There is a quote that keeps me up at night. When it comes to mind, sends me into a spiral of thought that is impossible to shut down.
That quote, "The mouse dreams dreams that would terrify the cat."
I read this in a Tom Clancy book at least 15 years ago. I can't tell you what book it was in, but the simplicity, elegance, and imagery of this quote has stuck with me all of my adult life.
I think that I have remembered this quote because I remember the Achille Lauro. I was ten years old when an offshoot of the PLO raided that cruise ship, and killed an American tourist. He was an older man, although his exact age and name escapes me right now. What I can never forget, is that they shot him in the head, and threw that old man overboard. The PLO gunmen simply wheeled him right off the ship. More than almost any event in my childhood, I think about the Achille Lauro. At the age of ten, in 1985, I learned from those PLO gunmen that there is true evil in the world, and that we have a true enemy.
Over my lifetime, I have seen a rise in the callousness and brazenness of terrorists. The tactics the terrorists use have become increasingly disconnected to the norms of society. What was a despicable and tragic event two decades ago is tame by current comparisons.
Though I have gotten older and do not have the fears of a ten year old, I am more concerned and distressed over the course that the world of terrorism has taken. My hatred, too, of those who pursue an agenda of terrorism has grown.
While fighting against terror movements, I detest the capitulation that is second hand to any policy argument. Namely, that there are social ills that we may or may not be responsible for, but that we must address before terrorism stops. Yes, poverty and other social ills may contribute to some terrorist movements. However, the poor are not the terrorists we must eliminate. There are the poor foot soldiers in some movements who blow themselves up and train in militant madrassas. The overwhelming evidence, however, is that the modern terrorist (leader) is educated and has a decent to very high standard of living.
So the question is this, what does the 'intelligentsia' of the modern terrorist movement want? In a word, power.
The terrorists know that they will never win militarily by attacking Mumbai, New York, Lahore, or Nairobi. With very few exceptions, terrorists never even look for a military win. Rather, they hope for a disproportionate and inhuman response from their targets. Why? Usually it's because the terrorist's own people, or those he views as his people, do not support him.
In Israel, Sri Lanka, India, Kenya, or the United States, we are targets because our response, if broadly targeted against the "people" rather than the actual terrorist, will foster support for the terrorist at home.
Time and again, one can look at the history of striking back against terrorists and see that there is a marked difference in the popular response when a terrorist leader is attacked rather than a large civilian population. When the leaders of a terrorist organization is killed, without retaliating against the civilian population, little or no sympathy is garnered by the terrorist. After all, the acts of a terrorist are often, if not always, disgusting even to his own people. On the other hand, if the response to terrorism is a large-scale retaliation against a large population, they will hate the terror victim who becomes the aggressor.
The solution to all of this is terrible, though no more so than our current policies of over blow reactionary tactics. We, the nation-states who are the victims of modern terrorism, must increase the active operations against the leadership of terrorist movements. We must refocus our power to pinpoint operations that are small, quick, and lethal. We need feet on the ground in fifty countries worldwide. We need to track every lead to the top, and stop focusing on passive tactics to fight terrorists. Most important, wherever the evidence of involvement in terrorism may lead, we need to act with unwavering resolution.
The thought that keeps me up at night is the belief that no terrorist movement today shows an inkling of restraint. I believe that any terrorist organization with access to biological, chemical, or nuclear capabilities will use those capabilities. Nowhere do I see any sign of restraint or introspection that would lead me to conclude that any modern terrorist movement would restrain itself from releasing a catastrophic attack.
I heard a joke once, "How do you get a nuclear bomb into the United States? Disguise it as a ton of cocaine." The moral, if after three decades of a war of drugs, how can we reasonably expect to stop a smuggled weapon of mass destruction?
So yes, the mouse dreams dreams that would terrify the cat. And yes, we are the cat. However, in the ever more dangerous world of brazen terrorist attacks, we must remember that cats kill and eat mice.
Tuesday, December 2, 2008
Monday, November 17, 2008
Talk Radio
For a number of years I have hated conservative talk radio. Not only do I disagree with much of the message, but I despise the tone that they take.
Conservative radio hosts are terrible to people. They have no respect. We all know it.
Recently, however, Air America has come to my city. And I have to admit that I have started to hate the liberal hosts for the same reason I hate the right-wing talkers.
