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It was probably a bit unethical, but it was within the rules set by the federal government. If the government says "take out bad loans, take on extra risk, and we'll cover you if it fails, and oh, if you don't your competitors will", then it's a bit unfair to say "you did what we asked".

FWIW Strat, I know a few people who have worked directly for Henry Paulson, and they "claim" he is one of the brightest financial minds they have ever met and have the utmost respect for him. They have never questioned his ethics. This came from two people whom I feel are honest people.

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Yep, and that's exactly the point. If you say to people "this is the only way you can expect to compete", then you can probably expect people to behave that way.




Yeah, I've seen some "free market" solutions proposed, but they don't seem to completely solve the problem, to me. I think the first solution, though, is to get rid of the fiat currency. Before this latest crisis, I figured Ron Paul was just being flaky about this issue, but I'm starting to buy into the need for a commodity-based currency, combined with no federal backing of failed banks. It gets complicated quickly, though, because you have to look at a couple hundred years of world history, across countries, and examine each case and ask what was primary and what was secondary. What causes bank runs? How much damage do failed banks do to the economy? In the absence of disincentives, what kind of risks will banks take?

There are no easy answers, but it's clear our current system is a mess.

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I'm not really sure what education would do. I KNEW why it was generally a bad idea to take out 100% mortgages and credit lines, but the incentives were set so that it was too hard to ignore them, so I got sucked in. And that's somebody who is smart and a chicken with money, what hope is there for people who are a little less of either? Can we ever be educated enough to ignore the chance to do something that makes sense for us, at least for now?

You really hit the nail on the head. When friends of mine were buying homes a few years ago and telling me what they were spending, I would tell them that there was no way that the market was going to sustain itself. They all had lots of reasons why it would even though it made no sense. I was renting a condo for dirt cheap for several years, was contemplating moving out of state for a few job opportunities and had some other financial obligations (car payment for both me and my son, college tuition for him) that I knew it was not the right time to buy. It would be easy for me to say that I was too smart to fall for what was going on, but the reality is that if none of those situations were occurring I probably would have bought during the hype as well.

It is human nature to make most purchases based on emotion than logic.

Were they buying homes in order to sell them?

If you buy a home because you want a place of your own to live, it doesn't really matter what the market does afterwards. That's assuming you can afford it, but if you can't afford it, that's still not really a market issue.

Made me think of this article in Rolling stone magazine that some guy spent 30 minutes telling me about one day when I was trying to leave work.

Capital Ratios and tighter regulation.

The main reason that the Canadian banks have weathered the banking crisis better than banks in other countries is that the regulators here required higher capital ratios so that they couldn't over extend themselves with huge risks.

http://www.reuters.com/article/idCAGEE5AM11I20091123

One of the new realities Worldwide for banks is going to be that regulators are going to require higher ratios which should help to reduce the amount of gambling that they do but of course it won't work in all cases.

Well, maybe. Assuming you are not going to move or take a job out the area. We bought our house in 2003, with the thought we probably would not be there longer than 5 years (start a family need a bigger home and/or possibly relocate for a job). Both those things happened, I bought way before the market peak, and I am way way upside down in that house. My mortgage payment is more than my rent I get from renters.

All the home improvements I did on the house to make it worth more at this point is wasted money, unless I keep the home for 10+ more years (which I probably will) and I did those all my self, so the only cost was the materials.

What were we talking about again?

How you sould have rented a condo and invested your money in stocks and gold...

When I said "buying a house to live in," I meant long-term.

Define long term.

Not planning on selling in the foreseeable future.

I'd define long term as "until the kids move out"

Define foreseeable future.

The future that you foresee.

Long Term, Foreseeable future, and the future that you foresee is all relative to who we are talking about.

Take My wife and I as example 1. We, much like El Guapo, bought our condo with our "Long Term" goals being 5 years at which point we want to start a family and possibly move out of state. We bought right near the peak, July 2006, and now we find ourselves 3 1/2 years later ready to start a family. We are going to put our house on the market in May and see what happens ... i'm thinking it will be bad and we will probably end up just staying put where we are for another couple of years, but we might as well see if we can sell.

Take my parents as example 2. When they moved to Hawaii and bought their piece of land their long term goal meant the rest of their lives. They have been there over 20 years now and they have no plans of leaving.

EDIT: Now that I think about it you guys were just messing around with each other and both know this ... Well Played sirs ... well played

Honestly, I don't know if Guapo is messing with me or not.

Do you think you made a bad decision in example 1? I don't.

