Q: Hello Mark, Great to read your articles and books. Regarding your answer to Mr. Summerford's question, above. The tax payer should not be "asked" ...obliged to pay for the bail out. The basic premise of the American way is risk taking and in this situation with the two F's, the Government has to let them fail. McCarthy and Hoover would have a field day with this as an incursion into Socialist economic behavior.... I am submitting the following interview from CNBC which is edifying in its explanation of why we should not have the Tax Payer Pay; your thoughts would be much appreciated. Let Fannie, Freddie Fail: Jim Rogers Fannie Mae and Freddie Mac should not be saved if they go bankrupt, and economic stimulus packages do more harm to economies in the long run than good in the short term, Jim Rogers, CEO of Rogers Holdings, told CNBC Friday. Last Update: Fri. Aug. 29 2008 | 08 09 00 http://www.cnbc.com/id/15840232?video=835801384&play=1

Submitted by Mike Beaudet from Megeve, France

A: I don't think letting Fannie Mae and Freddie Mac fail would have been in the best interest of U.S. taxpayers. The damage to the financial system and economy of allowing these institutions to fail would ultimately cost the U.S. taxpayer much more than the cost of nationalizing them. I also think that the Treasury's actions will not result in significant moral hazard problems. The common shareholders of Fannie and Freddie will likely lose everything and the preferred shareholders will suffer very substantial losses. More broadly, I think there will always be institutions that are simply to big to fail. Policymakers will not be willing to allow them to fail given the collateral economic damage that will result. As such, I think it best that we ensure that our regulatory framework and institutions are up to the task of forestalling excessive risk-taking.

Answered 09/09/08 20:21:56 by Mark Zandi

Q: The Federal reserve website shows "non-borrowed" reserves have plunged to hugely negative levels. What does this portend for the banking system? Has this ever happened before?

Submitted by Bart Stratton from Los Angeles

A: You are correct that the banking system's non-borrowed reserves have turned sharply negative since the beginning of the year and that this has never happened before. The plunge in non-borrowed reserve is due to a number of new liquidity facilities such as the TAF and TSLF established by the Federal Reserve at the end of 2007 and early in 2008. The Fed established these facilities in order to help the stressed banking system with its liquidity needs. So while the negative non-borrowed reserves overstate the banking system's problems it highlights that indeed the system remains under significant stress.

Answered 09/04/08 13:39:14 by Mark Zandi

Q: Why is taxpayer being ask (made) to pay for the debts of irresponsible financial institutions and borrowers to fix the sub-prime mortage mess. The quickest way to get past the problem is to let the free market work. Let those who made poor decisions experience the consequences! Making the US taxpayer come to the rescue is enabling those irresponsible institutions and borrowers.

Submitted by w sumerford from amarillo, tx

A: The reason taxpayers are being asked to help pay is that the cost to taxpayers of not responding would be measurably greater. Indeed to date, the cost of the taxpayer response to the financial crisis has been very small, at least in dollar terms. However, not responding to the crisis would likely send the economy into a deeper recession with the resulting loss of jobs hitting taxpayers and tax revenues very hard. In other words, the cost to the Treasury of responding to the crisis is less than the cost of not responding. You do make a good point that by helping "irresponsible financial institutions and borrowers," this might make institutions and borrowers make bigger mistakes in the future thinking that they will get help again. This argues for more vigilant regulation in the good times to ensure that institutions and borrowers don't take on those extraordinary risks. Such regulation wouldn't be necessary if these institutions and borrowers were allowed to suffer if things didn't go as they had planned, but as recent events show, the cost to everyone else of doing this is just too high.

Answered 09/01/08 20:53:59 by Mark Zandi

Q: As a participant (buyer) in the 2003 surge in real estate activity, I became concerned about the self-serving over-valuation of residential properties by the real estate industry (to assure higher and higher commissions) in conjunction with paralled appraisals by another arm of the real estate business. "Who really is responsible for the sub-prime mortgage fiasco and its present-day/future repurcussions?" In my view, it all began with overzealous Realtor Associations of America which worked in close conjunction with the ones who put a value (or over-value) on properties. Together, they combined their false reporting to lending institutions. Result: numerous homeowners having to put higher prices on their property in order to sell (at a profit, of course), and many lenders now realizing their residential property values falling below the original loan amount. Sounds a bit like collusion, which is a violation of federal laws.

Submitted by S. Hurd from Baltimore, MD

A: There is plenty of blame to go around for the current "subprime mortgage fiasco." The principal point of my book, Financial Shock, is to go through each of the key contributors to the current turmoil. I thought about writing a chapter about the role of realtors in hyping up the frenzy during the housing boom, but ultimately decided not to given that realtors always act as cheerleaders for the housing market. It’s not clear that they were doing anything during the boom than they usually do. Appraisers did overstate the value of homes during the boom, and it is likely than in some cases the appraisals were fraudulent, but I think their role in the current crisis is small. Not that there shouldn't be reforms to the way the industry conducts appraisals, only that the crisis would have likely occurred even if the industry had been much more conservative in valuing homes.

