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The cost of the bad mortgages multiplied because Wall St. did what it always does: shuffled around semi-imaginary properties in an endless quest to sell them for a profit. (Add in the default credit swaps and the properties get truly imaginary in a way that would get you sent to prison in any other field.) This isn’t a problem so long as the properties can be assigned a meaningful value. Like a house. We’ve had periods of high foreclosures before but they were weathered by the market being allowed to do its thing. But first the boom in loans given under foolhardy condition grotesquely inflated the value of the houses and the inevitable bursting of the bubble made many of those who could make the payment find that they owed far more than the joint was now worth. Although it meant a big hit on their credit rating, that was less severe than being stuck paying $600,000 for something that could sell for half that much after reality set in. Thus we get get state of the art ghost town in the Inland Empire region of Southern California.

We’ve been here before. Near Los Angeles is an area called the Antelope Valley. The two primary cities are Palmdale and Lancaster. These places have extremely little to recommend them. The only two good things to come out of Lancaster were Frank Zappa and Capt. Beefheart, and they got the hell away from there at the first opportunity. In the mid-80s new home development started going crazy in the Antelope Valley. At the same time there was the growing meme among young adults that if you didn’t own a home before you hit 30, you were a hopeless failure. This was largely because some idiots in Washington noticed that home ownership rates went higher during economic good times and came to the fallacious belief that high home ownership drove a strong economy rather than the other way around. This is a big part of the rationale behind CRA getting put on Carter’s desk.

Anyway, Palmdale sucked. It wasn’t the worst place on the planet but there weren’t much well paying jobs locally except the nearby aerospace companies (Edwards Air Force Base is where a lot of their stuff gets tried out.) So a big portion of the newly added population was commuting into Los Angeles every day. A miserable way of life. On top of this, the honest working folks who enthusiastically tried to make the most of their new homes tended to ignore the severe shabbiness of the adjoining tracts, which were only a few years older. They eventually found that a lot of their neighbors were the sort who thought the patch of dirt in front of the house was a large combination broken vehicle display lot and weed farm. These were the folks who got CRA-driven loans or were renting from same.

Of the two dozen friends, acquaintances, and relatives I knew who moved to Palmdale/Lancaster during 1985 to 1995, every one left. Most came back to LA or Ventura Counties, some left the state entirely. Almost half of them sold their homes at a loss or defaulted on their mortgages when they couldn’t find a buyer within an acceptable loss range. It just sucked that much living in Palmdale and working elsewhere. Home ownership wasn’t worth it under those conditions.

So there was a LOT of foreclosures going down then, on top of a lot of general madness in the real estate market here. Boom, bust, boom, rinse, repeat. But it didn’t threaten to topple most banks and lenders, because the market was still being run by mostly sane rules. Things weren’t piled so high and made so volatile that nobody was sure what a house whose mortgage had changed hands a dozen times in a year was worth in the real world. ACORN soon had that fixed.

Letting Lehman fail wasn’t the big mistake. Not letting more of them fail was the big mistake. (The auction I suggested would not have prevented several big names from disappearing and good riddance. It would just have prevented it from becoming a massive burden on the taxpayers.) The villains responsible for this wanted to prop up the financial institutions rendered impotent by their idiotic laws because too many failures would make too many people look at where this started and get angry.

It takes a lot to wake up the average American to consider things beyond his tiny sphere of interest, just as with most people everywhere. That Barney Frank is secure in his position rather than being hounded out of office is a perfect example of this. I’d be surprised if more than 10% of Americans even knew who he is and his role in all of this.

We’ve put the lunatics in charge of the asylum. Our new President litigated for ACORN to create the enhanced version of CRA Clinton signed. Our Teasury Secretary was at the helm of the NYFR when the signs became plain that the wheels were soon to fall off. His duty was to raise a hue and cry before the exposed axles were digging into the pavement. Instead he help plot the greatest bit of pickpocketry in recorded history.

Never attribute to malice where stupidity will suffice, the saying goes. So are these people stupid or evil? In either case, why are they still in charge and being cheered as they only make things worse?

I’m not saying you’re wrong, but I hear a lot of people saying that letting Lehman fail was a big mistake … and that we’re paying a big collective price for it.

I still don’t have a good detailed understanding of how $500B in bad mortgages got turned into trillions of bank losses. We haven’t been told the full story.

In practice, CRA didn’t have much bite. Only when a big bank wanted to do a big M&A deal, ACORN came out of the woodwork invoking CRA. Banks had to promise to do $xxx million in community lending to get their approvals. But I doubt this had significant adverse impact in relation to the mistakes institutions would have made anyway.

