I heard something on the radio that those executives were given bonuses for making those loans, so they went crazy.

I just heard Gerald Celente on the radio and he predicted this will be worse than the Great Depression because back then, few people owned homes, credit cards didn't exist, we had a manufacturing base and we weren't at war so had huge surpluses. He said to put your money into gold and only put enough money in the bank for daily expenses. He said the good thing would be to let the Big Guys sink because it would bring back the mom and pop small businesses which couldn't compete and people would become more community oriented.

http://www.trendsresearch.com/

I think we will be going back to the barter system, since most people are cash poor but have plenty of stuff to sell.

Barter, are kidding? what average suburban dweller has in a way of barter?

Velvetsky, I understand. I once worked for a small business with 17 staff. I handled the finances and payroll at the time, (which was good, it taught me a lot). The only time we went under was when someone owed us a big amount and delayed paying it. That's what it took to go into the red. Often the companies could afford to pay that big bill, too.

I apologize in advance for what I know is going to turn into a long post, but I just ran across this article this morning:

U.S. Heading for Slump, With or Without Bailout

A bank-rescue package ``is not going to save us from recession,'' said Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts. ``It will only prevent it from getting a lot worse.''

Or so they hope, as there's no firm evidence offered to support this assertion. I keep hearing the same refrain: "This bailout won't stop the recession, but it might stave off a depression!" Yet when I read what's going on in the country that's causing this financial meltdown: plunging home values (house prices in 20 U.S. cities declined in July at the fastest pace on record), and consumer spending has cut way back, it seems clear to me that the problem is not with the bank being unable to lend, but rather with the shaky foundation on which our economic expansion has been built.

Take, for instance, this quote: "Faced with stalling consumer spending and fading profits, companies are also starting to rein in their outlays and pare their payrolls. Industrial production fell in August by the most in almost three years as slower car sales prompted automakers to cut back on output. Data coming out Oct. 3 are expected to show that jobs declined another 105,000 this month, after an 84,000 drop in August, according to economists polled by Bloomberg News. Tighter credit is also beginning to take its toll on companies as earnings slow, making them more dependent on loans to expand their businesses."

Why would you need a loan to expand your business when demand is decreasing and unemployment is rising? Such examples that are being used to justify this bailout do not make sense. Financial analysts point to plummeting home values as the culprit, stating (with a straight face) that we just need to "put a floor under home prices" in order to stabilize that economy, but there is no such thing as a "floor" for home prices. Home prices rise and fall according to how much a purchaser is willing to pay, period.

But why do they want to "put a floor under home prices" anyway? Because they want the consumer to continue to go to the bank and ask for larger and larger home equity loans so that they can take that money and spend it on cars, furniture, appliances, televisions, landscaping projects, etc. This crazy rise in home prices was encouraged by lenders in order to provide the opportunity for the consumer to borrow more money to keep the economy stimulated.

But then we hit a glut. We had too much housing on our hands, real estate markets were flooded with condos and new single family homes and there wasn't enough demand to keep it propped up, so prices began to fall and BLAMMO! -- the consumer is no longer hustling to the bank to ask for larger and larger loans, which means that our economy, which is fueled by spending, is screeching to a halt.

The underlying problem is not that credit is tight -- the real issue is that we have no alternative engine for growth. Our entire economy relies upon ceaseless consumption, and ceaseless consumption relies upon borrowing. Once the consumer cuts back on spending, as we're seeing here, the whole thing starts to wobble and people begin tearing their hair out on live TV.

I'm not making a judgement against spending and consuming. I enjoy spending and consuming as much as the next person. What I am making a judgement about, however, is the bad financial policies that encouraged an international borrow and spend spree that was impossible to keep propped up.

When you read that this bailout won't prevent things from getting terrible, but WILL prevent things from getting horrible, ask yourself who benefits from the bailout the most? My answer is Washington, D.C. and New York City, precisely the very people who are on television and in newspapers screaming about how necessary this bailout is for our very survival. For their survival? Yes. For our survival? We're already toast.

The bailout will not solve the housing bust, and the housing bust is what got us to where we are now. You can't mandate housing prices, so home prices will continue to fall, unemployment will continue to rise (because the housing boom was responsible for our record low unemployment levels), spending will continue to decrease, businesses will curtail expansion, etc. until we reach a point where demand is once again supportable and the slate has been wiped clean.

