October 16, 2008

What McCain said about buying up bad mortgages.

After last week's debate, I wrote:
I should have paid more attention to this [McCain's proposal that the government buy up bad home-loan mortgages and reset the value of the loan]. I heard it last night, but couldn't understand how it would deal with the crisis. It seems like a massive government benefit going out to people who overextended themselves taking loans. Why not give money to all the frugal people who believed they couldn't afford to buy a house? I don't understand the theory, other than as political pandering.
During last night's debate, I felt like I was getting a personal response from McCain:
Now, we have allocated $750 billion. Let's take $300 (billion) of that $750 billion and go in and buy those home loan mortgages and negotiate with those people in their homes, 11 million homes or more, so that they can afford to pay the mortgage, stay in their home.

Now, I know the criticism of this.

'Well, what about the citizen that stayed in their homes? That paid their mortgage payments?' It doesn't help that person in their home if the next door neighbor's house is abandoned. And so we've got to reverse this.
Is that a good enough answer?

By the way, this problem reminds me of the parable of the prodigal son, specifically, the complaint of the other son:
And he was angry, and would not go in: therefore came his father out, and intreated him.

And he answering said to his father, Lo, these many years do I serve thee, neither transgressed I at any time thy commandment: and yet thou never gavest me a kid, that I might make merry with my friends:

But as soon as this thy son was come, which hath devoured thy living with harlots, thou hast killed for him the fatted calf.
Don't conservatives usually sound like the older son, irked with the way liberals wreck the incentive structure? But McCain is like the father in the story:
Son, thou art ever with me, and all that I have is thine.

It was meet that we should make merry, and be glad: for this thy brother was dead, and is alive again; and was lost, and is found.

42 comments:

Chip Ahoy said...

I never cared much for that prodigal son story.

mcg said...

Except that "all that I have is thine" means something rather different. In the prodigal son case, all the father has is rightfully owned by the father. In this case, all the father has was confiscated from the son by the IRS.

Revenant said...

McCain is like the father in the story... if the father had been giving away other people's money instead of his own.

Jen Bradford said...

Makes me think of the old New Yorker cartoon where the Dad spreads his arms expansively in his living room and says, "someday son, all this will be mine!"

Synova said...

The alternative seems to be having the property revert to the bank.

Then the bank has to revalue the property and sell it again at the value the market can bear... so the bank eats the difference.

And if the banks can't do that without going under, then the Feds have to bail out the banks or we're in bad trouble. A little bit of doing this ought to be figured into the business decisions of the bank... which would, of course, make them reluctant to give out any mortgages that might be more than the property is worth if the housing market goes south tomorrow.

(And everyone, particularly the federal government, was promoting "home ownership" by removing a great deal of the risk, which means shorter term natural corrections to bad practices didn't happen.)

(Like preventing forest fires until there is so much dead wood and undergrowth that when things finally catch fire they burn the whole forest down.)

So the government still eats the difference with our tax dollars.

I don't know how this is avoidable without simply letting the banks go under.

The only difference is keeping people in their homes with smaller mortgages, or kicking them out, and then selling the vastly devalued property to someone else. Even if it's fundamentally unfair... it seems better to try to keep people in their homes.

Synova said...

I can think of a different parable that might be better... it doesn't perfectly match, but at least it doesn't include "daddy."

It's the workers hired to take in the harvest... the ones hired in the morning were promised one wage. When more workers are needed through the day, each is promised the same wage. At the end of the day, in one last push to get done, even more workers are hired.

When they all line up to get paid, the workers who labored all day long noticed that the workers who only worked for an hour got the same pay. When they complain they are told that they are getting the wage they were promised.

I think the lesson meant to be taken from it is that comparing your own situation to someone else is not wise or useful.

My best friend in high school had a severely disabled child and she dealt with that some... she had done everything right, and yet he suffered a birth injury (umbilical cord strangulation) and was delivered early when the doctor didn't find a heart beat during an exam, while she knew so very many girls who smoked or drank or did all of the things that were supposed to result in injuries or low birth weight or mental retardation... their babies were healthy.

Cosmic levels of unfairness.

It just doesn't help to dwell on it. And she certainly wished no misfortune to someone else just to make it seem less unfair to her.

Pastor_Jeff said...

The prodigal came to his senses, recognized his wrong, and approached the father with an attitude of humble repentance.

