Over the past few weeks, market’s have been rather volatile, swinging wildly between triple digit gains and losses, closing at the highs and lows of the day. The sub-prime debacle, the credit crunch, the liquidity situation — all turn out to be pressuring markets. The ongoing fear is that there are more bodies that will be floating up to the surface, and this will eventually crimp the economy.
This entire week has been a grand lead up to Federal Reserve Chairmen Ben Bernanke’s major address on Housing woes at 10:00am.
Then, something rather intriguing occurred. Sometime last night, the White House announced that the President will deliver a speech — at 11:00 am today.
I found that rather curious.
The WSJ reported that the key provision of the policy initiative as an "administrative change to allow the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, to guarantee loans for delinquent borrowers."
Schaeffers Research notes:
"Traders seem to have packed away concerns regarding a speech by Federal Reserve Chairman Ben Bernanke, focusing instead on aid for subprime lenders being hinted at by the Bush administration. According to The Wall Street Journal, about an hour after Bernanke’s speech, Bush is expected to announce plans for a change in the Federal Housing Administration mortgage insurance program to allow more people to refinance with FHA insurance if they fall behind on adjustable-rate mortgages. The change would allow 80,000 more homeowners in 2008 to receive federally insured mortgages on top of the 160,000 projected to use the insurance, the Journal reported."
–Bush Trumps Bernanke, Futures Surge Higher.
80,000 homeowners? That’s a drop in the bucket of the millions of resetting sub-prime ARM mortgages. Very very small impact, at least as far as housing is concerned.
Still, I find this whole thing terribly interesting. A very minor policy change at the margins, but one with timing that is utterly exquisite. The President’s speech:
• Immediately diverts attention from Fed Chair Ben Bernanke’s speech;
• Comes right before a 3 day weekend;
• Is on the last day of the month;
• Is on the last day of the fiscal year many financial firms.
It just strikes me as . . . peculiar. Remember, White House chief of staff Andrew Card famously stated: "From a marketing point of view, you don’t introduce new products in August." That’s as true about wars as it is about major economic rescue plans.
And, we have seen more and more commentary like yesterday’s WSJ piece (Bernanke Breaks Greenspan Mold) suggesting that Ben Bernanke understands Moral Hazard, and won’t rescue reckless speculators from themselves, at every other taxpayer’s expense.
How have these speculators impacted both the Housing and Credit Markets? As the front page of today’s WSJ notes, Investors Default On Outsize Share Of Home Loans:
"Investors played a big role in pumping up home prices during the housing boom. Now, they account for an outsize proportion of loan defaults, mortgage bankers and builders say.
A survey by the Mortgage Bankers Association found that mortgages on properties that aren’t occupied by the owner — mostly investment homes — account for between 21% and 32% of the defaults on prime-quality home loans in Arizona, California, Florida and Nevada, states where overdue payments are mounting fast . . .
The four states were among the favorites of speculators during the housing boom. When the market was hot, many speculators bought homes hoping to flip them for a quick profit. But now that home prices have turned lower, that strategy is backfiring.
As a result, some investors have "simply walked away from their mortgages," said Doug Duncan, chief economist of the MBA, echoing recent comments from executives of Countrywide Financial Corp., the nation’s largest mortgage lender."
Will we also be bailing out these speculators, too?
A hedge fund manager friend noted: "I don’t see anything in Bush’s plan that will change the insolvency of the home-buyer. The "system" is illiquid (and that "problem" was addressed by the central banks two weeks ago), but the "borrowers" are insolvent. Nothing I’ve seen yet changes that fact. Nothing. Besides, has this Administration, which doesn’t believe in government programs, ever done anything bureaucratically well…?"
That’s a point well taken.
Let’s return to the timing: If you were introducing a major economic policy
initiative that was going to address a major issue — wouldn’t you wait
until Tuesday? Its only 4 days away. This is a huge vacation week, many people aren’t
around, and all they will hear is that the President did something.
I normally stick to mathematical analysis, preferring numbers to instinct, data to politics. But todays "news" struck me as an exquisitely timed, very clever PR stunt. Not to be cycnical, but this appears to be much more politics than policy, and a lifeline to the big investment banks on the last day the month and (some of their) fiscal years. I suspect hank Paulson had a major hand in the timing.
But a fix for what ails the system? Not even remotely close. That’s a function of time and quite a bit of creative destruction. As we noted on Monday, "Capitalism without financial failure is not capitalism at all. . . .
Opening View: Bush Trumps Bernanke, Futures Surge Higher
Bush administration to bail out subprime;
Schaeffers Research, 8/31/2007 7:58 AM ET http://www.schaeffersresearch.com/commentary/observations.aspx?ID=20137
Bush Moves to Aid Homeowners
WSJ, August 31, 2007; Page A4
Bernanke Breaks Greenspan Mold
Managing Crisis, Fed Chief Dulls Notion That Turmoil In Market Leads to Rate Cut
WSJ, August 30, 2007; Page A3
Investors Default On Outsize Share Of Home Loans
MICHAEL CORKERY and JAMES R. HAGERTY
WSJ, August 31, 2007; Page A1
As far as the market is concerned, i suspect this policy will matter far less than what the Fed does — and even that is of limited impact . . .
It’s all part of the p3nership society.
Bush’s “Being There” Moment?
Welcome to the Republican welfare state.
Gotta protect that election…….that is what this is all about….
marcus…i am not surprised a bit. people with money has been running this country since a while in the name of capitalism and free market.
so once again they get bailed out.
but i think common man would prefer higher taxes rather than a recession, and since most of them are debtors, they are the majority, hence all policies will be in favor of them.
another thing: what will it take to really bailout all homeowners??
i mean if we say that prices of homes have declined by lets say 30%, and total bad mortgage loans are around 2 trillion, thats only 400 billion of writeoff. plus another 200 billion in interest subsidy to help the homeowners…..
so if we divide that 600 billion among say 150 million tax payers…thats around $4k per tax payer.
no big deal….are we not already paying SST and Medicare tax even though we may not get any benefit.
and i have heard that in canada and other places….taxes are as much as 40%, i guess i will just take this as cost of progress.
nobody said life is fair.
The first thing that crossed my mind after reading about all this at N.J. sunrise was that B.B. is going to let the B Gross & Crazy Cramer crowd stew in their mental cesspools at least a while longer (longer the better!), while GW plays the good guy with his own version of “we’re here” hand holding.
Everything these guys do is about politics and not policy. Why should this be any different? You’d think after 6 1/2 years, someone in the media would have gotten the memo.
Amen. Has there ever been a more blatent gaming of the market by a President. I can only imagine what Paulson told Bush to get him to come back from vacation, remember he didn’t cut his vacation for Katrina until the whole city floated down the river. Not to mention Bush’s intial comment that he wouldn’t help individuals.
I agree Barry, another empty pr stunt. This subprime thing is akin the Titanic.
So, let me get this straight…
Certain irresponsible people bought houses they couldn’t afford, with money they didn’t have, from jobs they didn’t work, speculating the value would go up.
Meanwhile most of us were responsible, saved a reasonable downpayment, bought only as much house as we could afford, got a fixed-rate mortgage, and have made each and every monthly payment.
The responsible (i.e., non-defaulting) home buyers who purchased during this same period have already been forced to pay higher prices (and likewise higher property taxes) due to the artificially high demand caused by the irresponsible speculators who are now defaulting and crying for help.
And now that the former class of speculators aren’t able to make their payments because ‘nobody told them the payments might go up on their adjustable rate mortgage’, they want ME to bail them out???!!!
Well how about this Mr. President:
When I bought my house, nobody told me my property taxes would go up every year! WAAAAAAHHH!!! IT’S NOT FAIR!!! I WANT A BAILOUT!!!
We have a name for people who can’t afford to make their house payments Mr. President; we call them renters.
