I could be mistaken, but I seem to recall that the Savings and Loan crash back in the 80's (with which the current debacle certainly has many similarities) also occurred during an administration with a reputation of favoring wealthy supporters.
Within a half-days drive from my office are several large universities, school districts and private colleges, each chock full of intelligent people with advanced degrees in a variety of fields including business/finance. And many of these people have barely positive to negative net worths. Further, some don't balance their checkbook - the beginning point for living within one's means.
I've concluded that making good financial decisions has little to do with education of any kind and everything to do with common sense (street smarts.)
-HW "Skip" Weldon Columbia, SC
Well, the theory was that the rating agency would take a package of loans and plug it into a computer model. The model would use history to say that loans of this type and mix defaulted x% of the time with an associated loss of y%.
Now the revenue stream from the loans would sliced into groups, called tranches. The highest rated tranche would get first call on the payments and interest from the loans, the next highest would have the next call. So on down to the lowest (and highest yielding) tranche, which would have first call on the losses.
So, if the model held up, the likely losses would be down in the lowest one or two tranches. The highest tranche should have little or no chance of loss because they not only get paid soonest, they have all those other tranches that have to lose everything before they do.
But the model is based on history. In the meantime, the lending standards were deteriorating. The loans actually being made were not nearly as good as the history in the model, so the model was optimistic at best. The decline in housing prices exposed this when people that used to be able to sell when they got in trouble couldn't anymore.
In fact, the AAA rated tranches will probably come out all right. They really are a long way from any risk of loss. But they are currently priced around 80 cents on the dollar because nobody is sure.
The magic I don't understand is how the investment banks can round up a bunch of the mid-level tranches, repackage them into tranches, and get AAA ratings on the best of the repackaged junk. Same thing, I guess.
-- Doug
I have trouble understanding why you say this, other than general cynicism. In the 80's the CDs (up to $100,000) were insured by the full faith and credit of the United States. The taxpayers paid roughly $150 billion to meet the obligation.
The federal government has not guaranteed any paper in the current mess, other than conventional loans through Fannie Mae and Freddie Mac. While there has been some discussion of helping homeowners, especially by allowing refinancing through Fannie Mae or Freddie Mac, I don't see much stomach in Congress for a bail out of Country Wide or Merrill Lynch.
Do you know differently?
-- Doug
Actually, given their recent track records, it's quite likely that you would have done better. It's highly likely that a blind orangutan shaking up the old MagicEightBall(tm) would have done just as well, if not better.
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Joe, you're good guy I generally agree with on this forum but ...
Um ... No.
The only way to make it "avoidable" would have been to clamp down on folks freedom to borrow what they want, when they want, and from whom they want to borrow.
I don't want Uncle Sugar telling me (nor any other American) from whom or how much or at what terms I (we) can borrow.
Sorry. When that happens it's game over for all of us.
The other side of that, of course, is the "damned if you do, damned if you don't" logic. Obviously, we're damned because we did (let folks borrow the money).
If we didn't (damned if we don't, they'd all be have been screaming how _unfair_ (whine) it is that they don't have access to all that money and can't buy the house they (whine) _deserver_ to own.
There's no winning that one.
Not as far as I can tell -- you pretty much nailed it.
The only way out is to let 'em *all* feel the pain of their mistakes. The brokers lose their jobs. The banks lose their money and ... yes, virginia, the folks lose their homes.
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Unfortunately, the same way you let a kid get educated about the hot burner on the stove. You can tell 'em all you want how hot it is. You can scold 'em and punish 'em and watch over 'em all you want. The reality is ... no kid ever really *learns* until he feels the pain of the red hot stove burner eating throught that first layer of pain receptors.
As much as you want to love and protect 'em ... As much as you want to keep 'em out of harms way ... the only way they ever really learn the lesson is to let 'em get burned once or twice.
Life is about choices. You have to let folks make their choices and ... here's the really important part -- deal with the consequences of those choices.
Not an excuse. The mathematics necessary to calculate simple interest, compound interest, time value of money, present value, future value -- all is commonly taught by the 7th grade in the U.S. For most of us we had the tools necessary by the time we were 12 or 13 years old.
See above. If they went through the public school systems in America, they were given the tools to calculate these things by the time they reached (if not before) high school.
If they *chose* to ignore the information, that is not my fault. That is not your fault. That is not Uncle Sam's fault and that is not the TaxPayers' faults.
Education, in and of itself, solves *nothing*. It's what folks *choose* to do with the information that makes all the difference in the world and for you to force their choice is assenine. Let 'em choose. Let 'em learn.
It's been said a bazillion times before: You can lead a horse to water ...
