Sub-prime Bail Out
 

I have to agree, it is not quite fair. Someone should reduce my rate as well.

Subprime bailouts: Chump check
Responsible loan payers are crying foul about the breaks that delinquent borrowers are getting.
By Les Christie, CNNMoney.com staff writer
November 5 2007: 1:22 PM EST


NEW YORK (CNNMoney.com) -- Not everyone is happy about mortgage lenders' latest efforts to help troubled borrowers.

Take Teresa Nelson. Instead of going for an adjustable rate mortgage with its lure of low initial rates, she opted for the security of a 30-year fixed at 7.10 percent for a house she bought in Pinellas Park, Fla. in December, 2005.

"I was well aware of what an ARM meant, and was staying far away from those snake-oil pipe-dream promises," Nelson said. "I also wasn't shopping for a short-term, big payoff investment - I was looking for my home, until I retire."

But many delinquent subprime borrowers who went for low teaser rates that shot up to unaffordable levels are now paying lower rates than Nelson as part of a new round of foreclosure prevention packages. And she doesn't like it.

For example, one subprime borrower had a riskier hybrid adjustable rate mortgage (ARM) with a rate of just under 7 percent that was going to reset in December to 10.5 percent. But last month, as part of a new bailout plan from Countrywide Financial, the lender gave him a rate reduction to 5 percent on his loan, saving him hundreds of dollars a month.

Nelson feels cheated and has little sympathy for people who she believes weren't as careful as she was. "Everybody was seeing dollar signs," she said, "and let their greed get the better of them. So, no. No bail-out, no assistance with my tax dollars. Not one red cent."

The rest: http://money.cnn.com/2007/11/01/real...ion=2007110513

I tend to agree. Screw them. They chose this path.

But what happens to the economy on the whole and to my job specifically if all these people go broke?

If you signed a contract for a fixed rate mortgage and the mortgage company lowered your rate, wouldn't that be breach of contract? (Not that anyone would sue them for it.)

Unless, perhaps, you could get out of your mortgage and keep your house in that case . . .

Those who don't pay their bills have always gotten the sweet deal. Lenders when faced with receiving $0 or 50-80% of what the contract entitles them to will always choose the option that gives them at least something. It isn't just your mortgage either.

If you owe $5000 at 9% and you make your payments every month right on time, try calling the company and ask them if you can get a break on the rate. The answer will be no. Miss a payment and your rate will jump to somewhere around 24%. If you call and ask them to return you to your old rate and you'll get laughed at.

Now skip your payments for 7 months. You will have compounded 24% interest on that $5000 + late payments every month. BUT if you call that company and explain you can't afford to pay that, most of them will offer to wave all late charges, drop your rate down to 5-6%, and bring your account current if you can make some sort of a payment today and agree to make your payments from that point on.

If that doesn't seem like a good enough deal don't pay them for 13 months. By that time they will have sold the paper to an agency at a discount. Talk to the agency and offer to pay the account in full - for a discount. They will offer you somewhere in the area of 30-40% discount just to get something out of you. The longer you wait, the lower it goes.

So if we go back to the start, you used $5000 of someone else's money. You can make all the payments and maintain a positive credit score, probably paying well over $7000 to pay it off, by the time it is all paid off. Or you can sacrifice a few points on your credit score and pay them $2-3000 in a year or so. That's the way the cookie crumbles.

The point is the lenders aren't "helping" the borrowers, they are trying to salvage their own finances by preventing the mortgages from going into default, which effects the lender's own credit rating and ability to conduct business. Poor, poor business decisions over the last 6 years forced this issue.

That's from this MR post by Tyler Cowen.

Basically your moral outrage doesn't matter to policy-makers. At least that's what I get from "smart people."

