Sunday, May 23, 2010

Lewis and the Mortgage Mess

From today's Parade magazine: Cleaning Up the Mortgage Mess, by Joël Brenner.

"...foreclosures continue to sweep the nation."

"...more than 11 million U.S. families currently owe more than their houses are worth."

"...assistance is coming from an unlikely source: Lewis Ranieri, a former Wall Street trader whom many people blame for helping facilitate the mortgage mess."

"Ranieri is attempting to repair some of the damage caused by the misuse of the mortgage-backed securities market he pioneered while head of the mortgage desk at Salomon Brothers in the 1980s."
Okay. So do I trust this guy or not? Two paragraphs in, this is my question. Maybe it's another scam, another con, another Madoff-with-the-money. What do I think of this Lewis Ranieri? I read the rest of the article looking for an answer.

Ranieri's new company buys "distressed mortgages, often at discounts of 40% to 50%." It works to improve the homeowners finances and the mortgage terms. And it sells the mortgages at a profit.

Okay. Oh, I don't have a problem with a guy making a profit. In turbulent times, money moves in strange ways. And any time money moves, there's a chance to make a profit. So Lewis here could be doing really good things, good for homeowners, good for the economy, and still make a profit doing it. Could be. This doesn't bother me at all. But I still don't know what the guy is up to.

"The only way to really help people is to reduce the principal balance of the loan and the total amount they owe," Ranieri declares. "The government is just forestalling the problem by reducing monthly payments."

Okay. I like the guy. Go to him for help? Can't say. But I like him. I like what he says about debt. We have to reduce debt. He's right. I say the same thing.

A lot of people say the economy won't recover until we reduce debt. They're right.

So maybe everybody says that? You'd think so, sure. But Congress and the Federal Reserve ain't sayin' it. Even worse: They ain't doin' it. They're forestalling the problem, as Ranieri says. Postponing the problem. Letting that debt accumulate. Hoping to accumulate more. Why? Because that's what they think a booming economy looks like.

The difficulty (as Keynes said) isn't in the new ideas, but in escaping from the old ones.

We have to stop debt from accumulating, or the economy will stop it for us. That's what the financial crisis was -- the economy's attempt to fix the debt problem. We're lucky it didn't work. But the economy will try again, unless we take care of it with policy.

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