Almost without exception, the political talk radio programs are discussing people who have devoted much of their life to public service. Yet, these people are discussed with more bile than the very worst of society.
Certainly people in public life do dispicable things from time to time, but rarely do they deserve the public flogging that is handed out every day over the airwaves.
Conservative radio hosts are terrible to people. They have no respect. We all know it.
Recently, however, Air America has come to my city. And I have to admit that I have started to hate the liberal hosts for the same reason I hate the right-wing talkers.
Almost without exception, the political talk radio programs are discussing people who have devoted much of their life to public service. Yet, these people are discussed with more bile than the very worst of society.
Certainly people in public life do dispicable things from time to time, but rarely do they deserve the public flogging that is handed out every day over the airwaves.
Thursday, November 13, 2008
New Planets Found - Don't Pack Just Yet
Just recently, NASA announced that they have found planets orbiting a star that is light years away. These planets are most likely very large - probably something like the size of Jupiter.
These are not the first planets that have been found by astronomers by any means. I think it was about a decade ago that a couple of astrophysicists developed a way of detecting planets by looking at the gravitational 'wobble' of a star. Basically, planets orbit stars because of the star's powerful gravitational field, however, a star is also affected by the smaller planets in orbit around the star. So, they started watching the 'wobble' of the stars, and were able to determine the mass of the planets. So far, the technique can only find large planets.
While it is interesting that there are other planets in our galaxy that are 'relatively' close, it always makes me think about the impossibility of any type of extraterrestrial contact.
The biggest problem, of course, is space. It is really really big... and that may be the my understatement of the month. To give you an example of how far we are from our star, the Sun, it helps to think about it in terms of our moon. (which is an awful name for a moon, and should be named something better, but that is a topic for another day.) Our moon is just under a quarter of a million miles away from the earth. Although, the perigee (smallest orbit) and the apogees (largest orbit) do vary. The sun, on the other hand, is 93 million miles away. This means that a radio signal/beam of light will take about 1.5 seconds to go from the earth to the sun, but a radio signal/beam of light takes almost 8 and a half minutes to go from the earth to the sun. Even though propulsion technologies have gotten better since the 1970s, it would still take about three days to travel from the earth to the moon. Without a gravitational slingshot to help, a trip to the sun would take just over 1,100 days.
While a thousand days may be something we can accomplish, our closest star is Proxima Centauri which is about four light years away. To put this in perspective, we can travel at about 1 mile per second when traveling to the moon. With a gravitational slingshot or two, we've been successful in increasing that speed to about 3 miles per second. In other words, our best efforts to date have reached 0.000016 the speed of light. That means it would take us 250,000 years to reach our closest neighboring star. A quarter of a million years seems a bit daunting.
On the off chance that we developed a way to travel an astounding 1,000 times faster than we can travel right now, Proxima Centauri is 250 years away.
Besides the distances, interstellar space is not a good place to be. As it turns out, one of the reasons our planet is perfect is that it protects us from a lot of very nasty radiation. The magnetic field created by the earth's molten iron core protects our planet from solar wind. But outside of the earth's protection, a burst of solar wind would kill any biological being within minutes, or even second if severe enough.
So, not only is space too vast to travel between stars or solar systems, outside of our planet's magnetic protection, we cannot survive. And that is why we have never been visited by aliens from another planet. Sure, some people theorize that a space faring race could travel at the speed of light, or near the speed of light. The problem with this explanation is twofold. For one thing, as anything with mass nears the speed of light, is becomes infinitely massive. And two, as mass becomes infinite, it takes infinite energy to travel the speed of light. What does this mean? Basically, for a space shuttle sized ship, you'd need a source of energy that puts out as much energy as the sun.
The point of all this is that we have one planet, and we will never have the means to get another. We'd better treat this one with respect. And I say we name the moon "Bob", at least until we think of something better.
These are not the first planets that have been found by astronomers by any means. I think it was about a decade ago that a couple of astrophysicists developed a way of detecting planets by looking at the gravitational 'wobble' of a star. Basically, planets orbit stars because of the star's powerful gravitational field, however, a star is also affected by the smaller planets in orbit around the star. So, they started watching the 'wobble' of the stars, and were able to determine the mass of the planets. So far, the technique can only find large planets.