I know, I was one for many years.
Theory. Construction criticism welcome.
-Bush wants a smooth economy until he gets out of office. He doesn’t care how it happens. If pain is postponed, that’s the next president’s problem.
-Paulson is Bush’s “servant” as far as financial matters.
-Paulson has had meetings with Bernanke, most notably the meeting with Chris Dodd.
-Bernanke may have let know that he doesn’t think the Fed can do much to solve the problem and will not “relace the Punch Bowl”.
-Paulson told Bush this, and the administration decided to have a meeting one hour after Bernanke to “one-up” him, trying to wrest control to force the economy away from Fed actions and more toward the Treasury.
Public housing for the new millenium? You buy a home and the government pays for it! It sure raises lots of questions. Which 80,000 homeowners get help? Will the gov pay the entire delinquency? Will they pay subsequent delinquencies?
Well-organised charity starts with the poorest, the administration is taking of its poorest and the Fed is begged to take care of its poorest in Wall Street.
The message is clear the administration can address the situation on a case-by-case basis, the Fed may not.
Bush back from vacation tells me all I need to know. You’re last point hits the nail on the head. This is all about usurping the fed via political means. ANd BR has it too…..the day before a long weekend??? shameful..
He fucked the little guys by making it harder to declared bankruptcy just last year — right?
Now he’s friend of the little guy?
Oh wait, this bailout helps the corporations.
Nope, no hypocrisy here. Just business as usual.
Remember Bush’s $200B promise to help NO? All they got was fields of empty trailers? Will this be any different? A photo op of Bush handing a check to a delinquent Detroit single mother who is getting retraining after being laid off by GM/Ford/Chrysler.
It is my dream to someday live in a capitalistic society.
This is part of the “screw the shorts friday” masterplan that was put in place some weeks ago.
Good week-end to all!
nobody said life is fair.
Posted by: techy2468 | Aug 31, 2007 9:57:50 AM
In a system of rules, changing the rules for the benefit of the few, when their side looes, is unfair. You seem to think unlimited and endless credit – on the back of the taxpayer is a good thing. Only $4K of additional tax liability (id=s that what you said?)? That’s more than a 10% increase. Oh well – la de dah!
I hope Bush takes questions to explain how his proposed program will work – like he did with his Social Security reform proposal. He hasn’t had time for much coaching on this. “This is hard work”
This article makes plain that bailouts ain’t gonna fix our problems, but what else can all hat and no cattle do for his subjects…I mean citizens, and being responsible is not an option.
THERE’S NO SUCH THING AS A FREE BAILOUT
by Paul L. Kasriel
Senior Vice President & Director of Economic Research
The Northern Trust Company
August 24, 2007
PIMCO’s William Gross is now calling for a fiscal policy bailout for the U.S. housing market debacle rather than a monetary policy bailout (see “Where’s Waldo? Where’s W?”). On the surface, Gross’s arguments seem to make sense – on the surface. Gross argues that even a cut in the federal funds rate of several hundred basis points might not lower reset rates on adjustable-rate mortgages enough to prevent the massive looming foreclosures. In addition, Gross argues that such an injection of Fed-created credit could be the catalyst for a run on the dollar, which, in turn, would probably prevent 15-year or 30-year fixed rate mortgage yields from falling enough, if at all, to prevent massive foreclosures. Moreover, Gross argues that a large cut in the federal funds rate would perpetuate Greenspan’s moral hazard policy and would encourage further leveraging in the global financial markets. So as an alternative, Gross recommends that some federal government agency, either an existing one such as the Federal Housing Administration (FHA) or a newly-created alphabet soup, bailout those current home“owners” who otherwise are soon-to-be renters.
I believe that Gross makes some valid points about the implications of a Greenspan-magnitude cut in the fed funds rate. But I do not believe that a fiscal policy bailout of prospective defaulting mortgagees would be “free,” economically speaking.
Let’s assume that the FHA guarantees the refinancing of the approximately $683 billion of subprime and Alt-A mortgages that are scheduled to reset in the six quarters ended 2008:Q4 (dollar amount according to Merrill Lynch). An FHA guarantee is a full-faith-and-credit guarantee of the federal government. So, the market for these new FHA-guaranteed mortgages would overlap with the one for U.S. Treasury securities. That is, FHA-guaranteed mortgages and U.S .Treasury securities are close substitutes. Thus, all else the same, U.S. Treasury security interest rates would rise as investors shift out of Treasuries into FHA-guaranteed mortgages. But because the FHA would be guaranteeing massive amounts of subprime and Alt-A mortgages, market participants would anticipate higher defaults on these mortgages going forward, which, in turn, would cause market participants to expect higher Treasury borrowing requirements going forward to make buyers of these FHA-guaranteed mortgages whole after defaults. So, interest rates on Treasury debt would rise not only because of the substitution effect, but because a greater future supply of Treasury debt would be anticipated. In fact, the interest rates on all other fixed-income securities would rise because FHA-guaranteed mortgages are, to varying degrees, substitutes for other fixed-income instruments.
So, the current federal deficit would rise because of higher interest costs on the public debt. In addition, expected future federal deficits would rise because of higher anticipated defaults on FHA-guaranteed mortgages. Private borrowers would cut back on their borrowing and spending because of the higher interest rates they now have to pay in order to obtain funding. Other private – and perhaps public – spending, then, would be “crowded out” by the increase in FHA guarantees on mortgages. The cost of funds to private equity syndicates would increase, so the dollar volume of “deals” would decline from what it otherwise would have been. This would reduce the amount of shares being bought from households, which, in turn, would reduce an important source of household deficit spending. (For a discussion of the impact on household spending of private equity buyouts and corporations’ stock buybacks, see “Wall Street and Main Street Are Joined at the Hip”). Again, other spending would be crowded out by the increase in FHA guarantees of mortgages.
It is not even clear that the U.S. dollar would not come under downward pressure with a fiscal policy bailout of subprime and Alt-A borrowers. As alluded to above, private spending on research and development and business capital equipment would be crowded out by the government guarantee of less-than-prime mortgages. Slower growth in these types of private spending implies slower future growth in the U.S. economy. Slower future real growth in the economy implies slower growth in our standard of living, especially if we have to devote part of our future production/income to servicing our foreign debt. With the U.S. already a gargantuan net debtor to the rest of the world and with the bulk of our debt denominated in U.S. dollars, foreign creditors might wonder if political pressure would be brought to bear on the Federal Reserve to crank up the currency “printing press” in order to help make principal and interest payments on the debt owed to these creditors. The anticipation of this, of course, would induce investors – both foreign and domestic – to reduce their exposure to U.S. dollar-denominated financial assets, thus causing the dollar to depreciate vs. other currencies.
For the FHA to guarantee the refinanced mortgages of subprime and Alt-A borrowers, a moral hazard policy still would be perpetuated, just not by the Fed. Subprime and Alt-A lenders would be bailed out by the federal government, thus reinforcing the notion that some form of government safety net would likely be there to mitigate the potential losses of investments in risky assets.
So, there is no free bailout to the predicament we have gotten into as a result of Greenspan’s cheap credit and moral hazard policies. For those that think there are free bailouts, I suggest that they read the writings of Frederic Bastiat, a 19th century French political economist, who preached that in economic analysis, one must take into account not only what is seen, but what is not seen. In other words, employ general equilibrium analysis, not just partial equilibrium analysis.
“It is my dream to someday live in a capitalistic society”.
Didn’t we used to? :)
just for fun…
So, when the market was tanking on/around Aug. 14th-15th, there was seemingly no bottom… my question is, how many people petitioned to get their skrill back from the funds? the FED killed the shorts on Friday the 17th… and around and around we go.
Who, in their right mind, would bet this market right now… Burn me once, shame on you, burn me twice shame on you some more, burn me… you get the idea. This idiots are frantically trying to figure out how to pay the bill come end of September.
