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Comment by EarthIsHome | Hacker News Reader

I think it's pretty clear that China isn't going to bail them out like how the US bailed out our failed companies back in 2008.

China cares more about protecting the homebuyers and contractors who are building the homes more than protecting the investors [0][1]:

> Evergrande has almost 800 projects across China, many of them funded by advance payments from homebuyers.

> Local governments have ringfenced homebuyer deposits and other funds to ensure that Evergrande projects in their jurisdiction are completed and contractors paid on time.

So this is a much different reaction than the US government who protected the investors and banks.

[0]: https://www.ft.com/content/6d6b1f79-52b3-49e5-aa8a-7068adec7...

[1]: archive.is link of [0] https://archive.ph/GKWmv

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The idea that the PRC will act to protect foreign economies or foreign investors is directly contradicted by every single thing the Chinese government have done the last two decades. If they basically allow Chinese citizens to outright steal corporations (See ARM China), why do you think they would step in here?

The U.S. bailed out its banks. There is zero sign China is letting these defaults threaten its domestic banks, which are state owned.

China will protect local banks just like the US does / did.

>So this is a much different reaction than the US government who protected the investors and banks.

It was mainly to prevent systemic collapse of the financial system. Banks and other financial institutions profiting from it is an 'unfortunate' side-effect.

But the banks were the ones telling us that. How true was it?

An interesting read to answer this question would be "Stress Test" by Timothy Geithner. I think the general consensus was that in the moment, all appearances of financial contagion were very real.

It was true. The banking system can absorb in a best case losses on its outstanding loans of about 0.75% - that is 0.75% of the total amount of loans.

Absent intervention, the consequences of 2008 would have been Great Depression 2. With intervention, we get to deal with a different set of problems (most of which could to be fair about it, be resolved by clamping down on tax avoidance in the financial sector.)

>It was mainly to prevent systemic collapse

What systemic collapse ?

When a tree is rotten to its core, you need to either let it collapse on it own, or if it risks damaging other things when crashing, you cut it down.

One thing you do not do is prop it up and pretend that all is well.

With regards to 2008, absolutely not.

Caterpillar, which has nothing to do with the housing market had no market for its commercial paper which financed day to day operations.

I agree 100% that the banks and housing industry should have been allowed to collapse but it had gone so far beyond that there was no choice but to bail out banks or suffer from decade long depression like the 1930’s.

> Caterpillar ... had no market for its commercial paper which financed day to day operations

... at the lowball prices they felt entitled to. Did they try offering bonds with real interest rates, say 7-10% ? I'm reminded of this recent narrative about the so-called "labor shortage".

Market was frozen. When the major banks were going under would you lend someone hundreds of millions? Even at 10% interest?

Unfortunately I don't have hundreds of millions of dollars, so the question is moot. But yes, loaning out cash to blue chips and receiving bonds with yields approaching that of stocks would be a prudent move at such a time. Also "market was frozen" is such a short period of time compared to the length of the Fed's stimulus.

Why couldn’t they have prevented the systemic collapse simply by bailing out the individual homeowners? If they had gotten bailed out, so would have their banks.

Ethically, that would have been even worse. People rage against the banks, but it's important to remember the actual fraud was happening at the homebuyer level.

Millions of people were buying houses by lying on their mortgage applications about their incomes and assets, getting interest-only mortgages they could barely pay, and hoping to sell the house for a profit before their fraud was discovered.

When the market moved against the fraudsters and they got caught with houses they couldn't pay for that were worth less than they owed, which is why they started defaulting on their payments. The victims weren't the people who quit paying their fraudulent mortgages, the victims were the people who were deceived into loaning them money.

According to statista.com 5.2 million homes were sold in the US in 2007. Do you seriously believe that 30%+ of these sales were intended as investment only? Even if that were true it would have been more ethical to bail out the home buyers than the banks themselves. The majority of people who lost their homes ended up over their heads through no fault of their own.

You would have had moral hazard with home buying, and people would have been incentivized to pay a lot more for their homes because the likelihood of a bailout would be good.

At least with a central approach, regulators could come in and monitor. There wouldn’t really be a way for regulators to check home prices / the free market at such a massive scale.

People lied on their mortgage applications, claiming to have incomes and assets they didn't have, so that they could take out massive loans they could never repay. The loans were structured to have low payments initially and then larger payments later, which the fraudulent actors were ok with because they expected to flip the house before the larger payments were due. That is what caused the mortgage crisis.

To pretend that people committing fraud lost out "through no fault of their own" makes no sense, it's entirely their own fault. Legitimate buyers wouldn't be impacted- if a person buys a house to live in it, and pays for instance $3,000 per month, then the market price after purchase doesn't matter. They still live in their house and they still pay $3,000 per month.

