Matrix Blog

Posts Tagged ‘Ben Bernanke’

[Choking] No Questions Allowed, Ramming 700 Billion Answers Down Our Throats

September 23, 2008 | 12:51 am | | Milestones |

I don’t know if have much fight left in me. I am now reading the novel Choke (same author as Fight Club, an all-time favorite), the transition to this book seems appropriate at the moment.

We are spinning around in circles wolfing down the information we are fed and I think we are slowly, painfully moving in a more productive direction. But it is going to cost us dearly, talk a while and we don’t really understand how to fix it or prevent it from happening again.

It’s not enough for Wall Street to be reinvented. Of the 5 big investment banks, Bear and Lehman are now gone, Merrill was bought by BofA and Morgan and Goldman decided it was better to be a commercial bank.

Still no answers yet.

And old habits die hard – commercial banks don’t want assets valued at market value just yet because it might hurt their books before the bailout.

The SEC has been MIA and Paulson and Bernanke are moving in on their turf.

Members of the economic far left and far right don’t like the $700B bailout without answers either:

From the left

“This administration is asking for a $700 billion blank check to be put in the hands of Henry Paulson, a guy who totally missed this, and has been wrong about almost everything,” said Dean Baker, co-director of the liberal Center for Economic and Policy Research in Washington. “It’s almost amazing they can do this with a straight face. There is clearly skepticism and anger at the idea that we’d give this money to these guys, no questions asked.”

From the right

“This is scare tactics to try to do something that’s in the private but not the public interest,” said Allan Meltzer, a former economic adviser to President Reagan, and an expert on monetary policy at the Carnegie Mellon Tepper School of Business. “It’s terrible.”

Perhaps, the dialog for a solution can finally begin. The Brookings Institute released a brief: A Brief Guide To Fixing Finance

It’s all pretty basic but lays it out cleanly.

  • Policy makers need to set priorities – the problem is too vast to fix at once.
  • Know What Went Wrong Before Beginning to Fix Anything
  • Act In Our Own Interest, While Consulting with Other Countries
  • Principles To Guide More Permanent Reforms

They recommend these reforms should be:

  • First, financial instruments and institutions should be more transparent.
  • Second, financial institutions should be less leveraged and more liquid.
  • Third, financial institutions should be supervised more effectively, with greater regard for systemic risks.

Is gagging better than choking?


Tags: , ,


[Moral Hazard] No Atheists In Foxholes, No Ideologues In Financial Crises

September 22, 2008 | 12:01 am | | Milestones |

A lot has been made of the lack of moral hazard on Wall Street, festering into the current crises.

Michael Lewis, author of a number of great books, including Liars Poker comments in his recent column titled: Bright Side of a Total Financial Market Collapse:

No sooner did Greenspan shuffle off the stage and sell his memoir than the financial system he helped shape fell apart.

He’s left not only a mess but a void. No matter how well- educated we become in our financial affairs, we still need public officials to look up to, unthinkingly.

Slate’s new The Big Money is an excellent resource for financial news commentary. Martha White’s article: What Is a Moral Hazard? The economic reasoning behind bailout or no bailout is a good read.

While bailout seems to be the financial term du jour, right behind it is the more ambiguous “moral hazard.” Treasury Secretary Henry Paulson cited moral hazard as the reason not to swoop in to save Lehman Bros. and Merrill Lynch. Puzzling to many, though, was that while moral hazard was discussed in conjunction with the rescues of Bear Stearns, AIG, Fannie Mae, and Freddie Mac, it wasn’t a deal breaker in any of those cases.

…moral hazard is the idea that insurance in any form makes people riskier.

When I was 15 years old back in the Bicentennial summer of 1976, I rode my bicycle 4,400 miles zig zagging across the US with a group formerly called Bikecentennial. Of 4,000 people who participated, 3 people actually died riding that summer, and within our own group of a dozen riders, those who did wear helmets experienced wrecks and those who didn’t wear helmets (like me), were fine.

I often wondered if wearing a helmet made the riders more prone to take risks. I don’t think so – they represented a cross section of temperaments in our group. In fact, I bought a helmet when I got home and have worn one ever since – and no wrecks.

Perhaps it is more as an argument of convenience. Throw it in if it helps make the case?

The absence of moral hazard of the current situation was created by the GSE structure to begin with. Investors assumed the US would bail out ‘Mac & ‘Mae if they ever ran into trouble because they were “government sponsored”. I can only imagine what would happen to the financial system if the former GSEs were allowed to fail. “Faith and credit of the US” would have meant nothing forever, or at least as long as the current Yankee Stadium is old.

