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February 16, 2009

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"And the reality is worse than many people want to face, and as bad as I've been suspecting all along."

Is this some sort of an I told you so post?

First, foreclosures are going up, whether we deliberately "increase" them or not. They could reach 10M in the next couple years. They jumped over 80% b/w 2007 and 2008 (IIRC). That's happening - #4 is not a choice, it's a reality.

"And while we don't like, on an emotional level and as a matter of social policy, the idea of throwing people out of homes they can't afford... we're tending to miss the obvious. When people can't afford their mortgages, in that situation, the thing to do is... stop pretending that they can."

I don't know of anyone who's "pretending" people can still afford their mortgages - and by your statement you've completely left out renters in foreclosed properties - I think what pp are trying to do is stop the rising tide of homelessness and the downward spiral of neighborhood property values, etc. that follow from foreclosed properties. From my read there are numerous foreclosure victims that your post completely lumps together: a) there's speculator-investors; b) there's victims of predatory and/or subprime lending; c) there's renters; d) there's neighbors and local governments dealing w/foreclosed properties in their midst.

a) and b) tend to be in different types of neighborhoods - Las Vegas vs. Cleveland, for example; and c) and d) tend to be impacted no matter what. One thing our national discourse would benefit from is to be clearer about what neighborhoods and populations we're discussing, and most of the anti-foreclosure activism I've seen tends to focus on the lower-income, poorer, usually urban communities where subprime/predatory lending tended to take place.

Further, many of the nationalization arguments I've seen also demand wiping out entirely the insolvent banks - wiping out stakeholders, telling creditors to take a bath, etc. This seems like something you want, but you don't mention it anywhere in your post. This is why I recommended the Ferguson interview from Here and Now last Friday. See also this post:

http://oxdown.firedoglake.com/diary/3652

I think you're casting me into a callousness (or cavalier notion) I don't necessarily have, or an argument (as usual) where we don't especially disagree; there are some things you mention I left out mostly because they didn't fit (I am deeply concerned about the renters; but the underlying problem in those situations has to do with owners and their mortgage servicers - which is why I'd recommend the link to the Portfolio article to you, and the book they mention there).

Your a-d arguments also miss the obvious - there are people in homes who simply can't afford their mortgages. The bank or other lender wasn't predatory; their mortgage isn't subprime (the current wave of foreclosures is in Alt A, and prime mortgages are defaulting faster too); and they weren't "speculating." That's the real problem here - we're well past the point where the easy story of foreclosure is all about the evil predatory lender. It's bigger than that. And solving it by simply going after predatory lending (talk about closing the barn door after the horses escaped), isn't nearly enough.

I'm not saying I believe massive waves of foreclosure are the preferable solution; indeed, if it's not clear, I think we need a huge set of rewritten mortgages that change principles... but there's a huge wall of resistance to that; which is why I expect that, despite everyone's howling, that we will imply see foreclosures march on, at least through this year. And that's why #4 is a "choice" - foreclosures could leap exponentially for the next couple of years... it's not a great solution... it's not the solution I'd prefer... but we may well do it, simply out of failure to act on anything else in a substantive way. And yes, neither you nor I may "pretend" about foreclosure as the option in relation to people who can't pay, but lots of people still are, and it's driving what I'd say is a fairly fanciful discussion that we can just "stop" foreclosures, without dealing with the mortgages.

And again, you use "nationalizing" to describe what is simply individual banks being taken over when insolvent. That's insolvency; we have a process for it. Nationalization, really, is a bigger plan to bring the government into the operation of the overall banking system... and I reiterate, as a national plan to operate the banking system... we just aren't there. We have, we can, and we will take over insolvent banks, and when we do shareholders will be wiped out. No, at this point we don't know that a huge player like Citi will wind up there (I tend to agree with people who say they already are), but it's likely we can't avoid one of the top ten players going down. That's an event I don't think anyone's prepared for... and I think it's the big question of whether, by this summer, we're in a far more catastrophic scenario than we are now - and at that point, I don't think it;s a question of "can we do nationalization" - because we'll be lucky to have anything at all, never mind nationalizing it.

More than anything, I think we're arguing past each other - the question, as I see it, is what are we going to do about mortgages, and the point is... no one really has a lot of good answers, because we won't bite the bullet on writing down principles. And you won't even talk about that. That's what worries me.

"And again, you use "nationalizing" to describe what is simply individual banks being taken over when insolvent. That's insolvency; we have a process for it. Nationalization, really, is a bigger plan to bring the government into the operation of the overall banking system... and I reiterate, as a national plan to operate the banking system... we just aren't there. We have, we can, and we will take over insolvent banks, and when we do shareholders will be wiped out. "

In the discussions I've heard, and the link I posted, insolvency and nationalization are not two distinct options like you're treating them. So I disagree w/your binary characterization.

