Well, after careful reading in the Wall Street Journal and The Economist this week, I have to say I disagree with you both. Hal: while markets may be efficient, the aftershocks of the markets righting themselves has the real potential. Part of the problem is yes, historically markets have righted themselves, but that predates the incredibly complex set of instruments that banks and investors have cooked up in the last decade to package and resell debts/credit. We have months and months to go before all the carefully packaged and tangled debts are untangled and sorted out, and the real cost of that debt figured out. I reference in particular the article in the March 22-28th issue of The Economist titled "History Lesson."

And (I would argue) the Feds need increased regulatory control over all of these banking practices. Investors and bankers felt very free to indulge in risky credit, including the subprime mortgage mess, and had few if any watchmen to wonder aloud what they were doing.

The markets will still have to untangle themselves. And the Feds can't just keep throwing money at bad banks. But just standing back and waiting for the chaos to sort itself is also a mistake - it could well lead to a real depression, with credit markets and banks going to hell before beginning the long climb back. Unnecessary, in my view.

Erik,

You are making the mistake of confusing the collateral backed obligations (CBO's) market with the real estate market. They are both very different. The government has already bailed out the collateralized debt market. It provided liquidity that will continue to help fund the mortgage market. The real estate market is very different and that is where Laura and I agree. Just think of how much the affordability index has dropped for new home buyers! Of course they need to be credit worthy. You also failed to mention the people who had no business taking out a loan they could not afford. They are as (or maybe even more so) responsible for their actions than poor lenders or a lack of government oversight. The risk of depression that you mention can and would only happen if liquidity was erased from the mortgage market. As mentioned above, our government has already made that bailout. I agree with the actions of the Federal Reserve Bank.

Ken, I totally agree with you regarding Iraq. Very bad decision to go to war there, even worse decision to just pull out.

Incidentally, Laura, I just wanted to say (publicly) that I really respect that fact that you are honest and forthright when a candidate you like offers up a position or policy you disagree with.

It makes me trust your analysis so much more than I do bloggers who are just always trying to put a good spin on their candidate or party and gives your opinion(s) a lot of weight with me, because I know they are principled and sincere conclusions and not just clever glosses or highlights designed to mislead or obfuscate in those areas where you suspect the answer may not have the desired result.

You don't cut corners or take short-cuts when trying to persuade (or justify doing so with an ends justifies the means mentality), and I admire that.

Thanks, Hal. I too benefit from hearing and considering your points. (Laura must be pretty neat to know and get along with so many interesting people capable of carrying on a thoughtful discussion.)

For the most part I'm sympathetic to the "clean up your own" mess philosophy and to arguments that there may be a moral (and not just a pragmatic) component to the decision making process that should consider whether or not our contributions to a situation create an obligation.

As a matter of personal and corporate experience, though, I know that feeling such an obligation may increase one's desire to be part of the solution/clean-up of a problem, but it doesn't <i>automatically</i> make one the best person (or group) to do it.

If I (or my kids) are messing around with firecrackers and light my neighbor's house on fire--or if I see a criminal breaking into my neighbor's home, prompting me to run over with my shotgun and creating a catalyst where he takes one of my neighbor's kids hostage--I might very well feel a sense of obligation that would make me prefer to take an active role in fixing the problem as opposed to calling the fire department. That feeling would be perfectly understandable, but the truth is alleviating my sense of guilt (or responsibility) shouldn't necessarily be the first order of concern, and I may not be the best (i.e. most competent, most likely to succeed) person to fix the problem I created.

In fact, my insistence that I must be part of the process may hinder the process, especially if I insist that the police or fire department (or neighbor for that matter) follow my commands/instructions about how to address the problem even if my leadership or strategies have a pretty poor track record of being effective in the past.

Erik,

Interesting article in the Economist. Thanks for the reference. For anyone who's interested, the link is http://www.economist.com/finance/displaystory.cfm?story_id=10880496&CFID=141465&CFTOKEN=78108854

I'm not sure we actually disagree...I believe more (and better and streamlined) regulation is required.

What I don't think is helpful is a the specific proposal to help out borrowers who are underwater in terms of home value to loan balance. The dangers in the mortgage market derive from bankruptcies, not from falling home values.

It's all about the ability or inability to make monthly payments.

I wouldn't be against a government assistance program to help people refinance existing mortgages into a more affordable payment structure.

But it makes zero sense to try to alleviate the mortgage crisis by addressing paper losses.

Hal and Ken,

On the Iraq CF (no other word for it, Hal...sorry to those with sensitive ears out there)--

I'm also of the opinion that we never should have gone there in the first place. And my gut instinct is that we should get out quickly as possible...that we're not really doing much long term good there...that we're not likely to be able to truly stabilize a region that's historically been unstable under anything other than dictator rule.

I do, however, cede the point that immediate, unilateral withdrawal might make things worse than staying for a while longer. The questions are:

How long do we stay?
With what specific goals?
At what point have we done all that we can?

I agree completely with Ken that it's critical for us to examine whether or not we are the appropriate party to clean up this mess. We are viewed with justifiable suspicion and rancor by a good portion of the world...and it might be best just to provide financial assistance and let NATO take the lead.

