An admirably clear explanation. So clear, in fact, that it is hard to see how we geat out of this mess. Taking a senior preferred equity stake in some banks may be the government's best option for injecting new capital, as some money managers, such as Paul Johnson have advocated in principle, and as Warren Buffett has shown by example, but the economy may be weakening so rapidly at this point that even new capital may not be sufficient to stimulate more lending when there appear to be so many weak hands reaching for it.

And, for all of the reasons Professor Becker indicates, it is hard to see how we protect innocent parties (such as money market holders) without creating serious moral hazard problems. Nevertheless, if we must role the dice with $700 billion, I am for giving Secretary Paulson as much discretion as possible to deal with the emergency. We can worry about the long-term regulatory rules when the crisis passes. I just don't see a rule-based, or policy-based solution in the short term.

There's already a paper from Lucian Bebchuk on how to inject liquidity into the market without overpaying for the securities (and thus without bestowing a massive gift on the sellers). As the author puts it:

The Treasury could divide the $100 billion into, say, 20 funds of $5 billion and place each fund under a manager verified to have no conflicting interests. Each manager could be promised a fee equal to, say, 5 percent of the profit its fund generates — that is, the excess of the fund’s final value down the road over the $5 billion of initial investment. The competition among these 20 funds would prevent the price paid for the mortgage assets from falling below fair value, and the fund managers’ profit incentives would prevent the price from exceeding fair value.

Warren Buffett's thoughts on Paulson's plan are worth pondering: http://mathoda.com/archives/362

I am unclear on how your proposal would solve the problem. I was under the impression that the uncertain value of the mortgage-backed-securities was the main problem as the holders of those securities cannot sell them without driving down their value. At the same time, if they do not sell them, they keep them, and are uncertain as to their value and therefore cannot calculate their assets. You propose that instead of buying the securities from the banks, the government instead buys shares in the banks. This will provide an injection of capital, but the initial problem remains. If the banks do not sell their mortgage-backed securities, there is no way to tell what those securities are worth. And so the banks are unable to know what the value of their assets is. If they cannot measure their assets, investors will lack confidence and the banks will not know how much they can safely lend or borrow. The credit crunch will continue.

To conclude: How does your proposal address the uncertain value of those mortgage-backed securities? Unless that problem is addressed, won't the credit crunch continue?

Why dont we just pay off 2 million mortagage notes @ $350,000 each. This way we are giving the banks there infusion of $ paying off these bad loans and helping 2 millon households who will end up paying for this mess.

Great, concise summary of the issues. A few comments:

1) Related to the moral hazard problem, some commentators are arguing that the only way to truly remedy the investor confidence problem is to allow a number of banks to fail/go into receivership so that their houses will be cleaned. Obviously, this will mean a great deal of pain.

2) The deceptive practices Judge Posner alluded to have impacted home values to such an extent that, arguably, hundreds of thousands of U.S. home buyers have been defrauded. Admittedly, it will require more data/investigation to reach a responsible conclusion on this point. But this makes the phenomenon more than a simple bubble.

3) In reading discussions about the inevitable market price correction in residential housing, I have seen little out there about the likelihood that home prices will, at least for some indeterminate time, fall well below a stabilization level. No one seems to know how the witches' brew of weak dollar, recession, increased unemployment, and credit crunch will combine. But the lower prices fall, the more persons will be "underwater" in their mortgages...

4) Mortgage reformation on the consumer end is both just and essential. It is just because banks recklessly changed the traditional mortgage lending model in recent years from mortgagee ability to repay to mortgagor's ability to sell paper on the secondary market. It is unrealistic to expect the average homebuyer to have understood this business model shift and how it necessarily contributed to the bubble phenomenon.

We know that many appraisals were fraudulent and we now have reason to suspect MBS creation was heavily tainted by credit company fraud, as well. Time will tell the extent of any collusion...

Mortgage reformation is essential to mirror the correction taking place in the secondary market in valuation of MBS. Once MBS's are bought in tranches by the U.S. and reconsolidated, someone should just cut the Gordian Knot of these silly things and unwind them. The entire economy can't be held hostage by some math whiz's complex encoding. Homeowners should be allowed to deleverage in tandem with the banks, since estimates are that the actual ("stabilization") value is 30% -35% down from where we are now.

If, as Judge Posner suggests, the U.S. follows the Buffett/Goldman Sachs model and drives a hard bargain, reforming underlying mortgages can do no worse than bringing the consumer debt acquired by the Treasury more in line with the actual price paid. I would argue that the resulting paper will be far more valuable because default rates will be lower, and the taxpayer is therefore more likely to recoup. The government's extensive costs in reprocessing mortgages should be factored in when purchasing. Other reformation options are available to the government to strengthen likelihood of repayment in exchange for debt relief.

What I don't understand is how the u.s. government via fannie mae ended up underwriting no money down, interest only mortgages to people without income verification. After all, it is the underwriting by the government that allowed these securities to be sliced and diced into into a toxic soup.

It's a house of (credit) cards. The fundamental criticism by his Honor is right on - the Treasury is swapping debt for debt, with no infusion of new money. Becker is spot on when counseling against gov't ownership of private companies - that's swapping moral hazards for political ones.
I tend to agree with Calvo, provide 2nd mortgages to those homeowners that can meet modest financial guidelines, then they use the 2nd to payoff the first (how about at a 75% discount)mortagage. Then, the gov't is a mortgagor rather than holder of bad mortgage-backed securities and shareholder in Wall St.

Your argument seems to be that the government needs to inject capital because private investors can't readily determine the asset value of many of the banks, so they refrain from investing in those businesses due to that uncertainty. If the government buys the dubious assets at their "true" value, whatever that is, aren't they in effect removing that uncertainty, and price discovery can begin anew on the value of the remaining banks? In this case the government is not infusing the industry with capital, but rather trying to re-establish price discovery mechanisms to enable the investment function to work as it does in normal times.

The math of import today is too many nays and not enought yays for the bill to pass. Stocks resume slide.

Thomas Brownback:

I like the idea you put forth for injecting a market approach to the bailout.

One would hope that those buying the portfolio would see advantages to doing work-outs rather than foreclosing... but! since I trust W-S even less than government, I'd think that pre-sale there would be a mortgagee bill of rights. There is no chance folks can make it in this environment with usurious ARMs so strip all those terms with a max of 1% above normal mtg rates.

But, truth is there is no magic to offset the tanking of home prices. See my next post:

How far WILL housing fall?

http://mysite.verizon.net/vodkajim/housingbubble/

Take a look as this chart. Note that the bubble has tanked about 25% ....... so far.

Now put your straight edge on the inflation adjusted long term trend line --- this will give you a rough idea of the support level price.

Here's why that trend line is the "support" level:

"Notice that in the 25-year period from 1975 through 1999, real house prices stayed roughly within the range of $132,000 to $171,000. Only since the year 2000 have real house prices risen above the top of this range. The United States median price was at approximately $206,500 as of the second quarter of 2008. This is 21% higher than the previous housing boom peak of an inflation-adjusted $170,900 in 1989."

........... in addition NOTE that the trend line reflects the similarly flat median household wages of $48,000. ie.. maxxed out, one can buy a house priced at about 3 times HH income thus, the fundamentals point to median home prices in the $150,000 range.

But! of course housing itself skews to a bit higher income range because those much lower than median can not buy any home and dwell in apartments, mobile homes, or rooming houses.

So, Let's say that housing might balance out at $170,000 or the upper end of the long term trend line. What that means is we've another 20% drop ahead for nearly 50% total ---- with worse, FAR worse in the hottest markets.

Now if you peek at the LV chart you'll see they began tanking earlier and faster than many others. BUT, , in addition to being WAY overbuilt, their economy built on fun, fun, fun and costly conventions is tanking much faster than is the rest of the economy......... so, one suspects that Vegas home prices are very likely to bust down thru the long term trend/support line before flattening out. One has to keep in mind those "investors" who've long been flying into LV to "take possession" for $100 and all that phantom inventory being dumped or foreclosed outright.

So... where are we? Will Paulson's "deal" plus the mandates to do "workouts" with Main Streeters be enough of a shock absorber to avoid another "crisis" mid next year as the long term trend line is approached?

Maybe. But I rather doubt it. This is just enough to A. get through the election B. provide cover for a hasty exit by all who are on or near the stage today.

A bit more to my analysis:

There are about 50 million loans outstanding with 10% said to be "in trouble".

Now consider! The average loan is held only 7 years. So.. we've two classes of home owners. Those who've held longer than the average........ and the other half who've purchased in the last seven years and taken advantage of low down, no down et al. In short they moved in with no equity or at best, little equity.

Given a 45-50% drop in prices, on average, all who bought in the last seven years will be underwater from a little under to under by 25%, 50% or more. Most will not be able to hang on and many WILL not keep paying on a home deeply underwater even if it is arithmetically possible.

Those who bought before 2000 should be OK....... they'll have experienced a fine run-up in paper equity which is now disappearing like the morning fog under the noon day sun but won't lose their homes. They WILL feel much poorer though and will delay buying new homes, new cars, taking trips etc and with not other source of wealth I'd predict a worsening recession.

In closing there is, of course the matter of FLAT wages for 20 years despite a DOUBLING of per worker productivity. I've long pointed out that this economy can NOT fly on one wing, so IF our economy is to ever recover it is going to require getting some spendable income down to the working folk of median and lower incomes. Ideally it would come from wage increases, but those are not likely in a contracting market, so next best would be extended unemployment benefits, the per person spurring of $1,000 or some such and addressing what is surely a market manipulation of oil prices that is impacting those of lower incomes so heavily.

Where does the money come from? Like all wealth it comes from productivity. Our productivity per capita has doubled in 20 years while median and lower wages remained flat; working folk much participate in the "rising tide" or we'll continue to have a sick economy that is lacking in demand.

