Re:Can We Survive the Next Financial Crisis?
by dv_dt on Monday September 10, 2018 @04:10PM
(#17954781)
By bailing out the originator of the mortgages via QE2/3 purchases of securities, the Fed removed all pressure to accept a two-way reconciliation between the originator and the loaner in mortgage transactions - e.g. by reducing the principal cost of the loan to reduce further erosion of the assets and the market as a whole.
Once that incentive was removed, mortgage servicing (often contracted to the same banks) could continue, putting unrelenting pressure on people who had taken out the loans. So what if they lost their loaned properties? Well anyone who had put down a down payment or had equity in their home lost that down and equity. So this ended up being a very one sided transfer of wealth out of the hands of people taking out mortgages, while preserving the profits of banks (they didn't have to accept the losses of the securities bought by the Fed...).
To me it looks like the the organizations with the deepest buffers of wealth (banks), got a bailout by the fed, while individual people bore the full pressure of having their wealth systematically reduced.
As an alternative, the fed could have risked similar or less money by offering to pay down some slice of the principal of the loans, requiring a refinance/reset to put the security back into balance with the market prices. This would have allowed wealth to stay in the hands of individuals, somewhat insulating the banks, but resulting in less transfer of wealth.
Once that incentive was removed, mortgage servicing (often contracted to the same banks) could continue, putting unrelenting pressure on people who had taken out the loans. So what if they lost their loaned properties? Well anyone who had put down a down payment or had equity in their home lost that down and equity. So this ended up being a very one sided transfer of wealth out of the hands of people taking out mortgages, while preserving the profits of banks (they didn't have to accept the losses of the securities bought by the Fed...).
To me it looks like the the organizations with the deepest buffers of wealth (banks), got a bailout by the fed, while individual people bore the full pressure of having their wealth systematically reduced.
As an alternative, the fed could have risked similar or less money by offering to pay down some slice of the principal of the loans, requiring a refinance/reset to put the security back into balance with the market prices. This would have allowed wealth to stay in the hands of individuals, somewhat insulating the banks, but resulting in less transfer of wealth.