Housing Bubble

I find it ironic that the government is blaming mortgage companies for the subprime loan fiasco, when in reality, the government was what started the whole mess.

So, for those of you who are still trying to catch up, this is how things work in America. The government decides something in the economy isn’t “fair”. The government then enacts some sort of legislation to fix the problem. This legislation causes a new, much worse problem. The government blames capitalism and calls for more of the same bad legislation to fix things.

This is why government intervention in the market is bad. There are always unintended consequences to their decisions. And it always ends up being worse for those the government claims to be helping, more often than not because the “rich” that everyone tries to screw over are one of the main catalysts for the growth of the economy, which offers more opportunities for the poor.

I am so frustrated. But at least I can read this blog every day to know just how bad it is.

Questions? Comments? Rude remarks?

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13 responses to “Housing Bubble

  1. You’re ugly and your mother dresses you funny.

  2. There’s good points made here, but you can’t exculpate the person(s) who sat down and signed the papers and took on a loan structured in a way that they could never repay. I too resent the government’s bailouts, but my question is: Where was Government (or even other financial thinkers who could predict the consequences of these mortgages) during the time when so many were made? Why didn’t people have access to better information? Were Realtors (who are supposed to help new home owners) not telling these new buyers the full ramifications of subprime loans?

    I certainly didn’t fall in the subprime trap. I refinanced my home years ago to take advantage of the lower rates, but did so using a fixed rate and changed to a 15-year loan. Now, I’m smelling like a rose, and will own my home quicker to boot.

    Thinking people can overcome obvious future problems, if they only would.

  3. Pingback: Volunteer Voters » The Libertarian View

  4. If someone signs their name on a mortgage they know they can’t afford, who is to blame when they lose their house?

    Yes, once again the government will try to ‘fix’ the problem, and will just make it worse (or create a new problem).

  5. You’re right, the problem does also lie with people who bought stuff they couldn’t afford, but before, banks would never have loaned the money, but because of the government, they were forced to.

  6. One day, Justin, maybe on your deathbed, you’ll recant and realize that the government is not pure evil. I’ll admit, they don’t call home as often, but they’re not completely irresponsible children.

    Most economists, while they may disagree with the level of government involvement, will actually acknowledge that the government can serve positive purposes. Economic theory makes a lot of assumptions about a perfect market full of rational people that is rarely ever the case. Hell will freeze over the day you stop making statements that all government intervention is bad. (Yeah, I’m a realist — I know it’ll never happen.)

    Why can’t you be more reasonable (like “y”) about government interaction with the market?

    The problem is that government is subsidizing the building of million dollar mansions, and that needs to stop — it’s welfare for the rich. The government should provide existing tax incentives for building a home, but should phase it out at once the home construction goes past a certain value.

  7. I realize that it’s just as much of a problem of welfare to the rich as to the poor. But you look at neighborhoods with minorities that moved up to middle class areas because of the subprime stuff, and those are hit the hardest with foreclosures, at least in our area. Because they couldn’t qualify with their income, and now they are worse off than they were when they were renting, in many cases.

    I think government more often than not is evil, but I am ok with a reasonable amount of government in my life. I do think that, as long as we have a Constitution, we should follow it, or amend it when necessary, instead of ignoring it. And I think the current Constitutional scope of government would be best. We are supposed to be a free country. Freedom means, that sometimes, life isn’t perfect. Bad things happen. But the reality is that when the government tries to do good, more often than not, it does bad. And in doing so, it takes away the rights of those it tries to protect.

    Look at what’s happening now in Mississippi. There is a bill that would ban restaurants from serving food to people the state determines to be obese. One would look at that and think, “Man that is serious government intrusion into people’s lives” when in reality, because of the situation, its justified. The government pays for the health care of a large number of Mississippians. They are legally required to for many. So, since they can’t drop them off the roles, they start legislating what they deem to be good health decisions.

    And its the same with anything else. When you want more security, it often comes at the price of less liberty. If that’s what people want, then fine. Dig your own grave. I’ll move somewhere where the government doesn’t want to be all up in my business if it gets too bad.

