A potential solution to the United States mortgage crisis

[tomhorn]

As the tax law sits now, most people won't pay capital gains when they sell their houses anyway, so that doesn't help. The first $250,000 (single) or $500,000 (married) is excluded from capital gains tax. You can use that exclusion every two years.

[rogerthat]

I thought the exclusion was a one time deal?

Thanks for the lesson I have alot to learn about tax laws I guess, you can use that exception every 2 years?

Cheers,

M

[Watchmeister]

Chief-

You should leave the U.S. I travel and do business around the rest of the world (except Africa). 7% unemployment ain't nothing. Many countries are in far worse shape than we are. Most stock markets are off 50%+, currencies off 30% +. Even the almighty China requires growth of 8-9% year to stay even (or face a very different revolution). I had thought that the natural resource rich countries would be all right. But that is not true either. So I would say that as bad as you think the U.S. is today go visit some other countries. It's all relative. And I do believe the U.S. will be the first one out of the doldrums. Let's just call it FIFO.

[HauteHippie]

Cheiftang,

I am actually very encouraged by the American dollar increasing in value as an American.

It may not last,but does it not prove that all the talk of the rest of the world not needing America and China & India becoming the next superpowers is hogwash.

It is still true that if America catches a cold the rest of the world catches the flu.

I think the dollar increase proves this, China looks worse than us right now economically as a result of the recent downturn. Without American spending other countries will fall and thus the world will do whatever they can so America remains strong.

Maybe I am just a naive American, I don't really know.

Cheers,

M

I'm a (proud) American as well. But I'm also a realist. As I mentioned, the dollar rally underway is irrational. Markets in general are irrational in the short term. The dollar increase, unfortunately, is not based on the fundamentals of the dollar. M3 has expanded by roughly 18% yearly since 2001 and now we're going to be printing money like it's going out of style to fund the obligations of Fannie/Freddie, et. al. The $700B bailout was just a down payment. Ben "Helicopter" Bernanke will make sure of it.

[HauteHippie]

Chief-

You should leave the U.S. I travel and do business around the rest of the world (except Africa). 7% unemployment ain't nothing. Many countries are in far worse shape than we are. Most stock markets are off 50%+, currencies off 30% +. Even the almighty China requires growth of 8-9% year to stay even (or face a very different revolution). I had thought that the natural resource rich countries would be all right. But that is not true either. So I would say that as bad as you think the U.S. is today go visit some other countries. It's all relative. And I do believe the U.S. will be the first one out of the doldrums. Let's just call it FIFO.

The difference between us and most of the rest of the world is that we have a phony economy and they do not. They produce goods and loan us money so we can buy them. Our government prints money out of thin air to prop up asset prices and "create wealth". That's not real wealth, though. And it can not be sustained. The rest of the world will of course see a slowdown when the US stumbles because they're dependent upon us. But the point is that they don't have to be. Decoupling from the US would be painful for them in the short term, but their manufacturing capabilities, their economies based on production and savings, would get them through it and in the long run they'd be better off. They are already starting to learn that we can not pay back the loans. Did you see that the credit card bond market completely shut down on Wednesday? The rest of the world is catching on and doesn't want to touch that garbage anymore. I see a very subprime-like crash in the credit card market coming and surely the government will "rescue" that market as well. So like I said, the $700B bailout was just the tip of the iceberg.

The solution? I only see one. The government must not meddle in this, and just allow a severe recession or even depression to happen. It's the nature of the business cycle. Boom and busts happen naturally. But instead, we're just going to inflate our way out of this yet again, and keep this phony economy running on life support. So there's really no hope for us to transition away from a service sector economy. But if we'd allow the bust that needs to happen, then we'd eventually be able to replace all the lost jobs in the service sector with new jobs in the manufacturing sector, which is exactly what we need to do.

The fact is that we've allowed ourselves to go from being the world's largest creditor to its largest debtor. And I can't see any way possible that it won't catch up to us. The fundamentals always win.

[rogerthat]

I completely agree with everything you said, I just choose to have a more optimistic point of view on things.

While all economies may be better long term by following your advise, the short term loss will be so painful that I just don't see it ever happening.