Push ‘er up a few hundred, get some people feeling like their missing the boat, take it down a 100 and bait the short interest, take the profit off the “boat missers” and then pound it dry-like to the shorts…
If I were SEC, I’d be watching the Financial Guys closely right now, not because I’m a conspiratorialist (more of a realist crossed with some objectivism) but because there has been a huge increase in motive…
Bush and Bernanke cannot stop this train… at least not in the long run
Please — please tell me there’s one politician out there that will stand up and say this plan is ridiculous.
Anyone want to bet there’s one politician — either party — that will say no to helping the “poor”. I still want to have hope.
Fed Chair Ben Bernanke’s speech; The President’s speech and the other night we had a blood-red lunar eclipse that shone a beautiful deep red in the sky as the sun, moon and earth aligned for a total lunar eclipse.
“As stars with trains of fire and dews of blood, Disasters in the sun, and the moist star Upon whose influence Neptune’s empire stands Was sick almost to doomsday with eclipse. And even the like precurse of feared events, As harbingers preceding still the fates And prologue to the omen coming on, Have heaven and earth together demonstrated Unto our climatures and countrymen.” Hamlet – William Shakespeare
First the Feds waste $125B on New Orleans
They bailout the housing sector
and Bush never VETO’d a spending bill
Bush is a DEMOCRAT
Foreclosure rates going up, but mostly investors
The AP has a story on Bushs proposals on housing and the subprime mess. I am glad to see that no bailout is part of the answer. A lot of people are saying that we have pulled out of it. There were two sentences that should remind peo…
You can bet he’ll veto the spending bills pushed through by the Dems.
He’s not a Dem jj, he’s just inept, surrounded by advisers that are even more inept.
Mr president will be announcing the end of major combats in the Housing front. Sadly we know how much credibility left to this guy.
As for me, I’m tightening the stops into this rally.
I’m tired of renting responsibly. My rent subsidizes “poor” renters (who, from the looks of some of them, should just live with their parents a bit longer) and my taxes subsidize “poor” homeowners.
Time for me to buy a $250k shoebox in SoCal.
(Hmm..nah. Still can’t bring myself to buy a POS condo at that price.)
I see folks calling themselves Republicans and Democrats. You are the sheeple. Political Parties are used by the elites to pit various groups against one another so that responsible govt. is never an option.
Do you folks really believe either Party can give a rat’s ass about us? If so, I want whatever you are drinking. In fact order me a double!
It’s the elites against the rest of us folks. How about we quit fighting amongst ourselves and demand responsible government from these political shills already?
The Herb Greenberg index?
Bush is a DEMOCRAT
No, Bush is Republican, and a conservative. Republicans and conservatives supported him 100% (till he lost the 2006 elections.)
What conservatives did is conservatism, and what Republicans did, is Republican policy.
Because, these are the real people who stand for election and get power and the real policies that get enacted. As far as power and policy are concerned, and votes are concerned, result should be what matters, not myths.
Mythical characters and dreams are best left to fairy tales.
I guess it really is throwing away money if in addition to rent I’m also subsidizing the landlord’s mortgage with my tax dollars.
I should have bought an overpriced crackhouse with a subprime loan, I also should have known that a flipper/bank bailout was coming.
I’ve learned my lesson. Next time I will buy three crack houses.
Listening to Bush’s speech – he’s still an idiot. Get redy for this program to divert money towards anyone but the intended. A perfect record of incompetence.
Bush to Berno: moral hazard, schmoral hazard. Cut rates now and bail out my buds.
what a crock of shit…….
Affordable housing, mumble,mumble,mumble.
He’s so worried about it he can’t even read one sentence without looking down. Such a confidence boost…..
It’s all smoke and mirrors.
There is one simply reality that seems to be lost in the shuffle on this issue:
The minute it becomes policy that funds are issued to someone who can’t pay their mortgage, nobody will pay. Anyone with a house payment will simply apply for subsidy.
It’s not about the dollar, the election, or anything else. This is the operative fact.
This single reality is why there is no substance to these so-called “bailout” plans.
In the end, the natural laws of economics, through the means of supply and demand, will run their inevitable course.
Nobody, not even the president, can stop that.
And the issue, as stated by your friend Barry, is insolvency – not lack of credit.
The only way to solve that is simply to give out cash – despite the rhetoric and wishful thinking, that will never happen.
Remember the President’s “Social Security” plan that was the seeds of the DOW 25,000 ?
What people don’t seem to understand is that they are only “managing” the decline – they DON’T want to stop it, and they are not going to.
Can APPLE have a 700% gain from 137 ? Can Google have a 500% gain from 550 ?
You see my point ?
The big fall is all part of the game, and necessary to set up for the next bull market and the gains of 500/700% for those who buy at the REAL BOTTOM.
Take your money now while you can.
Just heard Bush speak. Sounds like a lot of regulation being added to the mortgage industry.
React to the speech is bizarre. Bush said he wanted to help people who have even smaller savings buy homes. Guy on Bloomberg just said that this policy will help encourage savings. Wha???
I feel like I saw the reincarnation of Herbert Hoover
blahblahblah, tough love, blahblahblah, tough luck.
blablahblah, credit counseling, blahblahblah, fraud prosecution, blahblahblah have a great weekend
So, who’s gonna hold heavily margined long positions over the weekend?….Besides Fred.
Even Michelle Malkin- MICHELLE MALKIN!- is calling bullshit:
Calculated Risk parses the Bernanke speech:
BTW, this doesn’t mean the market won’t pop, and that move up won’t last a few days/weeks.
I just think its based on less than pure fundamentals . . .
and that it keeps going up as the institutions are selling into the strength to raise the needed cash for that all important redemption day.
The market is such a joke……..let’s let the Fed play market maker one week and the administration the next week.
BTW Bush had to look down when he stated the FHA was the federal housing administration…..he is such a POS….
And quietly…….Fred Thompson enters the race…….you know where turd blossom is going to end up don’t you??
As Sen Lugar (R) so eloquently said about this admin “incompetents” or was it “incompetence”. A vague, marginal solution for a major league problem.
First the Feds waste $125B on New Orleans
They bailout the housing sector
and Bush never VETO’d a spending bill
Bush is a DEMOCRAT
Posted by: jj | Aug 31, 2007 10:41:38 AM
Bush and the Plurocrats are elites and not Republican or Democrat. Those tags lost their respective meanings long ago. Now we have elites VS. Everyone else.
Pres. Bush’s staff is pointing at the coming/ongoing housing crunch & reminding the President about a previous (more literal) storm which he was bit late to react to…
This speech today is all about being in front of the issue even though it is a friday before a three day weekend. Next year when the crap is hitting the fan, Bush & co. can point to this speech, pointedly avoid saying anything like “Heck of job FHA!” & also note that the Democratic Congress (+Hillary, +Obama)hasn’t done jack to help…etc, etc…
…so, yeah, politics as usual
I want to thank Dubya for making puts really inexpensive this morning; since I can’t rename my first-born I’ll just call next year’s tuition “George” instead. D*mn, ain’t crony capitalism great?
This is most certainly a PR move, but it isn’t particularly surprising that a President would make an announcement such as this for PR rather than a real solution. I agree that the timing seems strange, Tuesday would have been more logical. It almost seems like the White House wanted to push Bernanke off the front page.
spectre…you nailed it.
but but but…i cant even convince my colleagues in alabama that religion should not be the basis for voting in a democracy.
they have been totally convinced that capitalism and family values are perfect match. and they believe that trickle down effect is a good thing…since they do get peeed on by the rich.
fact is: religious right dont care if the country gets screwed….they just want rules to be made as per the bible. hence they will keep voting with big business..
sad thing….america and islamic nations are the only place where religion matters in governence (in usa it matters in elections….too bad there are not much elections in islamic countries)
politicians will keep raping us as long as we dont become smart…..and i dont have much faith from humans getting any more smarter.
