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The banks aren't just holding the cash "given" to them by the government/central banks... they're using it to shore up their balance sheets and to keep solvency.
Therefore, like I said, the quickest and most effective way to solve the default problem is to target households. If households are able to reduce their debt load in line with "market" amounts... the likelihood of default would be greatly reduced.
I agree that the banks are holding on to cash for solvency ... which also means people are still defaulting in record numbers with no end in sight.
However, reducing debt loads to "market" amounts would be yet another disaster. The bank, presumably, is still going to have to take the hit ... which isn't going to build any confidence in them getting paid back.
By renegotiating after the fact ... you're basically saying that any loan documents that were previously signed at certain amounts doesn't mean anything.
So the bank isn't going to have any incentive to lend at all ... because any amount that's agreed to is basically meaningless ... null and void after the fact.
And ... on top of everything else ... you're rewarding irresponsible behavior by borrowers.
I would never lend anyone any money under that scenario ... would you?
I agree that the banks are holding on to cash for solvency ... which also means people are still defaulting in record numbers with no end in sight.
However, reducing debt loads to "market" amounts would be yet another disaster. The bank, presumably, is still going to have to take the hit ... which isn't going to build any confidence in them getting paid back.
By renegotiating after the fact ... you're basically saying that any loan documents that were previously signed at certain amounts doesn't mean anything.
So the bank isn't going to have an incentive to lend at all ... because any amount that's agreed to is basically meaningless ... null and void after the fact.
And ... on top of everything else ... you're rewarding irresponsible behavior by borrowers.
I would never lend anyone any money under that scenario ... would you?
The HUD and Hope for homeowners program already has a program to write-down home owner principals (90% of market) and issuing a new loan with the FHA.
The FHA takes on a new loan and also an equity stake of the property (50% minimum) when the owner sells. So, it's not a total freebie to the home owners.
The problem is, is that the principal write-downs are "voluntary" and banks could basically ignore it. It should be that if banks take tax payer money for any bailout, that the lending institution/bank should be required to follow these FHA guidelines. That would be fair as the bailout would both help shore up bank finances AND it would also help out the homeowners. IMO, the banks have to take responsibility as well for what has happened. So far, NO bank/institution seems to admit that they were part of the problem.
At the moment, the bailout solely benefits the banks and does nothing to prevent the need for additional bailouts/capital.
Anyhow, people are clever... if the banks aren't willing to write-down their mortgages and negotiate... a lot of people are just walking away from their homes and buying another one. Essentially they are taking matters into their own hands and writing down their own principals. Eventually, the bank will have to work with people. Otherwise, the banks shouldn't get a bailout at all because it's a never ending cycle. Without addressing the root of the problem, banks will continue to have to borrow excess capital.
The point isn't just blame. The question is why aren't the usual recessionary measures not working this time?
In 2001, the government did the same thing. People got stimulus tax refund checks, the Fed slashed interest rates, flooded the system with cash, etc. and the economy recovered fairly quickly.
This time, the Fed cash isn't doing anything because the banks aren't turning around and lending it out like they used to. Why? Because with these record numbers of defaults they're terrified that they won't be paid back. And who can blame them?
Even if you have premium credit, chances you're paying much higher interest rates because they can't trust anyone to pay them back.
Greetings sheri257,
The US economy is the banana tree. Banks picked bananas off the tree without asking and created a contract with someone who may as well have been a monkey and declared it an asset. Many people have no idea how this stuff works, Then these banks knowing these were jokes sold these "assets" around the world. They were in the process of dumping them but people wised up before they could so now the sucker of last resort is taking them.
Who is charged with the public trust? Not the monkeys.
snippet:
"But over the past seven months, the foreign community has been treated to the visual of three of the five largest US investment banks disappearing. One literally disintegrating in the night. They also watched as the largest two US residential mortgage-financing intermediaries entered Club Fed, never to be seen again in public. Let's face it, the foreign community knows Lehman had been around for 158 years. The firm had lived through a domestic civil war and a financial/economic depression. And what eventually took it down? Granite countertops, stainless steel appliances and travertine flooring. Quite the sorry commentary. You get the point. We suggest that one of the most important consumer confidence surveys of the moment is the monthly tally of foreign purchases of US financial assets."
Everybody wants to blame Wall Street but the real problem is your fellow Americans. Wall Street merely gave people what they wanted ... the ability to use their houses as cash registers and live way beyond their means.
As soon as it came time to pay the piper, people walked away ... in droves. They didn't care ... as soon as it became inconvenient ... they took the money and ran.
Now the financial system and the economy is on the brink of collapase. Not just because of the losses on home loans but because financial institutions have absolutely no faith that they will be paid back by anyone. And who can blame them?
The Fed can keep lowering interest rates and flood the system with cash as much as they want but ... as long as people keep defaulting and crapping out on their loan obligations ... the banks are going to continue to hoard that money.
Hence the credit crunch. You cut the flow of money and you basically create economic disaster.
You want to know who really caused this entire disaster? It's the American public.
Sheri, Great Post!!! Would rep you if I could.
Personal accountability is gone, and until it comes back...we have huge problems.
People thought homeownership was a right. News flash: Homeownership is a privilege.
People thought this, or did certain people in Govt. think this? Go back do some research on who thought it was a right. News Flash: It takes two to tango (as the saying goes). Placing blame on 1 group is ridiculous.
People thought this, or did certain people in Govt. think this? Go back do some research on who thought it was a right. News Flash: It takes two to tango (as the saying goes). Placing blame on 1 group is ridiculous.
The point isn't just blame. The question is why aren't the usual recessionary measures not working this time?
In 2001, the government did the same thing. People got stimulus tax refund checks, the Fed slashed interest rates, flooded the system with cash, etc. and the economy recovered fairly quickly.
This time, the Fed cash isn't doing anything because the banks aren't turning around and lending it out like they used to. Why? Because with these record numbers of defaults they're terrified that they won't be paid back. And who can blame them?
Even if you have premium credit, chances you're paying much higher interest rates because they can't trust anyone to pay them back.
This is exactly what the problem is. The assumption by people that what was done in 1990 and 2001 are a fix for recession. The "fixes" implemented in 1990 and 2001 are not the "usual measures", they were a postponement and multiplier of a natural correction. You cannot solve the problem of too much debt by more debt. Recessions need to happen to correct excesses in the economy. They are what punishes people for spending more than they can afford and reward the responsible for being in a strong financial position. They reinforce ethics, and shine light on unethical behavior. When you interfere with the natural economic cycle you rewrite the rules and reward the very behavior that caused the problems in the first place. People need to know where the boundaries of irresponsible and unethical behavior are, otherwise their transgressions become more and more egregious until you end up with the situation we have now. The more the government attempts to relive the pain and fix things the worse they make it.
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