Sure, but next time, they won't be able to get a loan at all, whereas I still will, right? That's what I tell myself to keep from weeping, anyway.

you'd be surprised how often someone can do that and still get a loan. and the people who start the process with intent get quite a few credit lines set up before they quit paying.
i worked with a guy who had replayed the whole process on a very very grand scale every 7-9 years since about 1970. lived in a big big beautiful house, drove fine german automobiles, had tons of cash, and every toy you could think of and the only things he actually paid for were the house and cars.

do well with small credit lines. get bigger credit lines. keep balances low, get more and bigger credit lines, start taking cash out of a couple of the credit lines in small increments, make minimum monthly payments. keep pulling cash out start using credit for living expenses, stockpile cash. low low balances in checking accounts. big home safe. get new car. keep making payments on everything. get new house. next year start making payments for each credit line using another credit line. now you've gone a year without spending actual money, only credit. miss a payment. send in enough to catch up. miss another payment, catch up again. get offers for consolidation loans. accept biggest one, who cares about interest rate? no intent to pay. DON"T close paid off credit cards, pull out more cash make minimum payments on everything. do this until debt to income ration is too far out of whack to qualify for anymore loans, then start missing payments. wait 6 months, file BK.

get $300 credit card the next day. start process all over again. takes 6-9 years start to finish. New BK laws mean that the same people will keep doing this, but instead of BK they will contact creditors for reduced settlement. Average schmoes who got in over their heads before life smacked them a nasty one are the only ones hurt by new BK laws.

BTW - this guy made in excess of $200,000/year and was a complete douche.

Let them go broke. We absolutely need a total reset in this market and have for years, now. The longer we keep this crap afloat, the farther we'll have to fall in the end.

what exactly do you see as a "total reset" and what are the benefits/consequences?

Sane loans and prices that aren't artificially inflated to astronomically high prices by easy/free money. A normal growth in real estate and calm reactions on behalf of all parties -- lenders, buyers, and sellers. No more "free money" mania if enough investors learn their lesson.

If the government bails loans out, we'll see this problem extended and the inevitable could possibly be more damaging. We have years of ARM resets remaining before this is all over and done with, so any bailout that happens now is a drop in the bucket of a much larger problem, anyways. Besides, banks aren't going to take the fall and lawmakers will see to that.

Consequences include lots of burned out vehicles. Strange.

sorry to burst your bubble but the banks have taken a major hit when you look at since the first of the year you have had over 150 banks implode.
educate your self on implode.com

its hell of alot bigger problem than what the average person thinks.

what is there? i'm not getting anything? but you mean 150 mortgage companies, not banks right?

I just don't buy the idea that we need a taxpayer bail out for many of these people or lenders. The lenders need to fold and get out of the business, the people who bit off more than they could chew should pay up. Anyone with any sense would avoid ARM's like the plague. Sure there are some people who need a bit of help or let them reapply, but don't just drop their rates to 5% out of the blue, that is not fair to people who have a fixed rate percent.

The societal effects of largescale repossessions on defaulted mortgates also need to be considered.

I recall during the recession in the UK in the 1990s, the housing market ran into serious trouble and so did the employment situation. Large numbers of people defaulted on mortgages and had their homes repossessed and put back onto the market at the slumped price that had become the norm, or were under so much strain to pay what they could not afford that they put the keys through the door and walked away. The result of that was a sharp increase in the number of people (often families) who became technically homeless. A whole culture of 'bed and breakfast' families began.

Now, on the one hand those people could possibly be seen as less culpable than the sub-prime borrowers as theirs was the result of a market slump rather than poor finance decisions. On the other hand, the societal effects of sharp, sudden rises in homeless and temporarily housed familes (often involving the temporary or permanent break up of those families) is not lessened by the culpability of the borrowers.

1) i'm not in favor of bailouts. for anyone - companies or individuals.
2) ARMs are not to blame, they are a valid and useful loan when used correctly.
3) Dana this is similar to the UK situation as this IS a market slump, caused by the inevitable increase of mortgage rates from historic lows, which in turn causes home values to stall and pull back, preventing people from making the "quick buck" they thought they'd get in an ever increasing real estate market. most of these people bought these homes they can't hold onto using the "bigger fool" logic. they would hold onto the home until a bigger fool came along and paid them a huge gain and THEN they'd buy a house they could really afford. dummies. greedy dummies.

*nods* okay. I agree.

