Times: Homes at risk as banks seek more security for credit card debt

Feel free. However, if you have someone else fix your car or cook your food, you know you run the risk of crashing or being poisoned if they didn't do it right. You'd best know enough to make a judgement on that so that if the brakes make a funny noise or the meat looks raw, you can demur.

Same goes for dealing with debt. Ever heard the phrase "TANSTAAFL"?

I have the suspicion that things are worse than that, though of course it depends what we mean by "bankrupt". For certain values of "Mark to make-believe", their assets probably do exceed their obligations. The question is whether true values will be discovered...

It's the folks who end up with it who are in trouble. So far the brokers are surviving. No doubt they'll end up in a blizzard of lawsuits though as those who didn't do due diligence decide to blame their dealer.

Perhaps you'd say that folks buying a CDO should just know that it's OK and needn't know anything about them?

One down, and we're less than a year into this. How many of the rest would be under already if the taxpayer weren't being forced to bend over and pay cash against dodgy mortgage-backs?

The thing is that risk wasn't what everyone thought it was. I refer you to the speech by Sir Printsalot where he told the Congressional Banking Committee that these derivatives spread risk around the folks who understood it and could handle it.

It's that old heads-I-win tails-you-lose thing eh?

Hmmmm. There's another, older, Greenspan speech from around 1997 when he was asked whether they oughtn't to go into the business of regulating derivatives. His answer amounted to the same idea that these people were all grownups and knew what they were doing, and that regulation would bring two problems:

a) People would tend to trust the regulators stamp-of-approval rather than do due diligence because it was easier.

and

b) The market involved more money than planetary GDP and if the regulator got it wrong and got sued...

My take is simpler: regulation and a government stamp-of-approval isn't nearly as safe as knowing about the product. Basically Greenspan had the first part right, apart from him believing that the boys in suits really knew what they were about.

Interestingly the fuss came about as a result of the over-the-counter swaps trade being 7 weeks or so behind with their paperwork. Folks like Doug Noland pointed out that the danger was that if the markets hit problems, there'd be no transparency (well, even less than there already isn't in such unregulated markets) regarding who owed who what, and that could turn a drama into a crisis. Boy does that look prescient now.

Such touching faith in government regulation makes me nostalgic for the

70's. The problem, as we've discovered since then, is that the boys in braces get paid more than the boys in the government set to watch them. The evils of capitalism (heh) mean that the boys in braces will therefore be more clever than the government watchdogs and will get around whatever safeguards are put in place.

Yes, because the quicker we get to the bottom, the sooner we can get started up again. In 1930 fed interference turned a four year recession into a fourteen year depression. I'd rather get it done hard and fast and clear out the dead wood rather than long and grinding and spend a fortune bailing them out.

Debt-deflation is self-terminating and will restabilise at a different value of assets and money. The same cannot be said for hyper-inflation, which is where we'll end up if we print enough money to bail out all the idiots out there.

As I said: debt-deflation is the cure. It was the maniacal borrowing in the credit bubble that was the disease.

Sadly, it's going to take some time and a hell of a lot of denial before sufficient numbers of people finally admit this. It's also going to prove rather expensive.

I don't think it appropriate to gamble with other people's money.

It may be that there's some way to encourage use of credit for business without having everyone and their kid sister pay for a cup of coffee oin HP for 30 years. That used to be called "stigma" but having aseemingly abolished this, perhaps we can find another way?

I refer you to my previous answer re regulation. It anyway won't work unless we can regulate the punters too, and require that they know what they're doing. I only need to look at the drivers on the road to understand how well that would work.

*Everyone* should know better. I was emailed by a friend last year to tell me that he knew someone who'd been called into the FSA at the start of the NR crisis. It turned out that the high heid yins at the FSA had no clue whatsoever that Jimmy Stewart wasn't still handing out mortgages and he had to draw them diagrams on his napkin to explain securitisation and CDOs to them (this isn't a big secret as I'm told the same anecdote appeared in a recent TV documentary). Perhaps this might make you a little less confident about the regulators?

When was the last Great Fire of London? Are people still careful with matches there?

Note what I said: either do that, or do something else, like take care not to put more than the protected amount in one bank.

Do you suppose that perhaps a big part of the CDO problem was that people who used to do their own due diligence when buying products (even unto actually analysing them) instead grew to regard the ratings stamped on the envelopes? "Hey, a guy at S&P says it's AAA and that's good enough for me!"