And the system seems to be unraveling quickly judging by more actions this weekend.

Paulson and Bernanke have been making moves faster than Congress or the President can seemingly comprehend. Expect Congress to start fighting the changes once they get it.

There are no atheists in foxholes and no ideologues in financial crises,” Mr. Bernanke told colleagues last week, according to one meeting participant.

A bit unnerving but the Bush administration has been disconnected from the crisis until a few days ago, when it began to back Paulson’s actions. In fact, that was a requirement of Hank’s acceptance of the position to begin with, unlike his predecessors in the current administration.

And the candidates, until a few weeks ago, didn’t discuss the issue directly – and still don’t seem to get and at the very least, didn’t see it coming. Paulson and Bernanke need to move fast.

The lesson learned from this bailout of epic (trillions) proportions, was best said by Floyd Norris in his Reckless? You’re in Luck

If an activity is important enough to justify a government nationalization to prevent a default, it is important enough to be regulated. The regulators need to know what risks are being taken, and by which institutions, in time to act before a crisis develops.

Had the government bothered to do that in years past, it might not have faced the decisions it faced this week. First, it let one big firm go down, and then it became scared enough to nationalize another one to keep it afloat.

Now, showing no sign of embarrassment over how badly they failed before, the current crop of regulators seem to be unified in their determination not to let the markets force them to make a similar choice on some other big financial institution.

It’s not about more regulations, its about regulations that deal with today’s markets.

Paulson and Bernanke will have to wrestle with these issues later, right now, they are suggesting we all wear a helmet.


Tags: , , , , , , ,


Catch Phrases That Capture Our Housing Hindsight Morality

July 21, 2008 | 12:23 pm | |

Here’s a collection of phrases that caught my eye for our newfound understanding about our new housing/credit morality/thinking:

Moral Hazard – I have linked to Holden Lewis’ brilliant post before: Moral hazard is when people take unwise risks because they are sheltered from the consequences. For example, if you wear a seat belt and drive a car with airbags, you’re more likely to tailgate.

Rally between Concern Phase and Fear & Capitulation Stage – Comstock Partners has some great commentary about the housing market: Now even Fed Chairman Bernanke has caught on to the dangers of the bursting of the bubble.  He stated in both Tuesday’s and Wednesday’s testimony before Congress, “the housing market is the central element of the financial crisis.  Anything we and Congress can do to strengthen the housing market, or strengthen the mortgage financing market, will be helpful.  We can do this by restoring confidence in the Government Sponsored Enterprises (GSEs).”  We are happy to have Mr. Bernanke on board, but are not too happy about begging Congress to slow down the process by trying to get bills passed that would postpone the inevitable decline and make the eventual decline even worse. We have to let the free market work its way through the housing crises.

Flat is the new up – Daniel Gross of Slate’s column captures the feeling of victory in today’s economy. Last weekend, at a suburban barbecue, I asked a friend who works for an asset-management company how his firm was faring in these turbulent times. “We’re actually doing OK. Keeping our heads above water.” At which point another guest chimed in: “Hey. Flat’s the new up.”

Nexus between fear and greedI wrote about this one before.

Foreclosure Contagion – Zubin Jelveh’s Odd Numbers blog in Portfolio.com offers a wealth of sharp insight on an array of economic topics: The researchers also find that the negative hit from a foreclosure is strongest right before a lender takes control of the property. They argue “that when foreclosure is inevitable, efforts to speed the foreclosure process would be effective at reducing the contagion effect.”

It’s a good time to buy real estate – housing prices double every ten years – NAR is hard selling and yes, it may be a good time to be real estate in certain markets and for some people. Because NAR says this 24/7, it’s hard not to cast a jaded glance their way.


Tags: , , , ,


[Subprime Truth In Lending] From A To Regulation Z

July 16, 2008 | 12:01 am | |

The Federal Reserve finished crafting their subprime mortgage rules regarding Truth in Lending called Regulation Z. I am doubtful that this rule would have been updated if we weren’t experiencing the current mortgage market turmoil.

Because this is such an important issue, it will take effect on October 1, 2009 (more than a year from now.)

“The proposed final rules are intended to protect consumers from unfair or deceptive acts and practices in mortgage lending, while keeping credit available to qualified borrowers and supporting sustainable homeownership,” said Federal Reserve Chairman Ben S. Bernanke. “Importantly, the new rules will apply to all mortgage lenders, not just those supervised and examined by the Federal Reserve. Besides offering broader protection for consumers, a uniform set of rules will level the playing field for lenders and increase competition in the mortgage market, to the ultimate benefit of borrowers,” the Chairman said.