I've just watched an interesting report on Newsnight (finished about five minutes ago). We are having our own 'credit crunch' at the moment. Northern Rock was the first of our major mortgage lenders to go into serious and newsworthy crisis. Lloyd's Bank was in talks to offer them a hand, the Treasury and Bank of England both intervened to prevent this. Many companies are currently paying out more in interest than they can afford, so with a credit crunch we'll see joblosses and closures, and house prices are going to fall.

Traditional economic sense says you don't intervene to help individual banks or people. But, there are also economists arguing that this only makes sense if dealing with a local problem. The credit crunch being international can, if allowed to continue without those confidence raising measures at a local level, throw the whole economy into serious recession. The argument seems to be that the dangers to the economy of not intervening are significantly more dangerous than the dangers of not.

well, the gray beards in my business always say, "trees don't grow to the sky, do they?" yeah, i know, dumb saying, but the point is that the economy is a cycle, it has peaks and troughs and no one knows exactly what will be the catalyst for each or the day they'll start. but my money, says you'd be a fool not to have some pretty serious defensive measures in place if you are planning to draw income from your investments in the next 10 years.

http://ml-implode.com/

that includes mortgage co. and banks such as bank of america whole sale

Don't foreclose, or drop the rate, lengthen the loan.

This topic has two different aspects. First are the many homeowners who carry a sub-prime loan and were 'surprised' by their new interest rates; be that a teaser rate loan or other Adjustable Rate Mortgages.

Second are the various financial organizations who invested in these mortgages using various instruments such as SIVs, conduits, bonds, etc.

Many in the first aspect may have been foolish. Of them, some must indeed be punished by bankruptcy. But also may have been many banks that took those mortgages and are now stuck with homes worth even less. Or are they?

Whereas banks were once storage houses for mortgages; today, banks have become mortgage moving companies. Banks had less incentive to review an applicant's financial stability because the bank would bundle those mortgages into a bond. Sell the whole package off. Existing are many NINJA loans - "No Income, No Job Apparent".

Who would buy such risky investments? Welcome to a world where what you do today looks profitable today on spread sheets while risk can be ignored to only appear four and more years later on some future spread sheet. Many of these mortgages were sold to large investment houses such as hedge funds. According to bond rating firms such as Moody's and S&P500, these financial instruments had an AAA rating. After all, they were mortgages - and mortgages were always predictably stable investments. Few bothered to look inside; learn the details of these mortgages. Instead these mortgages were bundled in complex financial structures defined by 150 page complex legal and monetary agreements. Sure some would default. But few understood the time bomb implanted in these mortgages. Rather than study the product, too many 'geniuses' were too busy grasping the complex legal overhead. Few bothered to learn why so many banks (and mortgage companies) were ignoring the risk (i.e. Ninjas). Few bothered to instead look inside to learn details of those mortgages.

Many who bought these financial instruments expected even higher profits when interest rates increased. So many were even rewarded with bonuses. Four some years later, the losses fell upon the financial institutions. The guy who did not do his homework had profited already and may have been long gone. (Many of the corporate presidents responsible for the mess were fired with $200 million type severance payments.)

This second aspect is a story of major financial institutions now caught in a major liquidity crisis. Not a shortage of capital - a severe liquidity crisis. Well some, such as CountryWide Financial, took precautions. CountryWide hedged their risk by purchasing $hundreds of million in credit lines from major banks. IOW the liquidity crisis created by so many homeowner defaults moved through companies such as CountryWide Financial and ended up on the banks were underwriting these organizations and never expected the sudden demand for cash.

Other banks (such as Citigroup) attempted to become a full service institution. So they bought and held riskier mortgage packages since those (should) pay better in the long term while requiring no additional 'cash on hand'. This liquidity problem was supposed to be addressed by Basel 2. Riskier investments would have required banks to keep more 'cash on hand' for riskier investments. But Basel 2 never got instituted. Banks could reap higher profits for the same 'cash on hand' by purchasing riskier mortgages. According to their financial experts (and S&P 500, Moody's, etc), there was no higher risk. These were mortgages.

