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The Great “Entitled To Ownership” Society September 28, 2008

Posted by tkcollier in Economy & Business, philosophy & politics.
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Japan had their inflated Real Estate bubble in the 90s. Remember when the on-the-books value of their land’s country was priced higher than all of our land east of the Mississippi? Their big mistake, which their economy has never recovered from with zero growth that even 0% interest rates couldn’t jump start it was they never had an RTC. We blew out all of the bad Savings and Loans paper and our economy recovered. A lot of people got rich on those holdings when Real Estate recovered. The Japanese Banks never wanted to admit their losses and “lose face”, which is a big deal in their culture.

The problem this time is that the good and bad loans have been bundled together. The “Mark to Market” change in Nov. of 2007 was a huge SEC and Financial Board mistake. It allowed the current credit swap default market to explode to 70 Trillion dollars world-wide. The only way to value these toxic securities is not mark-to-market but by discounted cash flow. In other words if 10% of the bundle isn’t paying on their mortgage than value the paper by the remaining income stream and years left to maturity.

The Faustian bargain that started all of this was when the Banks wanted permission to roll-back post-depression regulations, such as banking across State lines, selling insurance, etc. In return, Congress forced lenders to agree to stop red-lining poor neighborhoods. Now everyone wants to encourage home ownership, but the problem started when, under congressional pressure, the highly politicized, bastardized Public/Private Mortgage behemoth Fannie and Freddie lowered standards. Read Wikipedia the history of the CRA legislation that promoted this activity.  As a result, other Lenders had to drop their standards to be able to compete in the lucrative home loan business. We are now reaping the results of that race to the bottom. An ex-Miami Mortgage broker, told me how he was coached by the lenders not only what they wanted to hear but also what they didn’t want to know about. The lenders just wanted to look the other way. As long as property values kept going up their Ponzi scheme worked.

Here is a video, edited by Republicans, from a 2004 House hearing; convened to receive a report on Fannie Mae by the Office of Federal Housing Oversight that was trying to warn the Congress about “safety and soundness issues”. It became “kill the messenger”. 

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