These folks have been lead to the water. It's up to them whether they want to drink the water or drink the Kool-ade.
You *have* to leave the choice to them and, yes, that means you leave them the choice to fail. Let them fail. Let them deal with the consequences.
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If I see something I currently can't afford, and *especially* if I "would never be able to afford" it -- I don't buy it. I wait until I can afford it or I don't buy it at all.
It's what adults do.
Q.E.D.
Who made the *conscious* and fully aware (by your premise above) decision that "Hey! I can't afford this" but went ahead and signed the papers anyway?
."Douglas Johnson" wrote
Congress's motivation to bail out homeowners and possibly some financial institutions would be to keep the economy from going into a worse tailspin. You really have not seen discussion of this?
I am not saying the taxpayers will definitely be on the hook for this. But right now, I do think it's possible that taxpayers will pay en masse for some of this. It's better to educate people early (and keep the already-educated from preying on the uneducated through deceptive practices), or else we all pay later. Same thing with health care.
How people and organizations with conflicts of interest are so ready to rationalize them is just disgusting. Nor do I understand why more people are not taught that a terribly complicated investment vehicle necessarily implies (1) one helluva lot of people skimming fees off the top, and so not actually believing in the substance of the product being sold; and (2) a high risk, house of cards.
"Sgt.Sausage" wrote Joe wrote
Before interest rates dove, lending institutions had in fact done this.
Joe is right.
"Sgt.Sausage" wrote
Your argument defeats the purpose of this newsgroup, for one, because people do learn from it and without getting burned.
Maybe you should do some thoughtful reading on psychology. What you describe is one way to "really *learn*." There are others. I am betting you yourself did not have to get "burned" first before you subsequently made all your good decisions.
Your arguments rest on a presumption that every, say, two-year-old could become as smart as, say, Yale econ yada professor Robert Shiller through becoming burned, and only burned, enough. The reality is a high proportion of two-year-olds left to their own devices would die. A certain foundation is needed before people, on their own, can survive and keep learning. If anything, we might simply disagree on when this foundation is laid and a person should be allowed to sink or swim, no more public education or help from the parents, etc. But we'll never agree that the only way to learn is by getting burned, as an academic, scholarly, realistic matter. That's just baloney.
Sgt. thanks, I try. You may have read more in to my post than I was trying to imply. I liked the rules 28/38, that 28% of one's gross income is the limit for mortgage payments, and 38% total debt to income. (this was the rule when such things impacted me) I was not inviting the government to do anything, I was lamenting that the lenders should have known better. I am with Elizabeth, and had that same 13-5/8% (1/4% under her) fixed mortgage. Back then, I recall the ARM mortgages still had qualification requirements, i.e. the borrower had to qualify at some higher rate than the teaser. Sgt., I know life is not a bell curve, but I am smart enough to know that at 1% 1yr t-bill, there's far more room to go up than down. Some portion of borrowers will get laid off, some will get ill, but the rate rise impacted every last one, and this is being treated as totally unexpected. My last refi moved be to a 15 yr fixed at 5.24%, an ARM was not even considered, and no one I advise found themselves in an ARM as the fixed rates hit recent lows. Either way, we may disagree a bit on this, but the regulars here are not 'average', this discussion is Greek to the average person. JOE
I've heard the following, which is relevant:
Q: How do people gain wisdom to make good decisions? A: With experience.
Q: How do people get experience? A: By making bad decisions.
We've all made financial planning mistakes. Even the most experienced of us continue to make mistakes from time to time, and we suffer the consequences. Hopefully, the consequences are not too severe, and hopefully we gain wisdom to make better decisions next time.
Dave
Just think of all the investment bankers in that area. They honestly thought they would make money loaning money to a people with a 500 or so beacon and no proof of income?
A major theme in this thread seems to be, "oh those stupid borrowers, they deserve what they get." That sentiment should go both ways when it is expressed.
A rare wise individual (not me -- I gotta get burned first) will learn from other's mistakes. Most folks brains just aren't wired for it. Mine included.
Maybe you should go out and talk to John Q. Public -- he doesn't hang out here in usenet. He's quite different from most folks who do.
I got burned, literally, by the iron -- no matter what mom said I'd play with it. Still got a scar to this day on my head to prove it.
Likewise, I got burned on financial decisions to the tune of $32,000 during college. I learned my lessons the hard way. Most folks are like me. They don't learn a lesson unless they experience it the hard way.
Nope. My argument rests on the presumption that if you don't let them feel the pain, they'll keep coming back and making the same mistakes again and again. No pain. No gain.