Cheers,

M

[HauteHippie]

While all economies may be better long term by following your advise, the short term loss will be so painful that I just don't see it ever happening.

Right. I don't ever see it happening either, which is why I have the long term outlook that I do.

[fakemaster]

One solution to helping with the crisis: Let GM fail.

Damn I said the very same thing on RWI. +!. Screw them and Ford. And living in a box has a strange educational effect.

[Pugwash]

Just curious:

what would be the downside to offering 0 capital gains ona future sale for anyone willing to buy a house in the next 6 months.

Assuming banks are still lending you would get a ton of renters looking to buy and tons of investors pouring money into houses that might otherwise foreclose? Could solve the housing crisis overnight at least for 6 months.

You only pay capital gains on the sale of a second house. Your primary home is exempt, as long as it's the only one you own.

In other words, the downside would be ... um, it's already the case and hasn't helped a thing.

[RobbieG]

There is only one solution and it is already happening. Before it is over the business model of banks will change. In a nutshell, they are going to be in the property management business. Kind of like natural selection works on nature. The forclosures are going to happen and then when the banks own them and the previous owners are off the note they will rent them. Sometimes, they will save the listing process and they will rent them to the one they foreclosed on. Same solution, no overlap, no moving expenses, same result. Some will be vacant, some occupied, banks royally f*cked like they are supposed to be.

Someone mentioned the free market? Exactly. I make my living in it every day and I'm close to it. All I can tell you is that the free market decided how this would all unfold based on the depth of its leverage in these instruments long ago. There is never a solution to any free market decision (read problem) other than the free market itself. Like in nature, if the dinosaur is set for extinction, so be it. In this case though the dinosaur doesn't just die off, he changes into a bird (sound familiar?). A bird who earns money renting property instead of loaning on it. Either way, they own the property. Period. Look, there is always a need for housing. It isn't like these places are all going to be unoccupied or otherwise disappear realistically. They are all mostly occupied now. The value of the notes are too high and there is no way to just erase that - other than to - um - erase it. It is called a writedown and it involves taking a loss, but at one payment or another, loan or rent, they will be filled and the gap is the loss the bank will take. And there WILL be more...

Oh, and if I hear one more person say the crisis here is based on people not paying bills I'm going to scream. No offense but it is an ignorant statement. Sure, there are people who bought more house than they could afford and used the crisis as an excuse not to pay bills - again. They have been doing that since the beginning of time and they still do - post crisis.

This problem came from debt on debt on debt in the form of complicated financial instruments called Klios which are a specialized form of CDO traded off market between banks. The entire banking industry was tied to a few major multi-billion dollar hedge funds who traded these with themselves for staggering returns. How do I know this? I personally know the guy who INVENTED them. He is the trading equivalent of the Manhattan Project (invention of the nuclear bomb). The instruments were specifically designed to never be transparent, to be traded OTC (meaning not on an open exchange). In other words, nobody was ever going to buy them other than the few people who were passing them back and forth in pre-arranged transactions, which is perfectly legal - but shouldn't be so more on that later. The intent is to use extreme leverage on small "market" motion to essentially lock in profits for both sides (investment bank-hedge fund & commercial bank holding the original notes) while simultaneously inflating home prices by measured amounts. Yeah that's right, I just said that home prices over the last five years were essentially set by hedge funds ahead of time. It is very, very complicated stuff and impossible to explain here, but very real nevertheless. But the bottom line is it ain't the broke d*ck who isn't paying his mortgage cause' the payment is too high...

Look, I'm not trying to sound like some d*ck intellectual, but there are only maybe a hundred people on the planet who really understand how all this stuff works and so you won't see it put this plainly on the news. But this is my backyard and I figure why not try and educate some of you here the best I can about this stuff. As I said, I know the guy who invented this stuff and he is a genius. Best bond trader ever in the history of the world. Good guy too. Family man. Loves his kids and is good to his friends. Comes from a nice family. He is also on the news relatively lately and his ex-funds are being investigated. The funny thing is, he isn't guilty of fraud or anything like that as he is being charged with. It is just a witch hunt. If anything he is only guilty of John Hammond syndrome (remember Jurassic Park?). He was so busy trying to figure out if he could create a "sure thing" legally, he never stopped to think whether or not he should

