Postings and assignments for students in Econ 3334 at UH
Wednesday, March 5, 2008
Bernanke Asks for Easier Loans
In this article, the Fed Chairman asks for banks to renegotiate or forgive portions of mortgages that might default. In terms of our model of the money market, what is he trying to do to money demand (L)? How would this help the economy?
The Financial times article speaks to Ben Bernake encouraging banks to change the terms and principal on their loans in order avoid foreclosures. The reason for his doing so is simple and, in a way, enlightened in its self interest. The move is done in order to increase, or at the least stop the decrease in, the demand of money. As we learned in class, the demand for money determines the slope of the LM curve and, therefore, the general effectiveness of his financial policy instrument. If demand is low, then the LM curve is sharply vertical and Bernake's ability to manipulate the money supply is ineffective. If he can keep demand high, then he faces a more sloping horizontal curve and his policy tool becomes far more effective to alleviate the crisis. The move is, in many ways, a move for greater freedom of action and effectiveness in his policies. While I'm no fan of the Financial times, there are too many American flags and red clouds around the white house, they clearly got some republicans who know their dollar bill talk.
In James Politi’s “Bernanke asks banks to ease loan terms” article states that the Federal Reserve chairman Ben Bernanke has made a request to various banks to be proactive and pardon mortgage loans to help stem the damage from the subprime meltdown. Ben Bernanke is requesting for banks to ease the terms in these special cases and give borrowers more of an incentive to remain in their homes and avoid foreclosure. Investors remain worried that rising foreclosures would further erode bank earnings and slow down the economy. His request did not only affect the banks, but it also affected the stock market. Since the inflow of capital is less, the value of the shares decreased. This affects a copious amount of people. The foreclosures cause a capital shortage and leave the government liable, causing the economy to slow down.
At first glance Mr. Bernanke’s plan to pardon mortgage loans seemed inappropriate for the economy, but he had ulterior motives. His plan is focused on ending the housing crisis and implied that many troubled borrowers had little or no equity suggesting that greater use of principals or short payoffs would be in the best interest of the both the borrowers and the lenders. He is doing everything he can to try and keep home buyers who owe more in loans than what their house is worth in their homes rather than being foreclosed.
Even though Bernanke’s plan has many loose ends, some people are still ready to see a change. This situation calls for immediate response and Bernanke is taking active measures to reduce preventable foreclosures. Chairman of the house of financial services Barney Frank, made a proposal of 20bn to the federal housing administration to help with the at risk mortgages. The New Hope Alliance; mortgage services issued a positive assessment of its progress indicating that more than 1m homeowners thus far have benefited from the changed terms. This plan could help to reassure investors that the chances of a big bank failure were slim.
Bernanke feels that because the majority of mortgage loans are now securitized and sold to private investors in the secondary market rather than held in the portfolios of banks and other institutions, short-term interest rates aren't as important to housing markets as they once were. About 56% of the home mortgage market is now securitized, compared with only 10% in 1980 and less than 1% in 1970. As a result, the availability of mortgage credit today is generally less dependent on conditions in short-term money markets, where the central bank operates most directly. While acknowledging the potential threat disruptions in the mortgage lending industry pose to the economy at large, Bernanke feels that some increase in the premiums investors require to take risk is probably a healthy development. Bernanke insists on not returning to the days in which all mortgage lending was portfolio lending, but clearly the originate-to-distribute model which is currently being modified to provide stronger protection for investors and better incentives for originators to underwrite prudently.