Personally I don't think we made a bad decision per se. We did the best we could with the information available. We also talked with the seller and got the price down 50K from what they were asking. All that being said we could afford and can still afford the condo that we bought and we put 10% down with a traditional 30 year on 80% and a HELOC on the other 10%. It just sucks now because we want to start a family and we can't really afford the house with just one of our incomes. It would be nice to be able to sell and get our deposit back and put that on another house out of state where we could get more bang for the buck. Either way though, I try not to second guess that decision too much.

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Speaking of Bailouts. Since this money is being returned wouldn't you think the best thing would be to use this money against the defecit. It's like they think since it is being paid back and there is extra money that they HAVE to spend it.

HEY GUYS ... IT'S NOT FREE MONEY.

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http://www.msnbc.msn.com/id/34341033/ns/bu...at_a_crossroads

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Bailouts are still bad...they are a 2 outer

Yes, the banking bailouts worked out much better than many feared. It's hard to argue that they weren't successful.

Unless you happen to be one of the banks that was put at a competitive disadvantage because they lacked political clout with Bernake et. al. Or the taxpayers who now have to put up with a congress and president that think they have finally discovered the secret to central planning.

But yeah, everyone else made out like bandits.

I don't think Lehman would still be around if the bailouts hadn't taken place.

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And there is the rub. I think Henry is probably (definitely) correct, in a vacuum, that we would have been better off long term if we just let everyone fail. In reality, if Obama (or Bush for that matter) had just let everything go to hell for a couple of years, there would have people amassed outside the white house with torches and pitchforks instead of signs depicting Obama with funny mustaches.

Sorry, my post was confusing. HBlask said that the bailouts put the banks that didn't receive federal money at a competitive disadvantage. I countered by saying that banks, such as Lehman, were doomed anyway. In other words, it wasn't the competitive disadvantage that caused them to fail. If their competition hadn't been bailed out, they still would have fallen.

I don't think this at all. Why would it be better if we had gone through a mini depression for 5 years or so? That doesn't makes us stronger in the long run, it makes us much weaker. The effects of such a mini-depression would ripple for decades and would almost certainly ensure that China surpasses us as the dominant superpower in the world.

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And perhaps you have a point there -- that with the government and banking so intertwined, and fiat currency run amok, and rules that encouraged a few big banks to become "too big to fail"... well, maybe in this case we had to. If that is true (and I'm not totally convinced of that), then we need to fix the system so that we are not on the hook for poor choices at private businesses.

The reason I say I'm not totally convinced this was necessary was the same reason the car company bailouts were a bad idea. Companies don't just evaporate when they go bankrunpt -- the are split up and moved around and reshuffled, and life goes on. By bailing them out, we've just created another generation of "too big to fail", leaving us on the hook for a bigger bill next time.

I disagree. If the fundamentals are messed up, a mini-depression is exactly what we need. The sooner we adjust to economic reality, the better. The government can't change reality by inflating a second round of the first bubble, it just puts off the inevitable.

I think some would say that by doing the bailous we will be in a mini depression for the next 10 years instead of a 2 year massive purge. However, a lot of this stuff is over my head (I got a C in Honors Econ at Penn), so I just like to throw ideas out there and see what you and Strat and Henry and others have to say.

Of course some will say this. But they're wrong.

Max depression was 6.7 years by most economist that agree with me on this

So out of a desire to understand things deeper than the normal shallow political level I strive to maintain.

Had the government not guaranteed bad loans,and encourage them through Fanny and Freddie, would the bad loans themselves have resulted in the need to bail out the big banks?

Or was it the post loan actions of grouping them, selling them, insuring them etc that really caused the collapse?

"The Obama administration has extended the $700 billion financial bailout program until October, setting up a struggle between Democrats who favor using some of the leftover money to help generate jobs and Republicans who say it should be used to shrink soaring budget deficits. "



That was the first paragraph of the article I linked ... but yeah ... nothing to do with bailout at all. Carry on then.

Think of it like a nuclear bomb. ( and please pronounce nuclear in your head like Bush says it )

The bad real estate loans were the conventional shaped charge trigger and the bundling and insuring and casino gambling with them was the atomic warhead.

The big bang won't happen without both parts but it's the atomic warhead that does the damage that is hard to come back from.

Speaking of bad real estate loans, I have two friends in the mortgage business. One sells them and the writes them and they both tell me the forclosure market is a long way from over. we can always use the funds to rebail someone else...that would be great. Instead of getting something fixed we can just continue the cycle.

Next can somebody explain how this is true?

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I've been wondering the same thing! I keep passing the same billboard here in NYC. Who's paying to put this up?