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One of the panic cries was that these assets couldn’t be priced and thus couldn’t be unloaded. This was utter nonsense. The same methodology of determining worth that has worked for millenia still applies: A thing is worth what someone will pay you for it. You cost is only a detail. If you’ve made something or offer a service at a price that gives you a profit but finds no customers, then you have failed. You can either swallow the total loss or try to break even on your sunk costs by selling what you have for whatever you can get and getting out of the business until you figure out a way to do it better.

A more rational approach would have been for the government to place an arbitrary value on the assets and offer to buy them for that price. That price would be far less than the bank or institution hoped to get but far better than nothing. Then the government puts the items up for auction and that is the end of it. Much money has been lost but the credit issue is negated. Oh, and while we’re at it, CRA gets repealed along with some other similar bits of idiocy that are guaranteed to pile up delinquent debts.

This could have been done for a small fraction of what TARP consumed and this leadership in the face of crisis could have turned the election.

But that would have required too much rationality on the part of the previous administration while the folks who’ve dedicated their lives to the destruction of this nation have been working towards this for decades. Look at CRA. First, you initiate a very bad policy but make it weak and relatively harmless. Then, after enough time has passed that everyone is accustomed to its existence, you boost it into something much stronger that can do serious damage. The Cold War took decades to play out. Will we realize we’re being warred upon by different means before it’s too late?

Often, Ch. 11 bankruptcies are converted to Ch. 7 bankruptcies, when managers no longer care enough to keep the business going (or when creditors persuade the judge that there really is no hope for getting paid back, and they’d just as soon sell off what assets are left before existing management can reduce their value further and divvy up the proceeds). Ch. 7 is where potentially productive assets get into new hands.

Of course the hybrid solution is a Ch. 11 with an active shareholder class. If shareholders would band together with a coherent plan to turn their investment around, GM could be fixed by filing for Ch. 11, getting a trustee or receiver appointed to make the hard decisions that existing management – who is too wimpy to say no to anybody – won’t make, getting some breathing room from debts, restructuring potentially favorable contracts and disavowing bad contracts, then emerging from bankruptcy with entirely new management and an entirely new board of directors, courtesy of a shareholder vote.

This will never happen because there are entirely too many shares of GM on the street for anyone to ever get a majority, and because the biggest chunks are held by institutional investors, who in my experience like to try to influence really stupid aspects of company policy, but won’t step up with useful business solutions. Here’s an example: the company I work for got hammered last year with shareholder proposals to amend the company’s non-discrimination policies to include sexual orientation and transgendered status. I wanted to call up these mutual fund managers and say “Really, seriously, with all the crap going on in the world, and that’s the best you can do? Demanding equal rights for the millions of transgendered who are working in the oil patch?” (the reference to the millions of transgendered in the oil patch is sarcasm, although it’s probably not coming through well).

TARP was a bad idea all the way around and I think history will judge Bush and anyone else who supported it very unkindly, for buying into Paulson’s “chicken little” dance / power grab. It was a bad idea to throw money to demonstrated failures with no real strings attached, it was a bad idea to create a financial panic in this country, and it was a bad idea because it broke the ice for the ridiculous spending bill Congress just passed. And the spending orgies to come.

Contrast Reagan’s sunny “It’s morning in America” world view with Obama’s pronouncements of doom and gloom, and I fear it’s the end of my great country as well.

Other writers here have made apt comparisons to 1990 — a time when many banks failed, and Citibank was a toss-up. Comparatively, the amount of dodgy loans that our banks have now should be less. Also, going into 1990, our banks tended to have lower capital ratios than they had in 2007.

TARP I was arguably necessary to avoid an even deeper liquidity crisis — an ER-like “let’s stick in some tubes and pump in some fluids, real fast!” Months later, we share collective unease with the lack of any diagnosis and recommended regimen from the big brains in DC. I suspect that the bank regulatory bureaucrats have ideas, but Obama & Co haven’t decided on their own politically correct solution. In this context, Obama & Co’s fixation on the Stimulus Bill is disconcerting … to say the least.

Unlike the Japanese approach, our resolution of banks/S&Ls in 1990 resulted in a quick and sharp decline in asset values … but these were mostly in commercial real estate and junk bonds. The assets today are mostly residential real estate … voters don’t want their property values to go down. I expect Obama & Co to go the Japanese route, because of this. Foreclosure relief will be part of this.