Maybe you weren't around at that time, but there were a dozen different wildly popular TV shows about people flipping houses, people were buying houses with zero down payments, buying houses they couldn't afford because "real estate always goes up" and advice to "buy now and refinance in 6 months when the price has gone up" and all sorts of other greedy, speculative behavior. Houses in 2007 were the cryptocoins of the day, but with massive leverage by lying on mortgage applications.

The fault is still the bank's. The bank is responsible, and charges for, checking the numbers. They allowed themselves to lose money and were rewarded for it.

That's not across the board. In the UK, banks were bailed out in exchange for equity. So there are fairer ways of handling this.

Amazing rewrite of history. Mortgage lenders knew it was bad debt but gave out money anyway, hedge funds that repackaged those mortgages knew it was bad debt but tried to aggregate lots of bad debt into somehow becoming "good debt", credit rating agencies gave these packaged bad debt gold star ratings knowing all along that it was bad debt, but really it's all the people's fault.

Nope, nobody along the chain had any responsibility for enforcing any kind of professional standards. I mean, it's not like we have systems in place to check things like "lying".

I'm confused by this response. Are you trying to argue against me here? It seems like you are, but you're talking about a bunch of unrelated things to my statement (which I agree with you on).

The initial fraud happened at the level of people lying on mortgage applications.

I'm not suggesting there weren't all sorts of failures of regulators and credit rating agencies, nor that many of the financial institutions involved in trading these assets weren't complicit in perpetuating the fraud. I'm just pointing out that "bailing out" a person who committed fraud when taking out a loan isn't a good thing for society to do. I'm not trying to let anyone else off the hook for their roles in the systemic problem.

> I'm just pointing out that "bailing out" a person who committed fraud when taking out a loan isn't a good thing for society to do.

Ok, and bailing out the financial institutions and traders that perpetuated that fraud "isn't a good thing" either, AND you said that what the home buyers did was "worse" for "reasons".

Except all of the reasons you listed are exactly what those traders and financial institutions also did, and arguably they have professional duties not to do those things and to in fact report them. You're also neglecting that home buyers aren't professionals in this, they're supposed to be guided by the professionals, but the mortgage lenders were encouraging people to inflate their assets as standard practice.

Where you lay the most of the blame on this issue honestly blows my mind.

How do you 'simply' bail out millions of homeowners?

The government could ask the banks for their list of debtors, and then transfer an amount of money equal to the sum of all debts, on the condition that the banks write off said debtors, no?

Not sure what side effects this could cause but it seems possible in principle.

Well, normally a bailout doesn't involve just giving people money (the bank bailout was a loan), but you could do that, it'd be a massive cost however. The biggest winners would also be those with terrible loans/those who issued them.

Alternatively, you could just give all homeowners a loan instead - but this doesn't change the fundamental issue of subprime mortgages, so it would really just be pumping up the bubble further.

Ah, I see what you mean by "simply".

Yeah, I guess there's definitely a ton of side effects depending on which way you go.

However, the optics of giving banks more "free" money at the expense of "the people" is not good regardless. I wonder what would happen if the government extends almost-free loans to whoever has a mortgage.

I imagine a lot of people would use it to pay it, but probably a ton more would just use it to get a bigger TV, a car or something similar.

No way to win either way it seems.

>How do you 'simply' bail out millions of homeowners?

Simple three step process:

- Be the leader of the CCP

- Declare that the homeowners will be bailed out

- Sit back and watch while your entire society restructures itself to bail out homeowners

I'm only half-kidding; this kind of stuff has been done time and time again, side effects be damned.

They bailed out people during the pandemic with cheques. Seems pretty straightforward.

There are three answers to this.

The first is that the us mortgage market is 10Tn. So it would have been required a 10x bigger bailout to do it directly.

The second is that someone has to decide who get a mortgage and one what property and at what rate etc. The government would need to do that too. And it seems cheaper and easier to use the existing companies that get the fed (?) To hire 1m real estate people and managers etc.

Reason 3 is that that would have been fine for mortgage holders. But what about everyone else who used those banks? Commercial loans, bon mortgage debt, insurance services, a whole bunch of very important economic processes would have suddenly ground to a halt. Mortgage holders were the main thing bailee out. But not the only thing.

You didn't have to bail out all home owners for the full amount, you could just give out some small amount that will let those who were almost able to make their payments continue to stay afloat, while letting those who wildly misrepresented their assets and liabilities to go under. This would still ripple through and hit those who bought the most truly bad debt, but that's how it should be.

If you do that some will default (which is the point right?).

But then house prices will fall, the economy will falter and interest rates on loans will go up.

And when that happens people who were previously fine will suddenly start defaulting too.

This is the problem with contagiousness, moral risk etc. If you don't bail out the first (worst) group to default, you rapidly find that people who were fine before are now no longer creditworthy.