Not all banks did this. But more irresponsible organizations include Citigroup, Bank of America, and JP Morgan Chase did. These three banks just announced a 'slush fund' (it has many different names including MLEC) so that a bank can borrow. Remember, the sub-prime loan mess does not create a shortage of capital. All banks (including Britain’s Northern Rock) had sufficient capital. But with so many defaults, the banks needed some liquidity while liquefying other assets. Unfortunately for Northern Rock, the British version of a Fed may have accidentally created a run on that bank. A liquidity crisis - not a capital shortage - undermined that institution.

These three American banks want others to join. But why? European and other American banks were not so promiscuous. Why would they want to join a fund that underwrites other bean counters that do not do their job? It is their job to identify risk four and more years before that risk can appear on any spread sheet. Instead these promiscuous types created off-balance corporations to mask their risks even from stockholders.

Because Citigroup's was so negligent - only investing in these sub-prime loans based only on financial returns rather than on risk - then Citigroup may be broken up. Citigroup may be worth more in pieces than as the unit once created by Sandy Weil. Critics note that no financial institution has ever succeeded in creating a 'one stop for everything' store. That is what Citigroup tried to be. The sub-prime mess may be the "camel's straw".

Merrill Lynch was once one of Wall Street's most conservative and stable organizations. It was never a most profitable company; but always a benchmark of good safe investing. Their new executive started pushing for higher profits; take more risks. The strategy looked good. Merrill Lynch profits were better. So executives were well paid with bonuses based upon yesteryear's spread sheets. Never forget how economics works. The spread sheets report things that happened 4 and more years ago. Today's spread sheets are now reporting those ignored risks created by financial managers investing in these SIVs or conduits. Another reason why those investments looked good? They were carried in off-balance entities - similar to how Enron masked massive losses.

In theory, these off-balance entities were only profit centers that also required no 'on hand cash' to be maintained. In reality, these off-balance entities would only suck liquidity out of the company without warning - because off-balance entities need not appear on the company reports to stockholders. Money games that are legal? Just another example of mistakes made so many years ago never appeared on spread sheets until today. How many of those executives prospered with $millions in bonuses long before the spread sheets could actually report reality four and more years later?

Merrill Lynch suddenly *discovered* an $8billion loss. If the SEC is not investigating, then the ghost of Harvey Pitts remains in the George Jr administration. Speculators believe Merrill may have another $10billion loss coming. Yes the loss was created many years ago when genius financial experts did not bother to study the risks - did not even know the details inside those investment packages. But they so clearly understood the 150 page complex agreements attached to those financial instruments. Only today - many years later - are those bean counter oversights actually appearing on spread sheets.

Again, this is not a financial crisis - a massive shortage of capital such as in the 1920s. This is only a liquidity crisis. The Fed has made loans more available for these institutions. But ... welcome to what happens years later when these actions eventually appear in the economy.

Remember, the stock market crash of the late 1920 did not appear in the economy until 1933/4. Economics has a bad habit of taking revenge when people solve problems using money games. Providing too much easy money can create other problems. Sharp increase in inflation (if you did not notice prices have risen far higher than 'core inflation' numbers). Other problems could be higher precious metal (gold, copper, etc) prices. Dropping dollar. Higher oil prices. And if too much currency in other nations is in dollars, then a worldwide dumping of dollars which only makes those problems even worse again. Eventually Americans (and government Treasury) must sell off assets to pay for these problems. Which American companies must become foreign owned? How many more treasury bonds must the government sell (mortgage your future) to pay its bills?
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Does this all sound drastic? That is jumping to conclusions. All these things are happening or will happen. Just will not happen catastrophically. For example, whereas the dollar once bought one Euro, it may soon require $1.50 to buy a Euro. $100 per barrel oil? That is all but inevitable. $3+ gallon gasoline is no longer the worry. When gas was under $2, most never imagines $3 gasoline. Currently realistic is $4 gasoline due to many reasons including the quickly falling dollar. The government has been playing money games with debts. China has all but been financing "Mission Accomplished". Reducing taxes while spending wildly will come back years later when debts come due. And when those debts do not result in profits, also expect higher inflation.