The Financial times reports that early in March Ben Bernanke, Federal Reserve Chairman, reached out to banks asking them to absolve parts of mortgage loans. This is an effort to relieve some of the pressure of the “U.S. housing crisis.” Ben B’s plan intends on aiding those who are upside down in equity, or they owe more on their mortgage than their home is worth. This is because consumers in this situation could be facing foreclosures and defaulting on their loans. If they receive a little help in the form of “principal writedowns or short payoffs” there will be more of an incentive to bear through the current housing disaster. On the other hand this requires that banks absorb some tremendous pain, taking shape in losses of payments and slashing the initial mortgage loan amount, in order to help this mortgage meltdown come to an end. So however noble Ben B’s intentions, this request led to a decrease in share prices, or the stock market, as well as no reassurance to already skeptical investors that this move might continue to deplete bank earnings and inhibit economic growth. There is also criticism saying that pardoning these mortgages might destroy whatever moral fiber the U.S. has left by rescuing those who made a gamble in the doomsday that is the U.S. housing mess.
In terms of our money market model and the IS/LM model, Ben B’s mortgage plan hopes to decrease the demand for money with short-term interest rate reductions which will thus increase output and help the economy grow. The increase in disposable income, that comes with easing the housing mortgages, makes consumption look a bit more feasible than under current conditions. This increase in spending will help stimulate the economy.
Personally, if banks basically erasing portions of people’s mortgage debt and cutting their payments short will help stimulate our economy and pull us out of the housing crisis and slow down the recession then do it! However, I do agree with the idea that responsible mortgage owners will feel like they’re being punished for doing the right thing. Whereas, joe schmoe down the street, who can’t sustain his obviously risky mortgage payments, will receive help from the banks. This isn’t always the case though, so something needs to be done soon to prevent further damage to our economy and numerous people from losing their homes.
The article, “Bernanke asks banks to ease loan terms” talks about how Bernanke had proposed Congress to “forgive” loaners that are in trouble with their mortgage loan. The article also points out how foreclosures are increasing and this factor is affecting banks. Bernanke’s proposal was to help buyers that owe more on their mortgage than what the house cost. This proposal would decrease the amount of foreclosure homes. The article also states how Bernanke’s proposal could be criticized because this would give the borrowers a break from purchasing a home that was over their budget. The article also point out that a democratic chairman has planned to give 20 billion to buy mortgages that face foreclosure. More than 1 million homeowners have had good outcome thanks to this proposal and Senators have stated that there is no downfall on banks. When we look at the money market demand in regards to this proposal we know l(r,y) would shift upwards since there is an increase in the money supply. Bernanke is trying to increase the money supply by paying of mortgage loans when the money supply increases output will also increase and real interest rate will also increase. I believe this proposal would help the buyers that have a mortgage loan. This would help buyers that are paying large amounts on their mortgage but would also affect buyers that want to purchase a house. Mortgage prices would increase and the interest rate would also increase. So I believe there is both the disadvantages and advantages to this proposal
In this article James Politi reports that chairman of the Fed, Ben Bernanke, asked banks to pardon mortgage loans that were given to borrowers who have not been able to pay them back. The rise of foreclosed homes has investors worried because US share prices are falling and the economy is continuing to slow down. Bernanke is targeting homeowners who owe more money of their mortgage than what their home is worth. He is trying to get the banks to lower their terms so home owners are able to keep their homes therefore reducing foreclosures. The problem arises from the fact that many of the homeowners cannot afford to pay their mortgage, but if lenders writedown principals, then this will benefit both the lender and the borrower. However there are those who believe Bernanke’s proposal is not fair because these people who borrowed the money should be obligated to pay it back. In addition most mortgage lenders do not “forgive the principal on loans.” However Bernanke insists that if nothing is done then the problem is just going to get bigger. If actions are taken to stop possible foreclosures then this would not only help the borrower but also the entire economy.
Bernanke’s proposal is to bring down consumers debt by pardoning homeowners who are unable to pay their mortgage, this will bring the money demand down. Looking at the IS/LM model when the money demand drops, interest rates will decrease. As interest rate decrease output increases. This is precisely what Bernanke is trying to do this will help boost the economy, and help alleviate the housing market.
In response to the article I believe what Ben Bernanke’s proposal will work and it should be in the best interest of both lenders and borrowers, especially on the US economy. Although it might be true that all of the homeowners that are in this crisis are there because of their own decision, and they should deal with their issues themselves, but in the long run it’s affecting the rest of the nation because it is hurting the economy. Therefore Bernanke’s proposal should be passed because it will benefit everyone by improving the economies current standing.