Jack

Not to toot my own horn but I've been pitching BONDS for weeks if not months. I'm talking about, in effect, force-fed coupon bonds issued "on behalf of" (like an indenture) the sick enterprises. The U.S. becomes & remains a super-secured creditor until the bonds are retired. Come on American, Japanese, Chinese, Arab, European, South American, et al., savers and investors. Nobody cashes in on bond proceeds without the FDIC's go-ahead. The taxpayer fronts initial working capital + interest but the sickos have to establish sinking funds and pay off the bonds out of future earnings? Careers in banking, any of you young 'uns? Maybe the taxpayer could help you with grad school or law school. I'm neither the President nor do I have a vote in the Congress. But I like that lady, Sheila Bair, who runs the FDIC. She's cut from Seidman's cloth, and she'd be hell on wheels if she had some money to work with. Get good people committed and keep it simple, Congress can pass a strong bill that only the culpable will fear.

One major loophole in the bailout proposal is that it does not mention anything about the treatment of assets from banks that have already filed for bankruptcy. The marks that the Treasury will use to purchase mortgage-backed assets from still operating banks have to be in line with the prices realized for similar assets during the liquidation of institutions like Lehman or Washington Mutual. Otherwise we would allow the creation of two separate markets for mortgage backed securities with inconsistent valuations. This would offer arbitrage opportunities at the expense of the tax payer.
A bank that holds eligible assets on its balance sheet could agree to sell these to the Treasury at 70% face value arguing that this is the "hold-to-maturity" value. At the same time it could turn around and buy the same (or similar) assets for 30% face value (which would be the current market value) from a bankrupt institution and realize a 40 Cents arbitrage profit for each Dollar of face value.
As long as the Treasury does not communicate exactly how it will protect the tax payer from overpaying for these illiquid assets, people will reject the bailout bill...

The dilemma we are in is one of the role of money lending in a capitalist free market economy. The money lenders are saying they can no longer make money on the money they have lent. They cannot roll it into cash, into new borrowing. Therefore the money lending gravy train is coming to an end. They want the borrowers to buy them out so that they can lend more money to a few, a very few, of the borrowers. The moral hazard question is whether the borrowers are going to yield to this, this graduated fraud, by the money lenders. They were fought off today, but they will be back. Even our presidential election candidates are on their side.

We had Enron then Arthur Anderson cooking the books... Now this. Let the market work. It will adjust. Lets get past this in a natural way.

I see way too much debt in America. Where is my social Security?

I've been restrained and do not want to pay for those who have not. We need to feel the pain and learn from it. This is good!!

Christian, it is not working in the way that you repay all the mortgages and then everything is gonna be fine. There are two reasons. First of all, if mostly the value of the subprime (but also part of the prime is involved) is 10, there is a level of CDOs in circulation 100 (or probably 1000)times that value, because they issued CDOs on CDOs. So the suffering securities are much more than that value. Secondly, there is no liquidity for that market (no demand) but few liquidity in the market in general (mainly for lack of confidence). Therefore, financial institutions are holding a huge and undefined amount of securities for which nobody is going to pay a penny, also if you decide tomorrow to repay all the mortgages. The reasons of this is that the bankruptcy in the last months of all the banks or companies directly involved on subprime and the increasing number of foreclosures have already emptied the box on which these securities (issued till the end of the 2007)were issued. In fact, the bankruptcy of those companies has been determined also for the impossibility to resell the foreclosed houses on the market (price down because offer was much more than demand; who was supposed to control the growth of the construction market and the inefficiency of the rent market??? it's not only a problem of the credit market!). Hence, when progressively those securities go to maturity those institutions do not get anything from them. There is only "toilet paper" on the market right now!
So, the bailout plan, rebuying those securities, want to give back confidence and trust on the market restarting the exchanges and increasing the liquidity on it, fuelling new exchanges and reducing the negative impact (also on the confidence) of those troubled assets.
What is not clear in this plan is, firstly, how do you define the price of this "toilet paper", because the real value is very low and on which basis they are going to help some institutions instead of others. My opinion is that there are also reasons linked to the difficulties for big firms like GM and Ford to find resources for their new restructuring programs (the alternative is another disaster on the real economy). These doubts, i think, pushed the Congress to correctly say NO. The solution should be to help only some big institutions (Citigroup, Goldman and Bank of America) giving strong incentives to the entry of new private capitals (like Buffett in Goldman, but in general hedge funds (the richest part of the market at the moment)) and taking stocks till the control if nobody is going to show up. The way of the "funds" proposed by Bebchuk could be one of the ways to do it. However, the profits those managers should generate (performance fees) from those securities are inconsistent, so they just would buy healthy securities not solving the problem of the "toilet paper".
This would already be a "public intrusion" in market mechanisms! I do not want consider at all the last plan proposed to the Congress, just because it gave money to banks and other institutions, as the problem was to make a lifting of their balance sheet, not considering the instability of the entire financial system and of the real economy on the background. And $100bln to the discretion of the Treasury's secretary looks so "Italian Job"!!!

Gentlemen, thank you. Alice and the rabbit are in the hole.

I have a question, maybe a dumb one. From the description, I gather that "banks" sold the mortgages and took the mortgage backed security in return. Those securities are now tied to the value of the mortgage, which they no longer control the value of.
Why don't the banks just buy back those mortgages that their securities are tied to. If they overpay, their securities value goes up, No? Wouldn't this help the balance sheet and its real value too?

Please link to this site♪

It looks like the House found the "bailout pill" a bit to hard too swallow and rejected it. The question now becomes "Where do we go from here"?

The reality is, everything depends on free flowing monies/credit, and nowadays, at high velocity across numerous frontiers. So what happens when it dries up? Everthing else dries up with it and much like the Dust Bowl blows away.

We've got a problem and it is a real dusie! Unlike the ostrich, we can't stick our heads in the sand and hope it goes away. Much like Congress and the rest of the Country seems to think.

Is it intentional that Posner smiles with his and Becker's own commentary and is not smiling with the replies? My own response to the discussion of bailout was that it, some media was describing it as bailing out the banks that just foreclosed on your house. My feeling, in response to some media perception was that not bailing those banks out
might promote the banks selling back the homes to those foreclosed upon for some lesser amount. I thought Posner's discussion of investment in these
companies rather than takeover made some
sense. It still seems to me that floating
bonds all the time to pay for everything
has economic consequences that Posner
is not discussing. I apologize as I did not
read the other replies to the Posner's post. For the
first time today, I saw what seemed like
a gorilla praying on the ground. I will try
to sell the photo to trib etc. Just using that
as an example of how normal projects like selling
a picture of a gorilla seeming to pray often
do not have any benefit. Similarly, normal concerns
such as buying or investing in banks have
unintended consequences. I have still not bothered
to study the list of what is being bailed out so
my perception is limited and faulty.

On a lighter, brighter, more hopeful note...here is a web site for Dina Cat Posner:

http://videos.komando.com/2008/09/24/the-boxing-cat/

Patrick, the structure is not that easy. Basically, State-chartered companies or little banks made those subprime mortgages (and some very risky prime) to people with low credit score. Those mortgages had been packaged mainly by banks that mainly bought those mortgages from those companies. These packages are structured by investment banks that underwrote some of those MBS (mortgage backed securities; a lot in this case). Many of those MBS had been packaged in other CDOs, increasingexponentially the leverage. It is oftenly used the metaphor of a box in other boxes. Those securities were strongly appreciated by financial markets because they gave a good yield and the risk was theoretically low because the assets behind them (mortgages) were supported by the increasing price of the houses (increasing home value; always increasing in the history of the US). It's important to precise that rating agencies classified those securities as triple-A (like Treasuries Bonds), giving to them a better appeal.
Therefore, the money freed from the packaging banks were mostly used to create other mortgages through the little companies or merely to bump the profits of the big banks that bought those mortgages from the little State-chartered companies to package them on the financial markets. How do you justify the impressive and enormous amount of profits in the banking sector in the last years???

Thanks Diego for the comments,
I apologize for the simplex question. The optimist in me kind of hopes that the Banks will help clean up their mess. But I remember reading that some of these securities may be duplicates tied to the same mortgage and are held by different institutions, and therefore nobody knows which, if either has any value.
I know that some sort of government intervention is needed, but hope that the banks will at least do the due diligence to determine what they hold, and where they think there is value - do the work to clarify what it is, and when possible clean up some of their own mess (and hopefully mitigate their losses at the same time.) I guess the root of my question (rhetorical) is if there is some way, with market incentives, to get the banks to do the research in determining value. My guess is that whoever was snatching up all this paper at these banks a couple years ago has a little free time now to do some due diligence and figure out exactly what they hold. I don't think we can put the genie back in the bottle, just want to identify the bottle and the genie.

Here is Thomas Cooley on Forbes.com with an interesting proposal for mortgage reformation:

http://www.forbes.com/home/2008/09/30/mortgages-haircut-paulson-oped-cx_tc_1001cooley.html

Brilliant analysis, but there is something I don't get, possibly because I am not familiar with the jargon:

What made the situation worse was that rather than retaining the mortgages that they originated, banks (especially the major ones) sold the mortgages in exchange for securities backed by the mortgages.

This sounds like banks were relabeling loans as assets (and losing their connection with borrowers into the bargain). In other words, creative accounting. Aren't accountants and credit raters supposed to ring alarm bells when this happens? Or am I missing something here?

Snorri, In response to your question in general is "YES". Providing the accounting method is in violation of the Law and acceptable Accounting Rules. When not, it's Debit's and Credits as usual. With Credits sometimes becoming Debits and Debits becoming Credits. That's how Enron and Arthur Anderson got themselves into so much trouble.

Ever heard of Deregulation and the old "Shell Game"?

Snorri:

The banks (in Posner's essay) are looking at two sets of "loans." There is the money it borrows from its depositors and investors, and then the money it lends out.

To a bank, the loans it makes to others are assets. It takes in money from its investors 9as deposits or not) and that money is an "asset." When it then lends that money to another a right to be repaid arises, and that is an asset too.

The key to why banks repackage the loans is diversification and flexibility. If I buy a single mortgage loan from a bank, I face the specific credit risk of the borrower as well as systemic risks in the economy as a whole. If I buy 10,000 mortgages I face only the systemic risks. Why? Sure, Bob may default and not repay, and Susan might burn her house down without adequate insurance and then declare bankruptcy...but if I have 10,000 mortgages I can come very close to predicting how many of the borrowers will default, and how many won't based on historical examples. I then use that data to adjust the amount I'd pay for the "pool" of mortgages as a whole.