Answered 09/01/08 20:38:12 by Mark Zandi

Q: Regarding the question from James in IL, I thought allowing the govt to do business with the american people was a conflict of interest? I thought our country learned its lesson during the depression, didn't the govt take over the agriculture industry? Would we really allow the federal govt the assume control of the mortgage and banking industries?

Submitted by jennifer from florida

A: The federal government has always played a very large role in the nation's residential mortgage industry. The FHA and VA, which have historically accounted for about 1/4 of mortgage lending, are part of the federal government. Fannie Mae and Freddie Mac which together generally account for another 1/2 of lending are not part of the federal government but as recent events show are financially backed by the federal government. Government has played this large role in an effort to ensure more mortgage credit to home buyers and to keep mortgage rates lower than they would be otherwise. Government's role in the mortgage market is even more important at the current time as there is very little mortgage lending being done by private financial institutions. While the federal government thus needs to play a big role in the mortgage today given the financial crisis, I think that once the crisis abates policymakers should work quickly to significantly reduce the government's role in the mortgage industry.

Answered 08/29/08 18:10:44 by Mark Zandi

Q: Regarding the question from Jim in MD on the 20th, are you considering submitting your proposal to congress perhaps?

Submitted by jennifer from florida

A: There is a substantial amount of policy discussion regarding the need to change the mark to market accounting rules which I hope to be part of.

Answered 08/29/08 17:54:05 by Mark Zandi

Q: Mr. Zandi, what I see as missing from your replies so far is mention of the role of rating agencies such as Moody's. Isn't it true that these agencies were an essential element in the formation of the bubble by pretending to greater competence than they actually possessed in evaluation of risk in complex mortgage backed securities? Would not the bubble have been impossible if the agencies had honestly declared inability to properly rate these instruments?

Submitted by Craig Busse from Califon

A: I am an employee of the Moody's corporation, one of the largest rating agencies. As such, I have recused myself from commenting on their role in the current financial crisis. The rating agencies have clearly played a role in the crisis, but I'm not the appropriate person to comment on it.

Answered 08/28/08 18:09:53 by Mark Zandi

Q: Years ago when questions were raised about the standing of Lincoln Savings and Loan, John McCain asked for an expert opinion. A young Alan Greenspan did the review and gave Lincoln Savings and Loan a solid report. The rest is history.............taxpayers paid over $2 billion for that fiasco. So our comfort level with our current financial problems should be what? Rate between 1 - 10 1 being the least concern - 10 being the greatest concern Just asking............................

Submitted by Maggie from Highland Park, IL

A: I think it would be prudent to have a high level of concern regarding current events, but not to panic. This argues that one should spend and borrow wisely, hopefully save, and make sure that your investments are well diversified and appropriate for your age and risk tolerance. It will be a very difficult next six months for many of us, but by this time next year I’m increasingly confident that the financial system and economy will find its bearings. This will require a bit of luck (hopefully we don’t see $4 for a galloon of gasoline anytime soon again, and good policymaking by the Federal Reserve and the next President.

Answered 08/26/08 18:44:12 by Mark Zandi

Q: From a bargain hunter's point of view, where would be the best market to buy a property in an upscale residential area that would recover strongly from the depths of the trough, and what would be the timing?

Submitted by P Dunbar from BsAs, Argentina

A: I don't give personal investment advice as it depends on an individual's specific financial circumstances and risk tolerance, so please take the comments that follow for what they are worth. Assuming that you have an investment horizon of no less than 5 years, I think the best housing investment opportunity lies in southern California near the coast. Prices have fallen sharply in this region as there is currently a substantial amount of foreclosed property selling at deep discounts. Moreover, this region is geographically supply constrained and a very desirable place to live with many upscale residential neighborhoods.

Answered 08/26/08 18:11:37 by Mark Zandi

Q: If this disaster had happened during the Clinton presidency I beleieve that everyone would be blaming him, so far there has been little "finger pointing" at the While House. My question is how much did the Bush/Cheney economic policies contribute to this financial meltdown?

Submitted by William R. Waitkus from Phoenix,AZ

A: Economic policies under both the Clinton and Bush Administrations contributed to the current housing crisis and fiancial turmoil. The Clinton Administration was very aggressive in using housing policy and banking regulation to promote homeownership. It could be argued that in the 1990s homeonwership will still low enough that those homeowners that were getting mortgage loans were able to afford them more or less. The Bush Administration was similarly aggressive under the rubric of his "ownnership society." Homeownership was already very high when he took office, however, and the increase that did occur in his presidency was mostly of homeowners who ultimately could not afford their homes. Indeed, when this crisis is over the homeownership rate will have fallen back to where it was when President Bush took office.

Answered 08/25/08 07:26:03 by Mark Zandi

Q: Mark, are you suggesting that mere economic "hubris" led to this crisis and blame is not properly allocated to Congress' deregulation, the Federal Reserve, and the dual smashing of our prior banking regulatory framework which was intended to govern "hubris", misallocation of risk, fraud and greed? Isn't it true that this all started with banks ( http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/weill/demise.html) coupled with Greenspan's free money cycle and specific deregulation (by him and other specific groups and individuals) actually led to this specific crisis? Isn't it also true that this could have been avoided even in the face of "hubris", as that is the point of smart and effective regulation?