The article begins by Ben Bernanke pleading to banks to “forgive chunks of mortgage loans.” This would be directed to those who are in some sort of a predicament and unable to pay. Bernake speaking on this topic lead to a downturn in the stock market. Investors have become apprehensive because of the predictions of more foreclosures. The forgiveness is for those that owe more to the bank than what the house is in actuality worth. He recommended that banks become more so lenient with the matter of terms. Hopefully that would help keep the people to continue with their investment. The government and other organizations have worked to lower the amount of preventable for closures. A criticism of what Bernake is asking is that this will put more pressure on the mortgage lenders. Further criticism is that the people will be “bailing out” by by the Fed. This would cause a more problem. Bernanke exclaimed that something must be done. Braney Franke said chairman of the of the House financial services committee has suggested that a 20 billion dollar be spent toward the Federal Housing Administration so it can buy mortgages that seem to be on the edge of the cliff. Barney Franke said that Bernanke is “showing willingness to work with us in a co operational way” The article further states that the Hope New Alliance said that homeowners have altered their loans and it has worked dwell for both sides. Shifting to the Senate, Donal Kohn, said that a “big bank failure remained low.”
I don't believe that the people should be forgiven. They need to learn form their mistakes. If they aren't reprimanded now they will continue this mess tomorrow. Also I don't think its only the home buyers fault. Those that sold the mortgages, the middlemen, are just as responsible. They didn't worry about who they were selling the mortgages to, they were just trying to get the deal done. So they should also be hurt in some way.
The government should set up more rules and regulations to secure that this does not occur again. That people that are not actually qualified to own a home shouldn't. There should be some sort of background check. Like checking their credit history. This would be done to asses how responsible they are.
Bernanke by asking forgiveness is essentially want to lower the demand(l). By lowering the total demand the interested rate will also drop. A lowered interest rate is healthy for the economy. The incentive to spend is increase. People become less apprehensive to spending. Increased spending would revive the economy.
6 comments:
The Financial times article speaks to Ben Bernake encouraging banks to change the terms and principal on their loans in order avoid foreclosures. The reason for his doing so is simple and, in a way, enlightened in its self interest. The move is done in order to increase, or at the least stop the decrease in, the demand of money. As we learned in class, the demand for money determines the slope of the LM curve and, therefore, the general effectiveness of his financial policy instrument. If demand is low, then the LM curve is sharply vertical and Bernake's ability to manipulate the money supply is ineffective. If he can keep demand high, then he faces a more sloping horizontal curve and his policy tool becomes far more effective to alleviate the crisis. The move is, in many ways, a move for greater freedom of action and effectiveness in his policies. While I'm no fan of the Financial times, there are too many American flags and red clouds around the white house, they clearly got some republicans who know their dollar bill talk.
In James Politi’s “Bernanke asks banks to ease loan terms” article states that the Federal Reserve chairman Ben Bernanke has made a request to various banks to be proactive and pardon mortgage loans to help stem the damage from the subprime meltdown. Ben Bernanke is requesting for banks to ease the terms in these special cases and give borrowers more of an incentive to remain in their homes and avoid foreclosure. Investors remain worried that rising foreclosures would further erode bank earnings and slow down the economy. His request did not only affect the banks, but it also affected the stock market. Since the inflow of capital is less, the value of the shares decreased. This affects a copious amount of people. The foreclosures cause a capital shortage and leave the government liable, causing the economy to slow down.
At first glance Mr. Bernanke’s plan to pardon mortgage loans seemed inappropriate for the economy, but he had ulterior motives. His plan is focused on ending the housing crisis and implied that many troubled borrowers had little or no equity suggesting that greater use of principals or short payoffs would be in the best interest of the both the borrowers and the lenders. He is doing everything he can to try and keep home buyers who owe more in loans than what their house is worth in their homes rather than being foreclosed.