The default risk I still face is that some factor raises the default rate for everyone in my pool (as happened here) more or less across the board. In other words, the risk is that the historical default rates of the past won't be a good guide to future default rates.

These pools are also good because, with that many mortgages (and to simplify), I *know* as certainly as I know anything that I will get back at least $1,000,000 on my 10,000 mortgages (which, say, works out to 2,000,000,000 in principal and interest on my loans). One million dollars is only $100 per mortgage and it would take an asteroid hitting the Earth for the defaults to be so bad that I missed that mark (again, a systemic risk).

So I am 99.9999% certain of getting $1 million. Let's say, based on my past data, that I am:

* 95% sure of getting at least $200 million;
* 90% sure I'll get at least $1 billion;
* 75% sure I'll get at least $1.5 billion;
* 50% sure I'll get at least $1.75 billion;
* and that I am willing to believe there is a 1% chance of me getting at least $1.95 billion.

(There is a zero percent change of getting the whole $2 billion.) I can take those numbers and sell different risks to different investors. If you only want safe bets (and lower interest rates) I can pay you the first $1 million that comes in. Since that is 99.9999% likely to be paid, you will only get the risk-free rate of return on that (less than the underlying mortgage loans pay), but that's the level of risk you want. Another person may want to get a higher return and be willing to take on more risk, so perhaps the security he buys only allows him to get paid after the you are paid off in full. Another buyer, wanting even more risk, may agree not to be paid until the first $1 billion has rolled in.

You can order the payments (aka "tranche") on the securities to offer safer and riskier products as potential lenders may desire. You can't do that with a single loan.

So the securitization as a vehicle does add value, in that it allows the markets to better match a lenders risk profile to the mortgage assets it's acquiring. The problem here is that diversification and tranching doesn't save you from systemic, market-wide, risks, like the entire U.S. real estate market tanking.

Tying this discussion back into other recent discussions, we can see that the Media does, in fact, affect the way people see controversial issues, and race matters.

First, polls show that public attitudes toward the bailout of irresponsible financial institutions have changed dramatically since the vote this week after news broadcasts consistently presented only one side of the issue. http://www.rasmussenreports.com/public_content/business/general_business/voters_divided_on_whether_wall_street_should_clean_up_its_own_mess
So, views that people are bombarded with in the Media affect their beliefs and behavior.

Second, institutions designed to extend loans for housing to low income minorities as well as anti-discrimination laws have played a central role in this crisis. The bulk of people who are in default are low income Hipanics and blacks. If the government (Congress and the Executive--President Bush) did not pressure Fannie Mae and Freddie Mac to loan more to low income minorities, then the monetary expansion might very well have been manifested in another sector of the economy. The statistics on this aspect of the crisis are overwhelming.

Incidentally, we can see that minorities are not simply positioning themselves defensively to avoid destruction. They can and have formed coalitions with other minorities and some factions within the majority to gain power. Elections in the U.S. have been about Identity Politics all along, but that trend has taken off since 1932 as the modern Democratic Party became the vehicle of non-northern Europeans and white Southerners at the time. White Southerners have since moved to the Republicans as have many Southern and Eastern Europeans as blacks moved completely away from the Republicans. It is no coincidence and should be no surprise that even many black conservatives support Obama.

Kurt: thank you. To (over-)simplify:

* I misunderstood the accounting, which is perfectly legitimate.

* The problem arises from under-estimation of the systemic risk (as in every bubble).

Your explanation of diversification and tranching was neat. Of course, the diversification (and perhaps also the tranching) introduces a moral hazard in the sense that there is less incentive for the banks to prevent each and every default.

I am unclear on how your proposal would solve the problem. I was under the impression that the uncertain value of the mortgage-backed-securities was the main problem as the holders of those securities cannot sell them without driving down their value. At the same time, if they do not sell them, they keep them, and are uncertain as to their value and therefore cannot calculate their assets. You propose that instead of buying the securities from the banks, the government instead buys shares in the banks. This will provide an injection of capital, but the initial problem remains. If the banks do not sell their mortgage-backed securities, there is no way to tell what those securities are worth. And so the banks are unable to know what the value of their assets is. If they cannot measure their assets, investors will lack confidence and the banks will not know how much they can safely lend or borrow. The credit crunch will continue.

Kurt, that's a great explanation. Thank you for that.

To systemic risks we need to add corruption in the appraising of home value and misinformation/fraud in high credit ratings (eg AAA) given to bundles of securities at the Investment Bank level.

To supplement the explanation, the repackaging into tranches that Kurt describes was performed at places like Lehman Brothers and Goldman Sachs. Kurt is alluding to their "value-added" role in performing a middleman/securitizing role between originating lenders and investors.

@Chris Graves:

Chris, I hope you're not trying to pin blame on the CRA or (god forbid) race-based generalizations.

The "pressure" on banks to lend to high credit risks was profit motive, not CRA or anti-red lining laws. The traditional lending model was inverted by the "irrational exuberance" (ahem) of the secondary market's demand for more and more MBS.

It's a bit much for proponents of deregulation to now come back and try to pin the blame for the crisis on stereotypes of financially irresponsible blacks and hispanics and their social liberal benefactors. Give me a break.

The CEO's in charge of the banks...I want to know why they get a slap on the wrist. They are talking about not letting them get anymore bonuses...these people should be going to jail. If I go into a bank and rob it they just don't let me off with a warning, yet these people are guilty of doing the same thing. We have laws, perhaps we should consider following them. There is nothing in the law that states executives are excluded from the laws.

You're right, there isn't. The federal and state criminal statutes are still on the books, alive and well. So is FIRREA ('89 Act). Lemme give you my take, without writing a book, after last night's vote in the Senate. With or without the House agreeing to the bailout bill (Senate version) tomorrow, financial firms and funds that have not already pulled out all the stops to shore up capital and conserve liquidity are being set up to be legally "failed," whether by way of the Bankruptcy Code or, in the case of banks, savings banks, and even some insurance companies, closure by the supervisory regulator followed by takeover by the FDIC or a receiver. To take the Treasury's money is to don a huge bullseye. No firm's manager can blame "mark to market" if the marks have been traded for cash and the firm craters nonetheless. The moves by Morgan, Goldman, and GE in the past week were made to get the jump on the reaper. JPM, Bank of America, and Citi went about theirs' to like end, but in a different form - assumptions of otherwise market and depositor insurance fund-ruinous liabilities of other firms - analogous to the late '80's use of net-worth certificates to buy regulatory accounting forbearance for acquirers of broke S&Ls.

The described scenario obtains whether the Republicans rule Washington, D.C. after January '09 or the Democrats achieve a full takeover. Obama sees the bailout bill, if he is elected, as no threat to an aggressive law enforcement agenda. Never forget, some wags still theorize that JFK would be with us today if he hadn't turned his brother Bob loose on certain enterprises. And nothing - least of all the Constitution - has ever stopped a determined Congress from writing draconian new laws or "improving" existing ones in order to bring targeted villains to justice. "Ex post facto? Bill of Attainder? Due process"? Tell it to the judge. That's how this Republic really works. It's hardball, untidy, plain ugly at times. But it beats pitchforks & rope.

Yes, gentlemen I have to agree.

I would also add that while the U.S government begins its global “sell” on the US$700 billion bailout plan, an untold story (missed by the mainstream media) is also quietly unfolding.

While the Federal Reserve and the mass media diverts investors’ attention to the housing market bubble another three bubbles are bursting at the seams (and popping) - without barely a whisper.

What isn’t being addressed are the exponential problems of outstanding U.S. interest-bearing debts to the tune of $51 trillion as well as derivatives held by U.S. banks totaling $180 trillion.

A large section of the banking and financial sector in the U.S is hanging by a thread. Over 1400 U.S. banks and more than 150 U.S. thrifts are at risk of failure, with total assets of $3.6 trillion.

Over 60 banks and more than 20 U.S thrifts with more than $5 million in assets are extremely exposed to poor or non performing mortgages.

And to illustrate how significant the shortfall is, the Federal Deposit Insurance Corporation’s (FDIC) only has less than 3% of the value of assets of banks on the troubled institutions list.

And that means that if all the troubled banks went into bankruptcy tomorrow there is only enough insured savings to return capital to 3 people in every hundred. And these are not tiny banks.

According to thestreet.com, you’ll see that among the 20 largest, are banks with assets of over $300 billion.

So these aren’t small banks.

And these are just the 20 largest. As I mentioned earlier, when you add up the total assets of all these banks you get $3.6 trillion at risk - and no trillion dollar bailout plan is going to stop that bubble from bursting.

According to the Federal Reserve and the FDIC, private sectors and local governments also own residential mortgages in substantial quantities, so the bailout plan would also have to cover:

* The issuers of asset-backed securities who currently hold $2.1 trillion in mortgages,

* Nonbank finance companies with $426 billion,

* Credit unions with $332 billion,

* State and local governments with $159 billion

* Life insurance companies with $61.6 billion, plus

* Private pension funds, government retirement funds and households

Then you have to take into account commercial mortgages. There are $2.6 trillion worth of commercial mortgages and they’re now also going bad. And some are also held outside the banking sector.

* $644 billion held by issuers of asset-backed securities

* $263 billion held by life insurers

* $65 billion at non-bank finance companies and

* $37 billion at Real Estate Investment Trusts (REITs)

While the mortgage crisis in the U.S began with home mortgages they have quickly spread into commercial mortgages, credit cards, car loans and almost any other kind of loan that the private sector could service.

There are now $14.8 trillion in residential and commercial mortgages in America. But beyond mortgages, there is another $20.4 trillion in consumer and corporate debt. This means that mortgages represent less than half of the private sector debt in America.

And What About Local Governments?

Local governments might be an even bigger concern. You see, the Fed currently estimates $2.7 trillion in municipal securities outstanding, most of which have been dependent on a bond insurance system that remains on the brink of collapse.

And What About Derivatives?

At the root of the global panic after the Lehman Brothers crisis is the derivatives time bomb – the biggest, baddest bubble of them all. And the most feared! Here’s why:

1. It’s the biggest – commercial banks hold over $180 trillion in derivative debt.

2. JP Morgan holds $90 trillion of that – over half of it. It’s no wonder they were so quick to get involved in the other Fed-assisted bail outs.