While it is interesting that there are other planets in our galaxy that are 'relatively' close, it always makes me think about the impossibility of any type of extraterrestrial contact.
The biggest problem, of course, is space. It is really really big... and that may be the my understatement of the month. To give you an example of how far we are from our star, the Sun, it helps to think about it in terms of our moon. (which is an awful name for a moon, and should be named something better, but that is a topic for another day.) Our moon is just under a quarter of a million miles away from the earth. Although, the perigee (smallest orbit) and the apogees (largest orbit) do vary. The sun, on the other hand, is 93 million miles away. This means that a radio signal/beam of light will take about 1.5 seconds to go from the earth to the sun, but a radio signal/beam of light takes almost 8 and a half minutes to go from the earth to the sun. Even though propulsion technologies have gotten better since the 1970s, it would still take about three days to travel from the earth to the moon. Without a gravitational slingshot to help, a trip to the sun would take just over 1,100 days.
While a thousand days may be something we can accomplish, our closest star is Proxima Centauri which is about four light years away. To put this in perspective, we can travel at about 1 mile per second when traveling to the moon. With a gravitational slingshot or two, we've been successful in increasing that speed to about 3 miles per second. In other words, our best efforts to date have reached 0.000016 the speed of light. That means it would take us 250,000 years to reach our closest neighboring star. A quarter of a million years seems a bit daunting.
On the off chance that we developed a way to travel an astounding 1,000 times faster than we can travel right now, Proxima Centauri is 250 years away.
Besides the distances, interstellar space is not a good place to be. As it turns out, one of the reasons our planet is perfect is that it protects us from a lot of very nasty radiation. The magnetic field created by the earth's molten iron core protects our planet from solar wind. But outside of the earth's protection, a burst of solar wind would kill any biological being within minutes, or even second if severe enough.
So, not only is space too vast to travel between stars or solar systems, outside of our planet's magnetic protection, we cannot survive. And that is why we have never been visited by aliens from another planet. Sure, some people theorize that a space faring race could travel at the speed of light, or near the speed of light. The problem with this explanation is twofold. For one thing, as anything with mass nears the speed of light, is becomes infinitely massive. And two, as mass becomes infinite, it takes infinite energy to travel the speed of light. What does this mean? Basically, for a space shuttle sized ship, you'd need a source of energy that puts out as much energy as the sun.
The point of all this is that we have one planet, and we will never have the means to get another. We'd better treat this one with respect. And I say we name the moon "Bob", at least until we think of something better.
Sunday, November 2, 2008
An Election Thanksgiving
In two days, the United States of America is going to hold a general election. In this election, seventeen gubernatorial races will be decided. One-third of the seats in the Senate will be decided. And, of course, every member of the House of Representatives will be up for (re-)election.
Yet, there is one race that has an overarching importance to every American, the race for the presidency. I have already voted, and I cast my vote for Barack Obama and so have quite a few people I know. Many other friends and colleagues will vote for Senator McCain.
This election process has been divisive and difficult for the country. I don't think there's any way to judge the impact that the campaigning has had on the psyche of the nation, but I think that it is fair to say that this election cycle has been negative enough that it will hamper whomever gets into the White House from ruling effectively – or at least as effectively as either of these Senators would have been otherwise.
For the theme of national politics, therefore, I am not thankful. But, there is much to be thankful for in this country when it comes to elections.
The Sitting President
Say what you will about President Bush, I know that it would never cross his mind to stay in office. To virtually any American, this is an obvious statement. Of course an American president is going to step down at the end of his (someday “her”) presidency. But this is not the 'norm' in many parts of the world. What has become the absolute outcome in America is not nearly certain in three-quarters of the countries in the United Nations.
So, to President Bush, and the forty-two presidents before him, I am thankful.
The American People
I believe that if a sitting president ever tried to stay in office after a four or eight year term, that president would simply be ignored. He would get a pat on the head, and bemused look, and all of us would ignore him. From the military, to the highest elected and non-elected offices, to the men and women on the street, a tyrant would never be allowed.
To the American People, I am thankful we would never allow this to happen.
County Elections Offices
Elections in the country are not carried out by the federal government, nor the state government. Each and every time we vote, that elections runs smoothly because of dedicated men and women in each and every county in this nation.