The only thing that $700 billion dollars CAN do is temporarily prop up the stock market, granting the financial players enough time to dump their stock portfolios on whatever sucker will eat them before everything completely bites the dirt. It sounds cynical, but it's merely self-preservation in action. Big financial players have the means necessary to force a political solution, and they're using it. I fully understand. But I really don't like the misinformation regarding how Main Street is going to suffer a world of hurt if this bill doesn't pass -- that kind of hyperbole is designed solely to cause consumer panic and get this bailout shoved through Congress.

I mean, really, what kind of rationale is: "Do this or you'll be sorry!" That's the kind of language people use when they have no genuine solutions or answers at their disposal.

First, FMae and FMac do not do their own lending. They buy mortgages from various mortgage brokers, banks, S &Ls (ie the companies who actually do make the mortgages) and package them and sell them as securities. One of their problems (FMae & FMac that is) is that they did not require proper underwriting for those mortgages; another was that they engaged in creative accounting (eg over-valuing their assets, etc.). But then the mortgage brokers themselves were doing the same things--playing fast and loose with mortgage requirements and passing the risk on to someone else.

The problem is, they won't because they are not honorable........

And their executives were handsomely rewarded, so they kept doing it.

I occasionally have lunch with a friend who works for a major corporation. Every time I've visited her office, as I walk through the department, I notice that there are more and more empty cubicles. When I see a new face, it has been a temp -- not just admin type temp, but professional temp -- IT or accounting, often from India. It's cheaper to hire temps because the company doesn't pay any benefits.

So maybe there is job security in being a temp, which is a bit of an oxymoron.

I wish I could buy gold but if I took my money out of my retirement fund, I will be socked with a huge pre-retirement tax bill. It's in a global index fund because I knew years ago that the US was in trouble so figured I'd be safer spreading my risk out to the rest of the world. But with a global economy, there is a domino affect. A friend said to marry a rich man, but if he's rich today, will he be rich tomorrow?!

I understand about dishonest, shady lenders and the huge mistakes made of lowering lending requirements, etc. for home buyers.

But what about personal responsibility on the part of home buyers? That seems to be the pink elephant in the room, and I sure don't hear any politicians talking about it.

If you make $50,000 a year, what in the world would make you think that you can afford a mortgage of $400,000-plus?

I've seen people getting into homes in which they can't even afford to furnish. They are house poor. Or, they were just paying "interest only" and never any principle.

It's amazing how foolish people can be when they decide they want something. I place blame on them as well.

Fiscal responsibility is important on every level.

Word. That's part of what kills me about the whole thing. What do they mean when they say "We are going to keep people in their homes"? Does that mean that those of us who were responsible and lived within our means are going to pay the mortgages of the irresponsible ones who bought outsized McMansions? Am I going to have to pay for folks to stay in homes three times the size of mine?

GRRRRRR.

VS, ITA. Personal responsibility is an issue often swept under the rug.

In total agreement with you VS.

That's what happened here in Southern California. People were getting loans for $400 to $500K homes when they were only making between $9 and $10 dollars an hour at their fulltime job(s). Another problem (in my county) was that most of the people who were getting these loans could not read in english. So, they had no idea about ARM's etc. that would turn around and bite them in the butt later on. But at that same time, ***if it sounds to good to be true, then it is.*** It's just common sense. Guess people didn't want to think about that at that time. And, the lenders who financed these deals should be in jail. They knew what they were doing and it was just plain greed.

Since the economy is in a tailspin, it sure has made me examine my spending habits. I have put away the credit cards because credit cards make things a bit to easy. I'm just sticking to the basics and buying things that are a neccesity and not a want. Hubby and I are alright financially but could improve in some areas.

This whole thing that is happening really sucks but it woke me up and that is a positive thing.

Nathan, I don't suppose you'd like to run for president? I'd proudly wear your campaign button.

As for the McMansions ... when DH and I would drive past neighborhood after neighborhood of these, we would ask each other -- who on earth can afford these? What do they *do* for a living? Because we both make a decent living, and we couldn't come close to being able to afford one of those. Well, now we know. Some people can afford them, but many can't and bought them anyway because they were led to believe they could. Those balloon loans ("Just pay a low monthly payment now! You won't have to sell your soul until, oh, at least five years down the road!") are just plain evil, and now we're all going to have to pay a price for them.

I'd like to think there may be a bright spot on the horizon here, which is that we'll learn something from this. I'd like to think we won't base our entire economy on such shaky grounds in the future, and that we'll do a better job overseeing our financial institutions. But I certainly don't see any quick fix on the horizon. This will be a long, bumpy road.