3. But that’s nothing compared to the total notional value of outstanding derivatives, which according to congressman Ron Paul, now stands at $1.1 Quadrillion - that’s 1000 trillion dollars. Now I don’t know about you gentlemam but I don’t think that number has ever been used in financial circles – this is a first!

What Will Happen When This Time Bomb Explodes?

Of course the honest truth is that no-one knows for certain…but the untold facts paint a much more serious picture than the mainstrain media or Congress is disclosing.

Are We On Track For The Black October Crash of 2008?

Isn’t timing an interesting thing? We are now into the month that brought about the Crash of ’29 and the Crash of ’87, so I see it as no coincidence that we are entering another possible Black October – hopefully not – and only time will tell.

The writing is however, well and truly on the wall and this government bail out attempt plus everything that doesn’t exactly spell good news for the month.

Right now the world’s paper-money system is risky. It depends on faith and trust. And because there is no trust in banks, financial institutions or government leaders, what we can inevitably expect is a bust!

That’s where the current financial system is headed and I don’t believe any miracle can prevent it. Bail outs may stall the inevitable but the financial system itself is in need of a major overhaul and it would seem that it must fail for the birth of a new system to come into being.

Senen Pousa
CEO
Echelon Research Limited
http://www.echelon-research.com

Snoori, please don’t be confused by some of the populist pandering above that completely misrepresents the real roles and responsibilities of auditors in this and other circumstances. I am a CPA and have absolutely no idea what the "debits becoming credits" thing means, but I can assure you it has nothing to do with Enron, Arthur Andersen, or the banks in this credit market. Let me try to explain as briefly as possible.

Financial statements are the representations of the company management. The role of an auditor is to evaluate the risks associated with those financial statements. An audit is not a guarantee of anything. Think of it this way – the only way to obtain complete confidence in the financial statements is to have an independent auditor evaluate the legitimacy and value of literally every single transaction and event of an enterprise. This is clearly an unattainable and undesireable goal. As such, an auditor designs an audit to obtain a reasonable degree of confidence that the financial statements are appropriate. That means that in some instances, the financial statements may not fairly present the financial condition of the organization, but the investor community is ok with that because to obtain a higher degree of confidence would be cost and time prohibitive. The higher degree of confidence would take a long time to obtain at which point the financial statements no longer are relevant and have diminished value to investors – among many other challenges.

A critical point is that creating losses for a business or making poor strategic decisions does not violate anything other than common sense. Companies and people make poor decisions every day and that happened in this credit mania. That does not trigger any sort of whistle blowing obligation for the auditor – so long as it is being reported to the public fairly. To my knowledge, there have been no assertions that the banks did not report their activities appropriately.

Investors have an important responsibility here as well. If an investor does not understand the financials of a business (as was frequently the case with Enron and many of the banks in question here), then he/she should not invest in that business. This is identical to the CEOs who made decisions to invest in instruments and activities that they did not understand. Both the investors and the CEOs made bad decisions, but those decisions are not illegal by any stretch. By the way, Joseph, if one borrows money from a bank (say for a mortgage) and doesn't repay the loan, should he/she be thrown in jail (along with the bank executives) for robbing the bank of its value?

Contrary to someone's comment above, accounting rules and methods are not dictated by, or established by, the "Law". In many instances, accounting guidelines allow, and indeed require, a significant degree of professional judgment which by definition means that people won't always agree with the judgment exercised. Again, different judgment is not criminal. The current credit market meltdown is demonstrating, among many other things, what can happen if that judgment is removed from the auditors/accountants in a certain situation -- the value of CDOs are automatically "marked to market" eventhough the true economic value is considerable. When that happens, as Judge Posner correctly points out, the capitalization requirements for a business can potentially be threatened or even violated.

Let's not start blaming auditors again for something in which they have no responsibility. I would also prefer if people would start spelling my last name correctly -- Andersen not Anderson.

You tell 'em, Artie!

Are you coming up to the house this weekend? I've got a financial question I want to run past you. We'll talk.

K

Reply to Dan,
Yes, I am saying that government enforcement of anti-discrimination regulations and the pressures to lend to minorities at Fannie Mae and Freddie Mac did open the gateway to this sort of lending.

The cause of this problem we are now in lies at the door of the Federal Reserve for artificially lowering the interest rate, and thereby inducing lenders to believe that there was sufficient savings to increase lending. Of course, lenders simply respond to the falling price of lending money. Somehow, the lenders and borrowers came to believe that the easy money, low interest rates, and increasing price of real estate would continue indefinitely. The bubble was created by the false signals (low interest rate) sent to market players by the Fed.

What you say about the dynamics of the bubble are true. What I am saying about the pump priming effects the CRA had on lenders' attitudes toward the prospects of the low income market is true as well. The policies at Freddie Mac and Fannie Mae in this regard contributed to forming the credit bubble, but none of these factors caused the crisis in themselves. I would also add other contributing factors--repeal of the Glass-Stegall ban on combining investment and commercial banking along with insurance (as long as there are the possibility of bailouts and deposit insurance)--this set up the bundling and resale of these loans to sometimes unsuspecting buyers, the moral hazard created from previous bailouts (e.g., the S&L bailouts in the 1980's), the role of derivatives and over-leveraging.

The primary cause of this fiasco is not the free market. Rather it is the Federal Reserve's discretionary monetary policy that sought to avoid a recession/depression at all costs. Alan Greenspan and others believe that deflation is the root of all kinds of evil. They think that if we got into a severe deflation, then we would have the Great Depression revisited. They fail to realize that if prices can fall freely, then a deflation would not bring long-lasting recession or depresssion. The recession would only be a necessary corrective to the distortions created by the Fed. A downturn need not be long-lasting.

If the real estate bubble had not occurred, then the same thing would have happened elsewhere in the economy because of the Fed-induced low interest rates. The regulations that I mentioned opened the door for reckless lending in this market in particular.

Chris, I'm with you as far as the Fed's lowered rate being a or the major culprit.

But the CRA blame game is a dog that just won't hunt.

Look at the Shiller/S&P Index and please explain why the housing markets most impacted by bubble valuation are low-minority areas, like Las Vegas.

And CRA has nothing to do with zero-down, NINJA lending to gain market share, systemic unethical practices in real estate and the unlawful practices at IBs, Frannie, and Freddie that I am sure will come to light in the next couple of years.

Sorry. But frankly I think trying to play the CRA card here borders on race-baiting.

Buffet way is safe way. The bail out just going to lining few ugly american's pockets like the last Japanese recession. History will repeat itself.
http://www.amazon.com/Ugly-Americans-Cowboys-Markets-Millions/dp/0060575018/ref=sr_1_4?ie=UTF8&s=books&qid=1222976715&sr=1-4

Dan,
Thanks for your comments. Please take a look at this N.Y. Times article on the race/ethnicity aspect of subprime lending. I am not saying that ONLY blacks and Hispanics took out such loans, but they are disproportionately represented. http://www.nytimes.com/2007/11/04/weekinreview/04bajaj.html
I do think we have to be realistic about such matters, and I do not think there is any question about the excessive numbers. I can supply other sources if you like.
Again, the underlying cause of the credit crisis is the Fed policy, not race. I believe that the overinvestment problem would have happened without the racial angle. It might have showed up in another market or in a different way in the real estate market.

K, ;)

You might read Lynn Turner in today's financial times.

Banks want to shoot the messenger over fair value rules
By Lynn Turner
Published: October 2 2008 03:00 | Last updated: October 2 2008 03:00

Excerpt:
If you make a loan for $100 but only get back $60, that is a problem. But when you do this repeatedly, using money borrowed in the first place, it becomes a crisis as banks run out of cash. It is the same thing that happens at home when month after month you spend more than you get in your paycheck.

In 1938, the Federal National Mortgage Association (Fannie Mae) was created to help Americans get mortgages. Fannie Mae is a private GSE (Govt. Sponsored Entity) regulated by Congress and it was created to help the country get out of the depression by making it easier for Americans to buy homes. Although Fannie Mae was established as a private company with shareholders and was supposed to make a profit, the American taxpayers would still be stuck for the bill if Fannie Mae suffered any losses.

A similar private organization, the Federal Home Loan Mortgage Corp (Freddie Mac), was established in 1970 and charged with creating a national secondary market for conventional home mortgages. By doing so, Congress hoped to level out the disparity among regions of the nation in regard to availability of and interest rates on home mortgages.

In 1977, however, Congress decided that it was time for the federal government to intrude into the free-market mortgage business through the introduction of welfare state type legislation. It passed the Community Reinvestment Act (CRA) which required banks and other lending institutions to make extraordinary efforts to give loans to “communities of color” disregarding sound economic and risk guidelines that were so successful in the past.In the name of ending alleged discrimination, members of these “communities of color” were no longer required to provide all of the standard mortgage documents such as verification of income, proof of employment, credit history, or even provide a down payment.

Because of the federal loan guarantees that came with the legislation, many banks and mortgage companies bundled billions of dollars of “subprime” loans and sold them to investors both in the USA and in foreign countries. It is these bundled Community Reinvestment Act type mortgages, that were doomed to fail, that would eventually cause the near collapse of U.S. and global financial markets in 2008.

In 1997, The Clinton administration, pushing the socialist idea that home ownership is a right of all Americans, placed even more pressure on banks to grant even more mortgages to the poor, minorities and people with bad credit. Reacting to the pressure applied by the Clinton Administration and the threat of federal lawsuits by Janet Reno, American banks began making thousands of bad loans, many with no money down, no documentation and even loans for up to 120% of actual values. Executives at Fannie Mae started to receive huge bonuses when mortgage loans targets were met. To help push the program, Franklin Raines and Jamie Garelick, from the Clinton Administration, were given top positions in Fannie Mae.

In 1998, Fannie Mae reported the following bonuses to some of their executives: chairman and chief executive James A. Johnson received $1.932 million; Franklin D. Raines, chairman-designate, received $1.11 million; Chief Operating Officer Lawrence M. Small received $1.108 million; Vice Chairman Jamie S. Gorelick received $779,625; Chief Financial Officer J. Timothy Howard received $493,750; and Robert J. Levin, an executive vice president, received $493,750. These bonuses increased in future years as fraudelent entries were made in the financial records.

