around. You learn something new about what economists didn't know everyday.
Oh well, better late than never.

[SanFranciscoJim]

Andrew, thanks for the history lesson. I thought at the time that repealing the Glass-Stegall Act was a bad idea, but did not realize how this directly led to the housing bubble until you pointed it out.

[Lafayette]

Closing the barn door after a herd of horses have escaped

It's a shame that Wall Street only does what is necessary only have after a monumental financial calamity.

Will they ever learn? Probably not. After all, this is the second one in ten years where intermediate agencies (supposedly objective appraisers) have been partly responsible for the mess.

How could this have happened? Just like the last time with the BigSix accountants. They were seduced by the lucre. I maintained that there must have been connivance for such evidently Toxic Financial Waste to have obtained passable ratings.

From The Economist (this week):

Credit-rating agencies

Restructured products

A beleaguered industry looks to reform itself

HOUNDING credit-rating agencies has become the bloodsport of choice for moneymen. At a conference this week one speaker announced, to raucous laughter, that he had just received a news flash: “Moody's has downgraded Fitch, Fitch has cut Moody's in retaliation, and Standard & Poor's has put itself on negative watch.”

Politicians and regulators are on the chase, too. Financial regulators, meeting in Amsterdam this week, said they would review a code of conduct for rating agencies, with a view to improving disclosure and clamping down on agencies that give advice on the creation of securities they rate.
The agencies feel that criticism of their role in the crisis was, in part, based on a misunderstanding: their ratings are based on risk of default, not market swings. But, as mortgage delinquencies rise, even they now admit that they were wrong-footed, and that the golden ratings they awarded to many mortgage-linked “structured” products were flimsy, particularly those of collateralised-debt obligations.

In an effort to head off draconian new rules, the agencies have begun to think about changing the way they do business. On February 4th Moody's said it was considering a new rating system for structured securities, using numbers, not letters, and a suffix that would indicate the expected level of volatility.

Not to be outdone, S&P was due on February 7th to unveil more than two dozen reforms. New committees will oversee governance and modelling and will be reviewed periodically by an outside firm. Information on non-default factors, including liquidity (whatever that is), will be attached to ratings. Like Moody's, S&P may introduce separate tags for securitised products and will analyse the effects of unexpected events. “We need to be clear about what traditional ratings do and don't do. Increasingly people have inferred more than was intended to be conveyed,” says Deven Sharma, S&P's president.

Such stabs at self-healing may not placate everyone. Some point to more profound concerns: because ratings are deeply embedded in financial regulation, the agencies have been handed an oligopoly; they suffer a conflict of interest, because they are paid by the issuers of the securities they rate, not by investors; and they are unaccountable because their ratings are deemed mere opinions and thus protected as free speech.

None of these issues is easy to resolve. Switching to an investor-pays system might seem the obvious solution, but it is not clear that enough investors would cough up to make the business viable. Some, perhaps many, would hitch a free ride as ratings leaked.

In any case, agencies can reasonably claim to be tackling their conflicts. Moody's and S&P have built stronger walls between their analysts and salespeople. Both have vowed to review any rating issued by an employee who leaves to work for a client. “Whoever pays, there will be a conflict,” says Brian Clarkson, president of Moody's. “The key is to manage it.”

More competition should help, but it might just as easily lead to a race to the bottom, as agencies vie to offer the best terms to issuers. Making agencies legally liable for their opinions, meanwhile, would scare them out of the business.

The most appealing reform, in theory, would be to end the regulatory dependence on ratings and let investors draw their own conclusions from “expert” opinions and market data, as they do with shares. (Even the agencies themselves believe investors should be placing more emphasis on other indicators, such as derivatives prices.) But ratings are so pervasive that it is hard to see this being accomplished without great dislocation.

A more practical approach might be to let the agencies get on with their house-cleaning while introducing a reform borrowed from the accounting industry: a board, made up of industry types, investors and academics, charged with policing the agencies' analytical techniques and governance. Rating firms have embraced change, but they will need help convincing the world that they mean it.

[Lafayette]

Good stuff

andrew: Sara over at The Next Hurrah has an informative historical perspective on the subprime fiasco

Good stuff, andrew, very good stuff. History repeating itself, only differently.

Lest we forget -- at the foundation of the inevitable financial calamity is the human Lust for Lucre abetted by a government incapable of keeping the Financial Beast at bay.

A government is there to level the playing field. When it caves in to the Siren Songs of BigMoney, it's the Little Guy/Gal who often loose their ante in the game.

We supposedly live in civilized country, run by intelligent people -- and yet the game rules are being fixed in favor of a privileged group.

