It's the Fed, stupid: Bernanke pushes write-downs

The winning slogan of the Clinton campaign "War Room" in 1992 was "It's the economy, stupid."  This election will likely turn on economic issues as well, but the most important and influential policymaker will not be on the ballot. To tweak the old slogan, "It's the Fed, stupid."

The Federal Reserve, under Ben S. Bernanke (pictured), continues to take unprecedented and unusual actions to fight the housing/mortgage/credit crisis. Tonight Bernanke endorsed the idea of major government intervention in the housing market, appearing to put further distance between himself and the take-it-easy Bush administration.

From the L.A.Times tonight: "In a speech in New York, the central bank chairman reiterated his controversial call for lenders and mortgage service companies to consider cutting the principal of some customers' loans to prevent foreclosure.

More: "'When the source of the problem is a decline of the value of the home well below the mortgage's principal balance, the best solution may be a write-down, perhaps combined with a government-orchestrated refinancing, Bernanke told a Columbia Business School audience."

Beyond a furious binge of rate-cutting, the Bernanke bailout already consists of numerous moves both creative and controversial, among them lending to barely regulated investment banks and the 11th-hour guarantee of Bear Stearns Cos.' debt. The Bear Stearns bailout, arrived at in a flurry of secret meetings, was, as they say these days, a game-changer. It put the Fed squarely into the political debate and opened the door to more guarantees. While it drew praise in some quarters for "snuffing the Bear Stearns panic," the Fed was effectively making a wider promise of government aid that only Congress can keep. Sen. Hillary Clinton has cited it as justification for broader aid to taxpayers: "When the federal government, through the Fed and the Treasury, gave $30 billion in a bailout to Bear Stearns I didn’t hear anybody jump up and say, ‘That’s not going according to the market, that’s rewarding irresponsible behavior.' "

At the moment, Bernanke -- not the Bush White House, not the Democratic Congress -- is setting the political and policy agenda on economic issues.  The media love the noise from the campaign and the infighting in Congress (dueling sound bites!), but Bernanke is the bigger story. Whether you think he's right or wrong is interesting, but I hate to tell you: He's not listening, and he doesn't have to.

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo Credit: Bloomberg News

Comments

[E]

He can write down all the mortgages he wants....it still won't sell overpriced houses.

It appears that this is more of a ploy to keep consumers/homeowners at their economic "breaking point". If the little guy (all of us bulls and bears that read this blog) saves rather than spends it doesn't help the fat cats (at the top of the economic food chain) plan for their next mega-yacht purchase.

[Gman]

So where does the word "contained" fit into this narrative?

The only way to get sanity back into this economy is to let fool's fail!!!

[irritated_renter]

So where is my reward payment for NOT GETTING AN OVERPRICED CR@PB0X?????

[Laker]

Helicopter Ben: "...'When the source of the problem is a decline of the value of the home well below the mortgage's principal balance, the best solution may be a write-down, perhaps combined with a government-orchestrated refinancing,..."

Hey Ben, The source of the problem is over priced houses and the crazy appreciation that was based on fraud and mortgage for all, not declining value of the houses.
In fact declining value of the houses is THE SOLUTION.
It is amazing that such a smart and extremely educated man can speak such crap out of his mouth.

Peter, I think you are wrong, Ben works by the president's approval. If Bush wanted something else, he could pressure him or get him to quit. That way, bush could come up as the winner or savior. So it is very safe to assume that whatever Helicopter Ben does is approved and supported albeit silently by President Bush.

[original thinker]

"Peter, I think you are wrong, Ben works by the president's approval. If Bush wanted something else, he could pressure him or get him to quit. That way, bush could come up as the winner or savior. So it is very safe to assume that whatever Helicopter Ben does is approved and supported albeit silently by President Bush."

Posted by: Laker

That's right, Laker. What's the hidden agenda in Ben's
piece of the fraud?... What was it in Greenspan's?...
etc., etc., etc.

Just think Mozilo without the tan in the endless game of
good cop/bad cop. How much will Ben gain from his
self-enlightened point of view after the debris has settled?

[Cal]

Whether he is listening or not, once the borrowers start hating their homes (letting the lawns go bad, yearning to take a vacation instead of being stuck at home and have some security about their future instead of sinking money into a black hole) there will be little the servicers can do it about it. The other half of the equation that isn't listening is the super senior tranches of debt who are relatively insulated from all but the most major of losses.

I understand Bernanke is trying to put a floor under this thing to stop a deflationary spiral (the worst thing that could ever happen in an economists world). But I don't believe he is providing any workable solution to the bondholders or the home owners. And with his recent moves (all understandable) that created massive inflation that is eroding at peoples paychecks more than it has helped erase their debts I don't think he has helped keep homeowners in home. Many people are fundamentally insolvent, add in the loss of well paying jobs that required little to no skill being lost in the bust (does anyone really need a subprime underwriter anymore? processors and loan officers?) and we have a lot of money that has just vaporized.

