The Paradox of Thrift: Credit Cards, American Express, Home Equity Loans, Debt, and Spending our way into the Curious Case of Being Broke.

The paradox of thrift isn’t a new idea although many are floating it out in the economic community as if it was some new mighty revelation.  The paradox of thrift (or saving) is an idea discussed by John Maynard Keynes that in recessions, if everyone decides to save this will help contract aggregate demand thus hurting the overall economic growth of a country.  However, in recent times most of our GDP growth has been contingent on consumption particularly in housing, cars, vacations, and foreign goods all being financed by debt.  In fact, our society saved nothing and spent everything!  Talk about the paradox of thrift dilemma taken to the extreme.

First, let us look at the share consumption takes up in calculating GDP for the past 60 years:

Consumption share of GDP chart

*Click for a sharper image, it won’t cost you a penny

Let us first start off that we have always been large consumers.  That goes without saying for a capitalistic and marketing driven economy.  Yet if you look at the chart above, for many decades consumption made up about 62% of our GDP.  Recently, consumption shot upwards to 73% of GDP!  Here is the brief formula of GDP for those of you unfamiliar with it:

GDP = Consumption + gross investment + government spending + (exports – imports)

So let us walk through this formula.  First, 73% is made up of consumption so only 27% is left to the other 3 categories.  Gross investment given the current market place is probably contracting or remaining stagnant.  Government spending is clearly going to be making up a larger portion of our GDP in the coming years and taking away from the private sector consumption side of the equation.  That is why even looking at Great Depression data, we are really in uncharted territory here.  The final portion of the equation is negative since we import more “stuff” than we export and this is largely expressed by looking at our trade deficits:

US trade balance

This has been going on since the early 1990s but this chart brings to the point that as a nation, we were consuming much more than we were producing.  The notion that we were going to become a 100 percent service oriented economy is flat out preposterous.  People in the California housing bubble cult got into this absurd belief that flipping homes to one another perpetually was somehow the sign of a healthy economy.  That notion is now seen for what it is, a complete nonsensical way of viewing the world and misplacing the value on basically putting on a suit and tie and acting as if you knew what the hell you were talking about.  The market is giving its final verdict on what it thinks about that.

Yet an interesting thing about the consumption chart above is that the trend broke in 1982 to the upside massively. We hovered around 62% since 1950 and all of a sudden, 30 years later this equation got slammed.  What happened?  The mythical belief that deficits don’t matter and the supply-side economics delusion that has come to a head 30 years later and is now exploding in a recession unlike anything we have seen since World War II.

To highlight this, let us look at the savings rate and also, household debt and you’ll notice that this pattern actually has its roots in the early 1980s:

Household debt and savings

I’m not sure how much clearer things can be.  If you look at the chart, two things happen in the early 1980s.  First, the savings rate precipitously falls but also, household debt starts making its unstoppable trek upward.  This has to do with easy access to credit but also the government at the time setting a horrible tone that deficits don’t matter.  We’ve done this for many years but never to that extreme.  First, tax cuts decreased revenues to the government yet we were spending wildly on government line items.  Then the notion of supply side economics came about which has been spectacularly proven to be a disaster.  It simply took 30 years to put that theory to rest.

Yet if you want to get an idea how much we spend, just run the numbers for consumption:

U.S. GDP approximately $14 trillion:  73% of that is $10.22 trillion

We consume way too much.  And the amount of money flowing to the financial sector is insane and in no time in our history has so much money gone to the crooks and swindlers on Wall Street:

over paid finance sector

Source: Wages and Human Capital in the U.S. Financial Industry: 1909-2006. Thomas Philippon† Ariell Reshef

So how do you put all of this together?  Well, what we had is a society that rewarded those in finance and real estate the most and these folks went out and bought luxury cars, goods, and homes.  Thus it was an incestuous cycle.  So now, the insanity of it all is that with our negative savings rate, the only way we have to go is back up.  Yet you can see the Catch-22 in that we need people consuming to keep demand up.  Now let us assume we go back to the historical 62% GDP being consumption.  This will suck out of the economy:

$14 trillion x 62% = $8.68 trillion

$10.22 trillion – $8.68 trillion = $1.54 trillion

This is what is meant by the paradox of thrift.  If Americans simply revert back to historical savings rates, we are going to eliminate $1.54 trillion from our GDP!  That is, GDP will fall by 11%!  Most consider depression level stats to be double-digit unemployment and GDP falling by 10 %.  Now, we need to remember that government spending will increase so this may be a mitigating factor but we need to keep our eye on that GDP consumption number and we’ll get some data on this Friday.