The father didn't bail him out in the far country.

Zeb Quinn said...

Actually, the answer is simpler than all that, and the doctrine is a different one than that in the parable of the prodigal son. It's closely akin to a concept we learned early in law school. The clean hands doctrine. Yes people over-extended themselves, but the government's hands are very dirty here, and especially dirty are the hands of some powerful but crooked politicians, so all in all it's right for a government program to in some degree assist those with sub-prime mortgages.

MadisonMan said...

But did the prodigal son learn anything?

What's to stop those bailed out from making the same mistake again in the future...why not? The government will just bail them out!

Or maybe everyone's learned their lessons now -- some expensive lesson -- and we can all be happy. Whee!

Revenant said...

all in all it's right for a government program to in some degree assist those with sub-prime mortgages.

Why? They're the ultimate cause of the problem. If the people who took out subprime loans would make their payments, we wouldn't have gotten into this mess in the first place.

We need to keep the banks afloat for all our sakes. But the deadbeat borrowers -- calling them "homeowners" when they have negative equity is a bad joke -- don't deserve a bailout, and it isn't in the interests of the rest of us that they get one.

Theo Boehm said...

Makes me think of the old New Yorker cartoon where the Dad spreads his arms expansively in his living room and says, "someday son, all this will be mine!"

Jen, I'm thinking of the one with the dad in rags holding up a little tool in a threadbare living room and saying to his kid, "Someday, son, this awl will be yours!"

Always favoring obscurity and indirection, I'll leave it to everyone here to write his or her own morals for this scene.

Synova said...

Okay... how about the credit rating hit... but keep the mortgage.

Make it so that the homeowner has to stay in THAT home because they absolutely can not, and will not, be qualified for a mortgage again... as if they have a bankruptcy to outlive.

Actually... this seems like it would satisfy some people's need for a sense of fairness.

Yes, they get to keep the house... but they can't buy another, can't "flip" the house if prices go up and they gain equity to move into a larger, nicer place, while their neighbor is still making up the difference between what they owe and the devalued value of their property.

Is this worth suggesting to our elected idiots?

blake said...

Just let me know when I can stop paying my mortgage....

Joan said...

I always thought the key take-away of the parable of the Prodigal Son was that the Father, in this case, is God, and with God, you're not talking about a finite set of resources belonging to the father and available to be parcelled out to each son. It doesn't matter how God rewards anyone else, it does not affect in the least what is available to you. In the physical world, we know that the pie is only so big, so if someone else is getting a bigger slice, your slice will be smaller. But when we're talking about eternal rewards, those rules don't apply.

In the real world, there are too many prodigal children who crawl back home for forgiveness, get back on their feet, and then strike out again having learned nothing. Eventually the parents have to put a stop to those "homecomings" or else they'll have nothing left for themselves. But God can always welcome back a prodigal, because He is not constrained that way.

Rose said...

In some cases, people are defaulting because of a balloon payment, or a stepped up interest rate - simply forcing a re-negotiation that keeps the payment at something they have been able to afford MAY stop a good deal of default and foreclosure. The last thing the banks want is to foreclose and have to deal with a house, particularly one that has gone down in value.

May not be perfect, or well articulated, but I agree with Synova.

Revenant said...

The last thing the banks want is to foreclose and have to deal with a house, particularly one that has gone down in value.

If the last thing the banks want is to have to foreclose, the banks will renegotiate the rate all on their own. The fact that the government needs to hold a gun to their head to get them to "renegotiate" the mortgage proves that doing so is not in the best interest of the banks.

rhhardin said...

Rilke on the Prodigal Son

bearbee said...

Steve Forbes at the Oxonian Society

Attempts to puts things into perspective, explains disastrous effects of mark-to-market, naked shorting, SEC mistakes and Fed miscalculations, etc., makes recommendations.

video 56 min.

Ophir said...

Son, my friend, let me fight for you.

Pundit Joe said...

Hi Ann,
The story of the prodigal son can be interpreted as one of compassion on a personal level. Compassion on a personal level is usually a good thing, but compassion on a macro level is often anything but.

That’s how we got into this mess in the first place. Lawmakers wanted to help low income folks buy homes, so they changed the rules, abandoned common sense for compassion. As a result, we have a damaged economy and a whole lot of folks that will lose their homes.

