Heavy price controls would have prevented most of this mortgage mess.

If laws were passed stating that real estate prices could not rise more than 3% annually, much of these financial woes might not exist today. Seriously, how in 2005 could an 800 sq. ft. 50-year old home in bad repair, and in a bad neighborhood go for $450,000 when it most likely would have went for less than $75,000 in 1998? With only a 3% increase annually, the 2005 price would be more like ~$95,000.

Had wages for the average American household risen this much (let's assume $45,000 in 1998), the average American household's income would be $270,000! I know this may not be representative of all housing markets in the US, but you get the picture. It is markets such as this that have some of the highest foreclosure rates.

Thoughts?

The question is: who was that idiot?

Greed exists not just on Wall Street but Main Street, too.

honest appraisers! Remember the good old days when you found a house you REALLY LOVED, the seller wanted more $$ than you thought it was worth but not a OLOT MORE, so you said OK...but THEN the bank appraiser submitted his report and the bank said NO WAY, we'll give you $XX,XXX based on the home's value and no more! Hell, I don't even know if they used bank appraisers anymore!

With honest appraisers, and lenders who still insisted on PROVING your actual income, none of this would have happened!

They were (and maybe still are) under pressure to produce the numbers the lenders and agents want. If their appraisals kill too many sales, they soon find themselves without work.

That's the excuse that the Enron guys used! I was only doing what my boss told me to do! Naw, that won't work!

say I buy a house for 90k and add new windows and a deck and finish the basement.Two years later I'm transferred to another city.I'm supposed to just eat the loss on a house that is now legit worth 125k?

n't

That's the problem of having a "market" economy. The only time they can work is when everyone agrees it is a good idea and they don't set up black markets to get around it. They worked to some extent in WWII because there was a war on and everyone had to sacrifice.

But the problem with real estate is that people are forever looking for places to stash their money. Capitalism rewards people who buy appreciating assets, and so they bid the price of houses up and up and up, far in excess of their replacement value. Once you account for the building cost of the house, that's how you get a $50,000 house sitting on a $400,000 lot.

The history of capitalism is replete with bubbles, where money gets sucked into something cool and fashionable, until it is no longer self-sustaining. Most bubbles collapse entirely, like the Tulip Bulb craze, but real estate is a little different in that it is always in demand (unlike tulips) and you can always set a floor for it depending on its value for agriculture. The problem is to keep the bubble from starting to inflate in the first place, and the way to do that is to keep money out of it. You find some other non-market mechanism of allocating goods, as the Communists did when they assigned housing (based on job, status, party membership, etc). There was no inflation in the cost of assigned housing in the Soviet Union, but the weekend dachas in the country took up the slack in that respect. After 1991, state-owned flats were dirt cheap, because everyone had one and there wasn't much advantage in trading one for another, but dachas quickly turned into a Western style housing market.

One way that would have helped control the market to prevent the current mess would have been to strengthen the homestead exemption. It is a relic of previous times when the government was promoting home ownership, but now it is just amounts to a small rebate on property taxes. It could instead be used to have people designate one primary home, one which they could be eligible for all sorts of tax breaks, assistance in times of emergency, and special low-rate mortgage programs. Property that was NOT declared as a homestead could then carry the extra reward (and risk), but those owners would be real estate investors and speculators and they could be expected to pay more substantial down payments, pay market rates for loans on it, get their own insurance, and not expect the government to come and help rebuild if there was a natural disaster.

I would expect to get an earful from Mr.&Mrs. McCain for making such a proposal. How dare I force them to single out only one of their seven properties for special tax status! How dare I say "you're on your own" if one of their other vacation spots gets hit by a hurricane of a tsunami. I think if such homestead exemptions were adopted, there would be a lot less flipping and speculating, which is the basis of a capitalist bubble.

By preventing commercial banks and investment banks from merging together, the hope was that it would curb speculation that was rampant in the years prior to the banking collapse of 1933 and the stock market crash of 1929.

Ostensibly, investment banks would want it to be easier to obtain a mortgage, since they could then repackage the mortgages into mortgage-backed securities (MBS). The more can be made, the more can be sold at a profit. Unfortunately, if some of these mortgages default, than an MBS bundle can be spoiled entirely even if only a small number of the bundled mortgages are in default.

A commercial bank wouldn't be subject to that kind of pressure, unless it was owned by an investment bank.

http://en.wikipedia.org/wiki/Glass-Steagall_Act#Background

In a planned economy, productive capacity has to be used to determine how much production there should be.

The problem has been too little market activity. Corporations operate like planned economies, that and credit destroys markets by eliminating value judgments from the equation.