[StuckInTheMiddle]

What do people think will happen if write-downs become common- will it actually support prices or will it just slow down the decline? Will lenders start giving 100% financing like before? Also, will this pertain to refis, too?

[tew]

Read this excerpt. Stop. Think. Be disgusted.
"In the past, [Bernanke] said, individual homeowners who had been hit by a job loss, serious illness or injury or divorce found themselves unable to keep up their mortgage payments and were forced to give up their homes. Now ... [this happens due to] 'declines in home values, which reduce homeowners' equity and may consequently affect their ability or incentive to make the financial sacrifices necessary to stay in their homes.'"

So when people loose their jobs or get seriously ill, we don't care - no government help for them. But when the value of the home goes down we need to bail people out.

So somebody that lost their home a few years ago due to illness or job loss now has to kick in taxes to bail out somebody that doesn't want to pay their mortgage because they don't have the "incentive".

Somehow it's a "financial sacrifice" to pay the mortgage.

[Sean O'Toole]

Great post. I think you can reasonably expand this to put rising oil and commodity prices on the fed's shoulders as well. The more dollars he pumps into the housing bailout the less value those dollars have.

[Enlightenment]

Don't Buy Things You Can't Afford!
http://www.jibjab.com/view/143626

[Landless]

Here is another suggestion: legislate that pay be increased times ten. . People cannot afford mortgages because wages have deteriorated since PATCO.

[Winfield J. Abbe]

Isn't it amazing how Little HItler, Mr. B., is able to make such speculations about what "might" happen if his advice is not taken? What happened to honoring a contract one signed without a gun to one's head? If I purchased something from a store a day before someone else bought it for half the price, why am I entitled to special treatment by the store? Prices fluculate every second of every day. The price of an identical Chevrolet is not the same at all times in all locations of the country. The price of a share of the same stock in the same company varies as a function of time. My parents loved the house in Sierra Madre they lived in from 1943, for which they paid about $5,000.
They never thought about its value; they lived in the house and made it a home. When it was sold in about 1987, the same house, with a $10K remodel job in 1954, brought about $230K including a real estate agent fee.
There were no loans on the house then. "It takes a lot of living to make a house a home". But Mr. B and his cronies in the New York Stock Market Casino are not interested in that wisdom. All they care about is fooling people and diverting attention from the true meaning of what a house really is: A home, not an unlimited money pit. A house is worth only what a buyer under no pressure is willing to pay for it and not a cent more. Most appraisals are totally meaningless because they become outdated the minute they are issued.

[Hugh Jorgan]

Bernanke thinks he is smarter than the Market (not Wall Street). Nothing could be further from the truth. The more Ben tinkers, the harder the market will smack down on his foolishness.

The drop in mortgage prices is painful, and will be more painful for a lot of people. But like bad tasting medicine, the sooner you take the foreclosure/short sale, the sooner you'll feel better.

[bulwark]

Helicopter Ben must have forgotten his pilot's training. U.S. housing prices are in what all pilots know as the "Graveyard Spiral". As the spiral continues, inexperienced pilots realize that they are going down instead of up and think that by pulling back even harder on the control wheel the dive will stop. This improper action causes the airplane to dive even steeper, and is the mistake JFK Jr. made that resulted in his death. What he should have done, and Bernanke must do, goes against one's instincts---to dive even steeper in order get more air under the wings to generate enough lift to pull out of the spiral. Increasing the speed of price declines is the only way to get sales and prices to rise without crashing our economy.

[gary]

TO LAKER..................thank you very much and I am so tired to people making excuses for bush and his ilk. He can stop or fix or reverse many things if he had the brains or balls to do it. Reagon and Clinton may not have been the bes,t but they at least showd leadereship. Both bush boys and their upcoming retarded cousin, Mccain, have no balls to lead. and get over it with mccain and what he did 40 years ago. what has he done for his country for the past 40 years other than nothing. Obama or hillary will have the guts to demand changes and changes will occur contrary to what all the fox news kool aid drinkers currently say.

[Mortgage payment]

Bernanke, you are my hero.
I hope you contest for congress (or) get vice president nomination.
I was paying all my mortgages by working hard with my family members; my kids skipped their outside meals, movies and so on...
You are rewarding those who are defaulting the payments. why dont you write off my mortgage amount and pay me back all the money I paid?