BTW, it is nice -- even comforting -- to see the clamoring for "Change!". But, what change? Where? Who is gonna change?

Those answers are going silent ... why are they afraid to tell us? Because we are children and just won't understand? Or, because they are offering us -- we'll see AFTER the elections -- just Small Change.

[Lafayette]

Article: In any case, all of this means that many of the policies being pushed at the moment (such as interest rate freezes) may not be particularly helpful in resolving the crisis.

Oh? And from the point-of-view of the poor fool holding a mortgage that, in the next six months, is going to balloon in his/her face eating up 75% of their net income ... just WHAT does the author prescribe?

[paine]

andrew great citation

[anne]

Sarah-Andrew;

"While FDR died in early 45, and Truman retained all his regulatory policy well into the 50's, and Eisenhower did not change much, nor did Kennedy or LBJ, it began to change with Nixon, with moving up the cap on FHA loans beyond the rate of inflation, and then following the Carter inflation, the regulation of Savings and Loans was eliminated, leading to the crash of these institutions in the late 1980's. Without understanding cause, or the reason for these Plain Jane savings organizations in sustaining middle and working class home ownership -- Congress just bailed out the lenders who had the wit to reorganize, and let it go at that...."

Thank you; I had not considered the change to Savings and Loans deregulation beyond the implications for the bond market. I foolishly never considered the implications for home ownership and the mortgage market.

[Affordable]

"Porches, sun and front were eliminated, Entry Halls disappeared, rooms got downsized, and kitchens became streamlined with the efficient work triangle, but became much smaller."

Yes, FDR understood that the median income person just wanted a safe and affordable place to live. Another reform would be to pass a national law eliminating non safety zoning regulations that only allow McMansions to be built. The median person does not usually want to be forced to work 2 or 3 jobs just to put a safe roof over their heads.

[Expat]

There are plenty of solutions to this problem. I believe all of them are improbable, illegal, unwise, or immoral (possibly all four). We have already cut rates. We have pimped ourselves out to SWF's. We have increased the deficit to assist Americans in buying more lattes.

Washington, Wall Street and the Fed will need to turn to stronger medecine. Freezing mortgages. Foreclosure moratoriums. Bank bailouts with public funds. Deeper interest rate cuts. Public works projects. Increased defense spending. Direct intervention in currency markets. Direct negotiations with China and Arabs over US bonds and dollar holdings. Government "takeover" of Fannie and Freddie.

Arguments about what is legal or "right" will be tossed aside in the name of protecting US consumption and the Wall Street banks.

[ken melvin]

"Change? Spare change?", she said. Euphoric rise, panicky plunge; bipolar lot, ain't we? New Deal hell, we've got us a New Tiger.

[mort_fin]

Dean - of course economists specialized in this area have known for decades (longer?) that price decreases caused foreclosure. Never underestimate the ability of economists to publish the same damn thing that other people have been publishing for decades, often with no citations, and put it out to the press as a new discovery. How else do you get tenure and the ability to attract research money?

[Jay]

Andrew:

Please remind everyone when (and thus under what administration) Gramm Leach Billey was passed.

Lafeyette:
"Oh? And from the point-of-view of the poor fool holding a mortgage that, in the next six months, is going to balloon in his/her face eating up 75% of their net income ... just WHAT does the author prescribe?"

The best solution would be to walk away and go back to renting. Lawyers have always been known for taking advantage of someone else's misfortune to make an extra buck. May I suggest this website....
http://www.youwalkaway.com/

[Barkley Rosser]

I agree with Dean. This is just not news at all to anybody who has been paying even the remotest attention to this problem. These sorts of stories just look sillier and sillier as they appear. What is the matter with these people? This is just not news.

[Lafayette]

Magic Wand Quick Fix

Aff: The median person does not usually want to be forced to work 2 or 3 jobs just to put a safe roof over their heads

Then median-Americans are going to have to understand that the deck is stacked against them. This lot is generally not terribly well-skilled, they work in standard Service Industry jobs. When they work in non Service Industry jobs with union agreements, these agreements assure that their labor is priced out of World Markets ... and their jobs are dislocating by the truckload.

This leaves what for a solution? Here's what:
1) A massive nationwide program to enhance basic secondary school teaching such that America's children rise from 14th to 1st or 2nd in the OECD Pisa rankings.
2) A federally subsidized scholarship program paying state-university tuition (plus a stipend to students to cover Room & Board) to study for a 4-year degree of their choice. And beyond, if the student decides to pursue.
3) That if the student wants a trade rather than a university degree, that schooling plus apprenticeship be similarly offered (as in 2 above).
4) That the stunning cost of Health Care be assumed by a Federal program that extends Medicaid to the middle-class.