IMHO, there's a lot of blame to go around here. First and foremost, the people that bought these houses were completely and utterly irresponsible. Going in with no down payment, not enough income, and in many cases it was compounded after the fact as increased property taxes, based inflated appraised values hit a lot of folks by surprise a year later. Then you have the developers that kept building; realtors who would do anything to make a sale; appraisers who asked what a property "needed" to appraise for instead of doing their job, and lenders who kept churning out the loans. Then you have a governement, who kept relaxing rules, and turned a blind eye to what was going on.

As a banker, I get touchy when people blame the banks. "Bank" is a very broad term, that currently includes many types of financial institutions which bear no resemblance whatsoever to small, community banks I've worked for over the years. One statistic I saw estimated that over 90% of the sub-prime mortgage debt was originated by lenders who don't fit the traditional definition of a bank at all. About four years ago, I was very tempted to cross-over to the "dark side" and work as a mortgage broker. Many of my colleages had done so and were making 3-4 times what I was in my community bank setting, but something held me back. Working mostly on the "law-and-order" side of banking as a Compliance Officer, I knew something was wrong with the picture.

This is what made me cautious: In my own neighborhood, the house next door was purchased by a nice couple, 3 kids, late 20's. He was a self-employed handyman that didn't ever seem to go work and she was a self-employed daycare provider. The house was new construction, originally listed at $247,000 by the builder. Our county appraiser's office has all property values on-line, so I do a little checking, knowing that when a property is sold, the county always adjusts the value to the sales price, and see that the county has the house listed at $297,000. Huh? Sold for more than it was ever listed for? After talking with my new neighbor, I figure out that they didn't have enough down payment, so the sales price was inflated, with an appraiser's help to make it look like the house was worth more, and builder's involvement (he borrows $50,000, gives it to the buyers under-the-table, and they use it for their downpayment and he gets it back at closing). She's just telling me all this, like everyone involved were the nicest people, and thinking that it was absolutely normal! Less than 1 year after they purchased the house, I was awakened in the middle of the night by a very loud diesel truck and loud clanging and banging only to see one of their vehicles being loaded on a flatbed by a repo company. A couple months later, the For Sale sign went up. They were asking $330,000, because after all the commissions, fees, and other debt they had accumlated, that was what they needed to get out from under the mortgage. When the bank first listed it, they started at $299,000, and it finally sold over a year later for $215,000.

I talked with a couple of the bank's customers who are builders and found out that this practice was quite common and well-known among all parties involved--builders, realtors, appraisers, mortgage brokers, etc. Mortgage fraud at its finest!

You find out more here on POL about what's really going on than anywhere else--and not only about perfume!

Funny you should bring up the current selection of temps to replace workers. At the last hospital that I worked at, they began hiring agency nurses and when regular nurses either quit or were fired, they were replaced by agency (temp) nurses.

From what I understand from a nurse friend that still works there, the place is practically 90 to 95% agency nurses now - you got it, they don't have to pay them benefits, they are not union, no retirement, OT, whatever. So it's happening everywhere.

That's totally true in the government as well. Federal employees are being replaced by 'contractors' where I work. No benefits and they can fire them all at a moment's notice. Comparatively cheap labor.

I've operated that way for more than a decade now (as a temp, then as a contractor, now as a consultant). The hourly rate usually makes up the extra you need to pay self-employment taxes, health insurance, and time off. The downside is not knowing what you'll be doing when your current gig is up, but so far I've been unemployed for maybe 5 months out of the last 10 years. Not too bad.

Thanks, Nathan and Flowergirl, for your very helpful explanations.

The people in the Mortgage loan business were not honest. They sold those mtg's like used cars. They didn't make it clear to people what was going to happen. They do not have a fiduciary relationship with their clients like realtors are required to do. They were not required to go to ethics classes and they were not regulated.
They got huge commissions from those mortgages and only cared about making the sale. It's a very complicated issue. Yet, there were people who were "flippers" and greed took over but................there were also people who got caught in the middle that were not trying to flip and could well afford the home that they were in before they refinanced. I was one.