[Trudy Self]

I have been looking at condos in San Diego County. I was shocked to discover in one tract the former loans-- so called teasers-- ranged from 5% to 29%. That's right 29%. Only one was 5%-- the rest all over 15%. Obviously, these people must have hoped that rising equity would allow them to refinance at a better rate. It is not just less or no equity that is causing the walkaways-- it is unbelievable interest rates on these so called introductory ARMS. Subprime loan, super prime + interest rates.

[Keith]

Bernanke is not independent from the Bush administration. The Bush administration has not accomplished one single task in a competent and legal manner. Bush and his appointees have destroyed Iraq, have destroyed New Orleans, and have destroyed the economy. And in the last few months of the administration, to try to manipulate the election and help industry profits, they are going to economically destroy the country.

[Michael T]

The problem with the economy isn't declining home prices. The problem already happened when greed and stupidity by lenders, consumers and the real estate industry caused home prices to run up to unsustainable levels. Lowering priciple values of loans is going to do nothing to ease tight credit, which is what will keep buyers out of the market. Either prices have to fall to the point that people can make payments on the loans being offered, or easy financing has to return. We all saw how well that latter option works, so I guess we are stuck with the former. As much as I dislike seeing the value of my properties decline, I just don't see any solution unless prices are allowed to fall.

[Matthew]

The following adage comes to mind..."You owe the bank $100, the bank owns you. You owe the bank $100 Billion, you own the bank." I tell this to my wife when explaining why our government / society is rewarding poor behaviour. Bernanke is scared to death that the wheels are falling off the cart and is doing anything he can to keep the overall economy from getting worse. In the end this has nothing to do with fairness or concern for people... its all about keeping everyone just happy enough so they continue to go to work, buy things and not riot in the streets. In other words, the irrational, foolish mob is now in control.

[Rich]

Pete, the Wall Street Journal reports this story very differently--that Bernanke's remarks are a coordinated effort to support Paulson's Treasury dept. as they prepare for a meeting with major lenders to put pressure on them to follow through with their "voluntary" program for helping troubled mortgage holders:

http://online.wsj.com/article/
SB121001844532568435.html?mod=hpp_us_
whats_news

[MyLessThanPrimeBeef]

OK, here you are with a $15 trillion house of cards built on a foundation of Kamikaze, yet real, everyday, mortgage cards.

Now, this $15 trillion, 30 story baby is jointed together, sort of, with CDO's, the SIV virus and some alien thing called credit default swap.

Along comes little blind Bin Lackey who has already admited, ON RECORD, he knew nothing about those miracle joints.

Nothing.

He knows nothing about them.

So, what does Wall Street's favorite lackey want to do about something he knows absolutely nothing about? He wants to trim those Kamikaze mortgage cards by 10, 20 or 30%. He wants to cut up those cards at the bottom of this $15 trillion mansion.

Does he really know how this very expensive, 30-story high tower of cards will react if he does that, tinkering with the foundation like Peter's kids playing with their toys? Are those joints going to hold? Has he checked with the tenants to see how they feel? How about the sheik from Dubai on the 28th floor? The Teutonic pensioner at the basement dungeon? The Swiss gnomes at the garden-in-the-air? The Chinese tycoon at his Red Chamber penthouse? The Russian robber-baron who owns several floors?

Or is the man simply interested in terrorizing us?

[Fourth Generation]

I have a home which I refinanced 3 years ago to a low fixed rate with the resulting low monthly payments. But even when I did the right movements at the right time and I hate to see my property value decline, I abhor even more bailing out irresponsible, greedy and stupid people. The only verifiable way out of these dolldrums is for the market to readjust to economically sound levels. After the overindulgency in house prices there is no other way but down!!!!

[Robert]

"Pete, the Wall Street Journal reports this story very differently--that Bernanke's remarks are a coordinated effort to support Paulson's Treasury dept. as they prepare for a meeting with major lenders to put pressure on them to follow through with their "voluntary" program for helping troubled mortgage holders:

http://online.wsj.com/article/
SB121001844532568435.html?mod=hpp_us_
whats_news"

Rich, tx for posting something other than a rant.

Personally, I don't understand why the financial system, greedy though it may be, should offer a free gift in the form of princple write-downs to people who either gamed the system, fell for a loan on dicey terms or more likely both. Some people took risks with unverified income (aka liar's) loans and now cannot afford their payments. Those in the game simply stop paying, lawyer up and get 6-12 months of luxury living free. Meanwhile I'm attempting to save pennies to move from renting to owning.
The costs to the banks will eventually be born by the banks depositors and future borrowers; the costs of a write down will eventually spread to the general public. If write-downs on a national scale only impacted lenders who played the pump'n dump game, fine. But that is not the case; when a problem is of this magnitude the consequences can easily spread to the other 95% who live within thier means.