Submitted by Thad Bettel from St. Louis

A: No, I'm not suggesting that hurbis alone led to the economic crisis. That would be too easy. I agree that the other factors you mentioned were all very important. Indeed, I spend a chapter of the book on each. Hubris is however a necessary condition for a bubble to develop which is at the heart of the financial shock.

Answered 08/25/08 07:20:44 by Mark Zandi

Q: If a person buys a house in 1972 for $20,000.00 and then passes it on to her children 35 years later when it is worth one million, do the property taxes stay at the same 1972 rates or go up to the new value?

Submitted by David Brantley from Merced ca

A: I'm sorry but I'm not well versed in the details of California property tax law and regulations. For such an important personal finance question I would consult with an accounant or financial planner.

Answered 08/22/08 16:21:14 by Mark Zandi

Q: During the last Savings and Loan crisis in 1981, interest rates shot up to quash both inflation and attempt to bolster the earnings power of banks, so as to not have more insolvent banks. Considering history and the sheer magnitude of the nationalization of Fannie Mae and Freddie Mac with 5.2 TRILLION in loans, can you predict that interest rates will likely have to increase, in at least what the banks are charging for housing loans. (increasing their spread) Didn't housing loans turn out to be riskier than lenders thought and isn't interest rate hikes the method the market prefers to deal with this risk? ~

Submitted by Doug Karlberg from Bellingham, WA

A: In the near term, the nationalization of Fannie Mae and Freddie Mac would likely result in lower mortgage rates, at least compared to where they are today. Their cost of funds has risen significantly in recent weeks as investors in their bonds have become nervous that they will lose money if Fannie and Freddie fail. Their higher cost of funds has added between half and a full percentage point to mortgage rates. By nationalizing them, this fear should evaporate and their cost of funds will decline as should mortgage rates. This is not to say they should be nationalized. The federal government could get the same result by simply stating in no uncertain terms that investors in Fannie and Freddie bonds will not lose any money under any circumstance. I do agree that in the longer-term mortgages rates will be higher than they have been historically. More precisely, the interest rate risk spread will be larger on average in the future than in the past given the now higher perceived credit risk involved in making mortgage loans. It is also likely that whether or not Fannie and Freddie are nationalized, there will be big changes in the relationship between the federal government and these institutions. These changes will mean at the very least that Fannie and Freddie will no longer have any type of guarantee from the federal government. This means their cost of funds will be higher and thus so too will mortgage rates.

Answered 08/22/08 15:54:47 by Mark Zandi

Q: What part do you see inflation (now running at 7%) playing in this? Once the fed jumps in and raises interest rates, won't that delay the recovery?

Submitted by Pag Cal from Nashua, NH

A: I don't think inflation concerns will be significant enough to cause the Federal Reserve to raise interest rates before the financial system settles and the economy stabilizes. The surge in inflation we are suffering currently is due to the record oil and other commodity prices which hit a peak in early July. These prices have since receded which should cause inflation to soon moderate. Oil and commodity prices could rebound quickly, but this seems less likely given weak global demand for commodities. More importantly, there has been little impact of the higher oil and other commodity prices on wages and inflation more broadly. If a so-called wage-price spiral were to develop the Federal Reserve would lift interest rates almost regardless of what was happening in the financial system and economy, but there is no sign that it is. Key to this would be an increase in inflation expectations (businesses and workers would have to believe that inflation will accelerate in the future). So far, inflation expectations have remained well-anchored as monetary authorities would say. I'm thus optimistic that the Fed will not have to jump to raise rates too quickly and short-circuit a recovery in the housing market, economy, and financial system.

Answered 08/22/08 08:34:14 by Mark Zandi

Q: Not surprisingly, the housing blues seems to have spread, with the credit market generally freezing up. In turn, this is hurting other types of institutions that one wouldn't have otherwise associated with a dependence on housing (e.g., retailing, student lenders). What should we be looking for as the first signs of a thaw?

Submitted by Jake from Brooklyn, NY

A: The key is house prices. As long as house prices are declining, there will be substantial pressure on the financial system and the broad economy. With falling house prices, financial institutions are forced to further writedown the value of their residential mortgage assets, undermining their capital, and making it more difficult for them to extend credit to other borrowers. With falling house prices, the wealth of homeowners continues to evaporate and the financial problems of state and local governments mount as property and sales tax revenues weaken. Through July, house prices continue to decline sharply, but there has been some tentative progress in correcting the problems in the housing market. Most notable is that the decline in prices is restoring housing affordability in some parts of the country. The decline in housing construction is also just now beginning to cut into the mountain of unsold housing inventory weighing on prices. Any sign that the downdraft in house prices is abating would signal that the crisis will soon wind down.

Answered 08/22/08 08:27:12 by Mark Zandi