I just re-read your post. I have to admit, I don't know where you're getting your info that people are in denial. Most of the stuff I read - over on the too-passionate-to-make-sense ANGRY LEFT, apparently - understands the depth of the crisis, the reality of the housing bubble, the problems with securitizing and selling off the mortgages and the high-risk, unregulated financial instruments that followed from them, and the scope of the intervention needed, which includes massive write-downs, deep anti-foreclosure efforts and major re-regulation of the banks. Are these not solutions you endorse? What are the solutions you endorse?

Speaking for me personally, as an activist and a homeowner, I'm fine w/write-downs, so I don't know why you think I'm not willing to talk about it. Or something. I read your post as we can have foreclosures or we can have write downs, but then you criticize Obama's plan for write-downs. Again, I really don't know who this collective "we" is that you speak of - is it Obama, Geithner and the banks? Is it property owners? Is it the American people? Can you offer any better definition as to who's holding up the changes you'd like to see? I can tell you as a property owner who surely owes more than her house is worth, if there's a way out of that that involves accepting that my house is worth less but also revising my mortgage to reflect that lower value - fine! Cuz I sure can't sell it at its current price and why should I keep paying the inflated value?

So who's the problem here? Clearly it's not you, cuz you know the truth and the rest of us are in denial about everything, or too passionate to make any sense.

Finally, as far as I can tell, the conversation about nationalization is growing on both sides of the aisle. So where is it increasingly making less sense from your p.o.v.? Seems to me this is the bipartisan consensus you want.

What would I endorse?

I would endorse the rewriting of mortgages to reflect lost value in the principle; so far, banks, and a number of government folks in a position to decide, seem hesitant to dive in fully to that choice (from what I've seen, Obama's $50B proposal is mostly around lower interest rates and extended payments... and that won't cut it at all), and its implications. What I find in the, er... passionate left of activists is more emphasis on "banks as enemy" than I think is constructive, and a little too much "blameless mortgage holder" for my tastes. I agree many people were drawn into easy promises of low payments and free money... but at some point we need to address the fact that you don't just sign mortgage papers without understanding what's in them. There's way too many appeals to make this an emotional journey where some clear-eyed, and occasionally cold calculations need to be made. Not everyone will be able to stay in their homes, even with new mortgages. New mortgages should not be a blank check to artificially set rates and payments too low, either. That's why this crisis is so much more than people make it out to be... the chance we had to halt a lot of this before it would take down our whole system was ages ago... we're way past that now, and we may not be able to stop massive bank failures or huge streams of foreclosures, even with most well meaning efforts. And no, I don't think there's... still... a lot of clear-eyed acceptance of the fact that, for many people, it's too late to save anything.

And that's what I mean about "pretending and "who gets it" - I think a lot of people understand, in a vague sense, the contours of the mortgage crisis; but I know from what I'm still reading in blog posts and articles and seeing in videos... there's a lot people still don't understand, or reluctant to face up to fully. You seem, though, inordinately focused on my saying "people don't get it." Get it or not... we don't have a lot of answers.

As for the banks, I think there is a conversation about nationalization that's jumbling up a lot of ideas - we could step in to take over insolvent banks... but we're doing that. We could make a more expansive effort to have the government step in to take greater control of the banking system - thats really more of a nationalization, and there are people arguing for it. But I do think there's an overuse of "nationalization" to reflect the normal, already in use process of government intervention in insolvent banks. Real nationalization - like the Swedish model - is more than that. I think that idea is unrealistic. How else do I put it?

Finally, I've been meaning to say, as others are saying that I think the real test coming up is the "stress test" Geithner's proposed for banks. If he's serious... almost everyone believes that many very large banks can't pass the test. I think the question is what then... and I don't know that, as a society we've got our heads wrapped around the possibilities. I wouldn't, even then, endorse a lot of government intervention beyond taking over insolvent banks... but I think the government's "stress test" of whether it can afford, say to, take over Citibank AND Bank of America and, say, Capitol One... is an open question.

Also this, from Greg Mankiw (via Tim Fernholz, via Ezra)

If the government is to intervene in a big way to fix the banking system, "nationalization" is the wrong word because it suggests the wrong endgame. If banks are as insolvent as some analysts claim, then the goal should be a massive reorganization of these financial institutions. Some might call it nationalization, but more accurately it would be a type of bankruptcy procedure.

Bankruptcy could become, in effect, a massive bank recapitalization. Essentially, the equity holders are told, "Go away, you have been zeroed out." The debt holders are told, "Congratulations, you are the new equity holders." Suddenly, these financial organizations have a lot more equity capital and not a shred of debt! And all done without a penny of taxpayer money!

Ezra's here:
http://www.prospect.org/csnc/blogs/ezraklein_archive?month=02&year=2009&base_name=burying_the_nword

Mankiw here:
http://gregmankiw.blogspot.com/2009/02/nationalization-or-pre-privatization.html

This is the same argument I heard from Ferguson, and it's one I agree with.

I recommend this post for how to avoid telling your readers you think they know nothing:

http://www.fivethirtyeight.com/2009/02/things-i-think-we-think-we-know-about.html

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