Now *that* regulation has hardly worked out well now has it? It's so screwed up it makes Greenspan look like a genius.

You share a love of government regulation with the lefties I drink with.

Save up for 'em.

I *do* rent.

It's gone beyond hope now don't you think? I've said for years here that we'd all ultimately get a ringside seat at a debt-deflation. Welcome to my nightmare I guess.

Which markets? I doubt the mortgage securities markets will ever return in the same form and am convinced the people waiting for them "returning to normal" are deluded. The Auction Rate markets are in a terminal state. Nobody seems to think that SIVs will even be on life-support much longer.

There will always be some sort of markets of course, and being an optimist, I know there'll be another boom at the end of all this. Much will have changed though and in the next bubble, the speculative token won't be housing. I can't tell you what it will be though.

It probably doesn't matter a great deal where it gets done now that the interweb is here.

I know too much about bubbles to have that degree of optimism.

Where? Who couldn't get a loan?

Much yakking and a little moving of deckchairs. There are even some now claiming they should postpone it.

You've been a good sport arguing with one so cynical as I, so I'll declare my interest. I'm a credit bubble junkie. I'm quite fascinated by historical oddities and things related such as financial manias and crashes. Despite the fact that a great many people go mad during them (really: the idea that just anyone could borrow becoming generally accepted will be seen in the future as an outbreak of mass-insanity) they do follow a predictable pattern (if unfortunately unpredictable timing, else I'd be mailing from my luxury spacecraft). This one has been the largest in history, involving the most debt and the most people. The denouement will most likely be spectacular.

What it means though is that you berating the regulators and me berating the idiot "investors" is pretty much beside the point. It's the very nature of these things to skew people's thinking so far as to make them seem caught up in madness to those who come after (we still don't think of the buyers of tulip bulbs as sane even though they were as much purely rational economic actors as your derivatives friends). The majority of people were always going to get caught up in this, just as the regulators were always going to look the other way or get slapdash. History is pretty clear that politicians and their friend who try to stand in the way of a bubble will simply be trampled in the rush. Most see the way the wind is blowing, sip the Kool-Aid and get with the program.

I can't say quite when all this became inevitable. Certainly there was an identifiable credit bubble by the time Labour were elected. I'm thinking though that historians are going to peg this as having started around 1984 with Thatcherite deregulation and that the 1990's recession will be seen as a mere pause for breath.

Anyway, as a derivatives guy, what do yoy reckon to Roubini's stuff?

Cheers

FoFP

It's in many people's bones. They'll take risks even if held responsible for their consequences.

You own the company. If the company owes someone money, then you do. Limiting that obligation is fraud.

FoFP

A key difference is that once assets are used to secure a loan, the same assets cannot be used to secure a different loan without first settling the original.

Secure a loan to a house and you guarantee the bank will come after the house if it's not paid. Have an unsecured loan and the bank will come after pretty much anything it can lay its hands on if it's not paid. It just so happens that it's harder to hide a house than pretty much anything else.

FoFP

Let's try this another way:

*IF* the bank couldn't come after someone's house (or car, or Hawkwind collection or whatever) when they defaulted on an unsecured loan, then the banks would charge a *MUCH* higher interest rate for these loans.

Thus by your logic, the bans have been defrauding themselves, not their customers.

FoFP

The lucrative suply of easy money has certainly dried up, but only partially because people don't want to borrow as much an more.

Still, I expect things to trend in that direction, but more because of what Prof Kindleberger called "credit revulsion" than because they're upset about the definition of "secured loan".

Yep. Interestingly in the US credit markets, it's become clear that second loans on houses can pretty much be defaulted upon without incident (because the first loan has priority and somehow if that's still being paid, it's damn near impossible to make a claim on the second loan). That credit supply has now very much dried up. I wonder if we'll soon see something similar here?

FoFP

Sadly, I think it's been something of a surprise to many that they're expected to actually pay back what they've borrowed. Look at the fuss over the whole Egg thing. "Want their money back? How DARE they!"

FoFP

In that simple sentence, so many of the madnesses that pertain in our credit bubble can be discerned.

FoFP

I don't know whether this will suprise you or not, but I agree with you, and the warning should be very prominent.

