Perhaps, these are more questions than thoughts…..
First, the problem:
It is too easy to say that the problem is simply “subprime loans”. The problem is more the following: the Fed kept interest rates too low, making the cost of money seem too affordable. People were encouraged to borrow money to buy homes and to improve their lifestyles. These loans included mortgage loans (often with adjustable interest rates) to finance the purchase of housing, and to refinance existing mortgage loans, as well as home equity loans and credit card debt. There were at least two faulty assumptions – one that housing values would increase so that the collateral would be worth more than the outstanding secured debt, and two, that borrower income would increase, making the monthly loan payments more affordable. Thus, as time went by, the assumption would be that the outstanding loans would become more affordable to borrowers with increased incomes, and secondly, that loans with adjustable interest rates would be able to be refinanced when the interest rates increased because of the increased value of the underlying real estate, the increased income of the borrowers, and the continuation of interest rates kept low by the Fed.
But the assumptions were false – because the other governmental goal was to keep inflation in check, and if you don’t have inflation, it is hard to assume increased income and increased real estate value.
Of course, there were scoundrels and con men in the mortgage business. But the governmental policy facilitated their actions, not only the monetary policy described above, but also the concept of an “ownership society” as a hallmark of the Bush administration, including the intensive push for homeownership even for those who clearly were not in a position to maintain a home.
1. Even though some families borrowed unwisely, the foreclosure of homes should be discouraged. One way to do this would be to permit homeowners to reduce their monthly payments, ballooning the reduced payments at the time the house is sold or refinanced, or even to enable homeowners to borrow governmental or governmentally insured loans which have no monthly debt service to enable their existing loans (to the extent that they cannot be modified) to be kept current. If when the house is sold there are insufficient funds to repay these emergency loans, the loans would be forgiven with no income tax ramifications (that is, the normal taxes on forgiveness of indebtedness would be waived).
2. The complexity of securitized mortgage loan instruments needs to be reeled back in. With the very complex instruments that now exist, there are many problems, including lack of transparency, lack of flexibility, lack of connection between borrower and true lender. This leads to large profits by investors and their principals, while the institutional lenders and insurers are caught because of various guarantees, shifting resources from what would otherwise be a greater amount of available credit.
3. As the government loans money as part of a recovery program, it is crucial that repayment of these funds be secured as tightly as possible. It sounds like everyone agrees with this.
4. Along with the principles between discussed by federal officials, I think that this is a time to think about redirecting much about the United States economy to discourage excessive profit taking generally (as especially by some foreign interests), and to concentrate on: eliminating the ever increase gap between rich and poor, investing in American industry (and ceasing to support moving jobs overseas), developing a plan to put people to work fixing up the American infrastructure, becoming less dependent on foreign fossil fuels, and of course creating a universal health care program. I am not sure how you get there, of course, but I don’t think we do ourselves any favor by leaving the world as it is, even if we are able to get beyond the current credit/equity crisis.