Sometimes we hear about something unjust or problematic about a county elections office. But, we don't hear a peep from the thousands of elections office that do everything right. We never hear about the offices that are politically neutral, efficient, and honest.
I am thankful for the men and women who make our elections fair.
The Candidates
I would never be willing to run for elected office. Frankly, I don't think my skin is thick enough to deal with the lies and half-truths that are continuously slung at the candidates. The truth I could handle, but time and again, we see that the truth is rarely used to castigate the candidates.
Sometimes I imaging myself in a politicians shoes (briefly), and I cannot image having the restraint that they always seem to have. I understand, in the abstract, that one must put the office above oneself, and that one must maintain a high level of decorum despite being lambasted by everyone. But, I know, that if I was in office, I don't think I would refrain from lashing out.
To the candidates, then, I am thankful for your ability to put the office above your personal feelings.
Voters
I always get excited when I think that tens of millions of Americans are doing the same thing – voting! After all, we are an incredibly diverse nation. Very often, besides being American, we have little in common. So, if you think about it, voting is brings us together unlike almost anything else as a country.
Each of us, with few exceptions, eats, sleeps, drinks, breathes, uses the toilet, and pays bills and taxes. Outside of that, there is very little that you might be able to predict about a random American. You can be American if you are from another country, or if your ancestors came over on the Mayflower. You can be an American if you speak only English or Spanish. You can be an American if you were born in Alaska, or if only one of your parents was an American and you were born in Morocco. And on the first Tuesday of November every four years, each and every one of us has the right to decide who shall govern this nation.
Two-thirds of us make the choice every four years to be a part of this process. In other words, we voters beat the non-voting community in a landslide!
I am thankful to all of the American who cast a ballot.
Our Ancestors
Today we have the oldest and one of the few stable democracies in the world. Though we may have struggled with Universal Suffrage, Jim Crow Laws, and the meaning of the phrase “All men are created equally...”, we are here. We are about to vote. In no small way, we owe this privilege, this right, to those who fought and sometimes died.
I am thankful to our ancestors for this Democracy!
Yet, there is one race that has an overarching importance to every American, the race for the presidency. I have already voted, and I cast my vote for Barack Obama and so have quite a few people I know. Many other friends and colleagues will vote for Senator McCain.
This election process has been divisive and difficult for the country. I don't think there's any way to judge the impact that the campaigning has had on the psyche of the nation, but I think that it is fair to say that this election cycle has been negative enough that it will hamper whomever gets into the White House from ruling effectively – or at least as effectively as either of these Senators would have been otherwise.
For the theme of national politics, therefore, I am not thankful. But, there is much to be thankful for in this country when it comes to elections.
The Sitting President
Say what you will about President Bush, I know that it would never cross his mind to stay in office. To virtually any American, this is an obvious statement. Of course an American president is going to step down at the end of his (someday “her”) presidency. But this is not the 'norm' in many parts of the world. What has become the absolute outcome in America is not nearly certain in three-quarters of the countries in the United Nations.
So, to President Bush, and the forty-two presidents before him, I am thankful.
The American People
I believe that if a sitting president ever tried to stay in office after a four or eight year term, that president would simply be ignored. He would get a pat on the head, and bemused look, and all of us would ignore him. From the military, to the highest elected and non-elected offices, to the men and women on the street, a tyrant would never be allowed.
To the American People, I am thankful we would never allow this to happen.
County Elections Offices
Elections in the country are not carried out by the federal government, nor the state government. Each and every time we vote, that elections runs smoothly because of dedicated men and women in each and every county in this nation.
Sometimes we hear about something unjust or problematic about a county elections office. But, we don't hear a peep from the thousands of elections office that do everything right. We never hear about the offices that are politically neutral, efficient, and honest.
I am thankful for the men and women who make our elections fair.
The Candidates
I would never be willing to run for elected office. Frankly, I don't think my skin is thick enough to deal with the lies and half-truths that are continuously slung at the candidates. The truth I could handle, but time and again, we see that the truth is rarely used to castigate the candidates.
Sometimes I imaging myself in a politicians shoes (briefly), and I cannot image having the restraint that they always seem to have. I understand, in the abstract, that one must put the office above oneself, and that one must maintain a high level of decorum despite being lambasted by everyone. But, I know, that if I was in office, I don't think I would refrain from lashing out.