We really stand at a crossroads here.  There is without a doubt too much debt in our economy.  The only way to get rid of debt is to pay it off or charge it off.  That is why recent talks with cram downs are fantastic.  However, this is much too little much too late.  This is actually one of the few things that actually makes sense.  Basically through Chapter 13 with a repayment restructuring a bankruptcy judge can bring the loan amount down to current market rates.  This was initially in the $700 billion TARP plan but the crony capitalist bankers lobbied Congress and got this removed.  In the end, we gave the banking industry a free $350 billion. Cram down legislation already passed the House and is moving forward.  Don’t you think this would have made more sense before we handed out the insane amount of $350 billion?

The one thing that is very troubling is the bad bank idea that is now floating out there in dark and gloomy space.  Of course, this is a wet dream for the CNBC crowd but is quite possibly the dumbest idea in the world!  Nouriel Roubini and others are calling for a nationalization of banks and as much as it pains me to say, I agree.  We either have the choice of being Sweden or having our lost two decades like Japan.  If we go with the bad bank model, you can rest assured we are going to have zombie institutions probably until 2020 since there is so much crap on the balance sheet of banks.  Take a look at some Real Homes of Genius and see if you are comfortable taking these mortgages onto your balance sheet.  The reason the market has been rallying recently is because of this absurd notion.  It isn’t because jobs are growing.  They are accelerating on the downside.  It isn’t because of earnings.  Companies are missing left and right.  This rally again ignores the silent depression of the vast majority of Americans while catering to the small crony capitalist group who argued for supply side economics and thinks this is a great idea.  It isn’t, at least not for 95% of the population.

Now why is nationalization a better use of money?  Well first, we are much too far down the road to discuss hands off policies (even though I advocated for this long ago because I knew things like TARP and Ben Bernanke’s nutty work were simply money being flushed down the toilet).  First, with nationalization we own the banks flat out.  We can then do the following:

-Shareholders get eliminated

-Bondholders get eliminated

-Management gets the boot

-Then and only then, do we separate out the good and bad assets.  The good assets we try to sell them off to the market.  The bad assets, we assess and slowly process a pricing model and get rid of them.  Yet we know since the ownership is now ours that we’ll try to mitigate the loss for taxpayers.  Right now with TARP and possibly the bad bank, banks are trying to off load as much of the crap at the highest cost to taxpayers while keeping the caviar assets all for themselves.

-This will get credit moving again because now instead of absurd capital injections, banks will now need to lend money because guess what, we freakin own them and we can decide whether we loan or not!

There is nothing more preposterous than a bad bank.  It falls under the SIIV mentality that each progressive bail out gets dumber and dumber.  In fact, this notion was what made the TARP fail during its first round. The idea that banks were going to dump the most toxic assets on the backs of taxpayers.  Here we are, discussing that damn idea again.

Let us nationalize it and be done with it.  Will the market feel pain?  Yes!  But those who face the most pain will be the banks and Wall Street who deserve it anyway.  Wall Street is so disconnected from Main Street that they don’t realize that half our country is already struggling with hard economic times, even before the bust.  We already know that they are not looking out for you and if you spend 2 seconds to think about what I just discussed, you’ll understand how horrible a bad bank would be.  It is a one-way ticket to a Japan like recession and why are we to expect a different result?  Keep in mind that in Japan they had a much higher savings rate which is buffer we do not have.  If you think Japan is a picnic think again:

“Over the last few years, temporary employees have gone from being a rarity in Japan to accounting for one-third of the workforce of 67 million. They enjoy far fewer protections than full-time workers — placing their necks squarely on the layoff chopping block.”

We are already seeing the part-time number of workers jump into the stratosphere.  Interestingly enough, Japan’s lost decade came after a real estate and stock market bubble.  Sound familiar?