What’s amusing to me is that whenever Bush ventures into a new realm of policy (Have we ever heard him talk about mortgages before?) he reminds me anew what an absolute moron he is.
How lovely of him to shine his headlight of ignorance into our little corner of the world.
Bush’s bailout pitch is the macro-ecomonic equivalent of “the terrorists hate our freedom.” It’s a meaningless bit of fluff, a vague appeal to emotions. Nothing more.
Bush called for rigorously enforcing predatory lending laws and strengthening lending practices.
That’s like calling for rigorously enforcing building codes and strengthening firecodes in Chicago circa 1872. (The Great Chicago Fire was October 1871).
Bush is a LIBERAL phony
politics aside. can some one give some insight into how it can be done:
* if we were to extend a life line to all the homeowner, but backing the loan with support of FED gov (in other words helping big business not lose their money/bad bets)
i dont think its impossible to do it, because all they care is 1.5 years.
and i dont think they will have shortage of funds?? some one please sketch how it can be done….i have a feeling it maybe done in the guise of helping homeowners.
Spectre of Deflation
you are a TROLL
we are in danger of having the gov’t go into the same problem, I mena “issue”, as the banks are in now. Leverage.
The banks have offered up all forms of collateral (boat loans, bike loans, home loans) now the FHA is going to guarantee the same loans that are being used as collateral to push the market up via the repo and auction market. OH yea…that sucking sound you here??..that’s the dollar being sacrificed for our form of socialism for the elitists.
man we are so fucked (politically and financially) but as you pointed out it really only has to be done for a short period of time…even shorter than 1.5 years as none of it matters as of November 9th, 2008.
Like we will even get the chance to throw the bums out………
Will the administration award a no-bid contract to Halliburton to handle the subprime mortgage mess?
well they’ve already handed one to Goldman to run our stock market….
just nothing “official”
>> Bush is a LIBERAL phony
Elected by Republicans.
Supported by Republicans.
Surrounded by Republicans.
If y’all are going to vote for Big Government, at least drop gay-bashing, religious zealotry, and war mongering from your platform.
But, your party won’t nominate Ron Paul, will it…
>> sad thing….america and islamic nations are the only place where religion matters in governence (in usa it matters in elections….too bad there are not much elections in islamic countries)
Right, techy. Iran has elections. And they have their mullahs to influence them. We have both, too. Elections + mullahs Limbaugh, Robertson, et al.
glad I found your site. I thought the timing was suspect on todays announcements. I saw a photo of bernanke this am.. looked like a french soldier in battle (scared to death, looking for mommy). Banks and a lazy fed got us into this position, tax payers and consumers will have to dig us out of it, per usual.
…was raised as a liberal, got a little educated and voted rebublican by age 19.. now 30yrs old and vote libertarian… is there anything further right?
JB- Certified Networked Advisor (CNA)
Note to the rich: there is nothing left to steal from the poor. Nothing. You’ll all just have to rob each other now.
Sorry, the poor are tapped out.
Strasser, I’m sure at one time America was indeed capitalist. No longer. Unfortunately, when the shit hits the fan, capitalism will likely be blamed for the problems. The real problem is that our government is to large and to involved in the economy.
Here’s a good link from Lew Rockwell.
Bush is really getting fond of the bigotry of low expectation. First Katrina, then Iraq, now housing.
BTW all those layoffs that are going to be announced next week at the brokerages??? All part of the plan to “show” the fed that we need a rate cut because we are feeling it too.
Where is the SEC in all (and I mean the whole picture) of this? Totally silent as they are more interested in busting someone who made a few thousand bucks than in getting to the bottom of the Fed/GOP Market Maker scheme that continues to push it up.
“and that it keeps going up as the institutions are selling into the strength to raise the needed cash for that all important redemption day.”
When is that?
We live in a society where no one accepts responsibility for their actions. Our government just extended that concept to individual financial matters. I’m not shocked. Just disappointed.
Even The Economist calls BS on Mr Bush little show this morning. Top story on economist.com
end of 3Q…September 28th….
The screwed part of all of it is that they (brokerages) all know what they have to do to accomplish that (i.e. they know that they have to sell to raise the needed cash to fund) just how coincidental would it be that the Fed lowered rates 10 days before said brokerages need a bunch of cash? and that the brokers are all going to announce layoffs in the structured products area (again all there fault)to demonstrate to the fed that they NEED a rate cut so that they will not have to continue laying people off (this is all about protecting profit margins and not about layoffs) layoffs are just being used as political blackmail so that the fed does what the brokerages want.
I find this cartoon fitting to the housing trap… just read “life savings/dreams” instead of birds.
So…did the FED decide on a 5% FFR August 29th?
The “bailout” will do nothing for “homeowners”. It will only help them continue to make a house payment they never could afford. This helps the buyers of CDOs continue to collect interest. That’s the point of the bailout. The money only passes through the hands of the “homeowner”.
They’re not giving borrowers any money. The proposal is to allow the FHA to insure more loans. That means that when the borrowers default and the banks don’t get the full mortgage value for selling the house, they get to collect the rest from the government. This part of the policy helps banks.
Where it helps the general population is that it makes mortgages somewhat more available. I’m currently wondering how much house sales will be down in August due to the banks panicking and not giving out mortgages. If the government insures the mortgages, it will increase liquidity in the mortgage market so that people can continue to buy houses. People who bought houses they couldn’t afford are still going to lose them. This will just make the correction more gradual.
All that we need to do is tell the Bank of Japan the US T Bills they hold will be void on 30 Sep and can be redeemed for AAA ratedtranches on 1 Oct 07.
On 31 Dec the same happens to the US T Bills held by Bank of China, to be similarly redeemed on 1 Jan 08.
Thay is why we have 1000 MIRV’ed warheads it is not?
America is surely moving toward the robber baron capitalism of the 1870’s.
This looks like 1873.
(Okay 1975 looked a bit like this, too; when do we hear the municipals bonds are defaulting?)
Greenspan said in 1960’s something about welfare state and inflating away excesses.
It has taken 40 odd years to figure that the welfare state is for rich people.
You have murdered and maimed my generation in Iraq, saddled most of us with enormous education debt, kept us out of the job market by holding onto your spots when you should retire. And now this – putting housing out of our reach permanently. What’s left of America? Not much for me. I’m moving to south america.
There’s no mystery that the president would have that release shortly after the speech. It was no more than an addendum to the speech. Read on…
First, to Ingolf: I’m not sure what you were making reference to in your remarks in another topic. It was either to the topic at hand (Blogging), or you may have kindly referred to my analysis (and therefore, thanks). I don’t know, so what I’ll say now may exclude you.
Here is the analysis I did prior to the Bernanke speech. Contrary to probably 99.99% of you all, including you, the media, who have pontificated all day about what Bernanke said, I’ve actually read every word of the speech and I know what he said:
Here’s the speech:
I’d already told you it would be a work of art. It was…
I’d told you it would be a classroom experience directed to the mortgage industry. It was… My heavens, about the only way it could have been more comprehensive would have been if he’d started with the Pilgrims on the Mayflower. After I removed the Federal Reserve headings, except the speech’s topic heading, and removed his concluding remarks, the entire speech was approximately 5,400 words, and almost 3,350 of those words amounted to a Macroeconomics 101 lecture on the entire development of the mortgage financing industry in the USA. I’ll only emphasize that remark by reproducing the sub-topic headings:
-Beginnings: Mortgage Markets in the Early Twentieth Century
-The New Deal and the Housing Market
-The Transmission Mechanism and the New Deal Reforms
-The Emergence of Capital Markets as a Source of Housing Finance
-The Monetary Transmission Mechanism Since the Mid-1980s
Were I a college economics professor, I’d assign the class this speech and later pop test them on it for credit. It’s like the Cliff Notes version of “Housing Americana, from Log Cabins to Flip-This-House”
I wasn’t surprised, because I’d already been kicking around inside his head and told you all what he’d likely be saying. He’s not difficult to forecast… particularly when he tells you what he’s going to tell you, and then he tells you… and then finally he tells you what he just told you. Just open your eyes and ears. He’s no mystery man.