So what can we expect? Clearly many organizations starting with major financial institutions must fire employees or sell off parts of America to foreign investors. Bear Stearns has already accepted massive Chinese investment. That is followed in the next decade by lower living standards. After all, when those profits start going to new overseas owners, well, who has less income?

Whereas government numbers mysteriously claim near zero inflation, well, the average lunch that once cost $5 when George Jr took office is now closing in on $10. Inflation, that must result from spending today without yet paying the bills, is coming. Taylor says interest rates should have been rising in 2003 to keep inflation in check. Instead we dropped interest rates - made easy money - keep the economy out of recession. We did the equivalent of ''ripping up the front lawn and reseeding it'. That created economic activity; makes higher GDP numbers. But when the profits do not appear years later and the debts come due - starting about now - four years later. If Taylor is correct, then expect the economy to punish for living too easy.

Has the sub-prime loan mess started the downfall? Was it just another example of money games to make the economy appear temporarily better? Something like 70% of the CA home loans were sub-prime. Using the housing market to make the economy appear healthier, does economics start taking revenge four years later?

This is not even a primer. More like snap shots of the many valleys and mountains in a country called ‘Sub-prime Crisis’. Appreciate how widespread a problem well beyond homeowners. Will it create a recession? No. Is it a precursor to recession? We will only know how much damage to the economy has occurred during George Jr’s tenure too many years from now. Has a major economic catastrophe been averted? I believe so. Apparently the majority of bad loans have conjugated in some badly managed institutions where bean counters only saw profits and completely ignored all risks.

One final note. Equifax claim they are not as risk. Equifax says they have something unique - risk analysis programs that do more than just measure default. It also measures liquidity risks. S&P, Moody’s, et al are said to have started creating similar products. These bond rating firms claim their ratings ignore time factors (sounds almost like admitting crime without being guilty). IOW a few defaults every year in an instrument is expected – still gets a high rating. But many defaults simultaneously is possible with higher rated bonds. That is a completely different risk problem.

tw, bottom line is, don't make me pay for your piss poor decision making, we have enough of that already in the rest of our lives.

However, merc, some borrowers were ripped off, accepting loans that turned out to be ARMs when they had the credit to acquire fixed loans instead. I know of at least a couple of them from my neighborhood.

But those people also shouldn't have a hard time refinancing for a fixed-rate loan. They'll probably lose several hundred or even over a thousand in refinancing costs for their mistake, but if they could really afford their house in the first place, it shouldn't be the end of the world.

In that case I would support having the companies who made the loans take it in the shorts, but DO Not pass that on to everyone else.

What is an ARM?

something Rate Mortgage I'm guessing.

Adjustable?

yes, that'd probably be right. Here we call them variable rate mortgages...which is what we have although we don't exactly have a mortgage as such. We have a line of credit...but it amounts to the same thing in the end.

ARM's:
A loan in which the interest rate is periodically adjusted, moving higher or lower in the same ratio as a preselected index, such as Treasury bill rates. ARM loans may include caps on interest rate increases in a given time period, and over the life of the loan, and may include limits on the frequency of interest rate adjustments. ARM loans generally have initial below market interest rates in return for the borrower sharing the risk that interest rates may rise during the life of the loan.

We call that initial low rate a honeymoon rate and it normally last for 1 to 2 years and then you're at normal variable rates.

I don't see why arm loans should be more subject to stupid borrowers. In fact, variable rate loans are far more popular in Oz than fixed. I suspect that will change shortly though with market trends the way they are. That is to say, I think if you could get a good fixed rate at the moment you'd be wise because interest rates here are steadily climbing and they're about to go through the roof (in my opinion).

That being said though, if you can't afford an extra $100 per month to cover higher interest rates, you shouldn't be taking out the loan. In fact it is my personal opinion tht if you're not paying off at least $500 more than the minimum of your loan per month, you should rethink what you're doing. It's stupid to take out a loan that you can only just afford.

I don't think the government or anyone else should be offering people bail out deals although I do see the consequences of not trying to prop up the market. The problem is, it is just a prop up, and sooner rather than later, the stilts are going to cave in, and the more bad risks you have sitting on them, the worse the crash is going to be.