FoFP

You know, it's unfair to people not to permit them to get secured loans against body organs. Surely nobody would deny that such organs are clearly their property, nor that they're valuable. Many people might be able to change their lives by buying an education (I daresay for people in many places in Africa they could radically improve them) with such money. Who's to say that with an education and the riches it would bring, they wouldn't live longer with one kidney than they would poor and with two? Surely only these people can make such a decision for themselves?

By outlawing it, we're pulling up the drawbridge behind us and denying them a chance. Our morality has been overcome by our squeamishness,

FoFP

Madness created by the lenders who have spent years carpet-bombing the public with the message that it doesn't matter if you can't afford something, that borrowing the money is the answer.

Exactly so. Thank Eris it will soon be over.

FoFP

However it would not be good for the whole economy if everyone who was slightly in arrears with an unsecured debt had to sell their homes to pay off the debt.

M.

We've been running the economy for years on the premise that we can all get rich by repeatedly selling each other our houses.

FoFP

Perhaps that's what's *really* behind the ID card scheme. The govt's personal details database can act as a mortgage register wherein charges against body parts can be recorded. Without such a register, people could pledge their organs many times over. Can't have that, can we?

With houses, we have the Land Registry. Also with houses, lenders require borrowers to insure them against risk of damage. What would they do in the case of organs? How do you insure against wilful destruction by the owner (e.g. of the liver by immoderate throughput of alcohol)?

What did people do to keep tulip bulbs safe?

"Ronald Raygun" wrote

Err - they buried them in the ground? ;-)

Hmmmm. Liver Default Swaps anyone? Their price could vary with someone's alcohol intake of a given night.

I'm guessing they really did keep them in safes. There is a story from (I think) Charles Mackay's "Popular Delusions and the Madness of Crowds in which a sailor mistakes a very expensive tulip bulb being imported to Amsterdam for a small onion and uses it to garnish a meal. He got six months in jail.

I suppose those who had particularly valuable bulbs had to post guards on their plots when trying to bud them.

They also had to invent Tulip Bulb Futures so that people could buy buds from a bulb of known pedigree which would be grown by the next season. Of course there was a certain risk in buying any bulb because nobody knew whether it would "crack" or not and produce the much-desired colour and flame effects (we know now that this was a virus infection). Undoubtedly futures prices varied with the estmated skill of the grower to achieve this.

Bulb traders would be recognised by many of the players of credit and housing markets today. Of course they had importers who would bring fresh bulbs from the wilds of Turkey. They had futures dealers who acted as agents for contracts between growers and prospective buyers or speculators. They had what we'd call "flippers" who would option to buy a bulb but planned to sell before its production. They had wholesale dealers and dealers who specialised only the the rare and expensive bulbs. Many simply loaned money at interest for others to buy and speculate.

All were for a time acting rationally (even the man who sold a house, brewery and multiple acres of land for a single bulb) because for a while demand for the bulbs was huge in western Europe and anyone might get lucky with any bulb and produce flowers of just the colours needed to become rich (by budding the bulb). After all, prices could only go up...

Naturally when the bubble collapsed, too much credit had to be squeezed into too little cash and not all could recover their money. A mad scramble for cash began and of course lending stopped dead. The country was buried in lawsuits as people tried to sue creditors into paying what they had no means, or willingness, to pay. The fact that there was a British, rather than Dutch naval empire may owe not a little to the damage this did to the Dutch economy. Our turn wasn't to come until the South Seas Bubble.

What's interesting is that there were four subsequent, though smaller, flower bulb bubbles in Holland. Unfortunately I've been unale to find any further information on these.

FoFP

t

They won't explicitly tell you that you can lose your home. They

*will* tell you that you have to pay the money back and can be forced to do so. You're expected to join the dots and realise that being forced to do so could involve selling any assets you have including your home.

They might and they'd be wrong to do so. That's what "ill health insurance" is for, not unsecured debt,

Cheers,

John

Ah so it is a loan secured on your assets, now we are getting somewhere!!!

I think you mean a unsecured loan, you have just give the description above. It's an unsecured loan because it is secured on you assets. you said it yourself.

Ah!! So you would be forced to convert the loan into an unsecured loan. so they could sieze your assets. I get it now!!!

Ah so the only difference is you have to get a rubber stamp from courts before you seize assets. Ie prove you were owed the money, which is the same as you would have to do with a secured loan if you seizeure was challanged.

>

Ah so basically all loans are secure on your assets.