Sure. The Fed Chairman is “well-armed” to combat crisis. What does that mean? Well, for the “pro-business” republicans it means, when little companies go bankrupt, trusting in the wonders of the free market to weed out bad businesses. “Competition and innovation are the center of our system”, and all that. But when the big, favored businesses threaten to go belly up, it means providing them with “federal handouts” (i.e., taxes stolen from the aforesaid little businesses), allowing the big businesses to continue the anti-market practices that got them into the mess in the first place.
JustinMartyr: I strongly oppose government bailouts of business. I also agree that plenty of Republican members of Congress pay lip service to free-market principles even as they help politically favored businesses suck at the public teat.
But your comment errs in at least two ways. First, the sort of Federal Reserve policy discussed here does not seek to bail out particular firms but rather to help ensure that our financial system has enough cash so that creditworthy borrowers can borrow when they need to. In times of financial stress, even healthy firms may find themselves unable to borrow. If such a “liquidity crunch†becomes sufficiently widespread, it can seriously—and needlessly—damage the economy. In forestalling such a crunch, the Fed carries out a normal, legitimate central banking function.
Second, when did the federal government last bail out a big business with taxpayer money? 1979? 1986?
#1 I think your speaking out of emotion of an ideological basis. While it makes a fine thirty second political ad, it does not get to the root of this problem.
The current crisis is a direct relation to the housing boom of just three years ago. It was the most overheated boom I’ve seen in 18 year in construction related industries. There was very low interest and escalating property values minimized risk that creditors began lowering the loan requirements dramatically offering “no documentation” loans, which carried a higher interest for the elevated risk but could be obtained by nearly anyone. Another trap was enabling home owners to finance the entire loan amount or even borrow over the assessed market value.
The housing market dropped off over a year ago (now about 18 months to two years ago) when the investors pulled out. In this area that was 20% of the market. Other parts of the nation it was less. This is the foreclosure wave as those who have ARMS or Sub-prime loans are having the interest rate catch up to them. This is very sad and families are being effected. I’m effected because my company is in indirectly related industry. I should not move for their are many homes for sale in my city and Yahoo! Real Estate has 197 foreclosures listed for my zip code.
However this problem is created by collective action of many individuals who over extended themselves on the house loan. It’s also mortgage companies, however the guilty are mostly have “bellied up,” for my refinancing to a 30 fixed rate four years ago was the same tooth pulling experience as it always been with a national bank.
Today, leaders are very skittish. That’s what’s creating the cash crunch. What the Fed must believe is that there not so much a money problem as being gun shy. While I’m certainly effected by the collective actions of my neighbors, I still could be a good customer (if you ignore my profession is somewhat tied to a the very housing industry).
Basically, from my prospective, this crisis could have been avoided if more folks listen to Crown Financial Ministries and less “you can have it all” of the American culture.
There is no “liquidity crisis.” There are simply over-extended enterprises that are not viable at the market rate of interest. The housing bubble, like the dot-com bubble, arose from the Fed’s injection of new money and artificial lowering of the interest rate. Now, with the party winding down, here comes the Fed with more vodka for the punch bowl.
Irenaeus, thanks for the reply. I believe that much of the federal intervention of which you speak is in fact necessitated by the federal intervention of which you speak. 🙂 Federal Reserve intervention (e.g., subsidized, guaranteed, cheap government loan instruments) in the 1990s and early 2000s set us up for irrational exuberance and thus the ‘correction’ we experience today.
You asked when last the federal government bailed out or substantially aided big business. My answer is all the time. For a start, a short look at the multibillion dollar lobbying industry leads us to fat pigs at the trough of government largess. Where there are flies there is probably a rotting corpse. We have the repeated bailout of the airline industry. Delta and American Airlines were the most recent recipients of ‘structuring packages,’ if my memory serves me correctly. This happens while smaller startup airlines such as the Richard Branson American Virgin Airlines is forbidden entry to the market, and cash-conscious airlines such as Airtran struggled for fair
competition.
Another sacred cow, so to speak, is the farming industry. While most
farms today are run not by your mom and pop establishment, but by very large corporations, they clamor for and constantly receive government tax payouts and subsidies. Then there’s the defense sector, pharmaceuticals — a big one, banking, and the list goes on and on.
An advocate of free markets, I am not against corporations big or
small — when they grow by increasing the their product utility and
thus customer base. I am however opposed to the hypocrisy of the
‘pro-business’ crowd which, when you examine their actions turns out to be a pro big business welfare crowd. When a powerful corporation uses government regulation and favor to create a barrier to entry for small upstarts, that is closer to fascism than capitalism.
You place the blame for the current ‘correction’ on an overheated market and irrational consumer purchasing habits. And that is indeed part of the problem. But take a moment to think what produced this detachment from reality. What made mortgage funding appear limitless and indiscriminate? How did people who could not afford a loan get one? Could it not be the government-subsidization and government guaranteed funding of the industry. This is the message the Fed sent to the loan industry: we have a limitless supply of money for you to hand out at will; and if you start to do things so crazy ordinary companies would go bankrupt, don’t worry, we’ll bail you out. The first step in remedying an addiction, is a good solid dose of reality. The Fed produced the unreality, and now is alleviating the morning-after hangover — all on trillions of dollars borrowed from the Chinese.