The bottom line is this mess was caused by traders and trading and I am happy to say I'm not one of them. We MUST regulate off market trading between banks and shift everything to the free market. In case you are wondering I'm not one of those guys obviously. I trade S&P 500 futures contracts on GLOBEX every day. It is like a real market should be - highly transparent and highly liquid. Could I make even more money engineering some bond trades off market and join the ranks of the elite in the industry. Yeah sure, I get offers every month to defect and work freelance for banks. In other words, they are still trying to do this sh*t as evidenced by them trying to hire my firm as a quant to try an engineer some more crap on top of crap to temporarily save them. Now that we are getting more and more on the math/software side of things of course we are on the lists now. But I'm happy where I am and my concience won't allow it. It is wrong. Again, the SEC must regulate OTC derivatives trading. That is the only way to clear up this mess once and for all and ensure it will never happen again. But someone has to pay, and in the real world it is always going to be the guy holding the note. There are no shortcuts.

If you would like to expand your knowledge of what really goes on in banks that you will never read in a paper or hear on the news there are only two ways to do it. You can talk to a guy like me who is close to it - and feel free to PM me if you have any questions. The other way is to read the one book that has ever been published that tells the truth about bank trading. It isn't specific to CDO's, Swaps, and Klios as I talk about here but trust me, it will scare the crap out if you if you are like most and have no idea what really goes on. Fate of the world in the hands of morons for the most part. Anyway, the book is called Traders, Guns, & Money by Satyajit Das. It is a tough read but if you can get through it you will be smarter - for whatever that is worth.

In closing, I was talking with some other traders last week and the subject came up of the writedowns and how to value the entire pool of real estate. Part of the problem still is that noone really knows what to write down because as I said the values have been tied to derivatives for so long. Here is my solution. It isn't perfect but at least we could get close to figuring out what the real numbers are. The bottom line is we need to value the homes based on what people can afford who live in them. Housing prices need to be tied to the income of the occupants again. They are so out of wack, here is a way to rope it back in:

1. Account for every occupied home in the US and use a combination of survey info and SS#'s for tax returns to figure the combined monthly household income of the occupants

2. Take that number and multiply it by 36%, which is the good old standard of the max amount of monthly income ones housing costs should be

3. Now take that number and annualize it, then reverse it into whatever the current 30 year fix rate is at the moment. Then account for a tradtional 20% down as a payment and that will tell you how much the house is worth.

Example: A house that was supposedly worth $500K at the peak. Now the bank says it is worth $350K. Let's find out... The income if the guy and his wife is $4500/month. 36% of that is $1620. So that is the amount of payment they can afford as rent or ownership. Therefore the house is worth $300K. 20% down brings the loan amount down to $240K which at 7% is a payment of around $1600 per month. Presto...

I realize this is more than crude, but if they did this across every neighborhood for entire portfolios we would start to get a picture of what the worse case was in that all the loans went bad and you had to rent them based on income alone. At least then we would know the absolute worse case for potential writedowns. I would love to know how these numbers work out because the bottom line is that if we used conventional income standards to see what homes are really worth, the whole rally of the last five years was fake. The fact is that real income basically hardly budged so the homes really should be worth about what they were when it all started. I guess we could skip all this and just do that then. LOL...

[Watchmeister]

Although I don't know all the trading parameters it is clearly a root cause. That and the fact that no one ever thought through what happens to a market concept when there is no market. I also think that at the end of the day it all starts with easy money. Low rates and readily available cheap credit whether mandated by the government in the form of the housing bills in the 90's, or unchecked liquidity allowing investment banks and traders to lever up trading portfolios 30:1 or allowing levels of leverage which are unsafe on hard assets and commercial enterprises allowed us to get into this mess. We all rely on "market forces" ignoring the most fundamental truth. People are greedy. They will always act in their own self-interest. So without proper safeguards and penalties many people will always err on the side of putting money in their pocket today (or yesterday as the case may be). Free enterprise is a great concept but by definition there is none without government and thus some regulation is clearly required. On this one we clearly got it wrong.

And one last thought - when perception is more important than reality - than it is reality.