To the candidates, then, I am thankful for your ability to put the office above your personal feelings.
Voters
I always get excited when I think that tens of millions of Americans are doing the same thing – voting! After all, we are an incredibly diverse nation. Very often, besides being American, we have little in common. So, if you think about it, voting is brings us together unlike almost anything else as a country.
Each of us, with few exceptions, eats, sleeps, drinks, breathes, uses the toilet, and pays bills and taxes. Outside of that, there is very little that you might be able to predict about a random American. You can be American if you are from another country, or if your ancestors came over on the Mayflower. You can be an American if you speak only English or Spanish. You can be an American if you were born in Alaska, or if only one of your parents was an American and you were born in Morocco. And on the first Tuesday of November every four years, each and every one of us has the right to decide who shall govern this nation.
Two-thirds of us make the choice every four years to be a part of this process. In other words, we voters beat the non-voting community in a landslide!
I am thankful to all of the American who cast a ballot.
Our Ancestors
Today we have the oldest and one of the few stable democracies in the world. Though we may have struggled with Universal Suffrage, Jim Crow Laws, and the meaning of the phrase “All men are created equally...”, we are here. We are about to vote. In no small way, we owe this privilege, this right, to those who fought and sometimes died.
I am thankful to our ancestors for this Democracy!
Tuesday, October 28, 2008
Backstabbing to 2012?
Many of the media pundits are talking about how Gov. Palin is distancing herself from Sen. McCain so that she can run for the presidentcy in 2012. If true, that would be a baffling tactic. For one thing, no one will remember four years later that she distanced herself from her running mate. Second, to run for the highest office, a person should have a semblance of integrity. And third, she cannot beleive that angering Sen. McCain's allies could be good for a political career.
I did not vote for Sen. McCain. However, I do respect him, and if a political novice believes that trashing the senator will help her win in 2012, I hope she ends up being wrong. I disagree with Sen. McCain on any number of issues, but given the fact that he stayed in a Vietnamese prison because his fellow soldiers and sailors couldn't go home with him, I do know for certain that he would never have pulled something like what Gov. Palin is (supposedly) doing.
For anyone who supports Gov. Palin, I have news for you, the Earth is not 4,500 years old. Jesus did not ask her to run for (vice) president. Her own daughter is proof positive that abstinance only education does not work. A Govenor can violate ethics rules, even if it's not technically illegal (that's how ethics rules work). And victims shouldn't have to pay for their own rape kits.
I did not vote for Sen. McCain. However, I do respect him, and if a political novice believes that trashing the senator will help her win in 2012, I hope she ends up being wrong. I disagree with Sen. McCain on any number of issues, but given the fact that he stayed in a Vietnamese prison because his fellow soldiers and sailors couldn't go home with him, I do know for certain that he would never have pulled something like what Gov. Palin is (supposedly) doing.
For anyone who supports Gov. Palin, I have news for you, the Earth is not 4,500 years old. Jesus did not ask her to run for (vice) president. Her own daughter is proof positive that abstinance only education does not work. A Govenor can violate ethics rules, even if it's not technically illegal (that's how ethics rules work). And victims shouldn't have to pay for their own rape kits.
Monday, October 27, 2008
Racism
Disappointed. I don't know how else to say how I feel about many of the people I know.
During this political campaign, I have received racist e-mails, phone texts, and even the occasional in-person comment or joke. I am not necessarily surprised by the racism. What surprises me is that people think that I would be fine with hearing that kind of thing. As if it's fine to say those things because we're both white.
I guess I am disappointed because each and every time I have called the person on it, not once has someone apologized. They intimate that there's something wrong with me because I don't want to hear that crap.
I am fairly well educated. Most of my friends are well educated. And while I never expected that just because most of my friends are similarly situated that they would necessarily think just like me, I am surprised that they harbor racist thoughts or feelings.
Anyway, disappointed kind of sums it up.
During this political campaign, I have received racist e-mails, phone texts, and even the occasional in-person comment or joke. I am not necessarily surprised by the racism. What surprises me is that people think that I would be fine with hearing that kind of thing. As if it's fine to say those things because we're both white.
