Anger is certainly an appropriate reaction in circumstances like this, but I find articles like this really gloss over the nature of the shared responsibility for what happened.
Yes, banks and governments (including the US! - we just haven't felt the full brunt of it yet) engaged in many unsustainable and downright fraudulent practices. Asset bubbles are breeding grounds for such things. On the other hand, no one forced homebuyers to take on loans they knew they could not afford, or spend borrowed money at unpayable rates.
Now, everyone wants a bailout. Neither banks nor consumers should get them. Iceland actually did the right thing by taking its banks into receivership and breaking them up. The banks screamed bloody murder and threatened national chaos, and the Icelandic economy did grind to a halt for almost a year. Now, they seem to be on a road to sustainable recovery. This is not true in either the rest of Europe or the US, where the bailouts came fast and generous. Look at today's job report. Is that the sign of economic growth?
While the decisions were justifiable at the time, TARP, TALF, and the like need to be admitted as mistakes and corrected. If this means recognizing all of our largest institutions as insolvent, so be it! The nation requires a banking system, but not any individual bank. It will hurt badly, just as it hurt in Iceland, but the alternative is Ireland and Greece.
On the other hand... for the equivalent square feet in Tucson, my rent went up 50% over a decade for the same square footage. When you see your rent go up so drastically, while everyone is getting low interest rate mortgages, you start to question your "fiscal responsibility." If I had bought in 2006, I couldn't have sold my property today. However, we didn't know where the "new normal" would even out.
People took on these home loans, in most cases, because of the fear of rent increasing past their ability to pay. If you buy, you may not be able to afford it now, but eventually inflation will bring the numbers into line, especially not knowing where the "new normal" would be.
People took on these home loans, in most cases, because of the fear of rent increasing past their ability to pay.
This is one of the most retarded ideas I've ever heard.
Renting: a small, liquid, short duration, unleveraged short position.
Owning: a large, illiquid, long duration, highly leveraged long position.
So basically, to follow a short term trend, people decided to tie up a large chunk of their life savings in dangerous, long term leveraged bets. Financial literacy FAIL.
I guess it's fine to put a lot of blame on people who bought houses they ended up not being able to afford. However, there were fraudulant practices by mortgage companies.
Banks have more responsibility for the mess because they are the experts (allegedly) at assessing risk. They are the ones that got ratings agencies to give high scores to the mortgage backed securities. They are the ones in a position to wreck the economy by collective failure. They are the ones who got a bailout and clamored for one.
An individual homeowner who makes a bad bet doesn't ruin the economy. Too big to fail banks who make millions of bad bets do ruin the economy. They socialized their losses and continue their extremely high pay and bonuses.
The anger should mostly be aimed at the banks. Especially in light of their dubious foreclosure practices. People are mostly financially illiterate. People don't understand percentages and compound interest. People are not rational (most of the time). A regulatory apparatus that isn't beholden to the banks is what is needed.
They are the ones that got ratings agencies to give high scores to the mortgage backed securities.
And that's an issue between them and the people/institutions they sold those securities to. It does not in any way absolve individuals for making dumb bets, particularly when those individuals often lied on their loan applications.
The housing bubble simply could not have occurred without financially illiterate people making bets they didn't understand in the hopes of getting rich quick. I agree with you that any individual bank had a more harmful effect than any individual real estate speculator, but that's just a matter of size. Collectively, real estate speculators are just as guilty as banks.
I don't disagree with you at all concerning bailouts. We should end "too big to fail".
But on the other hand, try to remember that real estate speculators also received massive subsidies (frannie, mortgage deduction) even before the crisis. The banks, excluding GM, have more or less paid back their portion of the bailout (this even includes the AIG portion). Real estate speculators have not paid back their subsidies.
The anger should mostly be aimed at the banks. Especially in light of their dubious foreclosure practices.
Many loan originators did shoddy paperwork to save a buck, and didn't transfer the lien's to the right party. Real estate speculators are now exploiting the legal problems caused by this shoddy paperwork to break their contracts and squat in homes they don't own. The loan originators absolutely deserve to be sued by the bond purchasers over their negligence.
But the real state speculators are also culpable for exploiting legal quirks to steal homes from their rightful owners [1]. We may not be 100% sure whether BankAm Loan Issuing Corp, BankAm Loan Servicing Corporation or the MBS corporation is the rightful owner of a home - but we are quite sure that the squatters currently occupying it stopped paying their mortgage and therefore do not have any right to it. The squatters deserve to be foreclosed upon, and then the loan issuer, servicer and bondholders can fight over who really owns the home.
