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Small businesses make up a large share of the whole economy, not only in the US but in all parts of the world. However, these businesses are the most affected by the recent global recession. People who were getting good returns from their businesses are now turning towards courts with bankruptcy petitions. There were 158,141 U.S. bankruptcy petitions filed last month — a 35% increase over February’s figure, according to data compiled by Automated Access to Court Records (AACER). This was a 19% increase over the number in October 2009, the last record-high month.
A large number of individuals are turning towards the complete bankruptcy filing (chapter 7 filings), allowing courts to foreclose all their possessions along with their homes. However, chapter 13 filings are also available, which requires individuals to repay a substantial part of their debts and prevents banks from foreclosing their houses. This behavior clearly indicates that home-owners are just walking away from their mortgages, rather than attempting to cope up with their payments, especially in times where large number of individuals are unemployed and don’t foresee themselves having good earnings in the near future.
The statistics show that personal borrowings in the US have increased 10 times more than they were in 1960, allowing individuals to borrow relatively more than their returning capabilities. That is why people are ending up bankrupt. My question here is: If people are not able to pay back, why lend them money in the first place? Why can’t financial institutions counsel their borrowers on borrowing patterns and best practices, keeping In view the conditions of the economy?
My question here is: If people are not able to pay back, why lend them money in the first place? Why can’t financial institutions counsel their borrowers on borrowing patterns and best practices, keeping In view the conditions of the economy?
Under the guise of "do-goodisms", the degenerate masters of ideologies such as socialism have in realty other designs on the victims, like slavery. Indebtedness is a typical feature of a downtrodden populace, ensnared by typical promises such as land ownership. The process can take some time, decades, even a century, or quicker if by violent means.
The "golden age" middle classes of the early industrialization era in places like the US and Europe are by now an expensive nuisance, but subtle devices are necessary to transform them into a downtrodden populace.
The masters of industry and finance need a vibrant middle class when the consumption pool is made up of some tens of millions, but a relatively downtrodden populace is all that suffices when the consumption pool is in the billions, some float upwards, some sink down.
Small businesses make up a large share of the whole economy, not only in the US but in all parts of the world. However, these businesses are the most affected by the recent global recession. People who were getting good returns from their businesses are now turning towards courts with bankruptcy petitions. There were 158,141 U.S. bankruptcy petitions filed last month — a 35% increase over February’s figure, according to data compiled by Automated Access to Court Records (AACER). This was a 19% increase over the number in October 2009, the last record-high month.
A large number of individuals are turning towards the complete bankruptcy filing (chapter 7 filings), allowing courts to foreclose all their possessions along with their homes. However, chapter 13 filings are also available, which requires individuals to repay a substantial part of their debts and prevents banks from foreclosing their houses. This behavior clearly indicates that home-owners are just walking away from their mortgages, rather than attempting to cope up with their payments, especially in times where large number of individuals are unemployed and don’t foresee themselves having good earnings in the near future.
The statistics show that personal borrowings in the US have increased 10 times more than they were in 1960, allowing individuals to borrow relatively more than their returning capabilities. That is why people are ending up bankrupt. My question here is: If people are not able to pay back, why lend them money in the first place? Why can’t financial institutions counsel their borrowers on borrowing patterns and best practices, keeping In view the conditions of the economy?
Well you have to realize that most of these people foreclosing and filing for bankruptcy are people that borrowed when banks thought they could lend to everybody. To start with mortgages, 95% of all mortgages have a Fannie Mae and Freddie Mac stamp on it (meaning the government was guaranteeing all of these bad mortgages). Imagine if the government didn't back these mortgages? Banks knew all of these ARM mortgages couldn't be paid once the interest rates reset, so why did they risk their capital when they knew they were risky loans? Well, Fannie and Freddie backed them up, so they knew the government would never let Fannie and Freddie fail (and as we can see, the government did bail them out).
Now, having said those things, banks were tightening their lending standards back to where they should have been (people having to put 20%+ down and have substantial capital to back up their mortgage). This resulted in "credit markets freezing" because I would guess that well over 50% of people wanting mortgages were trying to come in with either no down or much less than 10% down. Our savings rate was negative when all of this came, so we didn't have any money to put down on a mortgage.
So looking at that, common sense would tell you to let the banks go back to strict lending standards which would result in home prices declining so that people can buy affordable houses and pay them off faster. The government saw this as a bad thing and they came in to "unfreeze the credit market." So just to rehash, they wanted us to BORROW while we had a NEGATIVE savings rate and it was normal to have ARM and sub-prime mortgages with little to no down?!?! The government continually criticizes banks for their lax lending standards but they don't want them to tighten because this would result in less people being able to get mortgages which would result in decreased housing prices (lower prices than they have already fallen to).
The reason housing prices haven't dropped even farther, yet, is because much of the TARP money was given to banks to keep bad mortgages on their books to delay foreclosures and decrease how fast the supply of houses would have risen. So what happens when we run out of the TARP money or the government realizes we can't keep spending borrowed money? There will be an influx of houses on the market and the gov't will have just delayed the inevitable all while putting us farther and farther into debt.
One last point is the credit market debt/GDP number at it's peak in 2009 was 349%. The highest this ratio was during the 20's and 30's was 250%. We currently have a 100% higher credit market debt/GDP ratio than during the great depression. This thing should have caved in fast and the gov't is just delaying the correction. We need the correction so people can start saving again and so we can start producing useful goods to export (of course there would have to be a lot less gov't regulation and gov't taxes on businesses for this to happen as well, because right now it's cheaper to operate in another country due to these regulations/taxes). But how can the gov't lower taxes on businesses when we're almost to our highest debt/GDP ratio in our countries history? Well, they can't.
Anyway, I could keep going on but my main point was the free markets were correcting the problem by tightening lending standards back to where they historically were 20+ yrs ago and the gov't is trying to prevent it from happening.
... the gov't will have just delayed the inevitable all while putting us farther and farther into debt.
... main point was the free markets were correcting the problem by tightening lending standards back to where they historically were 20+ yrs ago and the gov't is trying to prevent it from happening.
Quod erat demonstratum
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