Ask anyone whether they thought these types of rules would already be on the books (for high priced mortgages – 1.5% above the “average prime offer rate”) – here are some excerpts:

  • Prohibit a lender from making a loan without regard to borrowers’ ability to repay the loan from income and assets other than the home’s value.
  • Require creditors to verify the income and assets they rely upon to determine repayment ability.
  • Ban any prepayment penalty if the payment can change in the initial four years.
  • Require creditors to establish escrow accounts for property taxes and homeowner’s insurance for all first-lien mortgage loans.

And here are rules for all loans, not just high priced:

  • Creditors and mortgage brokers are prohibited from coercing a real estate appraiser to misstate a home’s value.
  • Companies that service mortgage loans are prohibited from engaging in certain practices, such as pyramiding late fees.
  • Creditors must provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for any mortgage loan secured by a consumer’s principal dwelling, such as a home improvement loan or a loan to refinance an existing loan.

Is it just me or do these rules seem crazy obvious? Why aren’t they on the books already? Why on earth do these rules only apply to subprime mortgages? Not Alt-A or Prime?

Speaking of scapegoating subprime, and something about the squeaky wheel getting the grease, lets talk oil and the evils of the dreaded speculation.

And the tale of two economies…

Highlights of Regulation Z [Federal Reserve]


Tags: , ,


Jawboning The Inflation Rock And A Hard Place

June 23, 2008 | 12:01 am | |

Source: NYT

Click here for full sized graphic.

In this week’s Off The Charts column, Floyd Norris talks about how inflation has now become the key point of credibility for the Fed. Conventional wisdom says the Fed won’t raise rates in an election year so you could see an aggressive stance in the late fall.

It still seems unlikely that the Fed will actually raise rates in an election year when the economy is probably in recession. But the surprisingly strong increases in producer prices for May, reported by the government this week, increased the pressure on the Fed at least to sound tough about inflation.

In other words, the economy is weak and the Fed can’t raise rates or it will hurt the economy so they need to talk a tough line. A real rock and a hard place.

Unable to raise rates because of a fragile economy, policy makers have to resort to jawboning.

It’s not that they’re insincere about resisting “an erosion of longer-term inflation expectations,” as Federal Reserve Chairman Ben Bernankesaid last week. It’s just that they would prefer not to have to do it now, especially when they expect inflation to recede as demand weakens.

After a brief expectation of an increase, the Fed is likely to keep rates the same this week at the FOMC meeting.

And those expectations, if proven wrong, will eventually converge with reality.

And reality is that the Fed can only assure the credit markets by projecting an image of control. So, despite the severe problems with credit on a global scale, tackling the inflation risk has taken usurped credit risk as the productive course of action.

Still, questions remain about being inflation hawks.

Indeed, if growth slows, people are not likely to eat less rice or corn. And if they have less money to buy new fuel-efficient cars, they will be more reliant on gas-guzzling clunkers.

Why can’t central bankers distinguish structural problems from general overheating? If your only tool is a hammer, everything looks like a nail. But a deliberately engineered recession will only increase economic suffering.

I love the hammer/nail analogy, in fact I picked up the hammer and saw (sorry).

And finally, there is a difference between managing risk and managing volatility.

RISK management, then, should be a process of dealing with the consequences of being wrong. Sometimes, these consequences are minimal — encountering rain after leaving home without an umbrella, for example. But betting the ranch on the assumption that home prices can only go up should tell you the consequences would be much more than minimal if home prices started to fall.

We’ve known that the Fed would have to deal with inflation (The Rock) after it dealt with the credit crisis (Hard Place). Unfortunately, the aggressive rate reductions have not resulted in lower mortgage rates to help easy the housing market pain being felt in many markets.

Improvement in the credit environment will have to wait. Anyone up for Rock, Paper, Scissors?


Just add water: applying water to a rock and a hard place results in tubular commuting (hat tip to Dave Barry).


Tags:


State Of New Jersey: Otteau April 2008 Contracts

June 4, 2008 | 10:39 pm | |

This report is provided by Jeffrey Otteau of the Otteau Appraisal Group who also authors a series of widely followed quarterly market reports on the New Jersey real estate market. This information is collected from various sources including Boards of Realtors and Multiple Listing Systems in New Jersey.