So going back to how this interconnects with the paradox of thrift, we are now spending taxpayer money through our government.  Not all of it is bad but certainly the TARP and bad bank are horrific ideas.  The money we are spending is on the backs of future generations.  So much damage has been caused over the last 30 years with acceleration this past decade that we will have years to get this thing back on track.  Americans are only now starting to save more (a little) because their credit has been shut off.  That is it.  That was the end game.  Anyone thinking we’ll be back to the old spending ways when you can get access to your HELOC with one phone call or simply buy a new car every two years is smoking purified financial crack.  Those days are gone.  The days of zero down NINJA turtle loans on homes are gone.  I say good riddance.  They have led us to this cliff and have rewarded corruption, greed, and the destruction of our country’s financial stability.  I think it is apt to remember what Thomas Jefferson once said:

“If the American people ever allow private banks to control the issue of their currency, first by inflation then by deflation, the banks and the corporations will grow up around them, will deprive the people of all property until their children wake up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.

The paradox of thrift will hurt us in the short term.  Keynes argued that in these times, the government should step in to blunt the impact.  I would argue that the government should step in for the bare essentials but it should focus on correcting the systemic issues created over this 30 year period like what occurred during the Great Depression.  If you care about the future generations it is your duty to think longer term rather than worrying that you won’t be able to get that flat screen and charge it on your credit card.

Saving is important.  For both the government and consumers.  Yet as we discussed, government spending is a tiny fraction to the consumption side of the GDP equation.  The fact that new home sales came out with a record low, this data goes back to 1963, tells us that the most expensive items are collapsing.  Auto sales are falling off a cliff too.  What occurred in a nutshell is that we have gorged on homes and cars for a decade in advance.  I’m assuming most readers to this site are already savers (otherwise you are a glutton for pain reading these articles).  If you don’t save however, you need to start readjusting your mentality and getting used to buying things with saved money because we are heading down that path.  And there is no paradox in that statement.

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30 Responses to “The Paradox of Thrift: Credit Cards, American Express, Home Equity Loans, Debt, and Spending our way into the Curious Case of Being Broke.”

  • Well said, many of the factors you have covered are a mirror image of what has happened here in NZ. Huge current account deficit as a result of years of excessive consumption and little or no savings. House hold debt has skyrocketed as we have all lived off the increased ‘equity’ in our homes also. Certainly agree though that those time are over now. We fortunately have a banking system that is in much sounder state which is one positive i quess. Nice blog , just subscribed!

  • Doc, How come the obvious truth is so far detached from the current reality?
    I’m a little older and my folks were products of the Depression and WW-II, so we never learned the debt thing or car payments or keeping up with the Joneses. But the kids I see now with their student-loan mortgages and their McMansions is just mind-boggling. Honestly, most of the younger generations think saving is getting 30% off at the Gap…How do you work with that? I know a woman in so much debt there is no way out, but says “my savings plan is my house”. A mind is a terrible thing.

  • AH-bleepin-MEN

    Bravo Dr I’d have to say you’ve nailed it yet again.

    T-bone

  • whowhatwhenwherewhy

    I generally like your posts and I pretty much read them all but I disagree with two things today. First of all, I don’t agree with nationalizing the banks. Nationalization is crony capitalism at its worst. Nationalization has an altruistic purpose but all that ends up happening is the bank assets get sold off not to the highest bidders but instead to the friends and cronies of the government officials. And since it’s all backed by the tax payer then who cares what happens to anything, it’s not like they have to turn a profit. Look at the inner city public schools – they’re run by the government – imagine if our banks were run like that! I agree the banks have been run poorly of late but when they fail the good banks come in and pick up the bad assets on the cheap. There are still plenty of healthy banks out there. Nationalizing them is going to keep the same system in place; the more things ‘change’ the more they stay the same.

    Secondly, one thing we don’t really think about is that corporations and businesses are us, we, Americans. For example, the mortgage broker who gave the loan is probably your neighbor, the realtor is your high school friend, the banker who underwrote the loan is your child’s friend’s parent, the guy who constructed these condos is your brother-in-law and the borrower in the option-arm is your cousin. You make corporations seems as if they are as aloof as the czars of early 20th century russia, speaking french, holding parties and balls eating caviar while the population starved and embraced the bolsheviks. Corporations aren’t that aloof they are us. There are a handful of guys at the top and the people in those positions change quite frequently – ask the CEOs who have lost their job this year what they’re doing now. The government is not the answer especially because they have no interest in money or making a profit. At least the members of a corporation know that if they F’ up too bad they’ll lose their job whereas the employees of the government know as incumbents (or union members) they’re job is pretty much guaranteed. No accountability.

    IN short, yes, the system screwed up, yes, it was accross the world, but NO, running to the government to save us all for the ‘evil’ corporations is not the answer.