I’d already told you he’d probably bring ghosts with him, because they’re the ghosts he’s carrying around in his head. I was right too. I’ve carried them around in my head as well, and they’ve influenced my experimental macroeconomic theories published on this blog. I was beginning to actually think it was as if somehow, mysteriously, he’d quote ME, predicting his making in his speech an allusion to FDR’s “All we have to fear… is fear itself.” If he’d done that, I’d have sent him a bouquet of flowers. As it was, he got tantalizingly c-l-o-s-e.
The most amazing thing to me is how, after a very long and detailed speech, media can instantly produce an assessment of what’s in the speech. It took me over 15 minutes to read it, and then I had to read it again just to digest everything he wrote, and I read very rapidly. Within 5 minutes pundits had already informed us of the directions of his remarks and, to my mind, they weren’t very accurate.
– His remarks about the economy becoming more at risk because of spreading subprime problems wasn’t much more of a warning than the mid-stream Fed statement describing the same thing and what they were doing with the discount window… Plus, there were those letters waiving capital investment limitations for the banks to add to the capital of their brokerage subsidiaries. All that prior commentary preceded the speech today, and it was just as blunt, if not more so, than his reminding us of what the Fed had already considered and informed the public about. Big deal!
– There was no soothing assessment that the Fed would be ready to bail anybody out. He even specifically denied they would do this (quoting): “It is not the responsibility of the Federal Reserve–nor would it be appropriate–to protect lenders and investors from the consequences of their financial decisions.” end quote.
– There’s no reason to believe that the Fed would, unless further serious deterioration occurs, necessarily reduce the Fed Funds rate in Sep. If, in the interim, we get to a point of again criticizing him for being “Helicopter Ben” (I’ve told you he’s no such thing), it might be that we’d want him to be “Ambulance Ben.” The Fed meeting in Sep is a long way off yet… a long way.
But, yes, Herb Greenberg, I was a little puzzled that he didn’t break out more details about his creative financing overtures. I suppose a lot of that isn’t written yet… maybe it’ll be a good second semester course in “Housing Americana.”
Too, it would be difficult to believe that the president’s follow-on press conference about FHA actions and tax code changes wasn’t sort of an addendum for Mr. Bernanke’s speech. For example: In order to augment affordability via shared appreciation, we’d have to have a clearer understanding of how the capital gains in a real estate sale would be shared.
Just how would it be shared?… Pro-rated some way?… Sliding scale?… Optional according to completed payments?…
See what I mean?
Okay, so, finally, here’s a shout-out to all you staffers for Senators Dowd and Schumer, for you media types (Liesman?… Tell me… Did you stay awake for that speech?… How many nodded off?) and for you staffers and administrators of the GSEs and the private mortgage companies… and, heck, might as well toss in the White House while we’re at it… let’s b-r-a-i-n-s-t-o-r-m some realistic ways that we can avoid forcing asset sales to prevent bankruptcies. You know… homeowners and their lenders are all equally God’s children, but… all God’s children are going to have to lose something. That’s what Bernanke was really saying. Didn’t you get the message?
It’s probably going to take a forensic review of the financing circumstances, case-by-case, to figure it all out, after it’s been so messed up by the industry.
So, start the ball rolling. I’ll be back here with some ideas soon. I’ll probably break out in sweat just thinking about them. Here’s the question: How do we orderly deal with both: 1)- the current and rapidly worsening subprime dilemma, and 2)- the subsequent near-prime or prime dilemma if the housing situation worsens beyond anyone’s current expectations.
Having an orderly mechanism in place that is fair and responsible and doesn’t involve a financial bailout of irresponsible buyers or lenders will be to everyone’s best interest. What say?
Ideas please?… Herb?… Barringo?… Liesman?
Barringo, you can provide a valuable public service, and you already do… right here!
The Fed is back-peddling fast on inflation, however, the real CPI inflation “understates” price rises. Monetary inflation is the basis of price inflation! Year-over-year core pipeline inflation pressure will be high do to the overheating Chinese economy. So, I see trouble ahead for the U.S. dollar.
“All things are ready, if our minds be so.” – William Shakespeare
Contrary to you, I love to start with the numbers and superimpose the human aspect…
Maybe, he didn’t accomplish much this week and this makes him feel a little bit better, more efficient. Sometimes the truth lies in the simplest reason. LOL.
Various quotes form above…
>America is surely moving toward the robber baron capitalism of the 1870’s.
>politicians will keep raping us as long as we dont become smart…..and i dont have much faith from humans getting any more smarter.
>Please — please tell me there’s one politician out there that will stand up and say this plan is ridiculous.
>Anyone want to bet there’s one politician — either party — that will say no to helping the “poor”. I still want to have hope.
Ok, seriously folks, PLEASE check out Ron Paul and if you say he cannot win, then just give up now. He is that “one” politician speaking out against this mess Bush and the rest of the cronies in power (Repus and Demo) have been pushing.
Ron Paul is hope, and yes a HUGE uphill battle that can be won one person at a time. Go out and talk to one person at a time about Dr Paul, get them interested and then tell them to do the same, and then talk to another, convince them.
No Flipper Left Behind!
How can we begin to resolve the problem when the problem is opaque? The first thing that must be done is to increase transparancy to see where problems lie; however, I believe there is and would be monstrous opposition to doing this as it would expose all the beetles and slugs that have been hiding in the dark shadows beneath all the rocks.
Due to willfulness chasing phantom profits we have driven home value up 25-30% at minimum abouve fair market value, after which with even more willfulness we leveraged against those inflated values 100-1.
$20 Trillion (USD) in derivatives worldwide.
Do you really believe that anything more than bandaid patches can be done to squeeze a few more months or years out of Ponzi before it all comes undone?
This scheme requires expanding credit – stationary credit will not suffice.
Something like the concept of “stationary credit” may be part of the answer. Thanks for couching the phrase.
It’s something I’ve been pondering. Suppose theoretically that you were an Administrative Judge assigned the task of forensic review of the financing circumstances of a faulty mortgage financing.
Here are the facts:
-Lender is on the hook for the mortgage financing of a subprime borrower.
-Mortgagee would not have qualified for the mortgage in question.
-Funds are illiquid and frozen in the house. Kicking the mortgagee out will only compound the macroeconomic problem… raise the costs due to the legal expense and delays of foreclosure, eviction, temporarily abandoned and uninsured property, the costs of reselling, etc.
Now, ultimately, without the involvement of public assistance… we have the potential for one or both parties to realize an eventual loss. Right now the loss is u-n-r-e-a-l-i-z-e-d.
Should you be able to construct a mechanism of settlement, such that the losses are ultimately assessed to one party entirely, the other party entirely, or both parties on some reasonable sharing basis… then the frozen equity is not a penalty or detriment to public funds (taxpayers).
The only detriment is the suppression of equity values, but in order to repair this dilemma, the tenants of free-market capitalism r-e-q-u-i-r-e-s some detriment. This is an unavoidable detriment to the economy.
There’s no sense in having a punitive attitude toward lenders or mortgagees who were irresponsible, especially if that punitive attitude just punishes ourselves.
Neither Bernanke nor Bush have spoken to b-a-i-l-o-u-t-s. You know… there are gradients to opinions and recommendations. Everything in the world is not BLACK and WHITE… Sometimes there is a reasonable reason to view thinks in sepia tone.
Now, I think you’re beginning to see my direction in this. It’s a sort of tough love… a non-punitive but authoritative assessment of relative fault.