Even though Bernanke’s plan has many loose ends, some people are still ready to see a change. This situation calls for immediate response and Bernanke is taking active measures to reduce preventable foreclosures. Chairman of the house of financial services Barney Frank, made a proposal of 20bn to the federal housing administration to help with the at risk mortgages. The New Hope Alliance; mortgage services issued a positive assessment of its progress indicating that more than 1m homeowners thus far have benefited from the changed terms. This plan could help to reassure investors that the chances of a big bank failure were slim.
Bernanke feels that because the majority of mortgage loans are now securitized and sold to private investors in the secondary market rather than held in the portfolios of banks and other institutions, short-term interest rates aren't as important to housing markets as they once were. About 56% of the home mortgage market is now securitized, compared with only 10% in 1980 and less than 1% in 1970. As a result, the availability of mortgage credit today is generally less dependent on conditions in short-term money markets, where the central bank operates most directly. While acknowledging the potential threat disruptions in the mortgage lending industry pose to the economy at large, Bernanke feels that some increase in the premiums investors require to take risk is probably a healthy development. Bernanke insists on not returning to the days in which all mortgage lending was portfolio lending, but clearly the originate-to-distribute model which is currently being modified to provide stronger protection for investors and better incentives for originators to underwrite prudently.
The Financial times reports that early in March Ben Bernanke, Federal Reserve Chairman, reached out to banks asking them to absolve parts of mortgage loans. This is an effort to relieve some of the pressure of the “U.S. housing crisis.”
Ben B’s plan intends on aiding those who are upside down in equity, or they owe more on their mortgage than their home is worth. This is because consumers in this situation could be facing foreclosures and defaulting on their loans. If they receive a little help in the form of “principal writedowns or short payoffs” there will be more of an incentive to bear through the current housing disaster.
On the other hand this requires that banks absorb some tremendous pain, taking shape in losses of payments and slashing the initial mortgage loan amount, in order to help this mortgage meltdown come to an end.
So however noble Ben B’s intentions, this request led to a decrease in share prices, or the stock market, as well as no reassurance to already skeptical investors that this move might continue to deplete bank earnings and inhibit economic growth. There is also criticism saying that pardoning these mortgages might destroy whatever moral fiber the U.S. has left by rescuing those who made a gamble in the doomsday that is the U.S. housing mess.
In terms of our money market model and the IS/LM model, Ben B’s mortgage plan hopes to decrease the demand for money with short-term interest rate reductions which will thus increase output and help the economy grow. The increase in disposable income, that comes with easing the housing mortgages, makes consumption look a bit more feasible than under current conditions. This increase in spending will help stimulate the economy.
Personally, if banks basically erasing portions of people’s mortgage debt and cutting their payments short will help stimulate our economy and pull us out of the housing crisis and slow down the recession then do it! However, I do agree with the idea that responsible mortgage owners will feel like they’re being punished for doing the right thing. Whereas, joe schmoe down the street, who can’t sustain his obviously risky mortgage payments, will receive help from the banks. This isn’t always the case though, so something needs to be done soon to prevent further damage to our economy and numerous people from losing their homes.
The article, “Bernanke asks banks to ease loan terms” talks about how Bernanke had proposed Congress to “forgive” loaners that are in trouble with their mortgage loan. The article also points out how foreclosures are increasing and this factor is affecting banks. Bernanke’s proposal was to help buyers that owe more on their mortgage than what the house cost. This proposal would decrease the amount of foreclosure homes. The article also states how Bernanke’s proposal could be criticized because this would give the borrowers a break from purchasing a home that was over their budget. The article also point out that a democratic chairman has planned to give 20 billion to buy mortgages that face foreclosure. More than 1 million homeowners have had good outcome thanks to this proposal and Senators have stated that there is no downfall on banks.
