So now that we're in this handbasket, how do we get out?

September 15, 2008 3:25 PM

Okay, so a bunch of US financial firms are in a mess. What can/should be done about it?

I've got a pretty okay handle on what's went wrong with Bear Sterns, Lehman Bros., Freddie and Fannie, and the housing market crisis in general, I think (although if someone has a really awesome explanation and wants to post it, that's fine). I'm seeing a lot of articles saying things are a mess (to varying degrees), but I'm having trouble finding anyone saying what should actually be done now that we're in the mess. What can and should Congress, the Fed, the Treasury Department, whoever do? Anything? Do we just not know?

I'm reasonably financially literate (I'm an economics major who hasn't taken any classes about finances specifically, but I read financial publications on a regular basis and feel like I have an okay handle on them), but if the answer is really specific and complicated, I might need a little bit of an explanation - in particular, I get a little confused about all of this derivative trading business.

posted by dismas to law & government (11 comments total)

There should be caps on how much credit people can have. we're no where close to the bottom of the housing and related crises and when the dust settles, we will see very clearly what letting joe blow borrow ten times his yearly income with a zero down payment on his house will do to the economy. It will hurt you and me, and there is a very clear Constitutional precedent about not infringing upon the rights, happiness etc of others.

What should be done now? Nothing. No bailouts, no programs, no zero am loans. We should burn off the bad money just as fast as we let it creep in and get its tendrils all over everything. It will get so bad that so many people lose their homes that it may make sense to let them rent the homes from the bank-- because the bank won't be able to sell that much inventory anyway. Of course this monumental bitch-slap of an economics lesson won't sink in for the masses anyway. The same cycle of cheap money and bubble think will again pervade our markets.
posted by No New Diamonds Please at 4:10 PM on September 15, 2008 [1 favorite]

What should be done now? Nothing. No bailouts, no programs, no zero am loans.

Absolutely. Bailing out only tells the banks that "we'll clean up after you." It doesn't teach them how to address the problems and avoid another crisis. While it seems heartless to let companies go under, propping them up doesn't help in the long run. Alitalia, anyone?
posted by TravellingCari at 5:37 PM on September 15, 2008

Actually, changing the mortgage interest deduction to a straight tax credit would fix everything, but don't nobody tell Congress this because as a renter I want prices to keep falling.

AFAICT this is about an $80B line item in the federal budget. Increasing this to $200B/yr would result in an increased buying power of at least $200,000 per buyer.
posted by troy at 5:48 PM on September 15, 2008

If you value the idea of capitalism, you have to let these institutions fail. Help them fail gracefully so as not to shock the entire system, but they must fail. Socializing the losses, ultimately, is a losing proposition for those people (read: the other 99% of the economy that actually works for a living) who never got to reap the rewards in the first place.
posted by mark242 at 7:25 PM on September 15, 2008 [1 favorite]

I think they have got it about right with the bailouts. You can't bail everyone out and Lehman had too many chances to get its house in order and failed. This sends the message to other institutions that a bailout is not guaranteed just because you are big and important. Get your shit cotogether. However, the system we have now which separates the loan originators from the loan repurchasers is broken. The repurchasers lack sufficient information to know what they are buying. Markets work, but only when sellers and buyers have sufficient information. The loan sellers have been motivated to make tons of loans regardless of risk because they knew they could sell them into a hot market. That market is not so hot anymore, but far from dead. If we could find some way of providing the buyer with a better measure of their risk, sort of like a bond rating agency, then perhaps things would be better. The other area where we could help is putting a few judicious limits on some of the riskier areas like balloon payments, interest free loans etc. We used to have strong consumer protection here but is has eroded. We will feel a lot more pain before this is over and there probably is not too much that can be done about that. Most of the solutions are helpful for the longer term. There is a lot of talk about regulating existing loans, essentially redoing the contracts between lender and recipient, to essentially limit the lender's ability to ratchet up the interest rates on variable rate loans and other things. Perhaps, but one would think that a lender wants to balance default rates versus return on equity.
posted by caddis at 8:05 PM on September 15, 2008

I used to work for a banking consulting firm, staffed almost exclusively by pretty right-wing types with prestigious MBAs. The president of the firm was about as socially conservative as they come. But he advocated strong government regulation of all financial firms, because he said bankers and their ilk "just don't know what the hell they're doing." He said that without regulation, they chase fads, give out loans based on ridiculous ideas (like lending millions to Trump based solely on his name, and getting no collateral at all), and generally behave like children on too much candy. The power of controlling that much money messes with their logical thought, he used to say, and they'd just give away the company's assets willy nilly if they were allowed to.

He personally continued to vote Republican. But he didn't vote that way because he thought de-regulation was a good idea -- he thought it was a disaster, and pointed to the S&L crisis as proof. (This was in 1990-91.) He voted for Republicans because failing banks and financial giants were the source of his tremendous personal wealth

I never liked the guy (being a liberal through and through), but he certainly made sense, and he made a significant fortune telling bankers how to get out of the messes that he claims de-regulation let them get in.
posted by Capri at 9:04 PM on September 15, 2008

If we could find some way of providing the buyer with a better measure of their risk, sort of like a bond rating agency, then perhaps things would be better.

I think you're being facetious here, but I'm not sure. The failures of AMBAC, S&P, Moody's, etc., contributed greatly to this gigantic mess. Should a CDO of mortgages made to subprime lenders who have absolutely no way of paying off their mortgage really be rated AAA? Because they were! That's why Lehman et al bought them; triple-A rated, with a huge return? Sure, give us all of that we can buy! We'll leverage ourselves out the ass just to buy more of that triple-A crack that you're selling! Had the debt issuances been rated correctly, we likely wouldn't be looking at the financial wasteland we're seeing today.
posted by mark242 at 9:25 PM on September 15, 2008

I think you skipped over the word "better."
posted by caddis at 9:51 PM on September 15, 2008

George Soros's book has some good perspective on this situation.
posted by Coventry at 4:23 AM on September 16, 2008

The *best* thing you can do now for yourself and the country, is to find businesses that aren't screwing up and invest in them. Find banks that aren't invested in overly risky mortgage derivitives and deposit money in them. Give them a little capital to work with- the credit crunch is hurting the good guys.

Regulation wise, I'm not so sure. I mean, loan contracts have huge print that say what your payment will be and how much you owe and the like. Maybe adding a rule that shows what the payment will be for the first few rate increases in a similar manner.

But really, you can't regulate greed. The gamblers will find something else to abuse and wreck.

In cleaning up the mess, they need to find out if there was any deception in the credit ratings of these investments. If there wasn't, fuck 'em. These guys were playing the lottery and lost.
posted by gjc at 5:15 AM on September 16, 2008

Thanks for the answers, everybody. If anyone else stumbles upon particular editorials or web sites that recommend specific regulatory changes, I'd love to see them.

It does seem as if there's no point it doing much of anything until we know where the bottom is, and that won't happen until housing prices stabilize. Right?
posted by dismas at 1:30 PM on September 17, 2008