The hiding of all the bad mortgage debt in the various conglomerated vehicles is definitely a secondary issue as far as the cause of crisis is concerned, but it's a very important matter now, because it's hard to tell whose is holding the bad debt. A lot of institutions and people who did not in any way make a decision about buying a house or granting mortgages now find themselves holding bad debt.

Going forward, there has to be some way to unpackage the bundled loans and sort the good from the bad.

The housing bubble (not yet fully deflated) seems like it is a sticking point that prevents rewrites from happening. But they could go in a category by themselves.

Still it seems like unpackaging loans from non-bubble locations (like the Midwest) from the toxic loans would at least free some of the capital for trading.

Then at least the loans could be re-packaged into low risk-low return, high risk-high return and junk. would that unfreeze the system?

I remember a GREAT AG assertion after the POP that we wouldn't have a problem if prices went up just another 10%.

There seems to be a concerted effort on the part of some Republicans to spin economic meltdown as having been caused exclusively by the Fanny and Freddy failures. Dodd, Frank, and Pelosi seem to be the main targets of this campaign.

Of course, given the shocking reality that many people STILL don't understand the root causes of the housing bubble and ensuing meltdown, it could even be that these spin doctors half believe what they are peddling. But then again, they probably don't care much about the truth anyhow.

Why no mention of Alan Greenspan's speech in c-span or Warren Buffett's appearance in Charlie Rose. Mr. Buffett is for giving Hank unfettered power to fix this problem because he knows him personally. If that doesn't destroy then nothing will.

Well,

If people still had jobs,

Dean

Is there any relationship between risky mortgages and the bubble? Had the lenders been constrained to lend more conservatively, is it not the case that the bubble would have inflated less rapidly and therefore potentially deflated more managably? These are real questions, not rhetorical ones, so any enlightenment you can provide would be appreciated.

Fannie and Freddie played a role as a catalyst in the housing crisis - they were not its cause. Let's not forget that the first to collapse were hundreds of independent mortgage brokers followed by Countrywide, the nation's largest non-bank lender (they had a thrift charter, but did not use it to originate the mortgages originated to securitize until their demise was already certain). The Federal Reserve had the power to regulate these institutions but did not. They only recently issued regulations in this area after Frank said "use it or lose it" and threatened to give this authority to the FDIC.

The failure of the GSEs was due to declining house prices, not any direct participation in subprime lending. They were not even authorized to directly purchase until the housing credit bubble had already begun to unwind. The Republican argument is the economic analogue to McCain's desire to make the Iraq war only about the surge.

Blaming the failure of GSE regulation in 2005 on the Dems is also disingenuous. The Republicans controlled the House, the Senate and the Presidency at the time. In a recent FT article, Oxley blamed the Bush administration ideologically driven veto threat for the failure of the Senate to act on the bipartisan GSE reform legislation which passed the House. However, my view is that the Bush administration didn't want to regulate Fannie and Freddie because increasing homeownership as part of the drive to an "ownership society" had been a cornerstone of Bush policy and the clearest success of the first term.

The problem with FNM and FRE is even less complicated than the NYT's article suggests. Since home prices had never (since the end of WWII) registered a YOY decline on a nationwide basis, Fannie and Freddie assumed that they wouldn't. They used an ungodly amount of leverage in turning this assumption into a business and rewarded their senior employees handsomely in each year that this assumption was not disproved. The fact is that both agencies would be suffering today even if they not ramped up their investments in sub-prime rmbs (allowing Lehman, Goldman, Bear, etc., to do so instead). Sure, they would still be functioning private enterprises rather than wards of the state but their massive leverage did not permit them much room in the event of credit problems associated with a mnational drop in home prices.

OK, so the mortgage banking crisis is more like a symptom of a different problem - falling home prices in the housing market. So, maybe the mortgage banking criss can't be permanently solved without addressing the problem in the housing market.

It seems to me that the housing market is a market, and so it should e subject to the law of supply and demand. When prices in a market fall so dramatically, doesn't that indicate a surplus of supply - in this case, a surplus of housing capacity?

According to the USCB, in 1960, the 180M US population lived in 58M homes at 3.1 people per home, while in 2006, 300M people lived in 126M homes at 2.3 per home. If the 2006 population lived at the 1960 rate, we would need just 96 million homes - we DO have surplus housing capacity of 30M homes.

Did anything happen in or near 1960 that might have facilitated a lowering of housing occupancy rate? Are there any government policies or ideological positions (red or blue) which have encouraged members of one group to to "empower" themselves by forcing members of another group to move out of family homes?

Progressive policy does not promote the weakening of America or its citizens - policies that weaken us all, are not progressive.

If Conservatives are correct, 'marriage exists as the union of 1 man and 1 woman in order to facilitate reproduction' - if Conservatives are correct, parental rights are dependent on marital status. If Conservatives are INcorrect, then parental rights (at least post-natal) exist independent of marital status.

But, if Conservatives are incorrect, then the right to no-fault divorce can not be interpreted as a right to violate the equal fundamental PARENTAL rights of the NO-FAULT defendant in divorce, instead it MUST BE interpreted as the exercise of a right to leave the REST of the family and PAY support money. THIS interpretation of NFD would reverse decades of rising divorce rates by removing incentives that reward NFD. This interpretation would result in more families having more incentive to negotiate and work problems out, families that stay together will benefit from more efficient utilization of housing and wil be more likely to achieve prosperity.