[RobbieG]

Almost forgot - to the OP, I only felt the need to explain the root of the problem to contribute to you thread BTW. I think your proposed solutions, along with many others I have heard are good ones, albeit maybe not all that practical. Not that my valuation model is either or will ever happen. In any event, I think the most likely course is similar in that there will be a shift based on income in the end. People who should have been renters in the first place who never had a downpayment or credit history will need to return to that environment and the people with higher incomes and savings will still own homes, but they will just be worth less. Keep in mind that the majority of people with devalued real estate are still going to live there and make payments. Nothing happens unless there is a forced sale and at that point both the bank and the homeowner will lose, but mostly the bank and really only because of overlevering not because of the price drop. Prices have fluctuated wildly for decades in the short run and will continue to do so, but a 30% drop at 100:1 leverage is catastrophic. Prior to the CDO market that wasn't the case. The street level really doesn't matter. This issue is about bank failures and nothing else. Most people are capable of weighing the consequences and have. They have correctly decided that owning a devalued home is no different than renting a devalued home as in the end it comes out in the wash. If you rent you will pay less than the original inflated price mortgage payment almost anywhere. But then you incur the cost of relocation and risk of the market appreciating again as it eventually will so it isn't so cut and dried either. The difference in payment is marginal for most. And if it isn't they should have been renting anyway. In the end we all have to live somewhere - and we will - and the costs will be what they are and we will earn just enough to pay for it...

[RobbieG]

Greater truth has never been spoken. I make a living from working this concept. I don't act on what I think. I react to what is. What "is" is always right - even if it is wrong by all equations which use the past as a predictor of the future. Bear Stearns was too big to fail. But it did...

Although I don't know all the trading parameters it is clearly a root cause. That and the fact that no one ever thought through what happens to a market And one last thought - when perception is more important than reality - than it is reality.

[TeeJay]

This is all fascinating stuff I've always had an interest in the stockmarket, I've just never had the funds to actually play with it... Robbie, thanks for the posts, they're incredibly informative

I think the only problem with the proposal of Nightstroker's dad, is that it assumes that people are not making their payments because they can't make payments. Another issue with sub-prime lending, is that it gives credit to people who, not only can't afford to make repayments, but also don't intend to make payments. At one point, I did work for a company which dealt with sub-prime car finance (which went bust several years ago), and one application particularly struck in my mind. The underwriters had asked for four recent letters to prove the person's address. The letters they sent, were notices that their insurance was being cancelled as they didn't make the payments, that their Sky was being disconnected because they weren't making the payments, that their AOL was getting disconnected because they weren't making the payments, and a credit card statement saying that that was in arrears... I think it made a pretty clear case that the person simply did not pay their bills... That is the true downside of sub-prime lending, in that people who might not be able to afford to pay are given the opportunity to pay, but equally, so are the people who simply refuse to pay, thus creating the problem of massive arrears...

Putting people into homes which they can (on paper) afford, does not guarantee that they will actually make the payments

Awesome idea though, it'd be awesome if it works

[RobbieG]

Thanks. And keep in mind that the stock markets are unrelated to all this really even in the valuation of the bank stocks really. The bond markets absolutely dwarf the equity markets and that is where the real power brokers of the world move money. And the most powerful of the powerful do so off-market amongst themslves. That is where the real problems lie...

This is all fascinating stuff I've always had an interest in the stockmarket, I've just never had the funds to actually play with it... Robbie, thanks for the posts, they're incredibly informative

[TeeJay]

Thanks. And keep in mind that the stock markets are unrelated to all this really even in the valuation of the bank stocks really. The bond markets absolutely dwarf the equity markets and that is where the real power brokers of the world move money. And the most powerful of the powerful do so off-market amongst themslves. That is where the real problems lie...

Would that be a problem because it's de-regulated/out of the public eye, where other kinds of stocks are being traded publicly?