Thank you! This is exactly how I feel, but when I express it I'm made to feel like a beast. People say, "Well you should be able to trust that people are looking out for your best interest." The bottom line is that most people look out for their own interests first. My husband and I qualified for a half-million dollar mortgage, but we sat down with our own calculator and figured out that it wasn't prudent. We took out a mortgage for less than half of what we qualified for and we are sure happy we did so. It angers me that my property value has plummeted because others tried to live beyond their means.

-Noelle

We have created fantasy ideals of class that are not congruent with reality. It's that British Edwardian model of what a home and family should be that American yuppies seem desperate to shore up. The movie THE STEPFORD WIVES satiries people who live three members (Mom, Dad and a kid) to a McMansion that includes libraries, dens, conservatories, screening rooms, etc.

Nathan, I know I proposed to Demetrue recently, but I wanna marry you, too. Thanks for your spot-on analysis.

Sorry, also wanted to comment that I've seen non-furnished homes firsthand. I do college counseling on the side here in McMansionville and I can't tell you how many times I've walked into a home with little to no furniture. It blows my mind.

-Noelle

I predict that a lot of those areas with McMansions will be rezoned to allow them to be converted into apartments. Otherwise, they will remain empty and become dangerous eyesores. I remember in the older part of the city, there were beautiful old mansions that had been converted to apartments and were run down. So on the good side, maybe rents will come down because so many apartments will be available.

People may also start taking in boarders -- professionals who have lost their high paying jobs and homes -- to help with expenses.

Somewhat off topic, but this reminded me of some of the stories my Grandma told about the Great Depression. They had a farm, and strange men would just show up on their doorstep, asking for food and a place to stay. My Grandpa quite often would ask Grandma to feed them and he'd allow them to sleep in the barn, in exchange for farm labor. My Grandma was none too fond of this arrangement, and one man in particular scared her to death. She said that she slept with a butcher knife under her pillow until she knew he was long gone. My DH & I were talking about this recently and DH remarked that the difference was if a Depression happens today, the people would show up on your doorstep, pull a gun, shoot you and just take what they wanted rather than work for it.

Deeeeeeev, sometimes you act so slutty girl!!!
Are you wearing Tabu again????

I said , one of the reasons, you don't dispute that lenders by law were required to lend to people that did not qualify for a loan, banks were forced to do that. Of course, the more they lend, the more big bonuses they were payed, absurd situation, I agree. But those politicians, that forced the banks to lend to people who had no hope of paying the morgages also should share the blame.

I'm speechless, thanks for telling that.

Flowergirl................I had $150.000 down..............I wasn't irresponsible. I had my investment man tell me to go ahead. I just wanted to move to another house. Not flip..............there didn't seem to be any risk in prices going down when they were going up every month. It was hard to even price a house. Don't ASSume. I had a pretty hefty net worth.

Actually, I'm in Cruel Gardenia today..... heh heh heh.

Of course, on the largest level, we humans manifested this collective incident. Why? This-- even its fringe benefits-- will remain to be seen.

After all, we are fancy monkeys.... Primates. What, in fact do we "own" in this world?

I for one would never depend on an "investment man", banker or anyone else, for that matter, to tell me how much house(car or anything else) I could afford.

I would know.

I try to live by the rule of - "don't bite off more than you can chew".

Sorry, Glo, if you took offense to my post. I wasn't referring to you or your situation at all. In my post, I referred to people going in with no equity. That's one of the worst things about this mess, that people who have legitmate reasons to move a house are stuck in this mess of a market created by others' unrealistic expectations and greed.

I didn't take offense. I just think that everybody isn't clumped into one catagory of people who were all greedy. This is a complicated problem with many factors in it. It's not one person's fault. It just got really really big and all encompassing.

All right, you know things have hit the fan when the Queen starts making noises about a raise:

Queen asks UK Government for pay rise

"Like homeowners across Britain, the monarch has faced escalating prices for fuel, food and home repairs. These have seen the cost of maintaining her position as head of state almost double, but her taxpayer-funded Civil List payment of £7.9 million ($17.5m) has not increased in 20 years - and is not due to be renegotiated until 2010 . . . Two senior MPs who sit on the Public Accounts Committee said they had no sympathy for the Queen's plight and called for the Royal Household's accounts to be publicly audited in the same way as government departments."

In the meantime, doesn't she have a few jewels she could hock?

That's how I feel. No one could throw me a sales pitch that would convince me that I can afford champagne if I make beer money.