The above, in ten years, will fix the problem. But, not before. Don't go looking for any Magic Wand Quick Fix, cuz there aint none.

And, waiting for "Free Market Forces" to fix it is a laughable exercise in futility. We will still be talking about the problem in a decade's time and neither the problem nor the solution will have changed.

What will remedy the problem is dedicated Social Capital investment.

[Affordable]

L..."A massive nationwide program to enhance basic secondary school teaching..."

Under our Constitution, the states have control of education. The fed can only suggest, or offer money in return for some voluntary state action. The states mostly delegate the task to local school districts, with state guide lines. We don't have a single unified system, but thousands of independent kingdoms. School districts even have the power to levy their own taxes, which must often be approved by local voters. Most use property taxes, but some add income taxes, sales taxes, and such.

This leads to wildly divergent quality. Some suburban schools are world class. Some urban schools are little more than holding pens, with rampant violence in the hallways.

[Affordable]

"That the stunning cost of Health Care be assumed by a Federal program that extends Medicaid to the middle-class."

Medicaid pays hospitals rates that are far below cost. That is, hospitals lose money on each and every Medicaid patient. Thousands of hospitals and emergency rooms in localities with a lot of Medicaid patients have closed because of this. Despite population increase, the US has fewer hospitals and emergency rooms each year. Enrolling the middle class en masse in Medicaid would bankrupt most of the rest of them.

[Affordable]

"This lot is generally not terribly well-skilled, they work in standard Service Industry jobs."

Unfortunately, about half our population has below average IQ. About 1/5 of our population even has an IQ in the lower quintile. An advanced degree is not likely to enable everybody to afford a McMansion. We really do need some affordable homes to be built for those who make below median income.

[Lafayette]

A solid education

Aff: We don't have a single unified system, but thousands of independent kingdoms.

You may be right, but is the above a reason or an excuse to avoid radical change? The Federal government cannot set up a suggested secondary education Standard Curriculum and test learning, then allot subsidies to School Systems where students continually improve their scores? (And cannot these subsidies be employed as performance bonuses?)

The figures I am citing from the OECD's PISA's study are real. It is embarrassing that America should have such mediocre ratings, but it is the result of laxity in the matter of Secondary School education. And, that laxity, America is paying for in spades.

If we cannot go to the root of the problem, remedy it and carry on ... just what sort of "Change" do Americans want? Small Change?

Without a solid education resulting in solid skills, the American Dream becomes an unemployment nightmare.

[Lafayette]

Affordable Health Care is a birthright

Aff: Medicaid pays hospitals rates that are far below cost. That is, hospitals lose money on each and every Medicaid patient.

Yes, this is spot on. And, so?

Again, I must cite an international comparison, a ranking of HC-systems conducted by the World Health Organization. I posted the list in this Forum just recently.

The top fifteen countries, some European, have a first class HC system because the prices are mandated. The US has a "market economy" in Health Care, so you have practitioners earning an average $150,000 per year. And a classification of 37th in the list, just after Slovenia but better than Cuba.

Would you like the police or the firemen to employ the same market logic -- they service only those with the best insurance policies and they charge exorbitant rates to do so?

It's insane ... affordable Health Care is a birthright, not a business.

So, if costs have to be mandated by Medicaid to be affordable, then Medicaid must also provide the means to do so -- and this can only mean a parallel system of Health Care, run by people who will work for a decent salary (and not scalpers who have forgot their Hippocratic Oath).

This can be done. I live in a country that has done it, meaning France. The system is very much similar to the US, funded by both a payroll tax and the State. But it covers everyone and is a Single Payment system. (And, yes, the part funded by the state grows every year because the French population, like the American one, is aging and living longer, meaning more Health Care is necessary.)

But, alas, doctors do not run about in BMWs. (Well, some do, in fact, but they are highly regarded Specialist Practitioners.) And, everyone gets to see a doctor before an illness matures into an untreatable state -- because there is a Health Management System. People in the boonies do not go without Health Care because not enough doctors want to live there.

[Lafayette]

Off-track for more than a century

Aff: An advanced degree is not likely to enable everybody to afford a McMansion. We really do need some affordable homes to be built for those who make below median income

I agree. But, I am not talking ONLY about an advanced degree. (Only one third of Americans have them.) Your information, interesting as it is, indicates that we have a class society distinguished by the Scholastic Ability. This latter attribute is not necessarily innate. Intelligence can be provoked by good teaching skills, which must be done in Secondary Schools from the earliest age.