I guess I am disappointed because each and every time I have called the person on it, not once has someone apologized. They intimate that there's something wrong with me because I don't want to hear that crap.
I am fairly well educated. Most of my friends are well educated. And while I never expected that just because most of my friends are similarly situated that they would necessarily think just like me, I am surprised that they harbor racist thoughts or feelings.
Anyway, disappointed kind of sums it up.
Sunday, October 26, 2008
Failed Mortgages
In the currect economic crisis, I have a few thoughts on credit default swaps, the types of mortgage products on the market, and finally, how to save the homes of millions of American families.
First, the credit default swaps that led to banks being over extended need to be regulated like insurance. Because they are insurance.
In short, banks who owned mortgages were putting them together and selling the mortgages as securities. Unlike some bonds, which are just debt, these mortgage-backed securities looked like a good deal. After all, unlike most government or corporate debt (bonds), there was an actual house with an actual person paying the note on that house. But many of the people buying the mortgage-backed securities were weary of this type of instrument. Why? Because if you look at the types of mortgages that are being advertized, you start to wonder if you really want to own that mortgage. For example, people can now buy homes with an adjustable rate mortgage that can balloon up to 12 or 15 APR. Or, they can borrow 110 to 120 percent of the home's value. Or, they can have an interest only loan where both the interest balloons AND the principle gets added in a year or two after the note is signed.
So, back to the nervous investor. The banks who sold these mortgage products cannot hold the mortgage-backed securities themselves because they need the capital to make new loans. I am speculating, but I also beleive that they did not want to hold too many of their own mortgages either. Therefore, they could sell these mortgages to investor only if they gave the investor an insurance policy guaranteeing that if the mortgages go into default, that the bank will cover the losses. But therein lies the problem, if you call this insurance, the bank is going to be forced to keep a great deal of cash on hand to cover the potential losses. Instead the banks call it a credit default swap. That way it does exactly what insurance would do, but the banks did not have to keep enough cash on hand to cover the losses.
Once mortgages started to fail and banks were forced to pay the investors to whom they had sold insurance (credit default swaps), they started to fail. The banks simply did not have enough money to operate after paying off all of the investors whom they had insured.
This is why the credit default swap is insurance, this is why almost every bank in the US got caught with extremely low cash reserves (or deficits), and this is why credit defaults swaps must be regulated.
Next, I would like to address the types of mortgage products on the market today. I am no expert here, but I have done some research since I am a home owner.
When my wife and I bought our first home seven years ago, we were offered a twenty or thirty year fixed mortgage. This seems vanilla in retrospect, because over the last seven years I have seen any number of 'mortgage products' that do not make much sense. The adjustable rate mortgage (ARM) can only go up. I have never heard of someone's mortgage payment going down because an ARM. Intuatively, it doesn't make sense that a bank would ever loan you money and then discount its return later by reducing the interest rate on the loan. So an ARM can only go up, and sometimes that is a heafty increase. For example, if you took out a $200,000 loan at 5.57 APR over 30 years, your payment (not including taxes) would be $1,167 per month. If that is a fixed APR, you probably would be fine. But if this was an ARM and your interest rate went to 12 APR, all of the sudden your monthly payment is $2,057. Almost twice as much. Some ARMs go even higher.
The dirty little secret of the banks selling these mortgage products, however, is not that the ARMs go way up. It's that the debt to income ratio for a potential borrower is based on the initial fixed rate and not on the potential rises in the ARM. So, many families who could afford the six percent rate of their mortgages legitimately qualified for those mortgages. This mortgage crisis is not predicated on families being over-extended because of the initial mortgage rate.
Banks and investors knew that the debt to income ratios were going to be a problems when the ARMs started to increase. After all, the banks selling these ARMs knew that if they ran the debt to income ratios at twelve percent or higher that their models could predict mortgage defaults en masse. To sell these potentially toxic products, the bank had to give insurance.
A number of banks, most notably Bank of America, were sceptical of ARMs. They ran the numbers and knew that it was not a market that they wanted to participate in. As a result, BofA and a few other smaller national and regional banks are actually doing fine in the current climate because they never had to offer insurance/credit default swaps in order to induce investors to buy their mortgages.