#7 You are going to hear me say something very rare for my more libertarian views, but a lack of regulations on the non-bank mortgage firms. The reason I had to produce a SSN for a credit check is I refinanced through a bank. However this looks so much like the S&L;crisis it’s pretty frightening how history repeats itself.
In this are loans were given to the immigrant community without documentation required. This help folks hear illegally as well as those who may have full documentation but lower income and would fill the houses with many income producing house-mates (my city also has the ongoing saga of overcrowding as there voter pressure for regulation and ACLU taking new regulations to court). I can say from anecdotal evidence that these loads began a point or two higher than mine and if variable rate must be through the roof by now (I watch a home equity line go from 4.30% to over 8% before I paid to zero balance).
Less this is side tracked on immigration issues. While the that segment is in the $50K-$400K houses that make up a bulk of the 197 listed, there was at least 10 from the $500k-$1.2M category in default. My point being there were ways of obtaining money that was outside the normal safeguards I had to go through because I dealt with a bank that has been regulated with the creation of FDIC.
Now, I don’t think this will be nearly as bad as the S&L;crisis and I do not expect a creation of an RTC type entity. First we’re talking more market money, not insured deposits, in fact the banks are the ones who will probably buy this one out and for quite a profit on their end (somethings being a turtle saddled with regulation is not a bad thing, Verizon made out like a bandit after the telecom crash). Also while the scale is huge, residential only looses so much. The S&L;crisis was mostly commercial loans and a high-rise that is have finished just does not have much promise of making money. However in this crash an investor can pick up homes for bargain prices, hold onto to it for as a rental until the market improves then sell (guessing a year to brake even and five for a decent return).
This seems bad now (especially if you’re in the industry) but this will not be an election year issue. The foreclosure wave is the last to hit before the market begins to turn around. I’m guessing by Iowa we’ll be in a recovering market (think normal, no where near the insanity of the first part of this decade).
Sure. The Fed Chairman is “well-armed” to combat crisis. What does that mean? Well, for the “pro-business” republicans it means, when little companies go bankrupt, trusting in the wonders of the free market to weed out bad businesses. “Competition and innovation are the center of our system”, and all that. But when the big, favored businesses threaten to go belly up, it means providing them with “federal handouts” (i.e., taxes stolen from the aforesaid little businesses), allowing the big businesses to continue the anti-market practices that got them into the mess in the first place.
JustinMartyr: I strongly oppose government bailouts of business. I also agree that plenty of Republican members of Congress pay lip service to free-market principles even as they help politically favored businesses suck at the public teat.
But your comment errs in at least two ways. First, the sort of Federal Reserve policy discussed here does not seek to bail out particular firms but rather to help ensure that our financial system has enough cash so that creditworthy borrowers can borrow when they need to. In times of financial stress, even healthy firms may find themselves unable to borrow. If such a “liquidity crunch†becomes sufficiently widespread, it can seriously—and needlessly—damage the economy. In forestalling such a crunch, the Fed carries out a normal, legitimate central banking function.
Second, when did the federal government last bail out a big business with taxpayer money? 1979? 1986?
#1 I think your speaking out of emotion of an ideological basis. While it makes a fine thirty second political ad, it does not get to the root of this problem.
The current crisis is a direct relation to the housing boom of just three years ago. It was the most overheated boom I’ve seen in 18 year in construction related industries. There was very low interest and escalating property values minimized risk that creditors began lowering the loan requirements dramatically offering “no documentation” loans, which carried a higher interest for the elevated risk but could be obtained by nearly anyone. Another trap was enabling home owners to finance the entire loan amount or even borrow over the assessed market value.
The housing market dropped off over a year ago (now about 18 months to two years ago) when the investors pulled out. In this area that was 20% of the market. Other parts of the nation it was less. This is the foreclosure wave as those who have ARMS or Sub-prime loans are having the interest rate catch up to them. This is very sad and families are being effected. I’m effected because my company is in indirectly related industry. I should not move for their are many homes for sale in my city and Yahoo! Real Estate has 197 foreclosures listed for my zip code.
However this problem is created by collective action of many individuals who over extended themselves on the house loan. It’s also mortgage companies, however the guilty are mostly have “bellied up,” for my refinancing to a 30 fixed rate four years ago was the same tooth pulling experience as it always been with a national bank.
Today, leaders are very skittish. That’s what’s creating the cash crunch. What the Fed must believe is that there not so much a money problem as being gun shy. While I’m certainly effected by the collective actions of my neighbors, I still could be a good customer (if you ignore my profession is somewhat tied to a the very housing industry).