  • I always look forward to your blogs in the morning…

    I would say there is a fallacy in today’s post. I’m sure the point is the government IDEALLY would eliminate shareholders, sort through good/bad houses, etc.

    1. The government is bloated and unorganized. While the banks are greedy and corrupt, I would not say our government is far behind — if not neck-and-neck. Worse, they’re inefficient.

    2. Government (treasury and psuedo-governmental fed) are in the back pockets of the banks. Privatizing may solve some problems, but inherently why is the government more apt to run the banks than these crony capitalists? What entity allows the printing of money without accounting for it? It sounds suspiciously like the same entity that’s found to overstate their position in the gold markets to help overinflate the value of the dollar and manipulates CPI and other critical indicators.

    3. The hand that taketh (nationalization) also giveth (credit). Your figures today show we’re headed for a huge potential decrease in GDP from consumption. Could this be out-with-the-old economics (probably not)? A bad thing? I’m not sure about that. Do you really trust the same government who issued the $700B TARP program to now run these bad banks?

    4. & 5. Yes they are currently traded and affected by the stock price, but pulling banks out from trading and nationalize them, in my opinion, would create even LESS transparency than there already is…

    Of course, what’s the alternative — let it burn? Some would argue that’s what needs to happen. Some would argue it’s going to happen whether we like it or not…

    Thanks for all the insight!!

  • I suspect consumption will need to decline below the 62% level in order to restore health to household balance sheets, and/or incomes will need to rise– though I’m not sure how that happens any time soon.

  • Thanks for giving me a different opinion on temporary workers!

    For my own major (Speech Pathology) about 1/4th are parttime workers. I used to think this was a great number ( I could make a living not having to work so hard at something I dont really like) but I fear this number will keep going up. I keep hearing how stable the medical field is but it seems anything deemed “service” is facing a deep hole. Seems we are all destined to be highly educated indentured servants. Ugh…..

    Any advice out there?

  • thanks, excellent post!

  • As usual you have defined the problem perfectly, the bail-out idea is merely changing who does the comsumption the public or the Gov, The only relief after any binge ,as has been expressed before, is to PURGE.

  • Physician domocile soap orb, thanks for another great post. That’s the best arguement for Nationalization I’ve read.

    This is going to cost us big no matter which way we go. The issue that will lead us to riots like France is experiencing is that of accountability. We need to take the bad bank and stop throwing money at the doom makers. They should be punished not rewarded with fresh funding for their lavish salaries and bonuses. No more arguement about IF they will steal again, they alread have shown with the TARP 1 money that they will line their pockets first.

    Anyone in managment at these banks needs to be fired. Any resume that says any upper level of management at BofA, Wells, AIG, etc needs to be treated as instant clarification of incompetence and dishonesty, thanks for applying…next!

    We took over IndyMac and that turned out OK. When we have sorted out the mess we can sell the fixed banks to private concerns.

    You are correct about them keeping the treasures and giving us the trash. The sooner we take ‘em over the fewer sweet-heart deals their friends will get. Right now the choice $1.2 million dollar REO home will go to “a friend” in Wall Street or Gov. for $250k and the still-over priced crap shacks will end up on our doorstep. Take it all and take it now, before the plundering is complete.

  • Interesting post, particularly the chart on consumption. One of the things that amazes me is that many politicians are still looking at this like we can fix the economy by increasing consumption. They don’t seem to realize that an excess of that is what eventually pushed us over the edge.

    Also, one thing to clear up. That quote is fabricated, it’s not from Jefferson:
    http://wiki.monticello.org/mediawiki/index.php/Private_Banks_(Quotation)

  • GovermentNotTheAnswer

    Dr.,
    First, let me say aside from the government taking control your post was spot on. However, I would like a rebuttal about government taking control. Are you aware what happens when the government takes control? They over spend and cause more problems. Just look at the budget here in CA. I was disappointed to read that your suggestion is for government control since in previous posts you have been soo against them. I hope your suggestion does not see the light day or we are all in for even more pain.

  • New Zealand Renter

    Er Bruce, except for government owned (and the government’s credit rating has been downgraded) Kiwi Bank, we don’t have any New Zealand banks. All of our commercial banks are foreign, mainly Australian plus Rabobank. These banks are NOT in a sounder state. Australia and the Netherlands have extreme bubble problems. They are being bailed out by their respective governments (so far). Due to the dreadful state of NZ journalism, Kiwis have not been informed of any of this.