The final topic of this entry is focused on how to stop the mortgage defaults. The answer is to unilaterally amending the mortgage contracts to thirty year mortgages and setting the APRs to three, four, or five percent. The percentage rate that the government sets will decide how many people get to keep their homes. The lower the rate, the fewer mortgage defaults, and the more people who benefit. Higher rates mean more defaults, but even at five or six percent, the mortgage default rates would fall a great deal.
The reason the mortgage default rates would fall is simple math. Assuming a $200,000loan is fixed at thirty years at three percent, the payment would be $843 per month. At four percent, $954. And at five percent, a home owner's payment would be $1,073. For hundreds of thousands of home owners around the nation, their payments would go down by thirty to sixty percent.
There are a couple of arguments against the government unilaterally changing the APRs on mortgages that are in default. One such argument is from home owners who are not in default, who did not purchase a risky mortgage that was going to double in two or three years, and who do not want people to get a bailout and have a lower APR on their mortgages. And I see their point, I really do. After all, I am proposing that the government give a lower APR to people in default than I have on my own mortgage.
Similarly, many people who have supported the bailout package by Congress do not support actually helping individuals whose mortgage default is actually creating this financial crisis. This argument is disengenuous, however, because it ignores that fact that individual investors are going to be helped. Unlike the individual homeowner, most forget that there are individual investors who are being helped by this bailout. My best argument here is a rhetorical question: Why are individual investors worthy of a bailout and not individual borrowers?
If nothing is done to ebb the tide of mortgage default, we will have "Suburban Ghettos". There will be entire neighborhoods with many or most of the homes in foreclosure. Once that happens, none of the homes that are not in foreclosure in the Suburban Ghetto will have any real value. So long as the owners of those homes keeps making payments, there's not a problem. But, assuming that home owner ever wants to sell, move, or refinance, the Suburban Ghetto will be devastating even to the homeowner who made his or her mortgage payments. If the mortgages that are in default are not saved, within months we could have empty homes all over this nation that will detract from the value of every other home in every housing economy.
The government appears to be ready to purchase a large portion of the mortgages that are in default. As a result, the government is going to end up owning all of the homes that are empty in the Suburban Ghettos. I have very little doubt that this will increase the government's exposure when the government has to turn around and update, moderize, and fix homes once they've been sitting empty for years on end.
There have been micro examples of Suburban Ghettos in California, Ohio, Florida, and many other states. This trend must be stopped, and the only reasonable means of fixing it is to keep the current home owners in their houses with a mortgage payment they can afford.
First, the credit default swaps that led to banks being over extended need to be regulated like insurance. Because they are insurance.
In short, banks who owned mortgages were putting them together and selling the mortgages as securities. Unlike some bonds, which are just debt, these mortgage-backed securities looked like a good deal. After all, unlike most government or corporate debt (bonds), there was an actual house with an actual person paying the note on that house. But many of the people buying the mortgage-backed securities were weary of this type of instrument. Why? Because if you look at the types of mortgages that are being advertized, you start to wonder if you really want to own that mortgage. For example, people can now buy homes with an adjustable rate mortgage that can balloon up to 12 or 15 APR. Or, they can borrow 110 to 120 percent of the home's value. Or, they can have an interest only loan where both the interest balloons AND the principle gets added in a year or two after the note is signed.
So, back to the nervous investor. The banks who sold these mortgage products cannot hold the mortgage-backed securities themselves because they need the capital to make new loans. I am speculating, but I also beleive that they did not want to hold too many of their own mortgages either. Therefore, they could sell these mortgages to investor only if they gave the investor an insurance policy guaranteeing that if the mortgages go into default, that the bank will cover the losses. But therein lies the problem, if you call this insurance, the bank is going to be forced to keep a great deal of cash on hand to cover the potential losses. Instead the banks call it a credit default swap. That way it does exactly what insurance would do, but the banks did not have to keep enough cash on hand to cover the losses.
Once mortgages started to fail and banks were forced to pay the investors to whom they had sold insurance (credit default swaps), they started to fail. The banks simply did not have enough money to operate after paying off all of the investors whom they had insured.
This is why the credit default swap is insurance, this is why almost every bank in the US got caught with extremely low cash reserves (or deficits), and this is why credit defaults swaps must be regulated.
Next, I would like to address the types of mortgage products on the market today. I am no expert here, but I have done some research since I am a home owner.