When we look at the money market demand in regards to this proposal we know l(r,y) would shift upwards since there is an increase in the money supply. Bernanke is trying to increase the money supply by paying of mortgage loans when the money supply increases output will also increase and real interest rate will also increase. I believe this proposal would help the buyers that have a mortgage loan. This would help buyers that are paying large amounts on their mortgage but would also affect buyers that want to purchase a house. Mortgage prices would increase and the interest rate would also increase. So I believe there is both the disadvantages and advantages to this proposal
In this article James Politi reports that chairman of the Fed, Ben Bernanke, asked banks to pardon mortgage loans that were given to borrowers who have not been able to pay them back. The rise of foreclosed homes has investors worried because US share prices are falling and the economy is continuing to slow down. Bernanke is targeting homeowners who owe more money of their mortgage than what their home is worth. He is trying to get the banks to lower their terms so home owners are able to keep their homes therefore reducing foreclosures. The problem arises from the fact that many of the homeowners cannot afford to pay their mortgage, but if lenders writedown principals, then this will benefit both the lender and the borrower. However there are those who believe Bernanke’s proposal is not fair because these people who borrowed the money should be obligated to pay it back. In addition most mortgage lenders do not “forgive the principal on loans.” However Bernanke insists that if nothing is done then the problem is just going to get bigger. If actions are taken to stop possible foreclosures then this would not only help the borrower but also the entire economy.
Bernanke’s proposal is to bring down consumers debt by pardoning homeowners who are unable to pay their mortgage, this will bring the money demand down. Looking at the IS/LM model when the money demand drops, interest rates will decrease. As interest rate decrease output increases. This is precisely what Bernanke is trying to do this will help boost the economy, and help alleviate the housing market.
In response to the article I believe what Ben Bernanke’s proposal will work and it should be in the best interest of both lenders and borrowers, especially on the US economy. Although it might be true that all of the homeowners that are in this crisis are there because of their own decision, and they should deal with their issues themselves, but in the long run it’s affecting the rest of the nation because it is hurting the economy. Therefore Bernanke’s proposal should be passed because it will benefit everyone by improving the economies current standing.
The article begins by Ben Bernanke pleading to banks to “forgive chunks of mortgage loans.” This would be directed to those who are in some sort of a predicament and unable to pay. Bernake speaking on this topic lead to a downturn in the stock market. Investors have become apprehensive because of the predictions of more foreclosures. The forgiveness is for those that owe more to the bank than what the house is in actuality worth. He recommended that banks become more so lenient with the matter of terms. Hopefully that would help keep the people to continue with their investment. The government and other organizations have worked to lower the amount of preventable for closures. A criticism of what Bernake is asking is that this will put more pressure on the mortgage lenders. Further criticism is that the people will be “bailing out” by by the Fed. This would cause a more problem. Bernanke exclaimed that something must be done. Braney Franke said chairman of the of the House financial services committee has suggested that a 20 billion dollar be spent toward the Federal Housing Administration so it can buy mortgages that seem to be on the edge of the cliff. Barney Franke said that Bernanke is “showing willingness to work with us in a co operational way” The article further states that the Hope New Alliance said that homeowners have altered their loans and it has worked dwell for both sides. Shifting to the Senate, Donal Kohn, said that a “big bank failure remained low.”
I don't believe that the people should be forgiven. They need to learn form their mistakes. If they aren't reprimanded now they will continue this mess tomorrow. Also I don't think its only the home buyers fault. Those that sold the mortgages, the middlemen, are just as responsible. They didn't worry about who they were selling the mortgages to, they were just trying to get the deal done. So they should also be hurt in some way.
The government should set up more rules and regulations to secure that this does not occur again. That people that are not actually qualified to own a home shouldn't. There should be some sort of background check. Like checking their credit history. This would be done to asses how responsible they are.
Bernanke by asking forgiveness is essentially want to lower the demand(l). By lowering the total demand the interested rate will also drop. A lowered interest rate is healthy for the economy. The incentive to spend is increase. People become less apprehensive to spending. Increased spending would revive the economy.
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