Oh.. 30M surplus homes consume 30 million megawatthours of electricity each month, and burn an equivalent amount of gas - increasing costs for us all. 30M surplus homes require land, roads, sewers, waterlines, police and fire stations, schools - all costs that didn't need to be incurred, and which we all pay for.

Dean:
A few days ago, Martin Feldstein published a financial rescue plan, the terms of which I would assume you saw, but can be found here (http://online.wsj.com/article/SB122307486906203821.html?mod=googlenews_wsj). While his argument, given recent passage of the Bush/Paulson plan, may be moot, I believe that there's a far better way yet, outlined below:

Data on sub-prime mortgages from:

http://www.responsiblelending.org/issues/mortgage/quick-references/a-snapshot-of-the-subprime.html

Salient numbers from this data;

· Number of families who now hold a subprime mortgage: 7.2 million1

· Proportion of subprime mortgages in default: 14.44 percent2

· Proportion of subprime mortgages made from 2004 to 2006 that come with “exploding” adjustable interest rates: 89-93%

· Proportion of completed foreclosures attributable to adjustable rate loans out of all loans made in 2006 and bundled in subprime mortgage backed securities: 93%

· Number of subprime mortgages set for an interest-rate reset in 2007 and 2008: 1.8 million Valued at: $450 billion

There are 7.2 million subprime mortgages out there worth 1.3 trillion, of which possibly 70% of them have exploding rate mortgages, which means about 5 million have exploding rates. Exploding rate mortgages account for 93% of the bad mortgages, which means that possibly 4.5 million of these will go bad, or 63% of the total, at a value of $820 billion and an average value of $180,000. If the ARMs reset from 7% to 12%, the increase in monthly payments is about $590 per month. $590 per month times the total of 5 million is about 3 billion dollars per month. Therefore, $700 billion would pay for 233 months, or nearly 20 years of payments… and this without renegotiating the loans so that maybe they just go to… say… 9% with the government picking up the difference.

What does this do: The holders of all the CDO’s would then be able to value them, mark them back to market, solve their balance sheet problems… financial problems solved. From the housing markets point of view, it would relieve the pressure of the foreclosure spiral forcing down prices more than ‘normal’, and provide years for the economy to recover and housing to rebound. Furthermore, any homeowner who availed himself of the help would give up all or a part of the appreciation of the property over time, penalizing them for getting jammed up, but not penalizing the guy who is paying his mortgage and playing by the rules.

If the sub-prime ARMS were renegotiated down to 9%, the monthly payments the government would be liable for would be an average of $225 per house per month, or $1.1 billion annually. The $700 billion under those circumstances would be good for 636 months, or 53 years…

It seems to me that this would be a much cheaper and more effective way to solve the problem… renegotiate the exploding rate, paying the difference and profiting from the increase in asset value over time. the following is list of advantages the above plan has over the Paulson plan, and a comparison of its strengths vs. the Feldman plan

· No budget busting huge amounts of capital required in any one year, but rather nominal amounts in any particular year.

o Feldstein’s plan would require huge outlays of capital, a trillion dollars by his own estimate, in order to protect the 5,000,000 threatened mortgages, which is a totally unnecessary budget buster

· No need to try and ‘untangle’ all of the bundled, sold, sliced and diced mortgages… they will be paid.

o A benefit of both plans.

· Slows the fall in house values, shoring up all real estate assets both residential and commercial

o A benefit of both plans

· Doesn’t penalize those who ‘play by the rules’

o The Feldstein plan rewards those who for what ever reason can’t make their payments by making them eligible for a very cheap very long term loan. This penalizes those who are paying and is unfair on it’s face.

· Allows Mark to Market rule to continue to be used

o A benefit of both plans

· By establishing a value for all the mortgage-related assets, the markets in them will restart, liquidity problem solved.

o This is less clear under Feldstein’s plan, as there still could be defaults. Payment is left to the original mortgagee, and what if they decided to take that $80,000 and pay off some other more pressing bill. Because of that threat, the trillions of dollars in derivatives would not be as secure and thus would not be as valuable. They may be as liquid, but at a risk induced lower price… not a good thing.

· Moral hazard: companies that participated in selling the bubble take a hit for their reckless behavior through the discount in the ARM through the revaluing downwards of their assets.

o Feldstein’s plan does not recognize the need to lower the ARM (more appropriately an ERM – exploding rate mortgage) increases through a blanket one time renegotiation with all holders. This is equivalent to what happens when someone secures a better deal rescuing a company than the deal originally offered to the original stock holders… such is life.

· The program could be expanded to include anyone who was threatened with foreclosure due to ARMs… not just sub-prime, but Alt-A, etc.

o A benefit of both plans.

· No bankruptcy interventions necessary.

o A benefit of both plans.

I don't know if any of this is interesting or useful to you, but I send it along if it is.

All the best, and keep up the good work.

I think they can't be teased apart. Easy money means more money to buy houses, which means higher transaction prices, which happen because lending standards are lax and appraisals are optimistic. It's a vicious (or virtuous, depending on when you look at it) cycle.