In 2001, Enron Corporation collapses and congress the SEC and the FBI investigates. In the ensuing years, many of the Enron executives were charged with various federal crimes and many of them were sentenced to years in federal prison. The chielf executives of the company were found guilty of cooking the books. As a result of this business failure, in 2002 congress passed the Sorbanes-Oxley Act, which introduced major changes to the regulation of financial practice and corporate governance. Named after Senator Paul Sarbanes and Representative Michael Oxley, who were its main architects, it set deadlines for the record keeping compliance by the nation's corporations.

In 2003, President George Bush called for legislation to give the government more oversight of Fannie Mae and Freddie Mac, but his proposal fell on deaf congressional ears, many of whose members were receiving substantial bribes (I mean campaign contributions) from Fannie Mae and Freddie Mac. In 2004, the Office of Management and Budget, found that massive fraudulent bookkeeping practices were occurring at Fannie Mae and that these practices were very similar to the fraudelent practices in the Enron Corp case. The OMB determined that these annual false mortgage statistics were used to justify the top executives getting excessive bonuses every year. Unlike the Enron case, however, congress decided not to hold any hearings and the FBI did not launch any criminal investigations. As a result of the OMB report, Franklin Raines & other top execs were forced to resign from Fannie Mae for doing the same thing that Enron executives did (cookin the books), but unlike the Enron case, the Fannie Mae executives only had to give back $31.4 million dollars in fines after a civil proceeding.

In 2005, Senators Chuck Hagel (NE), Elizabeth Dole (NC), John Sununu (NH) and John McCain (AZ) proposed legislation entitled, " The Federal Housing Enterprise Regulatory Reform Act" (S-190) that was designed to give the federal government increased federal oversight over Fannie Mae, Freedie Mac and other institutions, but the legislation was met with fierce Democratic partisan opposition and it went nowhere. In support of this legislation, Sen McCain stated: "if Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole."

TWO SPECIAL INTEREST GROUPS THAT CONTIBUTED FOR THE MORTGAGE INDUSTRY FAILURES:

1 - The National Council of LaRaza, a racist and pro-illegal alien amnesty group, along with its Development Fund, have received millions of dollars in federal funds to "counsel" their constituents (including illegal aliens) on how to obtain mortgages with little to no money down. For years, there has been a rapidly expanding illegal alien home loan racket that the media and the federal government still are unwilling to talk about. Many banks looking for more federal guaranteed loan handouts, led by Wachovia and Bank of America, launched aggressive campaigns designed to attract more illegal alien homebuyers, subsidized by the American taxpayers of course.

2 - Another socialist Racist group ACORN (Association of Community Organizations for Reform Now) demanded “affirmative action” in all lending practices and programs. They pressured banks to make subprime loans to poor people of color with bad credit. Madeline Talbott, a Chicago ACORN leader, has even boasted of “dragging banks kicking and screaming” into these dubious loans. As conservative community activist Robert Woodson put it, “The same corporations that pay ransom to Jesse Jackson and Al Sharpton also pay ransom to ACORN.” The ACORN organization actively supports candidates of the Democratic Party and many ACORN people have also been arrested on various charges involving voter fraud.

To make matters worse, The most recent House and Senate Democratic bail-out legislation contained a well-hidden provision that would forward some of the profits, indirectly, to help fund organizations like LaRaza and ACORN. If this provision is included in the final versions, the American taxpayer will be giving more cash to the very groups that helped create the lending mess in the first place.

By 2008, Fannie Mae and Freddie Mac had loaned or underwritten about $5.3 trillion of the total $12 trillion of outstanding mortgage debt in the United States. Because of the shear magnitude of mortgages held, many in government and in the private sector believed that Freddie Mac and Fannie Mae were too big to be allowed to fail and the government had to take them over completely with taxpayers money.

Because of this philosophy, American Taxpayers either have or shortly will have shelled out close to $1.4 Trillion in bailout money for various reasons in the last 14 months alone.Here’s a list of some of the more recent Federal government's actions in the financial markets recently published by Reuters:

Cost to taxpayers and the Bailout Type

$ 700 billion+ - Proposed current Treasury Department legislation
$ 29 billion - Bear Stearns financing
$ 200 bilion - Fannie Mae and Freddie Mac nationalization
$ 85 billion - AIG loan and nationalization
$ 300 billion - Federal Housing Administration housing rescue bill
$4 billion - Mortgage community grants
$87 billion - JPMorgan Chase repayments
$200 billion+ - Loans to banks via Fed's Term Auction Facility
$ 50 billion - Loans from Depression-era Exchange Stabilization Fund
$144 billion - Purchases of mortgage securities by Fannie Mae and Freddie Mac

TOTAL: $1.8 trillion+
COST PER US HOUSHOLD: $17,064+

I believe that the solution to the problem is to end government meddling in the free market. It is time this process is put to an end, or at the very least, reigned in. The government should sell off the assets of Fannie Mae and Freddie Mac quickly and close down these corrupt organizations. Government must stop pandering to special interest groups, reduce the volume and complexity of regulations it imposes on lending institutions and stop passing social engineering legislation, like the Community Reinvestment Act, that interferes in the free market economy and which has ultimately led to this financial crisis.

It's a tough battle for those Senators and Members of Congress who have stood tall and who have voted against this massive fleecing of the American taxpayers for the benefit of Wall Street investors and big commercial banks. Unfortunately, if congress can be judged by its past practices, any proposed bailout legislation that comes to a vote will undoubtedly be loaded with riders, earmarks and all forms of other "pork" so that the special interests that are looking for us to bail them out will win and the American taxpayers will lose again.

Let us not overlook in this discussion that one major cause of the "bubble" was the kiting of home prices directly traceable to the land-use regulation/NIMBY problem -- i.e., the regulatory constriction of supply of moderately priced homes in areas where people wanted to live, even as demand grew apace. Don't take my word for it. Two presidential commissions on housing reached the conclusion that the NIMBY problem was at the root of the runup of home prices. Of course, this does not excuse either the reckless lending practices or the lunatic behavior of people who bought unaffordable houses with no realistic hope of being able to service their mortgage loans.

The speed-of-light measurement was off by a factor of nearly 100.
The technology of the era was not up the task. With new technology came new calculations for the speed of light path traveled in a vacuum one meter length is 1/299 792 458 of a second.
One day a Zen master was walking in the jungle and came across a large man eating tiger charging behind him, in a split second the made the decision to run down the path to escape the man eating tiger, suddenly he was at the end of the path which was a edge of a shear drop cliff dropping a long way to jagged rocks, so below which would be a sure death. So, the Zen master was faced with being eaten by a large man eating tiger or jumping off the cliff to sure death! The Zen master looked at the edge and notice a small vine at the edge of the cliff growing over the edge, with a split second decision he decided to use the frail vine to get over the edge of the cliff. The frail vine began to give way and the Zen master was falling to sure death to the jagged rocks below, when he notice a fresh beautiful bright red strawberry growing on the cliff right in front of him, the last thought from the Zen master was this is got to be the best tasting strawberry he has ever had. The economy would be the Man-eating tiger and the frail vine is the rescue or bailout plan. The strawberry is the pork barrel attached to the rescue or bailout plan.
Local Entrepreneur is selling Caps & T-shirt with the logo “Got $700 billion?” http://www.cafepress.com/092308

There is no great calamity in letting banks take the fall. Their "failures" will occur one at a time and be a detoxification resulting in transfer of capital from commodities where it is causing food riots and absurd energy prices back into finance where it is needed.

Here is a study with statistics galore on the ethnic and racial impact of the subprime lending meltdown: http://www.compliancetech.com/Demographic_Impact_of_the_Subprime_Mortgage_Meltdown.pdf

There is really no controversy about this matter if one simply looks at the statistics.

For some reason the entire link did not show on the post. Here it is again:

http://www.compliancetech.com/Demographic_Impact_of_the_Subprime_Mortgage_Meltdown.pdf

It is showing as I see it in the preview, but in case the entire address does not make it again, simply add

Mortgage_Meltdown.pdf

to the address that made it in my previous post. I do not know how much of it will show this time until I post it.

In case that strategy does not work, please try the compliancetech website and click on the study link at the right of the screen where it says " Demographic Impact of the SubPrime Mortgage Meltdown."

http://www.compliancetech.com/

Sorry for the difficulty.

J.W., Given the modifications to lending practices you propose, how does one deal with the economic injustice known as "Redlining"?

@Chris Graves:
Gotta love the tenacity of wingnuts. Please sit back and enjoy as I slow clap for your chutzpah. [slow clap]

As you no doubt were aware, the Compliancetech study you cited concludes the EXACT OPPOSITE of your assertions:

"Despite overwhelming evidence that support the above findings, this report reveals that the majority of subprime rate loans originated in 2006 were granted to non-Hispanic Whites and upper income borrowers. The same pattern occurred in 2005. In 2004, more subprime rate loans were originated for non-Hispanic Whites, but middle-income borrowers had the highest share. These findings are contrary to the way subprime rate lending is commonly portrayed. Popular media myths and erroneous assumptions about subprime rate loans are continuously presented as if subprime rate lending was predominately in the domain of minorities and low-income borrowers."

You're a fraud and I'm done responding to you.

The most insidious moral hazard is society's perception that the government should and does protect ordinary folks from all danger, from smashing our heads against windshields to overextending our debt. People substituted banks' and FNMA's underwriting standards for their own judgment, and we continue to perpetuate this mindset by treating them as victims. It's not just banking exec's that need to be weaned from government's tit.

Well, Dan, first I would suggest a course on informal logic and study, in particular, the ad hominem fallacy. Personal insults are not only disrespectful of your interlocutor, but it solves nothing. Even if your opponent were actually guilty of whatever charge you might make against him, such evils do not discredit the truth of his position. One has to deal with the truth claim made by another and the supporting logic and evidence. Otherwise, the argument is untouched.

Second, I would reconsider the position of Political Correctness where we do not discuss differences but simply drive these issues underground.

