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[john p]

So if both of you are right, which sounds perfectly reasonable, then the policymakers are in fact looking at the bottom up perspective and looking for that optimal catalyst to stimulate activity.

What is next? Do they continue?

As much as I vent about being on the losing end of this stimulus government intervention, it was also in my best interest that the economy didn't collapse and I think the housing market was an important structural element.

Perhaps, part of ratcheting this down they want to trade those that couldn't afford their homes at all with newer families that might not be the perfect candidates but can at least be a cash flow to keep some sort of heart beat for that particular property.

I think that if a young couple gets out of college with a ton of student loans and pay expensive rent and don't have much left over to save for a 20% down payment before they are 40 years old, I don't say they are "irresponsible", they just weren't in a situation where they could save that kind of money. I think that the banks and the governments need to play the hand they are dealt and work with the situation that many of these young families are in, otherwise they will have to rent in to their late 30's and buy later. The banks know they have to deal with this current situation which is most likely why they are making deals with many of these not so perfect situations.

I've been thinking about this for a while now, and I think that there needs to be some "Great Settlement" that forgives a certain percentage of debt across the board somehow in a macro, meso, and micro level.

I have thought that the macro level will come in the form of devaluation of currency, which I think will happen but we have these fault lines between debtors and creditors (rich and poor) and exporter and consumer nations. The Central banks will be important in administering the creditor / debtor relationship and the Governments will need to sit and have honest conversations about rebalancing debt and deficits. The reason why I think this will work is because it is really the smartest option and although people will complain about the past, this is about the future. In order to establish a fair playing field, they do need to establish a future code of conduct and benchmarks and regulations.

On a meso level, they need to come up with policies that don't reward States that overspend and speculate recklessly. Just like when a city goes bad, they need to follow more control from the State if they get State bailout, the US needs to step in and tell California that they can't offer public salaries and benefits that they can't pay and then expect bailouts from other States that have balanced their Budgets. Given that Illinois is one of the worst states financially, I doubt this will happen. This also means that they need to do things like cap Pensions at reasonable amounts. This will be tough to get to, but there isn't many other options. In this regard, I think Obama will get a second term only if he can avoid this: creating a fault line between the unions / public sector versus the private sector. From an integrity standpoint, he focused on Health Care because he knew that last year was their best chance. He took a major hit going to bat for what he believed in, and I am now watching whether he tacks back to the center or if he chooses to feed the public sector and unions and hope that they carry him to victory. If he comes forward and says, hey we've got to cut these pensions to sustainable levels, it will be the kiss of death with the public unions, unless the unions understand that their wealth is dependent on a healthy private sector that can compete in a global market. If Obama can bridge that, or get the public sector to buy into reform for the overall health of the nation, and can broker creditor to debtor and code of conduct policy with Central Banks and currency policy and writing off debt with exporter nations and covinces them that it is in their best interest to do so, he will be one of the greatest Presidents in recent history and I will put an Obama sticker on my car. That is a vision, a vision is seeing a State of Affairs that is the optimal situation for everyone and getting people to buy into it and sacrifice in some ways to get to that better State of Affairs. He needs to articulate this vision so that people will see that self sacrifice is in their self preservation interest. Obama needs to preface everything he says with "We need to do this because it is in all of our's best interest to do so in order to achieve a prosperous future..." Another challenge he's going to have to deal with is that he can't be naive and expect the unreasonable. We need simple elegant and achieveable / believeable solutions.

On a micro level, banks need to write off some credit card debt and bite the bullet with certain people, yet at the same time not ever allowing these families to extend like they did before. This way it will curtail their potential irresponsiblity and those that were responsible won't feel like suckers. Lastly, they should provide serious tax breaks for companies that set up shop and hire in poorer cities at the same time as breaking up all the public corruption that often plagues the poorer cities.

So, back to the $8k deal, if this is really helping us get to a better state, I will bite the bullet.

[balor123]

The Great Settlement is precisely what the bailouts were designed to avoid. The US government is trying hard to manufacture a world where costs only go up and debts are always repaid. A world where people, as a whole, never lose money but are permitted to keep it when it is made. Not surprisingly, just as the laws of physics can't be broken so can't the laws of economics. This hot potato is just being passed around and at this point it's not really clear who is holding it and I guess if you can't find it then it doesn't exist? Anyway, whether they realize it or not, some group of people are going to end up bearing the losses of all the gains over the past decade and I unfortunately I'm pretty sure it's not going to be those who made the gains.

[john p]

So with that perspective, how do you govern yourself?

[john p]

Oh, another funny "Boston Real Estate Trend" is this "Value Pricing". Have any of you heard of this:

in the ad it goes something like this... not kidding..

"Seller will entertain any offers between $450k and $600k."

Ummm, let's split the difference and offer somewhere around $525k...

[balor123]

[mpr]

[GenXer]

Debt forgiveness is the best way to crash the system. The more debt is forgiven, the more people will try this again and again, and eventually somebody will have to pay, and at that point there may not be a willingness to do so (if most of the incumbents who voted for spending get voted out). Thus, prices can fall even further, if this practice continues.

[john p]

GenXer:

I totally get the moral hazard about debt forgiveness.

MPR:

I get those distinctions you made, but I want to address the Pensions.