It may be that some lenders or their syndicated bondholders may be about to have their funding and repayment terms adjusted, on a forensic case-by-case basis.
I really think it might be accomplished with a mere minimum of the use of public funds. It might be that the work-outs could be conducted via a sort of Resolution Trust Company (used in the thrift rehab of the late 1980s) in which the company itself, though structured as an agency, might function as a shared-appreciation REIT, using private funds syndicated and sold to the public as investments, with appropriate disclosure of risk.
Given sufficient time to recover the real estate depressed conditions from this, and with equity sharing and current yield considerations, investments in such a resolution trust company might even be attractive.
BTW, Winston… regarding your mentioning of derivatives-related investments, I suspect that losses associated with those investments may be unavoidable.
It would be as impossible to delay the recognition of loss of some of these vaporous absurdities (impossible to freeze equity that has no tangible basis for existence) as it would be to prevent fog from vaporizing into bright sunlight.
Make no mistake… I am NOT advocating bailouts of ANY entity, but merely the application of reason to forensic work-outs of the circumstances of real estate financing contracts in which one or both parties to the contract acted irresponsibly.
Too, the definition of irresponsible is merely that a party has lost money, or stands to realize a loss in the future that is presently unrealized… and that the loss was not the result of fraud upon that party. However, the government is not responsible for bearing the loss of parties who incurred the loss as the result of fraud. I’m not talking about the equivalent of ‘no fault insurance.’
I would think a good starting point would be not who is at risk but who took risk in good faith.
They buyers of RMBS would have purchased “on good faith” that what they were buying was as was presented.
The equity tranches were stripped to create CDOs, whose buyers again purchased “in good faith” that these instruments were as described.
So what is the reason the RMBS and CDOs were actually toxic? Seems to be only a couple of places to look:
1. Inflated values to cover no-down loans.
2. Lack of regulation or oversight of lending standards.
3. Speculative buyers who relied on asset inflation.
So by my concepts, the primary fault lies with appraisers, originating lenders, and speculators.
Obviously, there are degrees of fault with the RMBS buyers and even more fault for the CDO buyers who were stretching for yield. But who is to say that the Bear Stearns subprime models would have failed if the appraisals had been accurate and the originating loans sound on a financial ratio basis.
Here is an idea. Suppose a house was purchased with an exotic loan type for $300,000 but now faces foreclosure, where the house might sell for $200,000. As long as the loan is for occupancy owned, the mortgage is rewritten for $200,000 on a 30-year fixed rate. The $100,000 loss is written as a second lien against the property and payments for this second note are shared among the originating lenders and the appraisers.
A little futher thinking on this scenario: special rules could be made whereby the owner can only recover the amount of the second loan (the $200,000), and any asset value increase would be subtracted from the seondary lien amount. This would mean that over say 10 years, if the home appreciated from $200,000 to $250,000 in value, the bank’s and appraiser’s portion of the second lien would reduce to $50,000, allowing them to pay off a $100,000 loss for $50,000, spread over 10 years.
Once the second lien was cleared, the asset appreciation would revert to the owner.
Ok, so everyone agrees, FHA modernization and loomingpredicted cut in FFR will not help but NOBODY is talking about how tremendous that whole “temporary elimination of the forclosure tax” thing is gonna help!!! Hey, now that that worry is off my back..the keys go in the mail tomorrow and Countrywide can have the place. I’ll just buy it back at the auction.
Orderly Unwind of Credit Bubble?
Fascinating concept and I see a lot of discussion on this blog about how this can come about.
Yes, how does a few trillion dollars get lost in an orderly fashion? How do x number of banks, hedge funds and misc. investors wake up on day say to themselves “Today, I will admit to the world that marked to market I have lost billions, but I will do it in an orderly and disciplined manner.” Nah.
Some guy in China used the wrong paint on some toys, he paid his staff and proceeded to hang himself. Then there were those guys in 1929 who, in a quite orderly fashion, ended their troubles.
Creative destruction: I like that phrase.
You have murdered and maimed my generation in Iraq, saddled most of us with enormous education debt, kept us out of the job market by holding onto your spots when you should retire. And now this – putting housing out of our reach permanently. What’s left of America? Not much for me. I’m moving to south america.
Don’t worry wonderwood. By the time the boomers realize they are too broke to afford their retirements they and your generation will push for and institutionalize mass euthanasia. Get a job at a mortuary and have a career for life!
Get ready for the great suicide/die off by the most cowardly generation in the history of America. It’s inevitable. The lemmings have nowhere else to turn. They could have made a fortune off Greenspan’s housing bailout which I think was designed to give the boomers enough money to retire on. Unfortunately they got greedy again just like they did in the I-net boom and made things worse for themselves.
Now it’s time to pay the piper but do you think they will do that? NO WAY! This is a generation that institutionalized abortion when they didn’t want to pay for their ‘free’ love. You can bet they will institutionalize euthanasia in order to pay for their free spending
This plan is really a warm-up for what is coming…a massive multi-hundred billion dollar bail-out of epic proportions next year. This bursting bubble is going to severely impact the collateral (housing) that backs our ponzi-based economy.
I’m afraid that “in good faith” isn’t going to amount to much or earn the offended party an opportunity to have losses covered. Buyers (and therefore users of borrowed funds) in these circumstances of subprime losses were by definition irresponsible, even if they acted in good faith. It’s not a matter of whether we should provide them with a windfall of debt forgiveness (I’m not about forgiveness of loans), but merely that we should provide a worthy and fair framework for working out their issues with their lenders.
Forget all that business about ephemeral investment vehicles. Reduce everything to where it should have remained anyway – where there’s just a house (a tangible thing), a lender who financed it and a mortgagee who lives in it and makes payments. While Bernanke addressed this founding stable condition of mortgage financing in the USA, he acknowledged that the favorable attributes of syndication (including enhanced intermediation) will prevent it from ever returning to this pristine state (my term).
Losses to any other property or entity is beyond the scope of my suggestions for workout. Those losses are now history if third-party settlement parties are unable to assume the losses… and they may as well begin the process of writing the losses down to marked-to-market values, or to zero if it is the lesser value.
Take note of the fact that, when any value is left available as a residual real estate value, then writing its loss down to a reduced value has a corresponding accountancy recognition of the equivalent of “found money.” In other words, you can’t eat the house. Just because a loss occurred, it doesn’t mean the house is gone. There’s still a value there that working out new terms for the lender (or its BK successor) and the mortgagee (when it’s justified and he is qualified) can indeed prevent a worsening aggregate macroeconomic dilemma.
What is the pristine state?… It’s the status in which the lender and buyer are both content and financially competent to contract for and live with mortgage financing terms of rather long duration. There was nothing inherently wrong with syndication of this arrangement, since the working capital available to a mortgage company was conveniently (to all parties) extended beyond the available funds of its own banker, or of the bank itself when the bank operated its own mortgage office.
With proper lending standards and responsible actions of mortgage originators, that pristine state was more-or-less unaltered. It was a good thing for many years and facilitated much of the recovery from the Great Depression of the 1930s, and Bernanke would agree (does agree).
The problem arose when the GSEs and private syndicators began to strive for higher EBITDA to satisfy the meet-or-beat mentality of Wall Street to drive earnings higher and stock prices higher as well, and they sought to accomplish this by creating mortgage syndications and holding them rather than selling them into the pristine state. Thus they earned not only the fees for the syndication process (their original chartered objective), but also a return on the investment portfolios net of their costs of capital and net of investment risk. And to hedge this vast portfolio risk they were required to use exotic techniques to offset the risks mainly of adverse interest rate moves and also of mortgagee default. That’s where the toxic waste industry got its foothold, and losses associated with toxic derivatives-based products will be terminal to some vendors and investors. They had an unquenchable hunger for earnings or yield (or both) and soon their bellies may be growling in the balance.
