You Know, It’s a Damned Good Question

Thursday, July 24th, 2008

See here.

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12 Responses to “You Know, It’s a Damned Good Question”

  1. #1 |  z | 

    It would be a good question I suppose if tax dollars were actually going to forgive Freddie and Fannie debt, but that’s not the case. As posed, the premise of the question is false.

  2. #2 |  Cappy | 

    Easily answered.

    They can forgive your debt.

    1099 OID, you become the creditor.

    How so? Whenever you sign for a loan, whether it be car, house, credit card or whatnot, do you see the cash in hand? Or do you see a check or some sort of balance sheet?

    Does the person who fund the loan have to pay for the loan? That is the question. Does the bank truly fund the loan? Or is money created? The bank only has the loan in name only and the only person funding the loan is…you.

    You file a 1099 OID with the IRS and you receive the monies for the loan which in turn you send to the lending organization.

    Only when actual, real cash exchanges hands can it be a valid loan. Otherwise money is merely created and that money is created by the government.

  3. #3 |  Nando | 

    I know I’ll get flamed for this, but here it goes:

    Sometimes, and I’m not saying this is one of them, the federal government should use it’s power and purse to prevent the economy from collapsing. It should only be in extreme circumstances when, if no action is taken, the country faces a good possibility of a downward spiral where recovery would be long and costly (think Great Depression). Today’s economy/market is based on speculation and appearance. If a situation comes around where people loose confidence, we could see the whole system come crashing down (it would have to be a big situation, hence the extreme circumstances).

    Anyone remember the movie Sneakers:

    Cosmo: Posit: People think a bank might be financially shaky.
    Martin Bishop: Consequence: People start to withdraw their money.
    Cosmo: Result: Pretty soon it is financially shaky.
    Martin Bishop: Conclusion: You can make banks fail.
    Cosmo: Bzzt. I’ve already done that. Maybe you’ve heard about a few? Think bigger.
    Martin Bishop: Stock market?
    Cosmo: Yes.
    Martin Bishop: Currency market?
    Cosmo: Yes.
    Martin Bishop: Commodities market?
    Cosmo: Yes.
    Martin Bishop: Small countries?

  4. #4 |  Edintally | 

    Everyone wants to blame the banks and the homebuyers for being greedy. I’m sure there was some of that going on, but am I the only one who remembers how they used to bird dog Alan Greenspan all through the 90s (maybe late 80s as well). Any time there was even a hint of an economic slow down ‘ole Alan would take a walk across the street with all the money guys watching him and trying to predict what he would do with the interest rate.

    Sure enough, a hint of economic slow down always meant a reduction in the prime rate. The lower the prime rate got, the more expensive real property became; you could afford to borrow more but that also meant sellers could raise prices on their property effectively negating any gain in your purchasing power.

    Of course, the bubble finally burst, but has the problem been fixed? Home prices are still too high relative to incomes. Also, somewhere down the line, I don’t think it really matters what new regulations they put on lenders, when the Fed decides they want to stoke the fire again, lenders will find a way to get the money out there to borrowers.

    I’m not an economist but I really think the Federal Reserve is the root of the problem. /shrug

  5. #5 |  freedomfan | 

    Taxpayer money is used to back the Fannie/Freddie debt because those institutions have become too large to fail. It’s a ridiculous situation, but my problem is less that their debt risk is being subsidized in this case than that the law just passed contains no fundamental changes to make sure it doesn’t happen again. (And it contains a bunch of bank pork, but that’s a separate issue.)

    As it stands, Fannie and Freddie have government-mandated advantages over private lenders that ensure that they are so large – and that ensure the next time there is trouble in the housing market, taxpayer money will be at risk again. This encourages them to evaluate risk poorly and make loans they wouldn’t make if they had to play by the rules of private lenders.

    I agree with Alan Reynolds (and many others, BTW) who say they should be broken up into smaller chunks (any of which could be allowed to fail if their lending practices were poor), the special rules for them phased out, and those chunks privatized (relieved of any special connection to the government).

  6. #6 |  Highway | 

    Edintally, you’re right. All those years, they wouldn’t let anything happen to slow down growth, or have any contraction in areas like the housing market. Made for a nice big bubble.

  7. #7 |  Ben | 

    “You see, when a nation threatens another nation the people of the latter forget their factionalism, their local antagonisms, their political differences, their suspicions of each other, their religious hostilities, and band together as one unit. Leaders know that, and that is why so many of them whip up wars during periods of national crisis, or when the people become discontented and angry. The leaders stigmatize the enemy with every vice they can think of, every evil and human depravity. They stimulate their people’s natural fear of all other men by channeling it into a defined fear of just certain men, or nations. Attacking another nation, then, acts as a sort of catharsis, temporarily, on men’s fear of their immediate neighbors. This is the explanation of all wars, all racial and religious hatreds, all massacres, and all attempts at genocide.”
    “The Devil’s Advocate”, Taylor Caldwell 1952

    This is our government. I encourage everyone to read this book and be afraid, because Ms Caldwell saw this coming in 1952 and took it to it’s conclusion of totalitarianism in the US.

  8. #8 |  MacK | 

    I blame the home sales TV shows.
    My home in NC is 3 bedrooms, 2 baths, dining room, living room, kitchen. Cost in 1997 was under 90K, and monthly payments under $600.

    Now on TV a young couple in CA, he is an up and coming salesclerk, she is a waitress and they look at 3 houses with the least expensive house costing 640K, most expensive is 820K on 2007 show. They get the mid priced 750K home then put another 35K to update it.
    Three months after the show, and they start defaulting on the loan, because they can’t afford the $3000 a month payment on their combined income of $3500 a month.
    They should never have been allowed to buy it, the banks should not have approved it, but the show is good so I keep watching them.

  9. #9 |  Matt Moore | 

    Sometimes, and I’m not saying this is one of them, the federal government should use it’s power and purse to prevent the economy from collapsing.

    But what if the bailout just perpetuates the current problems? Matt Welch pointed out today saving FM/FM reinvigorates the housing bubble, and will increase the already insane share of mortgages that FM/FM controls.

  10. #10 |  Nando | 

    Matt Moore:

    Like I said, this isn’t one of those situations where I believe the federal government should use our tax dollars. All I was saying is that there ARE situations where I would agree with my tax dollars being used that way.

  11. #11 |  akromper | 

    Nando, Bin Laden wasn’t 1/2 as stupid as we act and it’s become clear to a lot of people that whether he’s dead or alive, mission accomplished for him.
    Lack of personal responsiblity leads to nanny state, corporate leads to institutional bailout. Yeh, I think I’ll look into that book too and see how many items on my ‘oh shit’ list are have come true or are already in motion.

  12. #12 |  Shamgar | 

    Wow. I love the movie Sneakers, but I really don’t think it’s a great place to get your economic theory.

    Also, there is no such thing as “too big to fail”. Anyone remember the soviet union? Is Freddie Mac bigger than the entire Soviet Union?

    FM/FM are both a moral hazard, and together with the monetary policies of the greenspan/bernake era they have created this situation. Just like any other time, the worst thing that can happen is for the government to try to fix it.

    Honestly, what happens to “libertarians” during these times that causes them to suddenly think that central planning has merit? Why is it that it’s a bad thing during good times, and we predict all the evils it will bring about. But then when the evils come about, suddenly a bunch of us start talking about how central planning is what we need! It’s what got us into this mess – how can more of the same be better?

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