August 10th, 2007

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Quick post re meltdown of financial markets.

About a year and a half ago, I posted this piece,, on the possible meltdown of financial markets as increases in defaults triggered a tightening of money and a rise in rates.

What I always forget is how good the folks manipulating the money are at hiding this, delaying the inevitable, and generally making sure that all the suckers in the Ponsy scheme have ponied up before scooting off -- which, of course, makes the mess worse.

So now we are seeing a worse meltdown than I anticipated because I had not considered the impact of hedge funds and the drive over the past year and a half for private equity forms and M&A activity driven by cheap credit and easy money.

Libertarians who protest that regulation of lending practices and imposition of standards is paternalistic ignore these broader effects. (or, as Heinlien said of the Techno-elitists in "the Roads Must Roll" -- the complete interdependence of modern society appears to have eluded them.) The fact that I am going to end up living in a world created by irresponsible lending practices and the subequent crash of significant sectors of the economy because idiots wanted to wait for a "real problem" to emerge before acting (and refused to require the reports that would have spotted the problems in time for minor corrective action) irritates the heck out of me.

OTOH, I predict that economic uncertainty will continue to be the dominating theme in the 2008 and 2010 elections, as they were in 2006. We are reaching a point where too many people know others who have gone under economically, even if they themselves haven't, or who are riding damn close to the edge with an awareness that an unexpected fall down a flight of stairs can bankrupt you with medical expenses you can't hope to pay off on your current salary.
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A Last Quick Swipe at the Subprime Meltdown

So, Osewalrus, what's your 30 second before shabbos fix?

Here's what I would do: set up a government corporation that would offer to buy all loans secured by a primary residence for 25 cents on the dollar. (That's a rough guess, it might go lower, might go a bit higher.)
This corporation would then negotiate with the debt holders to refinance on a schedule that repays the loan and is suitable to the economic circumstances of the debtor. The government corporation would be prohibitted from making a profit, although it would be allowed to break even.

Why? Because we usually fix this problem in the stupid way of saving the guys who made the bad loans -- typicaly by throwing lots of money at them. This is stupid on a large number of levels which I will explain if asked. We want the idiots who made the bad loans, who aggressively advertised for these loans, etc. to suffer. How else -- in the absence of federal regulation -- will they modify their behavior if they are not permitted to feel the economic pain?

OTOH, we want to protect the real people, the citizens who took these loans. As an economic policy matter, we NEED to protect these people. As a social equity matter, they deserve protection.

So rather than throw money at the greedy villains who played people for suckers, lets throw money at the poor suckers. The issue in most cases isn't paying back the loan, but managing a system of payments for them to do it. Offering the bankrupt corpses of subprime lenders or the corporations that cannot hope to recoup even 25 cents on the dollar a way to cut their loses should get the loans into the government's hands without lots of annoying litigation.

Problem solved. Off for shabbos.