When my wife and I bought our first home seven years ago, we were offered a twenty or thirty year fixed mortgage. This seems vanilla in retrospect, because over the last seven years I have seen any number of 'mortgage products' that do not make much sense. The adjustable rate mortgage (ARM) can only go up. I have never heard of someone's mortgage payment going down because an ARM. Intuatively, it doesn't make sense that a bank would ever loan you money and then discount its return later by reducing the interest rate on the loan. So an ARM can only go up, and sometimes that is a heafty increase. For example, if you took out a $200,000 loan at 5.57 APR over 30 years, your payment (not including taxes) would be $1,167 per month. If that is a fixed APR, you probably would be fine. But if this was an ARM and your interest rate went to 12 APR, all of the sudden your monthly payment is $2,057. Almost twice as much. Some ARMs go even higher.
The dirty little secret of the banks selling these mortgage products, however, is not that the ARMs go way up. It's that the debt to income ratio for a potential borrower is based on the initial fixed rate and not on the potential rises in the ARM. So, many families who could afford the six percent rate of their mortgages legitimately qualified for those mortgages. This mortgage crisis is not predicated on families being over-extended because of the initial mortgage rate.
Banks and investors knew that the debt to income ratios were going to be a problems when the ARMs started to increase. After all, the banks selling these ARMs knew that if they ran the debt to income ratios at twelve percent or higher that their models could predict mortgage defaults en masse. To sell these potentially toxic products, the bank had to give insurance.
A number of banks, most notably Bank of America, were sceptical of ARMs. They ran the numbers and knew that it was not a market that they wanted to participate in. As a result, BofA and a few other smaller national and regional banks are actually doing fine in the current climate because they never had to offer insurance/credit default swaps in order to induce investors to buy their mortgages.
The final topic of this entry is focused on how to stop the mortgage defaults. The answer is to unilaterally amending the mortgage contracts to thirty year mortgages and setting the APRs to three, four, or five percent. The percentage rate that the government sets will decide how many people get to keep their homes. The lower the rate, the fewer mortgage defaults, and the more people who benefit. Higher rates mean more defaults, but even at five or six percent, the mortgage default rates would fall a great deal.
The reason the mortgage default rates would fall is simple math. Assuming a $200,000loan is fixed at thirty years at three percent, the payment would be $843 per month. At four percent, $954. And at five percent, a home owner's payment would be $1,073. For hundreds of thousands of home owners around the nation, their payments would go down by thirty to sixty percent.
There are a couple of arguments against the government unilaterally changing the APRs on mortgages that are in default. One such argument is from home owners who are not in default, who did not purchase a risky mortgage that was going to double in two or three years, and who do not want people to get a bailout and have a lower APR on their mortgages. And I see their point, I really do. After all, I am proposing that the government give a lower APR to people in default than I have on my own mortgage.
Similarly, many people who have supported the bailout package by Congress do not support actually helping individuals whose mortgage default is actually creating this financial crisis. This argument is disengenuous, however, because it ignores that fact that individual investors are going to be helped. Unlike the individual homeowner, most forget that there are individual investors who are being helped by this bailout. My best argument here is a rhetorical question: Why are individual investors worthy of a bailout and not individual borrowers?
If nothing is done to ebb the tide of mortgage default, we will have "Suburban Ghettos". There will be entire neighborhoods with many or most of the homes in foreclosure. Once that happens, none of the homes that are not in foreclosure in the Suburban Ghetto will have any real value. So long as the owners of those homes keeps making payments, there's not a problem. But, assuming that home owner ever wants to sell, move, or refinance, the Suburban Ghetto will be devastating even to the homeowner who made his or her mortgage payments. If the mortgages that are in default are not saved, within months we could have empty homes all over this nation that will detract from the value of every other home in every housing economy.
The government appears to be ready to purchase a large portion of the mortgages that are in default. As a result, the government is going to end up owning all of the homes that are empty in the Suburban Ghettos. I have very little doubt that this will increase the government's exposure when the government has to turn around and update, moderize, and fix homes once they've been sitting empty for years on end.
There have been micro examples of Suburban Ghettos in California, Ohio, Florida, and many other states. This trend must be stopped, and the only reasonable means of fixing it is to keep the current home owners in their houses with a mortgage payment they can afford.
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