I believe banks should immediately address their lending criteria and slowly tighten the belt on existing mortgages that're in default. In this way, the damage would be less than it will be in the future if banks continue to employ these delaying tactics.

We have 1 year, 2 year, 5 year and 7 year ARMs (I believe) where rates will stay steady for that initial "year" period and then the sky is the limit.

Wiki has a whole thing about them:

http://en.wikipedia.org/wiki/Adjustable_rate_mortgage

This economy is now full of adjustable rate whatevers.

These loans were important so that people who could never own a home could, instead, buy one. Or so that people could buy homes larger than they could afford. These groups cannot refinance because they could not afford the home in the first place. And now they cannot sell them because housing prices were significantly inflated by these ARMs and by Fed interest rates that were too low.

Meanwhile getting people into homes no matter what may be widespread. Fannie Mae and Sally Mae may be under investigation by the NY Attorney General.

Another looming problem resided in credit cards. In America, everyone is familiar with the Capital One credit card. Get everyone to transfer their credit card debts to Capital One with its low interest rates. Then when they miss anything completely unrelated to that Credit Card (ie the electric company bill is late), then that Credit Card interest rate increases massively. Now these debtors have seriously increasing debts.

GM is also guilty of playing such games. To maintain sales of poor products, GM simply tapped on of their remaining profit centers - GMAC - their financing company. By offering loans at zero percent, GMAC was simply giving free rebates on grossly overpriced GM cars. When do those losses appear? Four and more years later. Today GM admitted that GMAC is no longer a profit center. Duh-h-h-h.

GM was mortgaging GMAC on a hope that GM profits from cars would return. Maybe if car guys were designing their cars. Now GMAC is no longer a profit center.

GM was holding back on massive losses in a hope that GM would be able to write those losses off on those future profits. Well those not lying to themselves should have seen products not be profitable. GM had to finally concede to those losses - could no longer play spread sheet games to mask those losses. What surprised analysts are how much larger those losses are. Another money game exposed - along with these Adjustable Rate Mortgages and the looming credit card crisis.

So I try to look at news like this and think about how it applies to me.

I've been mulling over the idea of buying a new digital tv set. Most consumer electronics come down in price over time, so I expected that if I am patient, and hold off as long as possible, I'll be able to get a medium sized high-def digital TV for a fair price.

BUT, if the dollar is falling, and will continue to fall, should I grab a new TV now? Maybe the future exchange rate will be so unfavorable in a year or two that I won't be able to afford a new TV.

Thoughts?

buy it with today's dollars but pay it back with the value of future dollars. 0% financing.

Prices on digital TVs too a sharp dive this past year. Many were selling TVs at slim profits - some were being sold at losses last Christmas. Prices are not likely to go much lower for the next few years. You will need a new tech TV by Feb 2009.

However, with the threat of recession looming, will that $600 TV be a cost burden? This is no time to have credit card debts.

recessionary periods help those with fixed income sources (teachers, salaried people) play catch up with those that have variable or cyclical income. (sales, services)

credit cards are excellent tools in the hands of disciplined individual. the fact that he hasn't already purchased it on a credit card and has given future value consideration would indicate a disciplined individual.

There will be converter boxes for non-digital TVs.

So they say. I haven't seen any on the market yet, and I've looked (a little.)

True. I wouldn't go into debt to get a stupid tv, but I would be dipping into savings. I can afford it, but part of me recoils at the idea of spending that much (more like $800) on a tv.

they'll make them available. they aren't stupid enough to think we'll all just pony up for the new tech, when some kid will sit in his mom's basement and figure out how to make a box and start selling them on the street. they'll want the income from the converters that will be made either legally or illegally.

Converters were also defined almost 10 years ago when all this was required and when conventional (VHF) TV was slated to be turned off in 2006. Converter boxes were supposed to be made available for $100 with government subsidies. However all this (and Zenith for which much of this was created to protect) are gone, missing, or not discussed.

