John G. writes:
>
> MG writes: 1. That the fund should primarily be aimed at assisting
> homeowners and resolving the housing crisis rather than at purchasing
> mortgage-backed securities at above market prices from the banks. The root
> of the financial crisis is the housing crisis. Stop foreclosures and put a
> floor under housing prices and the distressed MBS's would rise in value,
> so the theory goes, as surely as the government buying them at auction,
> improving bank balance sheets and (presumably) their willingness to lend.
> JG replies: Point well-taken, however... ...call me a "getting prices
> right" market fetishist if you will (and it would probably be the first
> time), but isn't there something dodgy abouta solution to the rampant
> foreclosure problem -- which as things stand will only get worse -- which
> continues to inflate a real estate market artifically inflated in the
> first place by international economic imbalances, originate-to-distribute
> lending practices, and credit default swap gimmickry?!
> I'm not smart or patient enough to figure it out, but there's gotta be a
> fair and equitable way to keep folks in their houses without keeping the
> fizz on the real estate market, yes?
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I don't know whether the two objectives - unblocking the credit markets and
allowing house prices to fall - can be reconciled. It seems to me any kind
of mortgage relief would slow the decline. Apart from whether struggling
homeowners are entitled to such assistance, if home prices are allowed to
fall another 10%-15% or more and foreclosures continue to soar, the credit
quality of the MBSs, CDOs, CDSs and other financial assets will continue to
deteriorate, lending will contract further, and the recession will deepen.
House prices are already down 20%, and avoiding another great depression has clearly become an urgent matter for the ruling classes and the masses. Some measure of regulation of the derivatives and mortgage markets is certain to follow, and the crisis has already given some impetus to a rebalancing of global trade and investment, but for now stemming the precipitous decline in foreclosures and lending have taken precedence, and I think rightly so.