Basically, from my prospective, this crisis could have been avoided if more folks listen to Crown Financial Ministries and less “you can have it all” of the American culture.
There is no “liquidity crisis.” There are simply over-extended enterprises that are not viable at the market rate of interest. The housing bubble, like the dot-com bubble, arose from the Fed’s injection of new money and artificial lowering of the interest rate. Now, with the party winding down, here comes the Fed with more vodka for the punch bowl.
I should not move for there are many homes for sale in my city and Yahoo! Real Estate has 197 foreclosures listed for my zip code.
Attach of the vicious homonyms again … oh well …
Irenaeus, thanks for the reply. I believe that much of the federal intervention of which you speak is in fact necessitated by the federal intervention of which you speak. 🙂 Federal Reserve intervention (e.g., subsidized, guaranteed, cheap government loan instruments) in the 1990s and early 2000s set us up for irrational exuberance and thus the ‘correction’ we experience today.
You asked when last the federal government bailed out or substantially aided big business. My answer is all the time. For a start, a short look at the multibillion dollar lobbying industry leads us to fat pigs at the trough of government largess. Where there are flies there is probably a rotting corpse. We have the repeated bailout of the airline industry. Delta and American Airlines were the most recent recipients of ‘structuring packages,’ if my memory serves me correctly. This happens while smaller startup airlines such as the Richard Branson American Virgin Airlines is forbidden entry to the market, and cash-conscious airlines such as Airtran struggled for fair
competition.
Another sacred cow, so to speak, is the farming industry. While most
farms today are run not by your mom and pop establishment, but by very large corporations, they clamor for and constantly receive government tax payouts and subsidies. Then there’s the defense sector, pharmaceuticals — a big one, banking, and the list goes on and on.
An advocate of free markets, I am not against corporations big or
small — when they grow by increasing the their product utility and
thus customer base. I am however opposed to the hypocrisy of the
‘pro-business’ crowd which, when you examine their actions turns out to be a pro big business welfare crowd. When a powerful corporation uses government regulation and favor to create a barrier to entry for small upstarts, that is closer to fascism than capitalism.
KAR, a well-written, and thoughtful piece.
You place the blame for the current ‘correction’ on an overheated market and irrational consumer purchasing habits. And that is indeed part of the problem. But take a moment to think what produced this detachment from reality. What made mortgage funding appear limitless and indiscriminate? How did people who could not afford a loan get one? Could it not be the government-subsidization and government guaranteed funding of the industry. This is the message the Fed sent to the loan industry: we have a limitless supply of money for you to hand out at will; and if you start to do things so crazy ordinary companies would go bankrupt, don’t worry, we’ll bail you out. The first step in remedying an addiction, is a good solid dose of reality. The Fed produced the unreality, and now is alleviating the morning-after hangover — all on trillions of dollars borrowed from the Chinese.
#7 You are going to hear me say something very rare for my more libertarian views, but a lack of regulations on the non-bank mortgage firms. The reason I had to produce a SSN for a credit check is I refinanced through a bank. However this looks so much like the S&L;crisis it’s pretty frightening how history repeats itself.
In this are loans were given to the immigrant community without documentation required. This help folks hear illegally as well as those who may have full documentation but lower income and would fill the houses with many income producing house-mates (my city also has the ongoing saga of overcrowding as there voter pressure for regulation and ACLU taking new regulations to court). I can say from anecdotal evidence that these loads began a point or two higher than mine and if variable rate must be through the roof by now (I watch a home equity line go from 4.30% to over 8% before I paid to zero balance).
Less this is side tracked on immigration issues. While the that segment is in the $50K-$400K houses that make up a bulk of the 197 listed, there was at least 10 from the $500k-$1.2M category in default. My point being there were ways of obtaining money that was outside the normal safeguards I had to go through because I dealt with a bank that has been regulated with the creation of FDIC.
Now, I don’t think this will be nearly as bad as the S&L;crisis and I do not expect a creation of an RTC type entity. First we’re talking more market money, not insured deposits, in fact the banks are the ones who will probably buy this one out and for quite a profit on their end (somethings being a turtle saddled with regulation is not a bad thing, Verizon made out like a bandit after the telecom crash). Also while the scale is huge, residential only looses so much. The S&L;crisis was mostly commercial loans and a high-rise that is have finished just does not have much promise of making money. However in this crash an investor can pick up homes for bargain prices, hold onto to it for as a rental until the market improves then sell (guessing a year to brake even and five for a decent return).
This seems bad now (especially if you’re in the industry) but this will not be an election year issue. The foreclosure wave is the last to hit before the market begins to turn around. I’m guessing by Iowa we’ll be in a recovering market (think normal, no where near the insanity of the first part of this decade).
justinmartyr,
one significant error: the feds guarantee very few mortgages. Rates are mostly set by sales of mortgage-backed securities.
This is a test — I don’t remember or know why I’d type “;” in S&L;crisis and wondering if it was a script addition.
It is, it is the computer doing strange and odd things. Hmmm, I wonder why it does that?