Ahhhh, that explains it

Smelka, a lot of people seem to believe that, but it's not quite 100% true. For the past few years, most mortgage lenders still applied the basic tests for credit-worthiness they used when I was a realtor in the late 1980s. But more recently the lenders devised variants of ARMs in which they qualified applicants on the lowest terms. They also devised balloon interest only loans. No regulation 'made' them do this. There has been an all through the economy binge of greed and irresponsibility.

Some home purchasers bit off more than they could chew, but most people's defaults on mortgages came about because of job losses during the last year, as well as people getting in trouble with credit cards and medical bills.

Lately, I never would have expected to agree with Ben Stein, but he seems to have a more compassionate take on the situation than I would have expected as well as a good explanation. Cazaubon, I'm glad you posted the link.

Excerpt:

Nope, that's not correct. If you're talking about the CRA (Community Reinvestment Act) mortgages, those have not been a problem. No thing one was forcing anyone to make subprime mortgage loans, except greed.

At least for some in our area (we do NOT live in one): they bought and sold their homes in CA or NY or CT after making a pile of money on their house and bought here when real estate was lower here, where their money went farther. Or they inherited. Other than that I don't know who could afford them -- others are owned by doctors or lawyers. I know of at least one where likely the MIL paid for a huge chunk of it by selling her home in NY or CT and lives in a MIL side of the house.

I just heard they're "fixing" the bill to make it more palatable by adding $150 billion...

As far as the bill, what about the Acorn part of it? I'm getting mixed messages on that one.

>>>>

I know bankers here were given larger and larger goals that they had to meet for lending every year, to the point where the goals were nearly impossible to meet. Of course, if you met them, then you kept your job -- only to be given higher goals. If you didn't meet them, I presume you were out. These are local bank managers, not the big whigs who make the huge bonuses. And if you were in a higher end of town, you likely could make your goals easier than a bank in a lower economic area.

I'll have to do some research, but somehow I don't think that the majority of the foreclosures are on the McMansions. Those people nearly always land on their feet. I think the bulk of the foreclosures are on modest houses, first-time homeowners, single mothers, that sort of profile. I'll look for the answer and report back.

Some of them were welfare mothers (by some skewed logic, perhaps bankers figured they had a steady income) and illegal aliens in the southwest (again, perhaps skewed logic figuring they got paid in cash and paid no income tax, so they'd always have money).

http://michellemalkin.com/2008/09/24/illeg...-mortgage-mess/

...oops - sorry about my previous incomplete post!

I will quote Jeff Jacoby from the Boston Globe:



This is not to blame one side or another - I don't think any president since Carter is blameless, including Reagan and both Bushes.

And on a lighter note, a tutorial in progressive taxation:

The State of Our Tax System:

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.

The fifth would pay $1.

The sixth would pay $3.

The seventh would pay $7.

The eighth would pay $12.

The ninth would pay $18.

The tenth man (the richest) would pay $59.

So, that's what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. 'Since you are all such good customers,' he said, 'I'm going to reduce the cost of your daily beer by $20. Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free.

But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?' They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount and he proceeded to work out the amounts each should pay.

And so:

The fifth man, like the first four, now paid nothing (100% savings).

The sixth now paid $2 instead of $3 (33%savings).

The seventh now pay $5 instead of $7 (28%savings).

The eighth now paid $9 instead of $12 (25% savings).

The ninth now paid $14 instead of $18 (22% savings).

The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

'I only got a dollar out of the $20,'declared the sixth man. He pointed to the tenth man,' but he got $10!'

'Yeah, that's right,' exclaimed the fifth man. 'I only saved a dollar, too.

It's unfair that he got ten times more than I!'

'That's true!!' shouted the seventh man. 'Why should he get $10 back when I got only two? The wealthy get all the breaks!'

'Wait a minute,' yelled the first four men in unison. 'We didn't get anything at all. The system exploits the poor!'

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D.
Professor of Economics
University of Georgia

For those who understand, no explanation is needed. For those who do not understand, no explanation is possible.

Jeff Jacoby's pretty far to one end of the political spectrum, I don't look to him for impartial analysis.

But Smelka, like I said, the CRA loans have NOT been the problem. Underwriting regulations were written into the legislation and those standards had to be followed. It's the tons of subprime loans having nothing to do with the CRA that have been the problem, as those loans had no regulation whatsoever. Republicans love to blame that program and assume that most people won't know any better than to believe them.

Here's an article that explains it with evidence to back it up: http://www.prospect.org/cs/articles?articl...subprime_crisis

Isabellabird, it is an ad hominem argument.