I posted the following: > > Willem Buiter on the prospects for a massive Keynesian stimulus in the US. > > > > http://blogs.ft.com/maverecon/2009/01/can-the-us-economy-afford-a- > > keynesian-stimulus/ > > > > Probably [sic] outcome: Total collapse in the value of the dollar. >
And Alan responded: > Thanks for the link to a well-reasoned piece. I think he argues forcibly for > a "go slow" policy on the proposed stimulus, and I tend to agree. I am not sure it will matter. The overhang of dollars due to bad policies over the last 25 years, not only monetary and fiscal but also in the area of trade, is so great that a collapse in the dollar's value may well be inevitable at present. But Buiter does make a good argument about why more "Keynesianism on steroids" is not the prescription. Unfortunately, there does not appear to be much else that the US can try now. We have really backed ourselves into a corner in terms of policy options. And the counter-argument for a huge stimulus has been made by many good economists, such as James Galbraith, Paul Krugman and Robert Kuttner. And Alan further commented: > On a vaguely related note, I heard a caller to a consumer help radio show > give this story. The caller named "Vinnie" had his house foreclosed upon and > yet he and his girlfriend were still able to shell out $50,000 for an > expensive new car. So what was his complaint to the consumer advocate? The > detailing shop had buffed "swirl" patterns into the new paint. > > My jaw almost dropped out of my head. > > So obviously people like Vinnie have managed to game the system by buying > houses at 100% financing or even negative amortization, take out second > mortgages based on the perceived rise in real estate values, and then, when > real estate tanks, they effectively sell their houses at a guaranteed profit > back to the bank by walking away from the loans. > > And then they blow the windfall on 50K worth of wheels with swirlies in the > paint. > > Something is wrong here. I am getting a bit jaded at people giving sob > stories about being foreclosed upon. > > And I have heard similar stories here. One involved someone who got a house for nothing down (NINJA loan, the bank practically forced him to take the house), then was able to convince a separate bank shortly after that to give him a home equity loan, based on equity that he simply did not have. I have been trying to work up a list of the possibilities when it comes to the borrowing side of the mortgage mess. It seems it would have to include at least the following: 1. Cases where the borrowers were themselves crooks. For example, http://www.nypost.com/seven/10202008/news/regionalnews/its_on_the_house_134417.htm. Or this local scam from Boston: http://www.bostonherald.com/business/real_estate/view.bg?articleid=1094619&srvc=rss. 2. Cases where the loans were made to people who had no realistic ability to repay them (the sub-prime market being a major instance). Niall Ferguson's discussion of the Detroit real estate market towards the end of this excellent piece appears to fall into this category: http://www.vanityfair.com/politics/features/2008/12/banks200812 3. Cases where the borrower was buying houses to flip them for a quick profit. I heard somewhere that upwards of 40% (?; could be even higher) of the people who bought houses in recent years were buying a second home, and many of these were purely speculative investments. Paul Krugman had a great line in one of his columns about how the US economy in recent years had consisted primarily of Americans borrowing money from the Chinese to sell houses to each other. Looks like he was right about that. 4. Cases where the buyers already had a decent house, but overextended themselves to buy a larger one that was ultimately beyond their means, like the farmers who overexpanded in the 1970s but then got caught short when hard times came in the 1980s. 5. Cases where people used the equity in their house as a piggy bank for all kinds of things normally beyond their means. Getting a home equity loan to pay for a child's college tuition or finance real improvements to the property is one thing, but using it to pay for vacations, SUVs, and other forms of conspicuous consumption is another. I have even read that some people who invested with Bernie Madoff hocked their homes to the max and then invested every dime in Madoff's Ponzi scheme. Now THAT is both greedy AND stupid. 6. The people who do deserve some sympathy and a renegotiated mortgage with favorable terms, of whom there are of course quite a few. Some people were blatantly deceived by banks and mortgage companies. Others appear to have been too senile to understand what they were signing (I assume this is what happened to jazz singer Ernestine Anderson in Seattle, though I have not heard all the details; http://speakeasy.jazzcorner.com/speakeasy/showthread.php?p=758455). I am sure there are lots of other angles and permutations. Other than category 6., I am running low on sympathy for most of these cases. One additional problem is that if the government does start bailing people out, it will likely become yet another cesspool of corruption, and the speculators with political connections with make off with most of the money, and the folks in category 6. will still lose their homes. It is a real mess, and it will be interesting to see what Obama does about it. But the bigger mess is all the credit default swaps and the rest piled on top of it, and it is hard for me to see how any government policy can clean that overhang of toxic debt up. It seems that Paulson has decided not even to try, though that was supposedly what the TARP money was appropriated for. John M. --~--~---------~--~----~------------~-------~--~----~ Persons posting messages to not_honyaku assume all responsibility for their messages. 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