If we as a nation refused to bail out the bad subprime loans, would it help end the mortgage crisis?

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I mean, the reason why this economic mess and prolonged recession started was because a handful of banks gave out bad loans to customers who couldn’t pay off their mortgages anyway, correct?

So why not have the banks and people who took these bad loans deal with it themselves? I mean, if they do lose their homes, they should’ve thought about it before signing off on those loans, right?

These people/banks still make up a tiny proportion of the homeowners and banks in the US — why should the rest of us suffer for the foolish (and sometimes criminal) behavior of others?

  1. Reply
    May 16, 2011 at 4:55 am

    The reason for the economic meltdown is much larger and more complex. It isn’t just those bad subprime loans. If it were only defaulting subprime loans, the problem would be rather small.

    And its more than subprime mortgages that are defaulting. People used creative financing to buy way more house than they could afford. Housing prices were inflated and the bubble burst. Now the houses have larger mortages than the value. People are stuck with adjustable rate mortgages and interest only loans.

    But what really pushed all this to crisis proportion were security brokers and investors who took advantage of deregulation (thank you Bush administration) to make personal fortunes.

    There are lots of other complicated issues involved. But it’s way beyond those banks who gave bad loans.

  2. Reply
    Julius S
    May 16, 2011 at 5:03 am

    The Federal Reserve did as you suggested in 1929 following the Stock Market Crash and that led to the Great Depression. You are in good company in that George W Bush agrees with you and he is only helping his rich Wall Street friends rather than solving the underlying problem.

    The U.S. economy teeters on the edge of recession because of the wide-ranging crisis in the housing market: a vicious downward spiral in housing prices, escalating foreclosures, rising losses on mortgage-backed securities, contagion in other credit markets, and dwindling liquidity that has already toppled one major U.S. financial institution. The impact on families who lose their homes to foreclosure is substantial, and their neighbors and communities suffer as well. Foreclosures depress neighboring home values, and vacant properties become magnets for arson, crime, and vandalism. Our minority and low-and-moderate income communities are being hardest hit, but they are not alone. The housing crisis has already had macroeconomic effects, with liquidity drying up across credit markets, lost home values depressing consumer spending, and lost jobs in the housing and construction sector contributing to weak labor markets. Monetary and fiscal policies alone will not end the crisis. It is clear that after a year of exhortation, voluntary efforts developed by lenders and the Treasury Department to address this crisis have proven inadequate. The pace of modifications and refinancings is lagging far behind the ever increasing pace of foreclosures, which are expected to continue for a couple of years. The time has come for strong federal policies to restore capital markets and our communities by facilitating mortgage restructuring and community stabilization.

  3. Reply
    May 16, 2011 at 5:53 am

    I agree. The government handouts offer ZERO incentives for these companies or customers to change their practices. In a democratic capital market, companies succeed and fail all the time. You know what its called when the government owns these companies and keeps them afloat? Socialism and communism. These companies should be allowed to fail. Our economy has been operating at an inflated level due to credit given. Now its falling apart because people aren’t using their credit as much. The swipe of a VISA shouldn’t dictate our economic health.

  4. Reply
    May 16, 2011 at 6:09 am

    If we just ignored the issue of sub-prime loans it wouldnt go away. As those homes foreclosed and sold on the open market they would sell for a fraction of the normal price, which is driving the value of yours and my house down. that would mean that when you and I wanted to sell our house we would have to lower the price to a point where we would owe more on our house than our home is worth. That would cause others to foreclose.

    Property values would be caught in a downward spiral. Sooner or later you decide to buy a bigger and better house and walk away from your current one that you owe more than its worth. Causing home prices to come down more and more. Where would it stop?

    I dont agree with how its being handled, but at the same time you can’t just ignore the problem.

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