[HauteHippie]

Although I don't know all the trading parameters it is clearly a root cause. That and the fact that no one ever thought through what happens to a market concept when there is no market. I also think that at the end of the day it all starts with easy money. Low rates and readily available cheap credit whether mandated by the government in the form of the housing bills in the 90's, or unchecked liquidity allowing investment banks and traders to lever up trading portfolios 30:1 or allowing levels of leverage which are unsafe on hard assets and commercial enterprises allowed us to get into this mess. We all rely on "market forces" ignoring the most fundamental truth. People are greedy. They will always act in their own self-interest. So without proper safeguards and penalties many people will always err on the side of putting money in their pocket today (or yesterday as the case may be). Free enterprise is a great concept but by definition there is none without government and thus some regulation is clearly required. On this one we clearly got it wrong.

And one last thought - when perception is more important than reality - than it is reality.

I think you've pretty much hit the root causes, and they can be summed up like this: government meddling. "Traders and trading" - not the ROOT cause. They were simply playing the hands they were dealt. Free markets have to be allowed to work for the most part, but in the cases, as I've said, where normal market feedback mechanisms don't work until there is a major disaster, then regulation is needed. Take the insurance industry as an example.... There is generally no way to know that an insurance company is solvent until a hurricane, earthquake or other natural disaster strikes and the insurers tell the insured "Sorry, but we don't have the capital to fund all these losses." Well at that point it's too late, and this analogy applies directly to the credit derivatives market as well. There was no way to know that these guys were frauds until a major market crash occurred. So, a lot more transparency is needed.

As for "letting GM fail". Normally I'd go along with it, but not in this case. Government meddling is again the culprit here. The US auto industry has been crippled by draconian regulation through CAFE standards and the like - basically forced to produce autos that nobody in the country wants to buy. They are more successful overseas than domestically as a result. So if you're going to impose unreasonable regulations on companies that severely inhibit their profitability, and you're going to give bailouts to other entities whom you've forced in to bad business practices (banks), then it'd be utterly capricious and arbitrary to let one fail but not the other. Furthermore, they're being severely impacted by the credit crisis - also caused by government meddling - so it is a double whammy and they're the victims (for the most part). On the other hand, if government was not so overbearing with respect to private enterprise in the first place, then absolutely, when they fail, you let them fail.

[RobbieG]

Yes, any market which isn't truly free is a problem IMO. If you and I make a deal where we keep selling the same rep back and forth for $10 more each time and then split the profits we haven't gained anything obviously. But if we were able to artificially inflate the cost of reps by doing so some people would be [censored] off. Essentially that is what banks have been doing with their loan portfolios. Trading them back and forth using complicated instruments and promising returns to investment banks (who use their own hedge funds to trade them) by cooperating. It is VERY complicated quantitative stuff but essentially there is guaranteed profit for all parties as long as the market continues to support prices without the bottom COMPLTELY falling out. That was the black swan in the equation that noone expected to come, but he did - and brought a hundred of his swan brothers. The numbers were especially out of wack because they were so artificial. Nobody else was allowed to participate except the two parties in these transactions who simply pass them back and forth and add fees each time. How to pay for the fee? Easy, I say these houses are worth $239K now instead of $238K. Sounds reasonable right? Yeah it is only a thousand dollars but at 100:1 leverage and with a portfolio of tens of thousands of homes at even these modest prices and presto - billions of dollars generated. The guy I know personally made $40M a year in his pocket doing it with just one of the top world banks and getting leverage from one other investment bank besides his own on the trading side. Anyway, to use our rep example nobody would care because we can't influence the market by doing it, plus even if we could raise prices by a dollar in the used market and we had a hundred watches to resell there would be no money in it. No leverage. An entire portfolio of loans from a major bank at 100:1 is the market. Big difference.

Would that be a problem because it's de-regulated/out of the public eye, where other kinds of stocks are being traded publicly?

[gran]

government NEVER operates as efficiently as a free market. Therefore a better solution is one where government is not involved.

Now that is true when things are moving along nicely but not necesarily in times of crisis. Furthermore government is always involved at one level or another even in the USA. I beleive that Government can make a difference in times of crisis and should make sure that the rules the free marked is playing by are satisfactory. Lets hope Obamas team can bring optimism into peoples minds again.