Third, you seem to be quoting in your previous post from the conclusion to the study that I cited. If you care to read on you will see that the authors of the study clearly state that they want to preserve affirmative action and other race-conscious programs that are designed to force people into more equal patterns of housing. They did not want their study to support those who are critical of such programs. Generally, I would stick to the evidence in an academic study rather than simply read the conclusion. The facts presented in the body of the study clearly show that there were disproportionate numbers of blacks and Hispanics relative to their numbers in the general population who were extended subprime loans, and they suffered a much higher default rate than did middle class whites. The key issue is the default rate. If someone can afford an ARM or whatever, the loan in itself is not necessarily the problem. Of course, if fraud is involved, that is another matter.

Here are quotes from the compliancetech study that you seemed to have overlooked:

“Whites had 70.82% of the 2006 loans and 56.23% of the subprime rate loans with a spread. Asians share of overall loans at 4.48% was higher than their 2.85% share of subprime rate loans. By contrast, Blacks and Hispanics, and Native Americans and Hawaiians, albeit at much lower volumes, had a higher share of subprime rate loans than their share of loans overall. For example, Blacks and Hispanics had 9.97% and 13.92% of the overall pool of loans, but had 19.18% and 20.76% of the subprime rate loans, respectively.” p. 7.

“From 2004 to 2006, compared to all other racial groups, Blacks had the highest jump in subprime rate lending.” p.7.

“The vast build-up of higher cost subprime rate loans with Blacks is likely to translate into a disproportionately larger percent of loans that will experience mortgage defaults and foreclosures. In 2004, the first year HMDA pricing information was reported by lenders, more than 30 percent of the Black conventional first lien 1 to 4 family home purchase and refinance loans were comprised of higher-cost subprime rate loans. This was followed by a frequency greater than 50% in 2005 and 2006. During the same period, Blacks also had the highest average spread on subprime rate loans. (Figure 2)” If you take a look at the graph, the black loan rate is much higher than any other group. Hispanics are second. See page 8

“The trend with Hispanics, Native Americans and Hawaiians, while similar to Blacks, was not as high. Each of the above groups however, had a higher frequency and higher average spread on subprime rate loans than Whites or Asians. In fact, Asians had the lowest frequency and magnitude of loans with a HMDA reported spread. Thus, percentage-wise, Hispanics, Native Americans and Hawaiians are also more likely to experience a higher proportion of mortgage defaults and foreclosures. “ p. 9.

“Percentage-wise, however, the incidence of foreclosures in Black and Hispanic neighborhoods is predicted to be more concentrated than in White communities. Blacks and Hispanics had a significant number of higher-cost subprime loans and they had a much higher proportion of such loans. Thus, the high concentration of subprime rate loans in Black and Hispanic communities is likely to translate into a higher number and percent.” p. 10

"The White frequency (percent) of subprime rate loans was 21.78% with a magnitude (average spread) of 5.09%. Using the White frequency and magnitude of subprime rate loans as a benchmark, Blacks had the highest difference among all minorities with a 52.76% frequency and an average spread of 5.50%. Blacks, therefore, received higher cost subprime rate loans 2.42 times the frequency in which Whites received such loans. The difference between the White and Black average spread was 41 basis points.
Hispanics had the second highest disparity in the frequency and magnitude of subprime rate loans compared to Whites. Hispanics had a subprime rate loan frequency of 40.91% or 1.88 times the 21.78% frequency for Whites. The Hispanic average spread was 5.18% or 9 basis points higher than Whites.
Asians were the only minority group whose frequency and magnitude of receiving higher cost subprime rate loans was less than Whites. Asians received higher cost loans 17.43% of the time or 20% less often than Whites. Asians had an Asians had an average spread of 4.95% or 14 basis points lower than the White average spread.” p. 13

Shall I go on? I would suggest reading the entire study carefully before drawing conclusions. One also must filter out philosophical biases of the authors and distinguish their analysis from what they actually found.

Chris, Does this mean that Lenders can utilize this report as a form for economic racial profiling for making the decision for extending loans to Borrowers instead of basing it purely on the Borrower's ability to repay? Much like the Loan Maps created by the F.H.A. and other Private Organizations in the Banking Community that were utilised for loan approvals in the Thirties, Forties, Fifties, Sixties and were one of the prime causes of Urban Decay in American Cities.

Kurt is right, I lived in Los Angeles between 1977 & 1994, when this all came to a fever pitch.
I watched as Carter's 'Community Reinvestment Act of 1977 Law purported to prevent "Redlining" & Liberal Democrats began pressuring Banks to make home loans in "Low-Income neighborhoods". Under the Act of 1977, Banks were to be Graded on their attentivness to the "Credit Needs" of "predominantly Minority neighborhoods". The Higher a Bank's Rating, the more likely that Regulators would say 'Yes' when the Bank sought to open a new branch or undertake a merger or acquisition. The 'Housing Act of 1937 in the wake of the "Great Depression" was amended numerous times in 1977.
Then, In 1994, Bill 'Slick Willie' Clinton, signed a Bill to promote Low-Income home ownership.In 1993, HOPE (Housing Opportunities for People Everywhere(VI), helped Munitipal governments demolish dilapidated public housing projects and revitalize their inner-cities.
Threatening racial discrimination lawsuits Clinton's Federal Reserve demanded that banks threat "Welfare Payments, SSI payments and unemployment benefits as 'Valid' Income sources to qualify for a mortgage."
In 1999 Liberals were braggins about extending Affirmative Action to the Financial Sector.
Illegal aliens are given 'ITIN Tax ID numbers' and allowed to use this ITIN Tax ID number and their paychecks from them as valid income sources to qualify for a mortgage.
In 2006, 1.4 Million illegal aliesn used ITIN numbers filing taxes.
Still don't believe this can happen again? Don't believe all this I just presented to you has absolutely nothing at all to do with the $700 Billion Bailout?
Read these links as further evidence and know this will 'happen over and over again' if the Government's Democrat Congress keeps Forcing Banks to lend to people that life solely off of Welfare, SSI, and other 'Entitlements'.
Look at Maxine Water's Bill HR-1851
http://www.govtrack.us/congress/bill.xpd?bill-h110-1851
Section 8 Housing Assisted payments of 1.7 million households.
HR-1851 modified Section 8 to make mortgage payments, for 1st Time Homebuyers. Income of $10,300 can qualify, and as little as only 1 year of continuous employment to qualify.
In 1975 Housing Choice Vouchers 'Mobility Programs' which used under Section 8 Vouchers are being used to move participants from Public Housing Projects into areas that are no more than 30% African-American and these areas are called, 'Target Areas' by HUD/FHA.
http://nkca.ucla.edu/Master.cfm?Content=Map&ZoomTo-tract
Section 8 is designed to encourage tenants to settle in Middle-Income areas by Subsidizing 60% of their Rend or using the Section 8 Homeownership Voucher Program to buy homes in the 'Target Areas' of a Minimum of 30% African American population. This is called, 'Demographic Inversion'.
Pelosi's HR-3221 does the same thing as HR-1851.
It gives Section 8's & Low-Incomes more purchasing assistance to buy up all the foreclosed homes they were just foreclosed out of. "If" the Government Democrats continue to insist these Low-Income Minorities are to continue to be given Mortgages with Welfare, SSI and other forms of income from, 'Entitlement' Programs. An endless merry-go-round for them, more taxes for the Middle-Class.
The Low-Incomes know if they shout long and loud enough thru Coalitions, Organizations, Caucusus, representing the Low-Income Minorities, or simply voting in Obama, this will continue, and do the same thing that has just happened requiring another Bailout.
Already the California Governator is asking for Federal Funding to keep all the 'Entitlement' Programs running full of money.
Pelosi wrote her HR-3221 with the Low-Incomes in mind because the Middle-Class with the ridiculous Loss Mitigation costing around $3,000 per Mortgagee in distress, has 'NO GUARENTEES'.
She had the Low-Incomes in mind when fooling Congress into passing this one.
HR-3221 is 90% Rental assistance for low-incomes & 10% Homeownership for Low-Income 1st Time buyers, Interest Rate Buy downs, DAP of $7,500 Federally & more from each State, Low-Income Assistance with Closing Costs.
It is the 1st New Federal Housing Production Program since the HOME Program of 1990. Extremely Low-Income Section 8 was created in 1974. All funds for the Housing Trust will come from Annual Contributions made by Fannie Mae and Freddie Mac. 2007 would have seen $557 Million, 2008 expected to be hirher. However, 25% of the Funds each year MUST First go to a Reserve Fund at the Treasury to offset scoring problems. 75% remaining Funds divided between Housing Trust Fund & Capital Magnet Fund.
The 75% of HR-3221 is for Extremely Low-Income, all funds are for Low-Incomes only.
http://www.housingmatters.org 'Major Victory for Low-Income Housing Advocates, W/$700 Billion Bailout'.
http://www.ffiec.gov/Geocode/default.aspx
http://www.hud.gov/offices/adm/grants/fundsavail.cfm
http://www.ruralpa.org/migration_for_housing.pdf
http://www.chapa.org/FMRCommentstoHUD.pdf
National Housing Law Project
http://www.nhlp.org/html/sec8/index.htm
The De-Segregation of Rural & Small Town America
http://www.civilrightsprojects.ucla.edu/research/deseg/lasthavebecomefirst.pdf
There is an excellent Article by the Washington Post, June 10,2008 called, 'How HUD Mortgages Policy Fed the Crisis'.
HR-1851 & HR-3221 are a 'Kiss of Death to a City'
http://www.mlich.org
http://www.americanprogress.org/pressroom/releases/2008/08/housing_plan
Chris Dodd wants MORE Funding on the heels of Maxine Waters HR-1851 Funding.
http://www.govtrack.us/congress/bill.xpd?bill=s110-2684
Barney Frank & NAACP talk about MORE Funding
http://www.knowledgeplex.org/news/2084361.html
ACLU lays out Rights of the Poor Homeownership
http://www.aclu.org/rightsofthepoor/housing/13423Leg20020625.html
http://www.usccr.gov/pubs/sac/ny1099/ch5.htm
What happened in Antioch, California, a suburb right outside San Francisco.
http://www.nytimes.com/2008/07/25/opinion/25venkatesh.html?_r=1&oref=slogin
http://fackintruth.typepad.com/blog/2008/08/white-surburbs-go-ghetto-fabulous-in-antioch-california.html
http://www.upi.com/Top_News/2008/08/09/Section_8_tenants_sue_police_in_suburb/UPI-42821218301754/
Here's an Advertisment in the Naples Florida Naples Daily News to Attract Section 8's & Low-Incomes to Hurry and come get your Home Mortgages, since the HR-3221 just started on October 1st, 2008 this last Monday:
http://www.naplesnews.com/news/2008/sep/27/program-help-low-income-collier-residents-buy-home/
Collier County, Naples, Florida.
Down Payment & Closing Cost Assistance to Low-Incomes, was put on HOLD on August 26th, 2008, because the money for it was Going so QUICKLY!
The NEW PROGRAM HR-3221 taking effect October 1st 2008, Gives Low-Income (Only) Homebuyers ZERO Interest Loans Up to $300,000! (in the past buyers recieved up to 15% of the sales price OR as much as $45,000. Collier County wants to CUT that to 4% and NO MORE than $12,000 Cash Assistance).
The Housing Initiatives Partnership Programs, State of Florida, SHIP Program new Minimum Assistance would be $2,500 from SHIP, with $7,500 from the Federal.
Illegal Immigrants once legalized will ALL qualify for Tax Free SSI/SSP cash payments.
http://www.arthurhu.com/INDEX/immig.htm
'Most Americans fear bailout will help those who caused crisis'.
http://www.boston.com/news/politics/politicalintelligence/2008/09/most_americans.html
HR-3221 that started Monday October 1st, 2008
Has a very Strange Section in it called, Section 503. http://activerain.com/blogsview/61.942/This-is-Strange-Sec. In Pelosi's new October 1st, HR-3221, American Housing Rescue & Foreclosure Prevention Funding Act, there is Section 503.
Sec.503. Eligibility of Certain Projects For Enhanced Voucher Assistance.
Here is the very best, plain and simple explanation of how the Housing Crisis came about & will Happen Again.
http://www.wetcanvas.com/forums/showthread.php?s=&threadid-521438
'They Gave Your Mortgage to a Less Qualified Minority' September 24, 2008
On MSNBC this week, Newsweek's Jonathan Alter explains.
Under Clinton Federal Government put Massive pressure on Banks to Grant more Mortgages to poor Minorities. Clinton's Secretary of Housing & Urban Development, HUD, Andrew Cuomo investigated FAnnie Mae for racial discrimination and proposed that 50% of Fannie Mae's and Freddie Mac's portfolio be made up of Loans to Low-Income Minority borrowers by the year 2001.
http://www.marketwatch.com/news/story/analysts-taxpayers-learn-play-blues/story.aspx?guid=%7B537030A8-D417-426F-AB10-FACTFBF9E892%7D
"The funds are going to be borrowed by Treasury and it will be repaid over decades by taxpayers."
Don't kid yourselves or be neive, this will happen again with HR-3221, HR-1851, and all other Bills that follow. Like an endless of Tax-the-Middle-Class Merry-go-round, it will Never Stop unless people Awaken to the fact, people want to sit, watch soap operas all day, over-eat, live in lovely homes, drive Cadallics, and dress well, ALL ON THE TAXPAYER WORKERS BACK, and this will NEVER stop unless, people, the Voters FORCE the Democrats in Congress to quit the Quick-Fix Bills they pass to devestate the Middle-Class Taxpayers.