Both:

I see the debt forgiveness and the public pensions as somewhat of the same problem, here's why:

Use the LIBOR and the Adjustable Rate Mortgage Resets back in 2008. When people bought homes using ARMS back in 2005, a certain percentage wasn't entirely irresponsible. To many back then home prices bubbled up for a three year period and many thought that if they could pay a lower mortgage rate (effectively pay more interest over time), they could have three years of salary growth to catch up AND PAY THE PREVAILING RATE. Now what they were signing up for was a benchmark to LIBOR not a roulette wheel in Las Vegas. I don't think people understood these risks. What was pitched to them was that it would buy them a little time to catch up and it was a way to absorb the bubble and move forward with your life. I'm talking about individuals governing themselves based on an Economic Context. Sort of, given the State of Affairs at the time, reasonable people expected this range of results and that formed the Basis of their Evaluation.

http://www.usatoday.com/money/perfi/columnist/block/2008-10-20-ym-libor-arm-mortgage_N.htm

Now, a person who buys a lottery ticket can't say my basis of evaluation was that I'd become a millionaire and because I didn't win the lottery, I can't pay my rent. What I believe our society is about is if say someone, God bless them, has a child with down syndrome or something, that society doesn't say "Hey, that was the risk you took when you chose to have children". Our society says, "We're here for you". Now the debate moves to how much money they can afford per child, but the bottom line is that if someone gets hit with misfortune that is completely outside the bounds of a reasonable basis of evaluation, consideration and relief is given. My political belief is that we should preserve the public safety net for those that really need it.

The challenge today is that the range of misfortune is so vast that you have both innocent victims and irresponsible. I think that this whole loan remodification let the banks determine who was responsible or not, as absurd as that was, and further, the low mortgage rates were only accessible to those that bought prior to the bubble or had substantial down payments to absorb the price drops so the rich got richer. The Boston market is one of those markets where we had a correction, but not so much compared to areas of California or Florida. For example, I needed my house to appraise at $530k and it came in at $519k so I couldn't refinance without a ton of closing costs (even though a house three doors down which was 400 square feet smaller sold for $532k two months prior). How do you think it made me feel to read reports of some woman who bought a million dollar home with an ARM in California who refuses to pay her mortgage simply because what she owes is more than what the house will sell in the market, getting a $250k write-down from the same bank that denied my refinance? What was worse was that one of the houses that this bank used as a Basis of Evaluation had a patently false record of square footage. Don't think that this write down isn't happening, it is. My problem is that there is no Basis for this Great Settlement. It will, and it is being settled, but people need to talk about it openly so that we have honest evaluation of it.

Now this is related to the Public Pensions because at the time that the Public Pension Formulas were written we had an economic context where public sector employees made substantially less than the private sector, and the private sector was larger and was much more dominant in the global market. The policy to the public employees was always to make sure that they never fell behind, but had no fair correction when they got out way ahead. Now again, this is being settled right now. Younger public workers and union members don't get the same deal and protections as the older ones. Now, I don't care about giving a retired school teacher his/her pension if they were making a reasonable salary, I just think that an executive secretary or janitor making six figures needs to be adjusted, or if there are ten people in a department when they only need three, that needs to be dialed back.

Now, going back to the "Structural Flaw", where are you going to put these laid off public sector employees? If the jobs are draining out of our Nation to others that allow for pollution, child labor, etc. there is no private sector for them to go to. This is why we also need a Great Settlement with the exporter and consumer nations.

It is going to take a real skilled statesmen and politician to thread that needle and sell this fair and open settlement that acknowledges the anomolies of the market while preventing the moral hazard. I think that if Obama decides to target this State of Affairs and lets go of his loyalty to his base of public sector and unions, that he could actually pull this off. I think the guy could actually broker this deal and settle this structural flaw to a significant degree. I hope he has good advisors to help him lay this out and make the case.

[mpr]

John,

No doubt these moral questions are important for a functioning
society, and indeed you cant completely separate them from the
engineering questions since, as you're pointing out how you choose
to reengineer will produce winners and losers.

The govt's efforts were mainly aimed at preventing a collapse of the
system and giving it time to adjust. Unfortunately it was inevitable
that this would result in a large amount of "unfairness" of the kind
you're describing.

I put the " " because honestly I think your view of the world is somewhat
quaint compared with reality. Modern US societly is uniformly unfair on
many levels. The points you're complaining about are only slightly more
obvious than usual.

For example, there is an analysis which says that the woman in
California was offered an ARM with a legal "option" not to pay if the
value of the property fell (because she could walk away). This happened
and she exercised the option. In doing this she took advantage
of the opportunity presented - very American. If you failed to take
advantage of this, its your own fault.

Obviously this is somewhat tongue in cheek, but I think the above
is much closer to the way financial actors in the US really function
than your idealized view of the way the world should be.

[GenXer]

Government cooking statistics and misleading its citizens? Say it ain't so.

Commentary: Five reasons the employment numbers are worse than they seem

The news on jobs isn't as bad as it seemed on Friday.

It's worse.

http://finance.yahoo.com/banking-budgeting/article/109739/the-bad-news-bad-news-on-jobs?mod=bb-budgeting

[CC]

The housing-market recession is not over
Why you shouldn't be overly optimistic about real estate right now

http://www.marketwatch.com/story/the-housing-market-recession-is-not-over-2010-06-09

[GenXer]

http://finance.yahoo.com/focus-retirement/article/109867/in-budget-crisis-states-take-aim-at-pension-costs?mod=fidelity-readytoretire

Its now a proven FACT. Pension funds will run out of money, and faster than people realize. Everybody knows that the only way the states are going to survive this is by cutting the benefits of current retirees (and of course, the future ones). Most will probably try to get bailed out by the government. The problem for them may be that in the future, there will not be much interest among the voters to bail these States out. So in the end, after many legal challenges, I'm sure something will give. Either the States will get bailed out, or the benefits will be cut. So place your bets now...I wouldn't want to bet on the bailouts thought. The question is, how much of a cut is going to be required, and how that is going to be determined.