The raving liberal

Gunnar

[TeeJay]

Yes, any market which isn't truly free is a problem IMO. If you and I make a deal where we keep selling the same rep back and forth for $10 more each time and then split the profits we haven't gained anything obviously. But if we were able to artificially inflate the cost of reps by doing so some people would be [censored] off. Essentially that is what banks have been doing with their loan portfolios. Trading them back and forth using complicated instruments and promising returns to investment banks (who use their own hedge funds to trade them) by cooperating. It is VERY complicated quantitative stuff but essentially there is guaranteed profit for all parties as long as the market continues to support prices without the bottom COMPLTELY falling out. That was the black swan in the equation that noone expected to come, but he did - and brought a hundred of his swan brothers. The numbers were especially out of wack because they were so artificial. Nobody else was allowed to participate except the two parties in these transactions who simply pass them back and forth and add fees each time. How to pay for the fee? Easy, I say these houses are worth $239K now instead of $238K. Sounds reasonable right? Yeah it is only a thousand dollars but at 100:1 leverage and with a portfolio of tens of thousands of homes at even these modest prices and presto - billions of dollars generated. The guy I know personally made $40M a year in his pocket doing it with just one of the top world banks and getting leverage from one other investment bank besides his own on the trading side. Anyway, to use our rep example nobody would care because we can't influence the market by doing it, plus even if we could raise prices by a dollar in the used market and we had a hundred watches to resell there would be no money in it. No leverage. An entire portfolio of loans from a major bank at 100:1 is the market. Big difference.

It's funny you should say that, as, despite having dyscalculia, I can grasp this on a completely instinctive level, and it is (to me) absolutely clear as day I really ought to find some way of getting into the business professionally, although I doubt it would ever happen, due to my lack of experience in the area, or relevant education (all art-related ) Thanks for another incredibly interesting 'look behind the scenes'

[HauteHippie]

Now that is true when things are moving along nicely but not necesarily in times of crisis. Furthermore government is always involved at one level or another even in the USA. I beleive that Government can make a difference in times of crisis and should make sure that the rules the free marked is playing by are satisfactory. Lets hope Obamas team can bring optimism into peoples minds again.

The raving liberal

Gunnar

Heh. I've heard this elsewhere, too... The idea Obama of inspiring confidence and optimism so that banks will start lending and people start spending again, in order to "energize" the economy. And it's just off the mark. In fact it's exactly the opposite of what we need... The crisis we're in is not a financial crisis; it's an economic crisis. And the fact is that we need more spending like we need a hole in the head. What we really need is to get rid of our artificially low interest rates in order to inspire SAVINGS and *less* spending. Borrowing to consume has got to stop, and if the new administration intends to further encourage it then they'll only be digging us deeper in to a hole out of which we'll never be able to crawl. I see there is already talk of a new stimulus plan - a sign that they'll be pursuing short term gratification. Lovely, but that would be a bubble gum patch in a leaking dam that is ready to burst and would solve nothing. The structure of the dam needs a complete re-engineering and overhaul.

[RobbieG]

Ah, but it isn't traders trading. That is just it, they weren't trades and that is the problem. They weren't free market transactions. Make no mistkae, this is NOT the same thing as the so called oil crisis being caused by speculators. I have never heard more of a load of crap in my life. And I also happen to be against regulation for the most part of the free market. But the fact is, the real root of the banks problems with these loans and liquidity is absolutely 100% a direct result of these so called trading activities. The real estate market has been underwater by the same percentages many times but there was never this result. Period. Why? Off market extremely levered transactions is the ROOT cause - respectfully. Playing the hand they were dealt? With all due respect - Yeah I guess so, and they invented the game, made the cards and shilled the dealer in there too. These trades were essentially the same as if you gathered all the money you had and went to Vegas to play roullette. You went every year and bet all you had on black because the wheel was rigged and you always won. Then one year you went back and somehow it came up red. As the dealer rakes your chips your a*s puckers and you lose your breath for a second. Teh end result is you are broke and there is nothing to do but take it. They got exactly what they deserved and now the only solution is failure. printing money stops the failure but wrecks the currency in the process. There is no escape. The problem is that due to the scope of the problem this is not something that we can sit back and let happen again because these institutions are holding the puppet strings to the entire world economy. And I'm not talking about regulation. There doesn't need to be any big fuss over it. What is needed is simple. No off market transactions. Do whatever you like but do it on an open exchange and all is fair. Barring that we can sit by and watch the bailout plan in action and if it does anything it will be based on luck. But luck can fuel rally's so we will have to wait an see. But the coming crisis of the currency as a result of this printed and borrowed money? From that quicksand there is no escape...