As for your question to Chris, you sure better hope so, if you don't want this to happen a year from now, again. Oh, and again.
I watched as neighborhoods, block after block in Los Angeles, 'changed'.
This is NOT just going to take place ONLY IN LOS ANGELES, no not by any means.
It's going to keep on keeping on exactly the same, if there is not some kind of careful and thoughtful analysis by Mortgage Lenders.
Do you want me to keep working 48 hours a week to keep paying for these people to enjoy lovely homes in lovely areas, while watching them drive Cadallic Esclades with spinner rims, loading large screen Plasmas into their homes, as I'm off to my 2nd job?
I will stop working and 'Poor Down' myself if this continues, as will many other American taxpayers.
I'm tired of watching Un-Wed Mother's with 8 children and the 'Baby Daddy' living in the same house, collecting Welfare for Mom & Kids along with the free Medical & Dental from MediCal or Medicade, plus the free food, free heating assistance, low-income property tax assistance, Vouchers for Designer clothes and shoes, and Baby Daddy collecting SSI-Supplemental Seucurity Income & SSP from the State of California, while driving around twin Cadallics.
Watching tv all day, or hanging round' drinking beer, MD-2020, smokin' reefer, dealing Crank to Middle & High Schoolers, recruting more Gangbangers, harassing elderly Whites.
All this while I work tirelessly and constantly.
I'm going to sell off my home. Move to a remote area of Oregon I know of. And, build my own place.
Live off the land, cheaply.
Just to stop paying for these people to sit and be Un-fit!
Do get that Loud & Clear? We are tired of watching our hard working tax dollars wasted on lazy people that bring crime into our neighborhoods, turning them into 'Hoods'!
You need a Wake-Up call!
And when more and more Boomers retire, many early to escape the taxes, Obama will load onto us for MORE 'Entitlements', you will blindly turn to the Hispanics for another Bailout.
But, I know Hispanics, they enjoy the GRATIS way of life and they will line up outside every single Social Security Office in the land wrapping around blocks, applying for SSI, TAX FREE Supplemental Security Income pal.
It's not gonna' work!

And another thing, I'm tired of watching all the Construction work to go to illegals.
They have also polluted and destroyed my area in the Shasta/Trinity Forest with their Green Farms. It's ALL them, not Old Hippies anymore. These guys use AK-47's.
They will collect SSI & work all the Construction Under the Table.
That means though they will pay for some of the taxes, but be draining the taxpayer all the same, with Entitlement Overload.
Let's open our eyes shall we.
So many of us have lived thru decades of 'Flight' and our areas are again, being taken over.
This is just History repeating itself until it is stopped.
As Barney Fife would say, "Nip it! Nip it! Nip it in the Bud, Ang"

To Whom it may concern, I really enjoy it when when an individual or indviduals try to hide behind my name to advance their ideological agenda and hang it on me (a form of identity theft at work?). Or is it just another Neo-Con rhetorical technique at work?

Yeah, you're quite "right" when you say we need to eliminate all of the poor, disadvantaged, ethnic, racial, religious, etc., etc. groups that feed upon the largess of America. But how? Open Camps for their eventual elimination? Making the country "safe" for all us "Good Sorts"? This is a sound "American Tradition" of the Know-Nothing Movement.

That empty Retoric of the Poor DISADVANTAGED is O-L-D as the Hills of Appalacia now.
You need a new line, bra.
WE are living among these DISADVANTAGED people that Take ADVANTAGE of the Gravy Train.
Do you think we are all blind?
Do you think for one second we cannot see Tweekers, high out of their minds everyday, we come and go from our jobs, and see them, Enjoying their Advantage over us the Taxpayers on the 1st of each month.
We see them, and we see tham taking ADVANTAGE of us. Meant to be of Goodwill, this NON-Stop barage parade of Bills for the Ills of the Poor, is not going to stop with the Grand Theft Democrats.
And, we are 'Mad as Hell and We Are NOT Going To Take It Anymore'. So, get ready, we have HAD ENOUGH! Enough of the crybaby Social Program Entitlements bleeding us to the point we cannot drive or feed OUR families anymore!
Republicans are more dignified and quieter. However, there is a growing movement a stirring among us that urges onward towards a resolute to END this ENDLESS Social Program Funding Parade, at the expense of our lives becoming unmanagable because of the amount of taxes we are FORCED to pay so the POOR can, drive Cadallic Escalades with spinner rims, wear Designer Sports Shoes, wear Designer Sportswear and Exclusive/Expensive Logo Wear, get Bling-Bling Teeth, thru THEIR FREE/GRATIS Dental Programs, that drive right TO THEM, and We Don't All GET Any Kind of Dental Programs either, and WE PAY HIGH PREMIUMS FOR OUR MEDICAL and Other Medical Needs, They DON'T PAY A PENNY, not a penny! No wonder their drug abuse with perscription drugs is so high.
They call an Abmulance because they are so Morbidly Obese they cannot get up from Bed! I see this and so do others, but Republicans/Independent Conservatives are too dignified to say anything, but they are Thinkin' it! And that is a good thing too.
Awareness of Abuse to the Taxpayer is a good thing.
Now, you can keep on cryin' over your poor little poor people, that pay ZERO taxes for all they get but I have alot of very good stories that I have lived thru, not getting a single drop of Social Program Entitlements coming. Things I have had to live thru, while watching these poor people NOT suffer.
I am disgusted that SSI pays people for Depression & Anxiety and that 'OTHER' Medical is the Highest Growing portion of Recipients coming onto the SSI-Entitlement Rolls.
The ONLY persons that do not want to SEE the reality of the Abuse of Social Program Funding at the expense of taxpayers is someone that uses these people for their benefit, is ON Entitlements, wants to be ON Entitlements, or has a hang up for like Father Pfleger i.e., he thinks he's Black.
The Celebrities and their Fetishes have brought these people into the US in droves, and these dwidoits are responsible for the MSM Media attacking and blacking out all things Pro-Republican. They ONLY promote Grand Theft Democrats.
They BENEFIT from the continued extortion of illegals.
Actually, the Media MSM hatefest that has been going on for far too many months now, has been exactly what Awakened me to what was truely going on.
You see, I was NOT a Republican at the beginning of this Election Campaign.
But, what the MSM Media and what people have written in Articles, Blogs, Forums, Journals, and all Media, has turned me completely against what I used to be not that long ago.
I made excuese for the poor's behavior. Made excuses for the young man that rapes a child because he 'had a poor disadvantaged childhood'. Yes, I was a Liberal Minority. Like I said, I grew up in Los Angeles.
But, now I am Awake. I see the injustice of Section 8's moving into Target Areas as they are called, turning them into overnight dangerous drug infested gangbanging ghettos.
A perfect example of this is Antioch, California. Lancaster. Contra Costa. San Berdoo.
I know La really well. I watched it turn.
I watched as the Government forced people to just 'shut up and take it'.
I have been watching people degrade Senator McCain for his age. Yet they DO NOT remark about the age of Senator Harry Reids age, because he's a Liberal Democrat that Loves to help hand out MORE Low-Income Funding.
I watch my neighbors in my town of 256 live extremely well, while I have to cut my heat off for a certain amount of time, so I don't get too high of a bill and fall off my budget.
They just got another increase, for Heating & Cooling in this New Bailout Bill.
We just got a Bailout Bill, HR-3221. It added even MORE Section 8 Homeownership Funding.
When I moved far North to Escape LA. I ended up in a Naturally Resource rich area. Pristine, Clean, and FULL of the Goodness that is America.
The people Glowed with Goodwill as I had NEVER seen before in LA. I only saw scowels from angry Hispanics that did NOT want anymore 'light skinned' people in their Aztlan Nation.
I was at first perplexed as to why I did not have to RUN TO AND FROM MY CAR TO GET IN AND OUT OF MY PLACE OF EMPLOYMENT.
I actually was amazed people did not lock their doors!! That was profoundly awakening.
Yes, there were certainly good people here. I thought my journey was over and I had a lifetime ahead of me of SAFETY I had never known in LA.
But, that is All gone now. HR-1851's Funding that began on July 14th, 2008, changed this area to a dirty, filthy, trashed out, graffitied, cesspool as I had escaped.
So What Right! Certainly that's what you would think.
So to that, until I write again with the permission of these Fine Gentlemen's permission, I have a responsibility to take care of for awhile, then I shall return with yet another REASON, I will NEVER again fall for the Grand Theft Democrats overabundent overuse of my tax dollars to care for people, that most of them can take care of themselves.
If only there was not so much Fraud within the Social Service's maybe this would have never happened.
I did the US Census 2000 in my little community. I know these people, what they do, how they live.
Over half of them are Frauds. Using the system Fradulantly to gain a way of life that is fruitless, useless, worthless.