  8. Well, have fun in Libya…

  9. It’s not necessarily a matter of folks buying something they can’t afford. My daughter is an example of the sub-prime fiasco. She was approached by a broker “friend,” convincing her that yes, she could indeed buy a home instead of paying rent. Amy looked and looked, being careful to not bite off more than she could handle. She didn’t buy anything elaborate – roughly $100,000 in the Charlotte, NC, area. Very reasonable for this area. The first any of us heard about the sub-prime rate wasn’t even worded that way. It was worded more along the lines of you’re financing $XX at this rate and $XX at this rate (it was the 80-20 deal because she didn’t have a down payment). The 80 percent rate will adjust within 2 years and the 20 percent rate will adjust within years. Ah, but not too worry she was told — the whole time my business-savy husband squirming in his seat. Rates haven’t gone up significantly in YEARS, it certainly wasn’t going to happen now. At least not anything that wouldn’t be affordable – in fact, rates were likely to drop further. Yeah, right. I had never heard of anything like this, and it scared me. I don’t like the “unknown.” Even if you tell me something will cost $5000 and I agree to that, fine. But don’t tell me what COULD happen. I simply can’t function this way. Because of my constant nagging over the next 1 1/2 years, she was able to refinance at payments she could afford. See not only are these people having to worry about the adjustable rates, they are having to deal with a market that’s gone flat. House prices are depreciating – they’re not worth what they were financed for. Yes, I agree it was stupid of people to overextend themselves, but that wasn’t the case in every situation.

  10. I agree with osipov… a lot of it was the “glorious market” which lied to consumers and led them astray through confusing language and masking the truth.

  11. Guys, I don’t disagree with what you’re saying here. There were honest people who got hurt in this, but the problem is, no one should be able to purchase a house with no money down, and the government allowed that. And when the foreclosures started, whether because of irresponsible people, or not, it brought a tidal wave. I just read today that the FDIC is coming up with a list of 84 banks in the US that they think will go belly up within 18 months. That is not good.

    The whole point of this was to say that this all started with government mandates to do subprime loans. That starts, then people start buying real estate like crazy, especially investors. The fed cut rates drastically after 9/11, which spurred even more investment in real estate, which drove prices through the roof, which meant people continued to utilize subprime loans for investment purposes, and poor people bought homes when they really should have saved for a downpayment. But real estate was appreciating at such a rate that they were told that there was no reason to put a down payment, that they could essentially buy a house, and refinance, and make a ton of money.

    This all goes back to government intervention in the market. And its only going to get worse. I’m about this close to taking all my money out of the bank, if that tells you anything.

  12. There was a great segment on 60 minutes a few weeks ago coupled with a WSJ article talking about the same topic. The topic was the rise of mortgage walkers.

    We hear about people “losing their homes”, but many people bought these houses with no money down, paid on it for a while. Some even took money out of it with HELOCs. Then, when home values went down, and their rates went up, they realized that they stood to lose nothing by putting the keys in the mail to the bank and walking away. They owed more money on the house than they could get by selling it with no hope of this prospect ever changing. The only financial interest they had in the house was their mortgage payment they had been making every month, but they figured it wasn’t much different than paying rent. Why worry about paying down the house or trying refinance when it is just easier and cheaper to walk away, rent a new apartment, and let the money men sort it all out.

    I don’t blame the people who bought the houses because they were doing what was largely a very rational decision for them. If things went well, they stood to make a lot of money in real estate. If things went bad, who cares because they had no buy-in anyway.

    The people who stand to lose are…well, everyone. If you have a 401k, a mutual fund, buy insurance, are part of a pension plan, or a number of other situations, you are the person who is going to be hurt by this. All of these bad loans are packaged and sold as very low risk investments that are owned by large financial concerns that expect to get repaid on these loans. Because of the complex financial engineering, it is difficult for anyone to know who loans they have and which will go bad until those loans default, and by then it’s too late. We won’t see the repercussions of these bond defaults for years to come, but it will have all sorts of effects throughout the market.

    So yes, this is the government’s fault for creating a ridiculously unsustainable situation by subsidizing cheap money that made it rational for people to make irrational decisions. This was done in the name of helping to improve the economy. I don’t really blame Bernanke or anyone else thought because any student of macroeconomics knows that macro theory only lasts until the next big blowup, and then it gets rewritten all over again.

  13. Great post y. These comments are why I wish you hadn’t given up blogging.

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