Meanwhile, most of those HD TVs are a complete insult to me. Instead of receiving a true HD signal, they just widen the screen (make faces fatter) and promote "LOOK! IT’s a BIGger Screen!". No. A true HD picture means that when the Eagles are being taken apart in the Super Bowl, then you can see why on every play as Eagles receivers downfield are being embarrassed. Currently, the low resolution screens still on HD TVs only tunnel in the line of scrimmage. (Those not in N America will have to guess what was just written.)

See also the controversy between HD and Blu-Ray DVDs to appreciate how few facts actually get out to the public due to political correctness and the number of people who know only from what retailers tell them. "You cannot be trusted to know the truth." They get away with it because so many of us don't ask, "Why?" Why are those converter boxes not everywhere? What happened to the government subsidies?

Another question: why are TV receiver circuits so insensitive as to all but require Cable service? And why is this relavent to mortgages?

I have a solution for the TV...throw it away.

Returning to the topic: Bernanke (Federal Reserve Chairman), in testimony to a joint (Senate and House) committee, said that stagflation is back.

Stagflation was created when government was spending massively, government debts increases, oil prices rose to prices well in excess of $5 per gallon (in today's money), the dollar dropped massively, massive debts from Vietnam were coming due, jobs eventually were lost, GM, Ford, and Chrysler made cars so crappy that one always would not start every cold winter morning in the parking lot, mortgages were hard to obtain, the US 6th fleet at one point could not even put to sea due to fuel shortages, housing market crashed, gold rose to record dollars per oz., heavy machine operators would make best money driving construction equipment onto ships as so many American business were selling off capital equipment just to survive, copper prices increased by a factor of ten, accountants (bean counters) were in great demand while engineers (innovators) had trouble finding jobs, violent crimes increased (as anyone in Philadelphia what the lead news story has been most every night for the past two weeks), the third largest industrial base in the world (US overseas owned businesses) were being sold off completely to pay for America's debts, government was lying about environmental laws and enforcement, that light at the end of the tunnel was finally considered fiction (ie "Mission Accomplished"), and - how curious - the president was a crook AND a liar. Deja vue?

Bernanke has a problem. Core inflation numbers imply near zero inflation. However those numbers exclude things like energy (oil) and food. Two years ago, what $20 once bought in the grocery store now costs almost $30. But there is little inflation? Only according to the official government numbers. We know how honest this government (dominated by wacko extremists) is.

The Fed must raise interest rates to combat inflation? It cannot. According to Bernanke, a recession is a real possibility. So the Fed must lower interest rates? They already did that with prime rates as low as 1% when the threat of recession was less. Having lowered rates too low to make a 2003 economy look good, well, economic forces are now conspiring to take revenge for the easy money.

Nothing suggests stagflation will approach 1970s pain. But then how many here were 16 or older in the 70s? I suspect half in The Cellar have little grasp of anything but a Roaring 20s economy.

Bernanke’s dilemma: This economy has been in a slow destruct mode as America even entered a war that would only cost $2billion and it now created more anti-America uprisings even in S America. How many appreciate why this author has been so appalled for so long? How many know that tw was never even partially aggressive critical of politicians until George Jr came forward to lie routinely? Welcome to the George Jr economy which we will have to pay for in the next ten years.

In 2000, Bill Clinton left America with a $260billion surplus. George Jr quickly turned that surplus into a deficient that had increased to as much as $400 billion. As Cheney said, "Reagan proved that deficits don't matter." Welcome to what those who voted for George Jr were really voting for. This debt created when the economy was at its best - when surpluses are supposed to be created. No decent American has a kind thing to say about this scumbag president. Tw has never (UT, et al should confirm this) in what - 20 years - ever been anywhere near this critical of any leader.

Welcome to what may be the start of stagflation according to Fed Chairman Bernanke.

The role of the U.S. Government isn't to defend people who bought more house than they could afford. The markets take care of themselves. The government should not intervene. The more people who lose their houses, the more affordable houses become and others who act more responsibly and don't have as much money will be able to buy them at the lower price.

I don't see why responsible people should be taxed to pay for the irresponsibility of others and also don't see how the government should be involved at all.

When the government meddles in the markets, we have disaster. That is what caused the great depression in America. When markets are allowed to adjust naturally without intervention, we have normal cycles.