Last, I'm going to have to read Biden's plan again, but I remember it being the most thoughtful and feasible proposal out there.

Interesting discussion!

Some of my thoughts as prior banker/lender on the current problem:

>I think the overall concept of sub-prime lending is a good thing. It provides homeownership to a group of people that previously did not have that option. Every major discussion about how to raise people from poverty includes the ability to own one’s own home as part as a critical foundation. In fact, sub-prime lending has been going on for a long time in under different names. This includes most of lending done by small community banks in lower income neighborhoods as well as major programs like FHA. My first home purchase required $4,200 cash to close which represented less than 5% of the purchase price. I borrowed the funds from parents and then paid them back by taking a cash advance on our credit card.

>This is the third real estate cycle I have lived through in California. Not much changes. It is driven by lenders trying hard to find a way to get more loans done, a strong job market, weak oversight (lack of political will to be restrictive on lenders when everything is going well) and strong consumer confidence. When these basics start changing, so does the overall market.

>Lenders and borrowers choose the level of risk they want to take. Overall, I agree with Hal that the market will sort itself out. I think the market is good at doing so because it is looking for equilibrium.

>I don’t think lenders should get a bail out. You make bad loans, you suffer economic losses. Stockholders and executives do well when they make good decisions, they should pay the price for poor lending policies. Lenders should not have to write down loans to match current values. The lender never gets more back if the property goes up in value. Those lenders that made bad decisions will go under and be purchased by the stronger ones. You can bet that the members of Countrywide’s Board of Director’s Credit Policy Committee wish they had been more vocal on its lending practices. Not too realistic though. It is said that a Chief Credit Officer at a lending institution does not make it through a full economic cycle because they are criticized for being too restrictive during good times and get blamed for the bad times.

>Some borrower’s took risks believing that they could deal with rising interest rate environments by selling at a higher price or refinancing again at a low teaser rate. They should live with these decisions. Few of us remain that feel paying back loans is part of one’s character. However, I can easily envision a situation where someone would walk away but would hope to make restitution later should they have the capacity to do so.

>Regarding Government Policies:
• Unless there is fraud, I think the Government should stay out and let the overall market adjust over time. I think it will be a couple more years until we see a bottom and I think it will not start moving again for a couple years after that. We have more sellers than buyers now at the current price. Either we need sellers to lower prices, easier credit terms, more buyers or fewer sellers to stabilize the market. Bottom line is that I believe that everyone is entitled to housing but that there is not entitlement to homeownership.
• I believe that, over time, we should eliminate the “One Action Rule” in California. This will eliminate much of the speculative nature of the market in the future and make it harder for people to walk away from homes.
• I believe we should be able to take a capital loss on our homes that we sell for less than what we paid for it. This is only fair as a capital gain is required (with some loopholes) when we profit from a sale.
• Government should consider policies that would encourage one of the four ways to stabilize the market as long as it is based on sound macro economic policy. We should always ask the question: “Does this help the economy as a whole?” Some will clearly benefit but others pay the price. Lowering interest rates will make loans more affordable but it also reduces the return that “savers” enjoy. Since most of the savers are elderly, the burden of this decision falls mostly on them. These are the kind of hard decisions that our elected officials and our appointed friends at the Fed have to make.

I agree, pretty smart, indeed. Maybe we should propose him for head of the Fed when Obama or Clinton win?

Brilliant conversation here. I cheerfully admit that I'm still in Junior High when it comes to understanding advanced economics and the nature of lending/banking/etc. Do find it fascinating. Worth the price of admission just to read Dan Morefield's feedback. And, in case anyone cares, I think 1) yes, if you took out a loan you couldn't repay you should have to live with the consequences, 2) I suspect that most folks did not understand fully the terms of their loans (which doesn't let them off the hook for being responsible for it) and some lending agencies had a field day with that lack of understanding, 3) I don't sense in any of this discussion or the reading I've done thus far that tells me anyone on the planet has something approaching a comprehensive view of all the variables and the probable outcomes (too complex? Too many variables?) 4) That we are a people still possessed of only the most rudimentary critical thinking skills, and that is the deficit that concerns me most, 5) Eager to learn more about this entire strategy game called economics, 6) I would second the motion to have Dan head the Fed, regardless of the winner, but I want my friend Dan alive and healthy for many years to come, and that job would age him like cheese in a cellar.

Regarding Iraq: I have the sense from what I read on this blog discussion that there is an implicit assumption that the United States CAN clean up its own mess. I'd love very much to be wrong about this, but it has been my sense that once we destroyed the Strong-Man balance of Saddam's regime we, sadly, helped Iraq into religious and political upheaval for an indefinite period of time. We've given the leaders of the current Iraqi government a remarkable amount of time to attempt to put their house in order. As this week's news indicates Sunni and Shite are still too busy nursing old wounds and binding up new ones to create anything like a unified government. Centuries of religious hatred and resentment won't be solved by any surge of any duration. Again, love to be wrong about this. A large portion of the educated middle class has fled the country, the infrastructure of the place continues to dissolve, education and security are transient things, and too many of their elected officials are working harder for their factions or their self-interest than the well-being of the country.

There will be no pretty, clean way out of this mess. Some messes make bigger messes, and this, I'm very afraid, is exactly like that.