These are adults, who have had the tools and cognitive ability to use said tools for their entire lives. Not
2 year olds.There's a reason we don't let 2 year olds sign a mortgage contract (or any contract for that matter)
Presumably, they have this foundation by the time they're
18, right? Why else set a legal limit of 18 for "adulthood" in the eyes of the law?
Let me rephrase, then: For most, Joe-and-Sally-SixPack-America, making good choices based on knowledge of mistakes made by others is a pipe-dream. NOTE: I include myself in this category.
Yes there is a continuum here, but I'd bet my next paycheck that the folks who are in or near foreclosure now have never learned a lesson second-hand in their lives. Counsel them. Teach them. Advise them. Educate them. All for nought. They'll drink the Kool-Ade(tm) every time.
.======================================= MODERATOR'S COMMENT: Length. Please see the weekly post, "Posting to Misc.invest.financial-plan".
And that's fine and as it should be. It's the banks' money. It's the banks' employees and contractors processing the loans. It's the banks who (initially) took on the risk. It's the banks' profits at risk. It's the bank's paperwork and the banks' mortgage contracts.
As such, the *banks* have the right to dictate those terms -- just as you or I do to dictate the terms of any personal money we choose to loan out.
Uncle Sugar, however, has no legal right, nor the obligation to tell anyone -- you, me, nor the banks who and how to loan money.
No, he's not. The only way to make it avoidable is for Government Intervention -- which is a bad, bad way to go. You really don't want to go down that road, do you?
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Sgt, the opposite of 'avoidable' is 'inevitable'. If you believe that the combination of greed, for lack of a better word, and ignorance came together in such a way that there was no other possible outcome, I'm listening.
I believe that the interest rate cycle made a housing crunch (note: I do not say bubble) a probable outcome. Allowing for the ignorance of the average borrower, I'll concede that people will be happy to borrow what looks good today with no thought for tomorrow. And I'll hazard a guess that most of these ridiculous teaser rate loans were not held in-house but packaged and sold. So we go down a path which lead to a complete breakdown of a system that was working until recently. That may suggest inevitable.
The 'regular' (i.e. corporate) junk bond market found a way to raise huge sums of money, and if we ignore for a moment, the Milken/Boesky insider trading issues, the money raised helped to finance companies in the US which would otherwise have been unable to raise capital.
Sup-prime used to not be a dirty word, not when these loans were properly rated.
JOE
"Sgt.Sausage" wrote
You seem to be ignoring my main point, which is that most of America does not have the education (be it from mum or dad at the dinner table; public schools; a mentor; the military; whatever) to know how to make the right choices. Most folks' brains are in fact wired to emulate someone close to them. Otherwise, people are in fact not unlike two-year-olds with regard to budgeting.
I like Chris Gardner's story. He's the guy portrayed in the recent film, "The Pursuit of Happyness." But I note that, in his rags to riches story, he credits some family role models.
Otherwise, I guess you're saying that this group, and fora like it, do not help most of the people who post to it.
We disagree.
"Sgt.Sausage" wrote [The government] however, has no legal right, nor the
Joe said this was avoidable, without elaboration. You assumed, incorrectly, he meant through government intervention. Foul.
Fact is it was avoidable, through, for one, applying historical lending practices instead of new ones.
Government intervention is being discussed elsewhere in this thread. To understand that it might not be a bad idea (though I really do not know for sure right now), one has to understand why it is we live fairly harmoniously in the U.S. It is largely due to government intervention on a number of levels. Government intervention does aid the economy, and make you and me richer, by, for one, making sure the "lower class" is not so poor and uneducated that they turn to crime (in desperation), or that two parents have to work such crazy hours to pay for a mistake (wrought by deceptive loan practices and poor education) that they cannot supervise their children. Said children are then subject to unsavory influences that do affect your neighborhood. Said parents are so unskilled that they cannot take certain blue collar jobs. Said parents cannot afford health insurance, and guess who gets to pay for their ER visits? And so on. Invest now in society, or pay the piper later. Don't support freeloading, but don't cripple our economy by making the divide between rich and poor so great we have higher and higher gates, and increasingly more expansive gated communities. Because some day you will have to walk outside those gates, risking life and limb.
I do not wish to split hairs with you. I am only saying that some government intervention may be appropriate. It certainly is in some other situations. In the past it has often profited all of us.
Thanks for taking the time to understand my view.
Kind of like how Freddie Mac was created to provide a secondary market for mortgages back in 1970, and the criteria for those mortgages was strictly regulated by the Government. I was avoiding asking for government intervention, hoping the wisdom of the market would be to self-regulate, but there's a certain irony in wanting the government to stay away from regulating us away from a mistake but asking them to come in to fix one after the fact. JOE
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