Yes, conservatives sound like the irked son because we know you cannot make such things general policy. Conservatives know that wrecking the incentive structure and abandoning common sense only invites disaster. And yes, McCain’s wish, in this case, does irritate conservatives because he doesn‘t seem to understand that fact.

Policy must be based upon reason an logic. Show compassion in your daily life, but know that compassion on a macro level will often lead to more harm than good.

MarkW said...

The alternative seems to be having the property revert to the bank.

Except that having the government step in in this way may make the problem much more expensive than it would be otherwise. Most of the people whose homes are 'underwater' are not in subprime loans and have not lost their jobs or their ability to pay their mortgages -- are we going to given them a financial windfall by repricing their homes? If not, can't they get in on the deal by just missing a few mortgage payments?

It's going to really suck if the way to come out of this disaster smelling like a rose was to go into it being as reckless as possible -- buying a house much far expensive than you could afford and having the government buy a big chuck of it for you (while the way to fall behind was to have been prudent and sensible and, therefore, not be able to qualify for the big bail-out).

If we're going to do this, we need to make sure the government and/or mortgage holder gets an equity stake in those houses equal to the repricing and they get first crack at any capital gains that eventually result (plus interest).

marklewin said...

Let's take $300 (billion) of that $750 billion and go in and buy those home loan mortgages and negotiate with those people in their homes, 11 million homes or more, so that they can afford to pay the mortgage, stay in their home.

Is this not a form of income redistribution?

MarkW said...

Is this not a form of income redistribution?

Yes -- from the sensible to the foolish and possibly, too, from the middle-class to the rich:

"But as I noted in my column yesterday, the 11 million figure is his campaign's estimate of borrowers with negative equity (who may be perfectly capable of paying off their current loans), not borrowers who are about to lose their homes to foreclosure. Does McCain really think middle-class taxpayers should be forced to subsidize wealthy homeowners who bought mansions at inflated prices?"

http://www.reason.com/blog/show/129511.html

hdhouse said...

eviction and homelessness, particularly for a family is overall as costly as using the emergency room for primary family medicine or preventive medicine in general.

the host of social spending required to get a family off the streets and back on its feet pales to the amount it would cost to just bail them out.

on this, McCain is partly right and this is, at base, something of a good idea.

it still doesn't go anyway in the present allotment of Paulson largesse and I doubt anyone in the current Washington gives a rat's ass about helping any individual for fear that they may be a social liberal and thus little better than cannon fodder for the overseas adventurism.

Original George said...

Madison asks whether the Prodigal Son learned anything. In the long run, maybe not. He admitted that he had done wrong. He was forgiven and given another chance.

I always wonder what would happen if there was a sequel to the story. Does the famine continue? Do the hired men get laid off? Does the father have to sell the other son's parcel? Do the brothers reconcile?

Larry J said...

blake said...
Just let me know when I can stop paying my mortgage....


You can stop paying your mortgage when it's paid off, just as my wife and I have done.

Is this not a form of income redistribution?

Yes -- from the sensible to the foolish and possibly, too, from the middle-class to the rich.


Add to the price the costs involved with having the government renegotiate some 11 million mortgages. Bureaucrats aren't cheap and aren't known for their efficiency.

In the meantime, those of us who lived within our means and paid off our debts get the priviledge of paying off others' debts as well.

El Presidente said...

The point of the prodigal son is that we all sin and God loves us regardless of our sins and is willing to accept us back into his fold despite past sins. The prodigal son's brother also sinned and was still loved by the father, it just isn't the point of the parable.

A better parable is The Ant and the Grasshopper. The ant worked mightily all summer long to build stores of food so he could survive the winter. The grasshopper laughed and played all sumer long. When fall came, the grasshopper realized that he did not have enough food to survive the winter. The grasshopper had the bird to force the ant to give him some food.

And don't even get me started on Henny Penny.

rhhardin said...

I left a large square of backyard unscythed when I noticed that the rooster seemed to like the seeds that the grass had started putting out.

It's the parable of the rooster and the mower of lawns.

rhhardin said...

Alan Greenspan quote of the day:

“Being able to profit from the loan transaction but transfer credit risk is a boon to banks and other financial intermediaries which, in order to make an adequate rate of return on equity, have to heavily leverage their balance sheets by accepting deposit obligations and/or incurring debt. A market vehicle for transferring risk away from these highly leveraged loan originators can be critical for economic stability, especially in a global environment.”