Too, the use of aggressive hedging techniques put them into a conflict of interest with the v-e-r-y* i-n-v-e-s-t-o-r-s who provided them the working capital that is their bread and butter, the good faith buyers of their syndicated mortgage bonds, without which they cease to operate. It destroyed that pristine state and put the whole industry on an incredibly volatile course. Add to that the slack lending standards utilized, partially due to the syndicators’ false sense of security from hedging operations (or about the competency of the agents of their originators) and a confidence in continued real estate price appreciation, and you arrive at a total destruction of the pristine state for mortgage financing. Extreme volatility associated with the destruction of the pristine state is what has already tripped the booby traps of destruction for many lenders in the subprime arena, and it’s even caused turmoil at higher quality levels. If that devolution is unchecked and invades more deeply into near-prime or prime, then we’ll have a whole different kind of beast to deal with.
Winston, regarding your illustration of a work-out, this is the kind of thinking that will work to reach a resolution of the problem. It’s not easy and there will be losses, but it’s an approach to a reasonable work-out.
LaReality – I don’t think anyone in government has represented to you that there won’t be extreme losses associated with exotic hedges. If you think I’m wrong, then name the person(s) and quote them for us. All government has represented so far is that it desires an orderly work-out of the mortgagee-lender relationship. It’s all about a house, the occupant of the house and by whom the house is owned.
For any interested party:
I’m planning to detail Bernanke’s speech, line-by-line (or in consolidated sections) during the weekend and I plan to complete the project before Tuesday.
I suspect that it’s not possible for any person to accomplish this for you any better than I will do it… and I assure you that nobody in media will do it for you. They’re too busy launching into preconceived notions about what it says and means.
So, stay tuned to TBP. I won’t let you down.
It’s hard for me to share in your so broadly expressed indictment of the appraisal industry.
Certainly fraud can be an element in any financial transaction and there will be obvious examples of appraisal fraud discovered in this messy heap. It appears that Bush himself spoke to the topic of any irregularities in mortgage financing being investigated.
However, outside of very obvious cases of fraud (kick-backs, patent appraiser incompetency and negligence, etc.), once a real estate offer is made and accepted, the appraisal has received it validation.
An appraisal made that is i-m-m-e-d-i-a-t-e-l-y discovered to be out of line with a rational observation of values in a generalized area is one thing of concern and might result in some claim against an appraiser. But, a widely dispersed rise in general price level, even if exponentially erratic and seemingly irrational, is hardly something that the appraisal industry can be blamed for.
To my mind the fairness of an appraisal rests on whether the appraiser knowingly misrepresented any element of his appraisal, to either the buyer or the lender. Even if an appraiser constructed an appraisal that he himself found to be illogical, it’s not his business to interpret the market value opinions of his customers.
For example: I have never smoked and find the product dangerous and offensive, but I would have no reason to object to a sales assistant who sells the product as part of their job duties, whether they were a smoker or not. Thus, I would find the products value to be zero, but I would easily accept the value of the product expressed in the marketplace.
Spectre of Deflation
you are a TROLL
Posted by: B | Aug 31, 2007 12:19:41 PM
LOL! And you my dear dear friend are a complete moron with no basis in reality.
Can you talk policy, or do you always speak in sentences less than 10 words? I imagine when it comes to numbers, you remove your shoes, so maybe it’s good that you have the intellect of a slug. Cheers asswipe!
Looking forward to your Bernanke speech work.
Good point also on appraisal industry, which I had not considered.
I may have been taking the wrong tact with my approach, but it seems to me the losses are the very thing that cannot be tolerated. By spreading the loss over 10-20 years with the originating lender taking the hit, the value of the RMBS is at least partially protected as are the CDO values.
This is quite a complex issue, and my thinking is that whomever assumed the risk should take the loss – but this cannot be clearly defined due to the nature of risk spread via RMBS and other products.
At its heart, it was the lender who decided to grant a no-down loan on a $300,000 home to a doubtful borrower.
You cannot fault the borrower for taking advantage of the generous offer – heck, if prices inflate he may make $50-75,000 over 2-3 years with no risk. The worst that can happen is he walks away from the loan and has moving expenses to incur. It is absurd to call these no-down buyers homeowners – they have more in common with renters than homeowners.
That leaves the lender at fault. But the lender did not assume the risk because he packaged these loans and sold them as RMBS.
The risk transferred – but here is the crux of the problem that may make it insoluable: because the originating lender had little-to-no risk, standards of lending were brushed aside in order to close the loan and collect the fees.
This problem was systemic – and the root source can be traced to its nature – the unaffordability of housing via conventional mortgage vehicles – which was simply inflation – phantom profits – at work.
What we are seeing now are the effects of deflation in the housing market; Bernanke and company have worried about rising payroll costs as inflationary, while ignoring asset inflation; the one factor not addressed was servicing the debt; in order for the housing bubble to continue (inflation) there had to be compensating wage increases to service the higher debt; what we are seeing in the housing collapse is simply deflation of inflated assets because the inflation was not allowed to move into general prices and wage compensations.
It gets back to the same old problem with debt-driven economics: either expand the debt or stagnate; that is why I say that stationary credit (meaning no paper losses as all loans are fully covered) cannot even solve this problem – as it takes activated credit to move forward.
This type of framework could be described as “roll it over” economics, because it is based on the ability to service current debt obligations while rolling over the principal into expected (hoped for) future ability to service. It is accrual-based as we show obligations as assets – but whether those assets are realized gains is dependent upon increasing productivity, which has already been taxed by inflation, so no increase in wage growth accompanies the increase in productivity. Without an increase in ability to service increasing debt, the wall is finally hit where “stationary credit” is felt – an equalibrium between amounts payable versus ability to pay.
At that point, the only options are to increase by inflation the ability to pay or deflate assets to an affordable level.
While Bernanke is a smart fellow and has a hint of Volcker in him, I think Paulsen has a better grasp of the consequences of even an orderly decline – loss of power to the ruling class.
Bernanke, I believe, is working within the confines of economics and attempting as best he can to manage a disaster – to others, the disaster would be a compromise of their power (wealth).
I fully expect power to win versus reality, and thus in time we will see the losses monetized and to hell with the consequences.
“Forget all that business about ephemeral investment vehicles. Reduce everything to where it should have remained anyway – where there’s just a house (a tangible thing), a lender who financed it and a mortgagee who lives in it and makes payments. While Bernanke addressed this founding stable condition of mortgage financing in the USA, he acknowledged that the favorable attributes of syndication (including enhanced intermediation) will prevent it from ever returning to this pristine state (my term).”
E, this is a wonderfully written paragraph, and I think it points in the direction of what I said above – the “pristine state” became untenable due to phantom profits (inflation).
There is, to me, a corollary in the automotive markets – it was price that drove financing changes, not financial changes created to offer consumers flexibility.
I’m sure you can remember when 3-4 year car notes were the norm – a 4-year note was the maximum from a lender. But as prices of cars rose into the $20,000 range, the lending standards changed to compensate for the inability to service shorter-term debt – the 5-year and 7-year car loans took birth and there was a resurgence in lease applications.
Look at the past 6 years of average incomes – actually a small decrease – how do you take a flat $50,000 income each year and expand its consuption power? There are only two ways – either extend length of loans or lower interest rates on existing loans (which would have more mininal effect) – and account for unpaid debt in paper entries (phantom profits).
How do you move merchandise (i.e., houses) to a nation with a negative savings rate?
Eliminate the need for down payments – a rent-to-own contract written backwards with the ownership granted prior to the servicing of the debt.