    PS: There is no deposit insurance programme in NZ, although Mr. Key has indicated a willingness to bail out whatever. That is why the Kiwi dollar is headed for 40 US cents (or lower). Remember when the Kiwi was worth over 80 US cents? That was just 18 months ago. But she’ll be alright. Yeah, right.

  • Comrade HB (you all thought I was crazy for calling him comrade until you read this post- HA),
    ~
    While I don’t necessarily agree with you’re conclusion of the choice between bad and worse, you definitely hit the problem on the head with laser-guided precision. We have a simple math problem: we spend more than we save, we consume more than we produce. Yet this now-institutionalized way of thinking has led us to the brink of technical insolvency. We may be there already, we just don’t know what’s lurking in the bank vaults and they probably don’t either for fear of what they will find. For more on that, read this week’s blog at http://www.kunstler.com.
    ~
    Everything we know is a product of the spectacular success of the industrial revolution and the cheap and plentiful resources that fueled it (principally oil). My thesis is that the current crisis differs from the Great Depression and other Industrial Era cycles in a fundamental way. For the most part, once those cycles were over, they resumed the trendline. I believe this cycle marks the beginning of the end of the industrial era in which we will not resume anything that resembles what came before. That is why none of the fixes proposed in Washington (or any industrialized nation) will work because they are based on the assumptions of the last 100 years. I’ve said before that this is the greatest bubble ever invented by mankind and I meant it. The way forward must be sustainable and scalable. Think of it this way, the 21st Century will be as different from the 20th as the 20th was from the 19th. We have to demonstrate our ability to adapt to the reality or face extinction.
    ~
    Be brave Comrades!

  • Along with many other folks leaving comments, I cannot condone the final take-over of the banks.

    That being said, the banks were already already effectively “nationalized” by the establishment of the federal reserve board during the great depression. The federal reserve, through its politically appointed members, determine how much money is pumped into the system. This unelected cabal got us into this mess in the first place by injecting too many dollars into the system. As you learn in basic supply/demand theory, too many dollars chasing too few assets is going to cause asset prices to rise. This is exactly what happened.

    Doc, do you really want ass-clowns like the folks up in Sacramento running the local banks? C’mon, tell me it was tongue in cheek!

  • Sabin Figaro
    I’m with you. My parents were products of the depression. They had me in their late 40s and are a good 15-20 years olders than my friends’ parents. I am stunned by my friends who spend, are in major debt and have no savings. This, after their parents have bought them cars, paid for their college/weddings and gave them a sizeable down payment for their homes. I recieved none of that financial support and have much more wealth and no debt. They think I’m a cheap miser!

  • Dr Housing Bubble,

    Your articles generally make sense until you start spouting your envy filled populist claptrap as in this one. Let me point these out for your benefit:

    The first absurd comment in your article is that “cram downs” are a good idea. This is preposterous. Have you ever heard of the idea of a SECURED loan? Well, in case you have not, the idea of making a secured loan is that if you are a lender and the borrower defaults, you take the COLLATERRAL back to settle the debt. Why else would make this type of loan in the first place? Got it?

    The idea that a judge should be able to arbitrarily violate the private property rights of the lender with no recource is absurd. And if it does happen, I hope that mortgage lending is both more expensive and not available to the deatbeats who benefit form it. Or would you also compel future lending to them also?

    Then you come up with the brillaint idea of nationalizing the banks so that they can start lending again.

    The other absurd comment in your article is that government spending is a “tiny fraction” of consumption. I do not know what planet you live on (possibly Bizarro World0, but a Federal budget of $3 tTRILLION plus state and local spending can hardly be considered “tiny” relative to any other sector of the economy.

    Moreover, almost all of it is unconstitutional (at least the federal spending) and money primarily thrown down a giant rathole. Or perhaps you do not have a problem with THAT either?

  • Nice post. It’s interesting to note the popular attitudes of the day. The current one, “government is bad, government is the worst” is as interesting as was when “government is good” from earlier times.