I have known Jeff for many years and consider him one of the leaders in the real estate appraisal profession. He has taught me a lot about quantitative real estate market analysis.
…Jonathan Miller


HOUSING MARKET SHOWS EARLY SIGNS OF STABILIZATION

April home sales increased from the March pace for the first time since 2005 in what may be a sign that market stabilization has begun. In April, New Jersey contract-sales activity increased for the 4th consecutive month and recorded a 9.3% increase above the March level. By comparison, sales activity declined during April in both 2006 and 2007.

Also significant is that number of homes for sale rose modestly as Unsold Inventory increased by only 4.5%, less than normal for the month of April. As a result of these trends the Projected Absorption of homes offered for sale now stands at it’s lowest level of the year reflecting a 10.0 month supply. By comparison, absorption stood at 12.7 months in January, 11.0 in February and 10.5 in March.

Any determination as to whether these trends actually signal the beginning of a market recovery hinges on the momentum carrying through for the remainder of the 2008. There are ,however, a growing list of positive factors for the housing market which include increased housing affordability due to lower home prices, favorably low mortgage interest rates and massive pent-up demand due to reduced purchase activity.

To keep things in the proper perspective however, it is clear that the housing market remains in the grip of a dramatic correction and will not see rising prices until Unsold Inventory levels have been reduced significantly. Until then home prices will likely drift slightly lower, although at a slower pace than the past 2 years. But a bottom to the housing downturn may be forming which would be a first step towards recovery. Potential home buyers who have been delaying their purchase in an attempt to ‘time the market’ should consider whether that time has now come. This is because the greater risk in delaying is the likelihood of higher mortgage rates in the future due to the inflationary pressures of high oil and food prices which will erase any potential savings from future price declines. Supporting this view is recent remarks by Federal Reserve Chairman Ben Bernanke indicating that future interest rate cuts are not likely due to a need to guard against inflation. Our analysis of the cost-benefit relationship of delaying a home purchase indicates that the added monthly cost attributable to rising interest rates is likely to be greater than the savings generated by any further price declines. Thus, the next 6 months will present a rare combination of low interest rates, low home pricing and a wide selection of homes being offered by motivated sellers. We’re all likely to look back five years from now and conclude that 2008 was a time when Smart Buyers took advantage of this unique opportunity by locking in both low prices and low interest rates. I’m reminded of the axiom that the right time to sell is when everyone else is buying, and the right time to buy is when everyone else is selling.

Tags: , , , ,


[Mapping Misery] Only 10-15% To Go!

May 9, 2008 | 12:32 am | |

The Economist magazine appropriately named Map of misery article on US Housing showcases a map of OFHEO data that chronicles the change in housing prices by County/State.

The pain of America’s housing bust varies enormously by region. Hardest hit have been the “bubble states”—California, Nevada and Florida, and parts of the industrial Midwest. The biggest uncertainty hanging over the economy is how red will things get.

Yesterday I joked about Bernanke using heat maps and The Economist saw the humor in it as well.

Sounding more like a cartographer than a central banker, Ben Bernanke this week showed off the Federal Reserve’s latest gizmo for tracking America’s property bust: maps that colour-code price declines, foreclosures and other gauges of housing distress for every county. His goal was to show that falling prices meant more foreclosures, and to urge lenders to write down the principal on troubled loans where the house is worth less than the value of the mortgage. His maps—where hotter colours imply more trouble—also make a starker point. The pain of America’s housing bust varies enormously by region. Hardest hit have been the “bubble states”—California, Nevada and Florida, and parts of the industrial Midwest. The biggest uncertainty hanging over the economy is how red will things get.

But can a “bottom” be projected?

One of the most favored ways to measure a housing market by The Economist magazine is to track the ratio of rental prices to sales prices. From 1960 to 1995, rent/price was 5% to 5.5%. When prices soared over the last decade, the ratio is 3.5%. In order to get the ratio back up to 5%, prices have to drop 10% to 15% assuming rents are flat. It’s lookin’ like at least 2010 before this happens.

In terms of projecting when we will see an end to the weak housing market, try correlating it with handgun accuracy. NYC police officers hit their targets roughly 34 percent of the time. Of course, when they fire at dogs, roughly 55 percent of shots hit home.


Tags: ,


[Credit Spiral] Declining Home Prices Primary Cause Of Declining Home Prices

May 6, 2008 | 9:51 am | |

The FRB’s April 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices showed that:

In the April survey, domestic and foreign institutions reported having further tightened their lending standards and terms on a broad range of loan categories over the previous three months. The net fractions of domestic banks reporting tighter lending standards were close to, or above, historical highs for nearly all loan categories in the survey.