Artificial demand via lowered interest rates created a surge in buying interest from qualified buyers and refinancers – but this original surge only carried so far and then was spent. To continue the expansion of the bubble, the next wave had to rely on less-worthy borrowers and eventually the only way to sustain the credit expansion was to loan to unworthy borrowers utilizing unworthy exotic loans – this is the reason that the last 2-3 years of mortgage loans are so much riskier than the earlier loans – the only buyers left had either been: A) priced out of the market or B) too poor of credit risk to have been able to previously buy.
Where the housing loan industry failed versus the auto loan industry was in the concept of monthly affordability – extending payments from 30 years to 50 years would have had to become the norm in order to compensate for the rise in home prices compared to the lack of wage increases and vacant down payments.
While you correctly speak of “pristine state” (which is wonderfully put phrase), I could also say we have witnessed the “pristine state” of monetary inflation and its consequences.
Monetary inflation always leads over time to asset inflation, and eventually to general inflation. Deflation cannot occur without prior inflation. The end result of monetary inflation can only be uncontrollable inflation or collapse – the concept of managed inflation per central bank activities is an illusion, as market forces supercede the power of intervention.
Taking the overall viewpoint, we have a debt expansion-requisite economic system that has been able through globalization to surpress real wages in order to inflate corporate profits but is in the end dependent upon those very surpressed to increase debt-burden to sustain the expansion.
Inflation (phantom profits) will quickly turn to deflation (phantom losses) if credit expansion is not quickly restored – and that is what will turn out to be the Bernanke Put: when consumer spending is affected we will see his Greenspan side.
Rather than watching the TV, you may switch on the volume in order to listen as well, should you fail to do both you may be restricted to the cartoons channels only and at your old age your communication level may be impaired for longer.
My take on this, after some thought, is that this is not unprecedented, similiar RE multiples, and no I haven’t found any charts, yet, occurred in the mid seventies, just the multiples expanded from a smaller base. When my parents bought their median size 1500 sq ft’ home in ’76 ~ $37,500 by the early to mid 80’s these houses were worth > 90K. We all remember what Volker did to kill this. This time reigning in on asset inflation, will be brought about by the consumer due to the insolvancy issue, leaving the real culprit the FED blameless, they will merely need to appear to remain somewhat nuetral while fast tracking real price-wage inflation increasing M1 rather than money and credit, M3, while continuing to adjust reporting, to appear dollar vigilent. As inflated mean wages more nearly but not quite, gradually approximate median living costs over time stabilizing at home ownership being possable for only the most industrious amongst us rather than the average family unit. Case in point my house in OC CA (meadian home 1500 sq ft) only affordable to someone earning in excess of 170K using conventional lending standards. This can not hold so attempting to be realistic , I expect a sinificant correction till a more modest master craftsmen median income ~100K is in the range. This should take 5 -10 years, a mere sliver of the time the Money Trust has needed to perfect their control mechanisms. Mean while our standard of living will deteriorate to that of a “Walton’s era” genre where extended families will need to support one another in the same living quarters. This is already evident all over the country as more and more offspring increase their stays with their parents foregoing attempts at early independance. Those flush with cash will clean house during this adjustment, till, the industrialists again realize that people without means for an independant life style do not make good Debt-Slaves as they only require stuff -consumables, rather than assets. The FED will inflate as will all other CB’s. This will not be pretty for an entire generation which may need to defer home ownership till their children have already left the nest. There is no other fix short of the monetary reform I’ve been pimping.
I’m afraid President Bush’s proposed bailout won’t be enough to save the
housing market and get the economy back
I have a suggestion:
Let’s have the government raise the
minimum wage to the point where everyone
can afford to own a home! Somewhere in the $18 to $22 an hour range should do the
If they can’t manage that, perhaps another
alternative might be to butt out, and
let the Market take care of some imbalances
with its natural self-correcting forces.
Pretty good analysis. I might add that what you seem to be implying is that the housing crisis is actually an affordability issue, and with that I agree totally. The recent bank runs brought about a liquidity problem that was temporarily resolved by the Fed’s discount window operations; underneath, the problem is one of solvency and debt, and that has not resolved nor will it anytime soon.
Only two things can truly resolve that issue: higher per capita incomes or delfated home values; however, I suspect sellers will refuse to accept drastic price decreases unless there is no choice, so what we may end up seeing is a slow meeting somewhere in the middle of the two solutions.
End result will be an extremely slow housing market for years – more like 5-7 years or longer before price stability is realized.
Yep, the meeting in the middle thesis seems the only plausable outcome, I was also trying to slide some familial implications and living standard caveats in there.
With regards to restoring credit expansion, an absolute must in this debt based monetary eviro, I don’t really see how this is possable in the short term. Only after a serious cleansing would this be possable. J6P is maxed out, there is no income to service additional debt. Now if the GOV were able to spend freshly printed money into the economy quickly they might be able to inflate away a managable portion of the old debt short of default, in essence people servicing debt with more plentiful less valuable dollars. This however always seems to eliminate a whole segment of society from ownership, as only the more talented workers seem to be included in the wage increases. Creative financing has been uncloked for what it is -a scam and with regards to increasing terms of loans, not practical with reagrds to housing. 40 year terms are only maginally better than 30 and 50 isn’t even worth considering.
For instance @ 7% per 100k
30 years = $665
40 Years = $621
50 years = $601
In real life the longer the term the higher the interest as you can see even at a flat 7 across all terms anything longer than 40 isn’t even worth a look and on 300k borrowed who’d want to save $132 dollars to have the privilege of paying for 10 extra years.
This extending of terms only works with vehicles and such where 4 and 5 year terms @ 8.5% coincidentally end up defering the same $132/mo on a 30k debt load but at a much greater proportion of the payment monthly savings engendering the illusion of greater affordability.
I find it interesting that Mr. Pratical over at Minyanville came to similar conclusions as did I in an above post about the nature of power:
“The various forms of government, from pseudo institutions like the Fed to administrative departments like the Presidency and Congress, have become power based: the individuals that occupy them and the means available to them are really about power and maintaining that power. I only infer this from what I see. There are only two ways to maintain power: through force or appeasement. We are seeing the first in our foreign policy and the second in our domestic.”
From the same article:
By employing foreign borrowing and spending taxpayer monies (*** taxpayer monies only service previous debt*** my input) from those that have acted responsibly, the government proposes to step in and re-allocate reward to those that deserve punishment and punishment to those that deserve reward.
Is this not the natural progression of the Debt-Based Fiat Monetary System.
Create a “Bill of Credit”
Force the population to use this as the defacto monetary unit through the imposition of taxes.
Inflate the monetary unit to encourage the willing acquisition of debt, freemen willing through ignorance of the game to become Debt-Slaves, for a degraded version of the living standard, that previous generations saved and spent into, it is now is expeditious to borrow and spend into.
Even though economic reporting averages a 4% yoy inflation rate the feel on the street is that saving is futile. The feel is justified and the rate manipulated so as that this physicology is maintained. If inflation were flat people would defer spending. Deferred spending would result in credit contraction, the death nail for the Fiat employed.
For those in power of the monetary unit this encourages endless expansion of government financed through the endless debauchery of the currency to appease the have-nots for their willingness to be Debt-Slaves. Our founders knew this, we seem to have forgotten. Now people reiterate the inequities as if this is a new concept.
Many here would argue that the constitutional concept of “no bills of credit” at least not in the form of a private banking cartel issuing currency, is what is antiquated, when it is in fact this very form of monetary system albeit tecnically improved that is archaic. I liken it to adding navigation and sound system to your horse and buggy. When navigating a short road to the poor horse not nearly as useful is the good tunes.
Anybody out there want to buy “Hard Assets”?
Antiques, cute 1957 Chevys, and Art?
I am a artist who got seriously screwed during the “dot com” bust.
Unlike Bear Stearns , i took responsibilty for that loss, which has not be pleasant.
I paint Jazz Musicians, but i don’t accept
downpayments… All Cash..what a concept CASH.
Does anyone remember “Munder Net Net”?
Almost went nuts over that one.