Our financial system is crumbling this week.

[Arthur Dent]

Americans have a child-like ignorance to economic matters. As long as we can get our stuff, we're fine. We assume there are wizards that magically make it all work. IMO this is very sad.

Most people think that understanding the economy involves knowing terms like collaterized debt obligation, short selling, or treasuries... We shouldn't allow so much detail to confuse US. The national economy is hardly different than the one in our own homes...but perhaps this explains some of our ignorance - a lot of US don't even understand our own checkbooks, but we do know how to charge and buy expensive things.

Ironically, the national economic problem mirrors what's going on in so many homes. (or vice versa). What the govt is doing again is using a big credit card check (from the bank of China) to pay for expensive things (like Iraq War and bank bailouts.) As long as we have those blank credit card checks, we'll be fine.

American economic ignorance is a huge problem, but it is not sufficient to think of the national economy as being like that of a household. There are huge and important differences. For one thing, the national income grows much faster than a family income, so the ability to take on debt is continually increasing. The current national budget is clearly unsustainable, and it was irresponsible to rely on large borrowing to finance government in normal economic times, but the current national debt is currently 38% of GDP. As recently as 1994, it was 50% of GDP. We can afford our current debt even if the money for this bailout has to be borrowed.

[Arthur Dent]

As much as we don't want to see it, is it best for the long-term health of the economy if we simply allow these banks to fail, and fall into a depression? I don't think we can keep applying these band-aids at the expense of doubling the national debt every 2 years.

Maybe, but in the long term, we're all dead. The short term matters. A lot.

Isn't that awfully selfish of us? We're already passing off trillions of dollars worth of debt on to future generations. When do we finally say, "enough!"?

Our debt is not that high by historical standards. We can afford it.

Rather than relying of a hugely painful depression to impose discipline, it makes much more sense to find a short term solution (bail out) that maximizes punishment for responsible parties while minimizing it for the rest of us, imposing new rules to prevent future crises and resisting pressure to dismantle them in good times, and restoring the budget to more sustainable levels.

[Arthur Dent]

I was thinking of things like the civil rights movement, the anti-war movement during the Vietnam war... Even the Iraq War, as unpopular as it has been, can't motivate Americans to organize a decent demonstration. The Gulf War of 1991 (which had far broader support) inspired better protest. We're an apathetic people. Sure, we type all kinds of things into blogs and baseball forums on the internet, but I don't see that as the same thing as good old-fashioned protest.

There has been protest although it has often been ignored or minimized in the press. The protests of February 15, 2003 were perhaps the largest in world history. I think it's important to recognize that despite this huge turnout, the protest failed to stop the war, and the powerful chose to ignore the public. Mass demonstrations have not been particularly effective, and I think it's time to turn to other strategies.

[cardinalkarp]

• * We knew that it would adjust up by x (I can't remember, but it was a lot), but even though it is our first house, it was our dream house.
  
  * I was sure that I'd make enough in five years to cover this (who can possibly know this?).

These are the type of people that piss me off the most. If you know it's going up, and you can't afford it, why in the world did you take the loan. Yeah, dream houses are great, but only if you can afford it. I'm not going out and buying a ferrari even though I would love to be driving around in one.

First house and "dream house" shouldn't be in the same sentence.

[Popeye_Card]

As much as we don't want to see it, is it best for the long-term health of the economy if we simply allow these banks to fail, and fall into a depression? I don't think we can keep applying these band-aids at the expense of doubling the national debt every 2 years.

Maybe, but in the long term, we're all dead. The short term matters. A lot.

Isn't that awfully selfish of us? We're already passing off trillions of dollars worth of debt on to future generations. When do we finally say, "enough!"?

Our debt is not that high by historical standards. We can afford it.

Rather than relying of a hugely painful depression to impose discipline, it makes much more sense to find a short term solution (bail out) that maximizes punishment for responsible parties while minimizing it for the rest of us, imposing new rules to prevent future crises and resisting pressure to dismantle them in good times, and restoring the budget to more sustainable levels.

If it keeps going at the current rate--they've just handed out over $1.5 trillion over the last year in bail-out programs--it's not going to be sustainable. This bailout crap we keep pulling while CEO's pocket their millions is insane.

Think about this. $700 billion in spending authorized over a weekend. How much thought has really been put into whether that kind of historic spending is even going to work?

EDIT: And both parties are to blame for this. The democrat-controlled legilsature is every bit as much to blame as the republican president.

[Arthur Dent]

If it keeps going at the current rate--they've just handed out over $1.5 trillion over the last year in bail-out programs--it's not going to be sustainable. This bailout crap we keep pulling while CEO's pocket their millions is insane.

Think about this. $700 billion in spending authorized over a weekend. How much thought has really been put into whether that kind of historic spending is even going to work?

The graph is incredibly misleading. Measuring national debt in inflation adjusting dollars is not particularly meaningful as the country has grown enormously. That graph makes it look like WWII debt was small potatoes compared to today's debt. Nonsense.

Further, the bailout has not yet been authorized, and is receiving a skeptical audience in Congress. Limiting executive compensation as well as taking back past earnings based on fraud are all being considered. A proper bailout will also lead to much of the money being paid back.

[Popeye_Card]

• * We knew that it would adjust up by x (I can't remember, but it was a lot), but even though it is our first house, it was our dream house.
  
  * I was sure that I'd make enough in five years to cover this (who can possibly know this?).

These are the type of people that piss me off the most. If you know it's going up, and you can't afford it, why in the world did you take the loan. Yeah, dream houses are great, but only if you can afford it. I'm not going out and buying a ferrari even though I would love to be driving around in one.

First house and "dream house" shouldn't be in the same sentence.