Banks are a convenient political target. But real estate speculators are just as guilty as the banks.
[1] Obviously, not all real estate speculators are doing this, but I have read quite a few media accounts of this.
The whole "Fraudclosure" thing is a bit of a red herring. Yes, banks should be made to pay for their negligence in complying with basic mortgage laws, but does their negligence change the fact that the occupants of those homes have not and cannot pay their mortgages? The mortgages are delinquent, no matter who the actual owner of the note is. All the controversy has done is slow down a process that will eventually happen either way.
TBTF needs to go. Many banks, including big boys like JP Morgan and Bank of America, probably need to be recognized as insolvent despite the bailout money they took. The foreclosure mess in its own way probably only slows this down by continuing the cloud the status of the properties in question.
"The housing bubble simply could not have occurred without financially illiterate people making bets they didn't understand in the hopes of getting rich quick."
A financially illiterate person who makes a bad bet does so with someone lending them money. In the case of the mortgage market it is a financially literate person giving them money. It's not mere convenience to place greater blame with (investment) banks.
Historically, a person put 20% down on their property as a down payment. The interest rates were high, at least 8%, sometimes over 10%. Take the house in 1970s tucson that was $30,000. Interest rate was about 10%, the down payment was 6,000, so the payment was about $250 a month.
Now, drop the down payment requirement, and drop the interest rates to 5%. that same $30,000 dollar property suddenly costs about $175. But, there are plenty of people who can afford $250. So, they value (perhaps erroneously, but follow me here) the object not as its purchase price, but rather as a comparison to what they pay as rent.
Suddenly, people are valuing the property as $45,000. But more importantly, people who don't have savings but have income are looking and saying, "I can afford a house!" Thus, demand rises along with the perceived value of the property. Then, the people with rental property look at increasing mortgages and adjust their rental properties' prices accordingly. Investors look at increasing prices and create a follower effect. Demand increases.
Rent increases. The bubble has renters facing higher costs looking at property not as an investment, but as a hedge against increasing rent costs. This isn't necessarily a bad decision: consider if you are buying in 1999. You can barely afford the property, but you are averaging 3% raises. That $35,000 salary in 1999 is $48,000 in 2010, but the housing cost is the same.
I forgot to follow this with: The problem with 2006 is not only that the property value is diminished, making a property sale impossible, but it is combined with a recession. If you could afford it before, you can't after you lose your job, at least not past your savings. (I know people out of work for over 9 months.)
The total domestic residential mortgage book kicks in around 750,000 contracts for a total of 100bn EUR in the Republic. 3% of that is according to a Goldman Sachs report a pessimistic default rate. 3bn EUR sounds to us like pocket change these days.
The responsibility is not shared as evenly across Ireland as is commonly thought.
Most of these are high street banks (equivalent to S+L) that were making housing loans. You want to tell pensioners that their life savings are gone and the government is not going to do anything?
It might work - but it also means people will stop putting their money into banks, which means no credit cards, no business loans, no mortgages, no saving, no insurance.
So everybody will only deal in cash which means no taxes.
Admittedly ireland is probably closer to a 12th century barter economy than the rest of europe - but I don't think it really wants to go there.
Yes, banks and governments (including the US! - we just haven't felt the full brunt of it yet) engaged in many unsustainable and downright fraudulent practices. Asset bubbles are breeding grounds for such things. On the other hand, no one forced homebuyers to take on loans they knew they could not afford, or spend borrowed money at unpayable rates.
Now, everyone wants a bailout. Neither banks nor consumers should get them. Iceland actually did the right thing by taking its banks into receivership and breaking them up. The banks screamed bloody murder and threatened national chaos, and the Icelandic economy did grind to a halt for almost a year. Now, they seem to be on a road to sustainable recovery. This is not true in either the rest of Europe or the US, where the bailouts came fast and generous. Look at today's job report. Is that the sign of economic growth?
While the decisions were justifiable at the time, TARP, TALF, and the like need to be admitted as mistakes and corrected. If this means recognizing all of our largest institutions as insolvent, so be it! The nation requires a banking system, but not any individual bank. It will hurt badly, just as it hurt in Iceland, but the alternative is Ireland and Greece.