I am suggesting a disciplined Secondary School regimen that leads people successfully to either of two ends, an advanced degree or a trade/profession/skill that a competitive economy needs. Both should result in durable employment at a decent wage.

And, either is better than greeting people with a smile at WalMart or flipping hamburgers at Macdonalds.

I am also suspicious of Secondary School sports that breeds not sportsmanship but "winners", meaning those who are good enough to earn BigMoney in the BigLeagues. Our society is far too competitive for its own good. (History shows us that, in the past, "winners" built civilizations only by enslaving others to do their bidding.)

I doubt our forefathers had "success" in mind as an integral part of "liberty". We began to equate the two sometime later, when the Industrial Revolution permitted a super-rich class of individuals.

We've been off-track for more than a century.

[Affordable]

L..."...just what sort of "Change" do Americans want?..."

As far as I can tell, only some Americans value education. Thus the wide variations in quality. The various teacher lobby groups seem to mostly be interested in higher wages, more benefits, and job security. Performance standards imply that under performing teachers will be fired, or at least receive a reduction in pay. This is politically unacceptable, since politicians can't get elected without lobby group support.

L..."So, if costs have to be mandated by Medicaid to be affordable, then Medicaid must also provide the means to do so -- and this can only mean a parallel system of Health Care..."

Yes, this is true. However, the health care lobbies want a monopoly (higher wages, job security, etc...). Thus laws are crafted to prevent any competing system from arising, whether public or private.

L..."I am suggesting a disciplined Secondary School regimen that leads people successfully to either of two ends, an advanced degree or a trade/profession/skill that a competitive economy needs."

This presumes that our system is capable of figuring out which jobs, and thus skills, will be in demand decades in advance. Constant change seems to be the nature of the modern economy (except for the de jure monopolies, which can simply donate to politicians to prevent change in their field).

You have many good idea Lafayette. I'm just not sure how they can be implemented under our system. It differs dramatically from France's system.

[Lafayette]

Affordable: Yes, this is true. However, the health care lobbies want a monopoly (higher wages, job security, etc...).

Ok, so if we accept that because there is a lobby somewhere promoting its self-interests, that mean that the common good is lost?

Only if we let it. Let's send people to Congress who don't want lobbyists mucking about with the political agenda. And, if they don't want to take a hard stance against lobbyists, then surely they have a personal, vested interest in not doing so. (Like they don't give a damn about you and me, but about getting reelected with the "help of their friends".)

Meaning, let's tell 'em to go to hell. They either go to Washington to represent you and me or simply themselves -- there's no two ways about it.

And, if it has happened, it's because we let it happen. So, no complaints, folks. We have met the enemy and he is us. (Pogo)

[J.C. Ernharth]

I'm all for the intent of the post just above from Lafayette. But who are we kidding when the banking system is functionally a system of collusion between central bank and member banks who are in the business of assigning value to freshly minted credit and money and earning a (in many cases a very fat) living off of it? Money and credit invented from nothing gets its value from real producers whose production backs ever dollar they use. Not so with this quasi banking cartel that can simply push a few keystrokes and lay their claim to the allocation of scarce resources.

All said, we can dabble as we might in the exercise of what changed since it was "fixed" by FDR, or what have you, but this is still the game of papering over what is fundamentally flawed. The massive clustering of errors that are now exposed in housing, mortgages, and credit in general were enabled by sending the market false signals in terms of a fixed price for money and credit. The Fed are nothing more than price fixers who make up for shortfalls in immediate supply of savings by printing over the difference. Activity that would quickly cease expanding at a low rate invariably compounds when the natural braking process of rising rates is short circuited.

This is not Minsky moment. This is the byproduct of dislocating production based savings from the productive economy, and into hot money areas nearly entirely dependent on the economies of low rates for viability. It is thus that we have absurd, unsupportable median home prices in so many regions and an absolutely ridiculous oversupply of condos up and down the East Coast -- especially in Miami. Clearing those errors should be priority one to restore order, and instead we watch as the Fed wishes to assist its members in keeping blood supply to these economic malignancies. This is not the free market in any shape or form. This is cartel-based centralized banking.

In other words, if you wish to fix the problem, address it at the root and stop dabbling with fixes that chase the many symptoms of the root problem.

[Ryan]

"Unfortunately, about half our population has below average IQ. About 1/5 of our population even has an IQ in the lower quintile. An advanced degree is not likely to enable everybody to afford a McMansion"

Classic.