Except that they don't. Government has always meddled in the market, it's just that it usually meddles on behalf of big business and lobby interests.

Unhampered Free-Markets ALWAYS take care of themselves and have never failed. Only when government involves itself do things fail. Anyone with even the slightest knowledge of economics knows this.

The invisible hand absolutely exists and absolutely works 100% of the time. The hard part is keeping government out of the markets. The more government involvement (especially in regulations) the worse off the economy, and the less freedom people have.

Socialism is always wrong.

I do not believe it has been truly tested, anymore than I believe communism has been truly tested. Even the most hands off gvernments aren't actually hands off. Rules and laws relating to trade are skewed in favour of a particular class and even in a predominately laissez faire government such as America's there are such things as trade protectionism, subsidies and corporate welfare.

I tend to agree with you on capitalism not being fully tested, but not communism. Communism was setup the way it is described by Marx, but it never lasts because it violates human nature. What is the motivation for one person to produce more than another when there is no more reward? People who do more naturally want more than the guy who does less.

History has proven many times over that the more a country embraces socialism or communism, the more likely that country is to collapse financially under its own weight and beg capitalists to bail them out. Communism always ends up being totalitarianism because an iron fist is required to force people to violate their own nature.

Socialism and communism require force to exist, while capitalism does not. In capitalism every person is a winner in every transaction because every transaction is voluntary and each person will do what is in their own best interest.

I have a dollar and I want an apple. You have an apple and you want a dollar. I buy your apple for a dollar. We both win. Some will claim I was ripped off for paying a whole dollar for an apple, but to me it was worth the price. Nobody forced me to give up my dollar for an apple.

If I had been walking in the desert for days and was starving and the guy sold me the apple for $100, I am still not a victim. The value of the apple rises the more I want it.

I disagree. In fact the people attempting to 'set up' communism also disagreed...with each other. There are many ways of intepreting Marx, and the mensheviks and Bolsheviks each had their own analysis of how to go about creating a communist state. From the very start the project was riven with internal dissent and civil war. In such a climate, Strongmen flourish. Systems envisaged to promote democratic participation were in fact skewed to the needs of said Strongmen. Communism, as envisaged by Marx was never implemented.

Technically it can never be implemented 100% as envisioned by Marx because humans can't do it; only robots can because it violates our very nature. Capitalism on the other hand, could be and does not violate human nature.

I am not sure I would agree completely. The system where government is involved in the markets is actually an important aspect. Regulations which control how companies can and cannot act are in important factor in controlling fraud and abuse. It is not perfect but I think it is better. Take for example Enron. A number of new rules and regulations were developed to hold CEO's more responsible for the bottom lines reported to the shareholders and those that trade on the stock in the various exchanges. There are other examples I am sure. It is important that we go after crooked companies and hold them responsible, it is the responsiblity of Government to do that.

Again, I disagree. Communism doesn't sit well with our concept of what an advanced society is. There have been numerous cultures which have developed along broadly collectivist principles. Many of those cultures are cultures we deem to be anachronistic and undeveloped. But the people living within them are (or were) still humans and those cultures do not clash with their nature. Many such cultures have since been eroded through contact with our culture and our concepts of ownership, trade and the market. The reason communism appears to run contrary to human nature is that the kind of culture and sensibilities which 'won the race', so to speak, have not developed along broadly collectivist lines. But there were fits and starts of collectivism within the history and development of even these cultures.

There is nothing inherently natural about market forces, or inherently unnatural about collectivism or communism. We view such concepts from the perspective of people raised within one of those systems and as such we are viewing the one through the filter of the other.

There are only 2 choices.

1) Free-Market capitalism which does not require force to exist.

2) Everything else.

However, since you can't prevent "force" from existing, you can't implement capitalism in a "force-free" environment.

The only valid use of force is for defense. We either trade dollars or bullets. I prefer trading freely and peacefully. Will there be some who don't subscribe to this? Yes, but then using force against them is ok.

So it would take some force to exist.

Capitalism doesn't take force to exist. It only takes force to defend. Capitalism can exist without force. No other system can.

If it can't exist without being defended by force, then it requires force to exist.