Excellent point.

I just had a conversation with a buddy who's having to move for work purposes last week, and there's a bit of concern about the overall security of his company. It's a profitable huge company, but in prime position to be bought by someone else, which would probably destroy the real estate market in the small city the headquarters is currently in (where he's moving back to). Anyway, he's married and recently had his first child, so he has them to look out for as well. I stressed to him about "needs" for his house vs. "wants". Figure out what you need in a home right now, and look to only own it for a couple of years until you have a better idea of your longer-term stability in the area. No need to knock yourself out trying to find a dream house when your dream could become a nightmare quickly if you'e forced to move and take a huge loss on your real estate, which you were stretched to afford in the first place.

Common sense prevailed. He ended up finding a house that well-served all of his needs (and even some wants) in the lower end of his price range, instead of going with the house they had earlier fallen in love with (at the extreme high end of their price range).

But not enough people sit down and analyze what they "need" in a house. They see a place and fall in love, and then they take whatever steps they can to afford it.

[cardinalkarp]

There are plenty of people that had no idea what they were getting into because it wasn't explained truthfully or at all. There are plenty of stories that seem reputable where people honestly thought they had a fixed rate, and only discovered they did not when the mortgage payment skyrocketed. Not all, but enough to where blanket statements about people in trouble aren't fair.

edit - my wife is the financial expert in our house, and she really is an expert so I have a big advantage in these matters. But I can't fault people who don't have that knowledge and were just flat out lied to.

But, jim, don't you think people should know a little bit about what they're doing before they do it? I mean, if you go get a loan, shouldn't you at least look into it a little bit at least? I mean, we're not talking complicated economics or math here. One simple test will tell you that people are lying/offering a loan that is too good to be true. Even at 5%, a low rate, you're still paying $833.33/month in interest alone on a 200K mortgage. I know banking and the accounting that goes along with these loans can be incredibly complex, but there are a few simple and extremely easy things that people should be able to do themselves to figure out if they are getting a fair shake.....and figuring out your payments aren't even covering the interest should be one of them.....

It's too complicated. Unless you are a lawyer you aren't going to understand the entire contract. If it were one page where it said you are getting a loan with these terms, then yes absolutely. But they bury so much crap in there and make it impossible for the average person to understand.

Bush addressed this very issue early in the week and he's spot on.

C'mon jim, you are really giving people the benefit of the doubt. When we signed our loan we knew which papers we were signing were more important than others and its pretty easy to see written in the contract that its a 30 yr FIXED rate, that and if you're unsure say you want to SEE it in writing. Most of these people knew they were in over their heads and tested it. The housing market crumbled and these people couldn't sell houses that they thought they could make a profit on before the adjustable rate went up.

[Popeye_Card]

If it keeps going at the current rate--they've just handed out over $1.5 trillion over the last year in bail-out programs--it's not going to be sustainable. This bailout crap we keep pulling while CEO's pocket their millions is insane.

Think about this. $700 billion in spending authorized over a weekend. How much thought has really been put into whether that kind of historic spending is even going to work?

The graph is incredibly misleading. Measuring national debt in inflation adjusting dollars is not particularly meaningful as the country has grown enormously. That graph makes it look like WWII debt was small potatoes compared to today's debt. Nonsense.

Further, the bailout has not yet been authorized, and is receiving a skeptical audience in Congress. Limiting executive compensation as well as taking back past earnings based on fraud are all being considered. A proper bailout will also lead to much of the money being paid back.

Compare it to GDP if you'd like.



That still isn't a good trend. And I personally don't like the changing role of our economy--going from manufacturing/production based to more consumer/trader based. I don't think it provides a sustainably outstanding GDP in the long-term.

As for it's scrutiny in congress and it getting paid back, I'll believe it when I see it. These are the same congresspersons who thought the economic stimulus plan was a good idea.

[Leroy]

There are plenty of people that had no idea what they were getting into because it wasn't explained truthfully or at all. There are plenty of stories that seem reputable where people honestly thought they had a fixed rate, and only discovered they did not when the mortgage payment skyrocketed. Not all, but enough to where blanket statements about people in trouble aren't fair.

edit - my wife is the financial expert in our house, and she really is an expert so I have a big advantage in these matters. But I can't fault people who don't have that knowledge and were just flat out lied to.

But, jim, don't you think people should know a little bit about what they're doing before they do it? I mean, if you go get a loan, shouldn't you at least look into it a little bit at least? I mean, we're not talking complicated economics or math here. One simple test will tell you that people are lying/offering a loan that is too good to be true. Even at 5%, a low rate, you're still paying $833.33/month in interest alone on a 200K mortgage. I know banking and the accounting that goes along with these loans can be incredibly complex, but there are a few simple and extremely easy things that people should be able to do themselves to figure out if they are getting a fair shake.....and figuring out your payments aren't even covering the interest should be one of them.....

It's too complicated. Unless you are a lawyer you aren't going to understand the entire contract. If it were one page where it said you are getting a loan with these terms, then yes absolutely. But they bury so much crap in there and make it impossible for the average person to understand.

Bush addressed this very issue early in the week and he's spot on.

C'mon jim, you are really giving people the benefit of the doubt. When we signed our loan we knew which papers we were signing were more important than others and its pretty easy to see written in the contract that its a 30 yr FIXED rate, that and if you're unsure say you want to SEE it in writing. Most of these people knew they were in over their heads and tested it. The housing market crumbled and these people couldn't sell houses that they thought they could make a profit on before the adjustable rate went up.

Everybody told me to go with an adjustable rate, and for awhile it looked like they were right. But it turned around and I'm glad that we went that way. Others choose to gamble...some win some lose. But when I gamble I almost always lose.