As a member of Myinvestorsplace.com I am aware that I must pray and pay - but I need more viable solutions. Where do we go from here?
Looking for applicable advice and solutions.
Your help is appreciated.

As a member of Myinvestorsplace.com I am aware that I must pray and pay - but I need more viable solutions. Where do we go from here?
Looking for applicable advice and solutions.
Your help is appreciated.

As a member of Myinvestorsplace.com I am aware that I must pray and pay - but I need more viable solutions. Where do we go from here?
Looking for applicable advice and solutions.
Your help is appreciated.

As a member of Myinvestorsplace.com I am aware that I must pray and pay - but I need more viable solutions. Where do we go from here?
Looking for applicable advice and solutions.
Your help is appreciated.

Thanks for your questions, Neilehat. First, I believe that it is up to each lender in negotiation with borrowers to determine the conditions for a loan. The lending institution should be free to set its own criteria for lending as long as there is no deception in setting out the terms of the loan and there are no bailouts from the State. If there are bailouts, that is another matter entirely. So, if a financial institution wants to use statistics about who is more likely to repay the loan or credit scores or their loan officer's intuition or whatever, it should be their own decision.

As I have suggested in previous posts, I would argue in favor of legislation that sets broad rules that encourages more personal interaction between borrower and lender. When people can sit down with someone with whom they are familiar and with property they can actually see, fraud and mispercptions are less likely. People are less likely to cheat others who can retaliate or people one has a personal relationship with. Consider Adam Smith's analysis of community and personal relationships in his *A Theory of Moral Sentiments.* We are less likely to mistreat another with whom we can empathize as we see ourselves in them. This is why I believe too much diversity in the same geographical area is not a good thing--we humans have less "sympathy," in Smith's use of the term, with those who are very different. Further, the more personal contact we have with others, the less likely we are to mistreat them. That is why global capitalism is dangerous. We lack the face-to-face personal contact that is needed to maintain ethical and fair transactions. People are less likely to sell a pig-in-a-poke to another one knows. As you may know, Southerners in the U.S. and Asians have traditions of doing business only with people they have a personal relationship with. That is wise. Consider a very recent study at Lehigh University where MBA students were more likely to cheat people they had less personal, more ephemeral contacts with.

http://www3.lehigh.edu/News/V2news_story.asp?iNewsID=2892&strBack=%2Fabout%2Fnews%2Fdefault.asp

We can find evidence for my position on lending with the success of banks that foster personal contact between their staffs and their customers. Hudson City Bank is an example of such a success story. Here is a link to a N.Y. Times article on the more conservative, more personalistic, less formulaic approach Hudson City takes in lending:

http://www.nytimes.com/2008/08/14/business/14hudson.html?ref=todayspaper&pagewanted=all

Notice in the article that Hudson City started as an immigrant bank early in the 20th Century. Bank of America started this way, too. There were many such banks. So, if you are worried about red-lining and minorities being squeezed out if banks could lend to whomever they choose, then upstart banks that discriminate in favor of their own race or ethnicity could (and have in the past) ameliorated that problem. Staff of such banks can also have the rapport and intuition to be able to override the influence of gross statistics and discern who among disfavored groups is likely to be responsible and who is likely not to be. Lending decisions might be more accurate if made on a personal, case by case approach. Again, consider the success of immigrant banks on this score. Anti-discrimination laws get in the way here.

Finally, in reply to your comments on social justice, I would argue against ahistorical or current time-slice approaches to social justice. I would advocate a historical, process-oriented entitlement approach as advocated by Robert Nozick. If both parties agree to a transaction and there is no fraud or coercion involved and they are trading their rightfully gained property, that transaction is ipso facto fair regardless of how an overall distribution of wealth is affected. Notice that Nozick's approach is very different from Judge Posner's. What gets Posner into trouble, I believe, is that his theory of social justice is too result oriented. How people obtain their possessions is not a relevant consideration on his theory. See this excerpt of Nozick's *Anarchy, State, and Utopia* for a fuller discussion of theories of distributive justice. See especially pp. 150-160

http://books.google.com/books?id=hAi3CdjXlQsC&dq=nozick+robert,+theories+of+social+justice+anarchy+state+and+utopia&pg=PP1&ots=OFj4p6olgE&sig=g5meQ12FkIoXAsV805rrPs-lgR8&hl=en&sa=X&oi=book_result&resnum=4&ct=result#PPA150,M1

Thanks for your questions, Neilehat. First, I believe that it is up to each lender in negotiation with borrowers to determine the conditions for a loan. The lending institution should be free to set its own criteria for lending as long as there is no deception in setting out the terms of the loan and there are no bailouts from the State. If there are bailouts, that is another matter entirely. So, if a financial institution wants to use statistics about who is more likely to repay the loan or credit scores or their loan officer's intuition or whatever, it should be their own decision.

As I have suggested in previous posts, I would argue in favor of legislation that sets broad rules that encourages more personal interaction between borrower and lender. When people can sit down with someone with whom they are familiar and with property they can actually see, fraud and mispercptions are less likely. People are less likely to cheat others who can retaliate or people one has a personal relationship with. Consider Adam Smith's analysis of community and personal relationships in his *A Theory of Moral Sentiments.* We are less likely to mistreat another with whom we can empathize as we see ourselves in them. This is why I believe too much diversity in the same geographical area is not a good thing--we humans have less "sympathy," in Smith's use of the term, with those who are very different. Further, the more personal contact we have with others, the less likely we are to mistreat them. That is why global capitalism is dangerous. We lack the face-to-face personal contact that is needed to maintain ethical and fair transactions. People are less likely to sell a pig-in-a-poke to another one knows. As you may know, Southerners in the U.S. and Asians have traditions of doing business only with people they have a personal relationship with. That is wise. Consider a very recent study at Lehigh University where MBA students were more likely to cheat people they had less personal, more ephemeral contacts with.

http://www3.lehigh.edu/News/V2news_story.asp?iNewsID=2892&strBack=%2Fabout%2Fnews%2Fdefault.asp

We can find evidence for my position on lending with the success of banks that foster personal contact between their staffs and their customers. Hudson City Bank is an example of such a success story. Here is a link to a N.Y. Times article on the more conservative, more personalistic, less formulaic approach Hudson City takes in lending:

http://www.nytimes.com/2008/08/14/business/14hudson.html?ref=todayspaper&pagewanted=all

Notice in the article that Hudson City started as an immigrant bank early in the 20th Century. Bank of America started this way, too. There were many such banks. So, if you are worried about red-lining and minorities being squeezed out if banks could lend to whomever they choose, then upstart banks that discriminate in favor of their own race or ethnicity could (and have in the past) ameliorated that problem. Staff of such banks can also have the rapport and intuition to be able to override the influence of gross statistics and discern who among disfavored groups is likely to be responsible and who is likely not to be. Lending decisions might be more accurate if made on a personal, case by case approach. Again, consider the success of immigrant banks on this score. Anti-discrimination laws get in the way here.

Finally, in reply to your comments on social justice, I would argue against ahistorical or current time-slice approaches to social justice. I would advocate a historical, process-oriented entitlement approach as advocated by Robert Nozick. If both parties agree to a transaction and there is no fraud or coercion involved and they are trading their rightfully gained property, that transaction is ipso facto fair regardless of how an overall distribution of wealth is affected. Notice that Nozick's approach is very different from Judge Posner's. What gets Posner into trouble, I believe, is that his theory of social justice is too result oriented. How people obtain their possessions is not a relevant consideration on his theory. See this excerpt of Nozick's *Anarchy, State, and Utopia* for a fuller discussion of theories of distributive justice. See especially pp. 150-160

http://books.google.com/books?id=hAi3CdjXlQsC&dq=nozick+robert,+theories+of+social+justice+anarchy+state+and+utopia&pg=PP1&ots=OFj4p6olgE&sig=g5meQ12FkIoXAsV805rrPs-lgR8&hl=en&sa=X&oi=book_result&resnum=4&ct=result#PPA150,M1

Depression?!, My, My! It looks as if the Neo-Cons are getting desperate! It's always important to have a scapegoat close at hand to blame for our own failings. What ever happened to the sense of a little Christian charity?

Welcome to the Neo-Con vision of the New America.

Having been in and out of Appalachia, it's just the way they do things up in the hills. Always have, always will. Not too mention, the lack of Economic oppurtunity. There is something to be said for the old Mines, Mills, and Factories. But then, that's old style economics and doesn't fit the world of derivatives, mortgage backed securities, hedge funds, and other exotic financial instruments.

What if the government "suggest" to the banks or mortgage loan suppl