BTW, I always found the endless debate between Republicans and Democrats to be more than a little silly. I also don't think it should be too tough to consider which side of the fence I tend to fall on. But Republicans pride themselves on trying to avoid printing money at all costs and blame the Democrats for currency devaluation. Meanwhile, Democrats critizice Republicans for huge deficits and pride themselves on not borrowing money. The net result is the same. When humans don't have any money they have to either borrow it or print it. Either essentially has the same consequence in the end. Failure. Where we are at right now is the direct result of greed and overlevering and it has nothing to do with politics. As a result, WE DON"T HAVE ANY MONEY. And we aren't going to get any more ever again without major consequence because of this. The world has changed. Mark my words. No administration is ever going to fix or even help fix this problem. The whole system of financial business as it is known is going to change and there is no going back. Take it from a trader that slugs it out in the real free markets every day. Hope is for suckers...

I think you've pretty much hit the root causes, and they can be summed up like this: government meddling. "Traders and trading" - not the ROOT cause. They were simply playing the hands they were dealt. Free markets have to be allowed to work for the most part, but in the cases, as I've said, where normal market feedback mechanisms don't work until there is a major disaster, then regulation is needed. Take the insurance industry as an example.... There is generally no way to know that an insurance company is solvent until a hurricane, earthquake or other natural disaster strikes and the insurers tell the insured "Sorry, but we don't have the capital to fund all these losses." Well at that point it's too late, and this analogy applies directly to the credit derivatives market as well. There was no way to know that these guys were frauds until a major market crash occurred. So, a lot more transparency is needed.

[Nightstroker]

Just curious:

what would be the downside to offering 0 capital gains ona future sale for anyone willing to buy a house in the next 6 months.

That is actually an excellent idea!

Although most homeowners wont stay in a house long enough to build equity that requires a capital gains tax, INVESTORS would find this idea of 0% capital gains very attractive.

Investors have to pay a capital gains tax regardless of the ammount of equity that accummulates. If the house is bought for $400,000 and a year later its worth $435,000, the investor would be taxed on the $35,000; but if there is 0% capital gains tax, then the investor can keep ALL the equity, even after 10 years of appreciation. Capital gains tax has always been a downside for property investments. Thats why this idea is great for investors and not for those who will live in the home.

I suspect that many investors would jump on that bandwagon immediately.

You only pay capital gains on the sale of a second house. Your primary home is exempt, as long as it's the only one you own.

In other words, the downside would be ... um, it's already the case and hasn't helped a thing.

Yep, thats why it makes sense for investors.

I think the only problem with the proposal of Nightstroker's dad, is that it assumes that people are not making their payments because they can't make payments.

That would be only a small percentage of home owners.....basically unmeasurable. Nearly all people who forclose on a house do so because they cant make the payments.....because they fell into an attractive offer....teaser rates, etc....and when the offer expired, the house payments became unmanageable overnight.

[RobbieG]

As a side note, it is a good thing we never have to depend on debt to buy our watches here!

[RobbieG]

I would buy property tomorrow as an investor under those terms and keep buying until I ran out of money. There are a lot of great deals around right now especially in Florida. Get is passed I say.

That is actually an excellent idea!

Although most homeowners wont stay in a house long enough to build equity that requires a capital gains tax, INVESTORS would find this idea of 0% capital gains very attractive.

Investors have to pay a capital gains tax regardless of the ammount of equity that accummulates. If the house is bought for $400,000 and a year later its worth $435,000, the investor would be taxed on the $35,000; but if there is 0% capital gains tax, then the investor can keep ALL the equity, even after 10 years of appreciation. Capital gains tax has always been a downside for property investments. Thats why this idea is great for investors and not for those who will live in the home.

I suspect that many investors would jump on that bandwagon immediately.

Yep, thats why it makes sense for investors.

That would be only a small percentage of home owners.....basically unmeasurable. Nearly all people who forclose on a house do so because they cant make the payments.....because they fell into an attractive offer....teaser rates, etc....and when the offer expired, the house payments became unmanageable overnight.