That would print under The Clouded Crystal Ball as a New Yorker squib.

The actual trouble is that executive types don't understand what the tech types are doing, which is as bad for regulators as for CEOs.

Stability is difficult to analyze, and is another step beyond even knowing how the system works. Namely whether there are any slight perturbations that will grow on themselves or not in such a system.

You don't want there to be any perturbations that can grow on themselves. The wing comes off sooner or later if you miss one.

Larry J said...

A better parable is The Ant and the Grasshopper. The ant worked mightily all summer long to build stores of food so he could survive the winter. The grasshopper laughed and played all sumer long. When fall came, the grasshopper realized that he did not have enough food to survive the winter. The grasshopper had the bird to force the ant to give him some food.

And don't even get me started on Henny Penny.


You might want to throw in the Parable of the Talents as it relates to Obama's stated goal of "spreading the wealth around" verses McCain's goal of growing wealth.

rcocean said...

Joan are you talking about God or the Federal Reserve?

Oligonicella said...

So, you believe that the government is the actual owner of all the money involved instead of the bank investors? If not, why do you think the parable is relevant to the discussion?

rhhardin said...

Money is not wealth. It's a ticket in line to say what the US economy does next, presumably something for you.

The Fed constantly regulates the number of tickets outstanding so that they are not so few that they leave parts of the economy idle, and not so many that they bid up prices in a too-busy economy. It either prints new dollars or burns old ones, by buying back or selling debt, repectively.

Tickets work like wealth to an individual, but not to a nation.

So long as the temporary new tickets don't compete with old ones, there's no actual taxpayer cost to the bailout.

The old ones, for the moment, have mostly gone into mattresses and are not bidding for anything, leaving the field clear for new ones.

Japan got into a situation (a ``deflation trap'') where no matter how much cash flooded into the economy, nobody would spend it. The Fed wants to avoid that too.

El Presidente said...
This comment has been removed by the author.
El Presidente said...

Parable of the Talents (c) 2008

The man who had received the five talents went at once and put his money to work.

'Master,' he said, 'you entrusted me with five talents, which I invested in Mortgage Backed Securities . See, I have 1/3 of a talent remaining.'

Zeb Quinn said...

Why? They're the ultimate cause of the problem. If the people who took out subprime loans would make their payments, we wouldn't have gotten into this mess in the first place.

Unclean hands. Already explained it.

Jamie Gorelick. Franklin Raines. Christopher Dodd. Barney Frank and his boyfriend. And many others. "Handsome profits" doesn't cover it. Way beyond handsome. Tens and tens of millions of these very same dollars in their personal pockets. Under the circumstances it is only right to throw a lifeline to those swirling around the toilet bowl of financial ruin about, to go ker-plunk

Geoff Matthews said...

The tale of the prodigal son is one of forgiveness, so forgiving debts . . .

But, at the end of it, the faithful son got something, the remainder of his father's property, whereas the prodigal son, while welcomed back, had no property.

There has to be some negative consequence, such as having to stay in the home for at least 5 years, or taking a huge credit hit, or even creating a new tax bracket for the recipients of this bailout (1% higher tax rate for life?). Otherwise this is just rewarding bad behavior, which leads to more bad behavior.

blake said...

blake: Just let me know when I can stop paying my mortgage....


larry: You can stop paying your mortgage when it's paid off, just as my wife and I have done.


Pssh. Sucker.

Theo Boehm said...

El Presidente: LOL!

Revenant said...

Unclean hands. Already explained it.

You stated it. You didn't explain it.

Barney Frank, et al, just encouraged the lending of money to the deadbeats. The deadbeats themselves are still the ones causing the problem. If I lend you a thousand bucks and you blow it on cocaine and hookers, well shame on me for lending you the money I guess, but you're still the only one failing in his responsibilities.

nder the circumstances it is only right to throw a lifeline to those swirling around the toilet bowl of financial ruin

It is the exact opposite of right. Your logic is "since these dipshits couldn't be trusted with money, let's give them more money". Fuck those people; they can rent.

knowitall said...

I hear these liberal illuminati talking about the bailout will help us. Well if I stayed in my home and paid the bills, do I still get help? It wasn't easy, but I managed to do so. Oh I forgot, the socialist way says you can be behind on your bills, but people like me that aren't have to come to your rescue.

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