  • I think a lot of folks are missing the point. The banks that don’t work are going to be socialized sooner or later. Their business model didn’t work outside the shadow banking system and now that sunlight is starting to pour in, the zombies are decomposing. It’s not like anyone wants the banks socialized, the point is to do it before they are looted and the only thing left is the Chernobyl Cheeto’s. The scope of this fraud is so vast it can’t be fixed by normal means. The world of derivatives, just the OTC Market is something like $600T, which is probably more than all the real money in the world. There is likely no algorithm to get it back to good. The only hope is to mitigate the damage and not let everything burn up in the spreading fireball.

  • I agree with this guy.
    After all is said and done, it is still, CHECKMATE – we lose…

    http://blogs.ft.com/maverecon/2009/01/can-the-us-economy-afford-a-keynesian-stimulus/#more-395

  • The funny thing is, one’s incentive to save is being dramatically reduced with the Fed running the presses full speed, full time! Every month I sock away a couple grand for a rainy day, but I wonder whether I shouldn’t be spending it instead since the government is trying as hard as it can to inflate its way out of the popping bubble. While the effect of this so far has been limited to a few horrifying months of hyperinflation in the first half of last year, I suspect that the dramatic increase in the money supply will come home to roost in the end.

  • @polo
    Good article. I agree. So much of economics is based on models that just aren’t right. Like the mood swings of a billion simultaneous influences yields a predictable integral. Buffet’s about as successful as anyone and he doesn’t even pretend to know what will happen tomorrow or next week. Schiff got one thing right and everything else wrong. Only when something like the housing bubble gets so out of hand that everyone is scratching their head.
    @JimAtLaw
    We know the intrinsic power of our savings is shrinking, but saving is often its own reward. We do without crap, life gets simpler, we enjoy the people in our lives more and that is a profound truth. We may not get rich saving, but we will definitely get poor spending.

  • The Obama administration has yet to figure out how to deal with the complete failure of the American banking system. This systemic banking crisis will mean a run on the banks beginning next week and the stock markets to drop 20%. Only immediate nationalization of most banks next week can stop such an occurrence!!
    The insolvency is too big for a good bank/bad bank scheme. It would take at least …8 trillion dollars for such an attempt.

  • @cudlow
    Maybe so, maybe not. Although Bank of Armageddon is too big to fail, it’s too broke to be solvent either; yet they bolster their balance sheet with Countrywide Cyanide and Peril Lynch. Everyone knows US will never pay off their debts, so last one without a chair loses, yet the world keeps running to the United States of Wiemar and buying up Treasury Marks like so many sheep hiding under a tree in a lightening storm. The tempest is coming but tough to call the year let alone the day. Can you elaborate why you feel it is so imminent?

  • I have to give Comrade HB credit for being on the same side as one of the top economist of our era, Nouriel Roubini. Even if he’s wrong, that’s good company!
    http://www.bloomberg.com/apps/news?pid=20601085&sid=a6A9lCHrtAqk&refer=europe

  • Or how about Joseph Stiglitz? Any chance of a Nobel Prize for the Doctor?
    http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=aKrRkAwxNhTw

  • Hello, Dr HB;

    I have been reading your site for several months now.

    I would like to know if you can direct me to any site that has the same valuable information that you provide for the San Luis Obisbo, North County area. All sites I see say that we are different. Yet I see on Keith Byrd’s real estate site that prices continuously drop. Indeed, new houses in the Montebello Estates area in Paso Robles have dropped from high 500 – low 600K to under 500K. so I guess the mid 400K prices they are asking for the REO’s and short sales will drop soon.

    Thanx in advance.

  • Compass Rose’s Super-Easy Financial Stimulus Plan:
    ~
    Hello, TARP-covered Bank–
    ~
    Lend the money the taxpayers gave you. Now.
    ~
    Or the taxpayers withdraw your corporate charter.
    ~
    love and kisses
    ~
    Too easy, right?
    ~
    rose

  • Not nitpicking, but it’s because I so thoroughly enjoy this site and respect the Doc… but that Jefferson quote has been called into question many times and strong evidence suggests it was not made by TJ at all. At best, parts of it were paraphrased.

    http://wiki.monticello.org/mediawiki/index.php/Private_Banks_(Quotation)

    Doesn’t make the sentiment any less true, but wanted it to be made known because I think the Doc has used that quote at least twice.

  • @EM: I don’t see how cram-downs hurt the banks. The cram-down just reduces the size of the loan to the current market value of the property — in other words, the actual value of the collateral securing the loan! If there’s no cram-down and the bank forecloses, they’ll lose even more money, because foreclosed homes always sell below market value.

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