Okay, so I'll make a few comments and we can take it from here, if I say something that interest you.
Originally Posted by FredFredson
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I have long-stated the best thing to do is nothing. Indeed if nothing is done, home prices will drop low enough that investors will want to buy them. Delays in foreclosures only serve to delay the housing recovery.
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So, we've had that discussion a couple of times already and since it is not the central thesis here, I'll let it go. But this "the market will clear, eventually" supposes that there are investors waiting on the side-line. As is sometimes said on the capital markets about shitty assets - "I am a big buyer at 0" i.e. "there are no prices low enough to make me buy that shit".
In a prolonged and deep Depression, this could apply to pretty much any and all assets, INCLUDING homes.
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The only long-term durable solution to the unreal estate mess is to cease further securitization by agencies and shut them down. It's time to concede that "homeownership" is a fraud. Rather, virtually everyone with a mortgage is renting debt-money from a lender and leasing the land from a local taxing authority. The mortgagees have a "dead pledge" in the value of the debt owed, not an "asset". The lenders and taxing authorities are the "owners" of a lien (a bond or constraint on the real property), which entitles them to income in the form of compounding interest and tax receipts in perpetuity.
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So this is fancy talk to try and change the names of things. It can be done about anything. A share is not a piece of a company, it's an option on future cash flows. A mortgage is a bond. A bond is picking pennies in the face of an incoming freight train (risk of default). Etc.
To a certain degree, you can always mix language to skew the impression you're trying to make. But I think houses definitely register as "assets". Mortgages against them are "liabilities". If your asset decline in value and your liabilities stay stable, you may end up bankrupt. It doesn't really change the fact you had an asset.
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The value of an unreal estate loan should not exceed the householder's income and should be 100% collateralized by an asset or funds other than the property. If someone wants to mortgage a house, and his household income is $50,000 (around the current US median household income), he should not be lent more than $50,000, and he should have at least that much in collateral in order to qualify for a "dead pledge". That way, the debt is self-liquidating. Terms should be no more than 10 years.
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Evaluating a would-be borrower is a bank's job. There are objective criteria, there are risk appetites and there are cultural norms. French banks are notoriously more restrictive with credit than Anglo-Saxon ones. Thus, France avoided the creation of a domestic sub-prime issue (although they were somehow happy to get exposure to the US/UK ones. But French banks are run by clueless idiots so maybe that's not surprising).
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By the way, this system was generally the norm for centuries before the period after WW II.
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Yeah and it's called 'progress'. "Trade finance" used to be outrageously expensive (discount to medieval "letters of credit" were sometimes 50 to 80%. Nowadays, it's maybe 0.1 to 5%). Profits used to be 10x your investment. Nowadays, 10% is pretty damn good.
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We have the colossal mess because we have allowed ourselves to be taken over by the rentier mentality, which always leads in the extreme to unserviceable debts, extreme wealth and income concentration, and economic and social crises and collapse.
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Please explain and define this further. The Austrian school explains business cycles with credit expansion/contraction and, although I am not keen on other aspects of the Austrian School, I do like that bit. It's however not really linked to "rentier mentality", whatever that might be.
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It is appalling and obscene that we assume as a normative condition spending 5-6 times the perceived market value (debt-based value) of a house over a lifetime when costs of principal, interest, taxes, and maintenance/improvements are included, whereas the rentiers have little or no accompanying social obligations to support public infrastructure required for productive enterprise.
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This is almost Marxist (or at least classical) in that he claims that a good/an asset has an intrinsic value (here, the value of a house is determined by the debt & taxes). In reality, prices don't have to follow any "value". Prices are a function of supply and demand, that's it. And, if you want to try and put some 'value' number down, best used DCF, discounted-cash-flow. That's about the only 'objective' method, with the caveat that no one truly knows what the future looks like and thus predicting cash flows and discounting rates is more art than sciences.
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Increasing non-productive rentier gains to the top 0.1-0.4% of US households have resulted in deindustrialization, militarization, financialization, hopeless indebtedness, obscene wealth and income concentration, and the gutting of the productive capacity of the US economy.
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It's a bit more complicated than that. And the top 0.1% didn't get rich by lending money to sub-prime borrowers. Or at least not only like that.
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Of course, all of this would mean effectively returning to something like a Victorian-era banking standard, which no rentier, politician, or most of the public will accept.
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1- Victorian-era
was the time of rentiers. They appeared in the early 19th and disappeared in WWI.
2- It was hardly a stable era for banking. Bank runs were common. Crisis occurred with regularity.
3- Fractional lending is fine, indeed beneficial, as a whole. But the fraction ratio and the risks taken do matter.