To be clear, I'm not arguing this is fair or right or "should" be. I'm just explaining the decision that a theoretical politician would face.

> But then house prices will fall, the economy will falter

Does not follow. Whether house prices fall and/or the economy falters is not out of your control, nor are they certain. It depends entirely on the choices made in the size of payout, the payout schedule, and enumerable other factors that can be managed to some extent.

Home buyers weren't innocent in all of this, but the worst predators were the ones that were bailed out, so the moral risk argument doesn't justify the choices made IMO.

If you let even 1% of people default, that's a huge excess supply and fall in demand (if people sold their houses every 10 years, only 10% of them would be for sale in 1 year, so a 1% repossession increases supply 10% in a given year).

So then what?

You either bail out so many people that fewer than 1% of people default. That's basically a 100% bailout right?

Or you don't and then prices fall.

And as soon as prices fall, suddenly construction stops and more people lose their jobs and people are underwater and consider defaulting strategically even if they don't "have" to.

I really agree about buyers not being innocent. I really do. It's by far the least reformed group in the 2008 shit show of fraud.

But this isn't a moral position. It's a practical one. And you can't punish those people or they'll take their neighbours (and elected officials) down with them...

> Or you don't and then prices fall.

Falling prices are fine because homes were overvalued virtually by definition of the circumstances at the time. Your argument assumes this would lead to a run away effect rather than it all reaching a fixed point, but this claim isn't justified.

My position isn't that home owners were the worst actors here, but that the bailout should have gone to home owners rather than the banks; the moral hazard argument applies to both, but at least in one arguably most people get to keep their homes and you're not rewarding the people whose professional responsibilities were to assess risk and properly manage financial instruments.

I'm just claiming that this wouldn't have required a full/100% bailout, just like we didn't fully bail out the banks and let some fail.

When you have a ton of people in default on mortgage loans, and you pay off the loans for them or otherwise help with their default then people don’t lose their homes AND the banks are OK and the system doesn’t collapse.

If you take the same amount of money and just give it to the banks and they foreclose on the homeowners the banks are also OK. But the homeowners are fucked.

Guess which of those two options we chose following the 2008 financial crisis.

The money wasn't just 'given' to banks, it was a loan that they ended up paying back.

Just paying off loans for homeowners with bad mortgages would also have been horrible - you're essentially rewarding bad quality loans. And how else would you bailout homeowners?

You could restructure the loans make the interest rate lower make the payment period longer prohibit the banks charging extortionate penalties and fees make the banks write down some of the principal or accumulated interest in arrears and lots of other stuff. It’s ridiculous to claim that there were no options here.

And also it’s telling that you don’t even consider the idea that the homeowners could have gotten similar treatment, ie a favorable loan that enabled them to eventually pay the principal back.

Also you’d have to explain how bailing out banks that made poor quality loans and are on the risk of insolvency isn’t “rewarding bad quality loans”.

A lot of loans were restructured (both due to the government and because banks themselves don't want people defaulting on loans either), but for a lot of the really bad loans the slight help from restructuring wouldn't have been enough. That's also why giving homeowners a loan wouldn't have helped, which is essentially just restructuring.

>Also you’d have to explain how bailing out banks that made poor quality loans and are on the risk of insolvency isn’t “rewarding bad quality loans”.

It is, to an extent, but a loan is much less of a reward than someone paying off your debt. That's also why new regulations were introduced so that future behavior likes this from banks wasn't incentivized.

The resulting inflation would also have been somewhat epic.

An artificially low interest loan is a gift. Banks could have raised the same funds on the open market - they would have just had to pay for it. But rather than conservative cash holders being rewarded for better preparation, the Fed stepped in and made the overextended investment banks the winners instead. It's correct to say it was a gift.

Have you ever seen the movie "The Big Short", where they go to Florida and meet a stripper who owns 4 McMansions and a minimum-wage lawnmower who is buying a giant, expensive house? Those were realistic depictions of the fraud happening at the retail level which created the entire problem.

The people defaulting on their mortgages were people who had committed fraud by lying about their incomes and assets in order to take out massive loans they could never repay, because they thought they could flip the house for a profit before paying any principal. Foreclosing on those people is the good and right thing to do, they were criminal fraudsters not victims.

Of course, the ripple effect when half the market turns out to be fraudulent is that prices go down when the bubble bursts which also hurts legitimate buyers who bought at inflated prices, but that's secondary to what caused the wave of defaults.

> fraud happening at the retail level which created the entire problem

Yeah no. Pretty sure that there were a few things happening inside the banks that helped create the problem.

You may have missed the part where they talked about Moodys (or was it S&P) rating the garbage MBSs higher than they should have, which led to institutional investors and many others buying garbage.

I choose to assign blame to the parties with the most power and knowledge to have prevented the disaster.

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