In other words, it’s a lot harder to obtain financing.

Chairman of the Federal Reserve said in a speech yesterday that the decline in home prices was different this time and more flexibility in solving the problem is called for.

In a 10-page speech, Mr. Bernanke said (is 10 pages double spaced supposed to be significant?) that some regions of the country including California, Florida, Colorado and parts of the Midwest have experienced sharp increases in the number of homeowners who are delinquent on their mortgages, despite data that does not reveal the classic causes of foreclosures, like higher unemployment rates.

Instead, much of the problem can be attributed to a decline in home prices, which, Mr. Bernanke said, can “reduce the ability and incentive of homeowners, particularly those under financial stress for other reasons, to retain their homes.”

(image of lightbulb turning on) Borrowers were allowed to have mortgages they could not afford and speculators have less incentive to hold on to their properties. Economic vulnerability is made even more precarious by the vulnerability of the GSEs. (Today, Fannie Mae Posted unexpected losses associated with credit performance).

Bernanke’s comments on GSEs

Separately, the government-sponsored enterprises (GSEs)–Fannie Mae and Freddie Mac–could do more. Recently, the Congress expanded Fannie Mae’s and Freddie Mac’s role in the mortgage market by temporarily increasing the limits on the sizes of the mortgages they can accept for securitization. In addition, because the GSEs have resolved some of their accounting and operational problems, their federal regulator, the Office of Federal Housing Enterprise Oversight, has lifted some of the constraints that it had imposed on them. Thus, now is an especially appropriate time for the GSEs to move quickly to raise significant new capital, which they will need to take advantage of these new securitization and investment opportunities, to provide assistance to the housing markets in times of stress, and to do so in a safe and sound manner.

As the GSEs expand their role in housing markets, the Congress should move forward on GSE reform legislation, which includes strengthening the regulatory oversight of these companies. As the Federal Reserve has testified on many occasions, it is very important for the health and stability of our housing finance system that the Congress provide the GSE regulator with broad authority to set capital standards, establish a clear and credible receivership process, and define and monitor a transparent public purpose–one that transcends just shareholder interests–for the accumulation of assets held in their portfolios.

Bernanke actually says “Location, Location, Location”
There is significant locational disparity in the performance of housing markets across the country. Bernanke showed a very cool set of heat maps on a variety metrics.










Tags: , , ,


[Getting Credit For Credit] Getting Sentimental About The Past But Not Many Ideas About The Future

April 13, 2008 | 5:21 pm | |

As the housing market economy continues to show problems (although some argue it isn’t that bad) as evidenced by the sharp drop in confidence, voices from the past are popping up.

I have been struck by the notion that virtually nothing has been done to fix the credit markets, the core of the current economic problems that will prevent a rebound of housing markets across the country until credit is fixed.

In part, that is because there is a scarcity of ideas. Paul Volcker, the former Federal Reserve chairman whose legacy has not crumbled since he left office, was right this week when he said the financial engineers had created “a demonstrably fragile financial system that has produced unimaginable wealth for some, while repeatedly risking a cascading breakdown of the system as a whole.”

With Paul Volker, the Fed Chair pre-Greenspan who rightly suggests that we can’t return to a financial market that existed before electronic trading and securitization and Greenspan working hard to fix his legacy of creating a credit bubble and current chair Bernanke who is stuck with the problem, it’s getting crowded on the lecturn, podium and talk shows.

Volker is starting to look like the new zen-god of the financial system simply because Greenspan’s reputation has quickly unraveled (why did I buy his book?).

In an interesting juxtaposition of events in recent days, the two former Fed chairmen collided in the headlines. Greenspan, who left the Fed two years ago, took to print and television media to defend his battered reputation. Volcker, in two rare, back-to-back speeches, gave a critical assessment of the current economy and the Fed’s role in creating and managing the crisis. Their styles have always contrasted, now and when they were at the Fed. Economists say Greenspan is as much a politician as he is a policymaker – always looking for opportunities to claim the spotlight – a tactic that may be hindering rather helping his reputation now. It’s just the opposite for Volcker.


Tags: ,


Reserve Judgement: The Econometric Disconnect And The Housing Market Reality

September 12, 2007 | 11:01 am | |

The release of the Beige Book (last week) is always a fun read (yes, I am admittedly, pretty boring) because it allows the Fed to present a regular anecdotal description of the current economy. I’ve provided feedback to the Fed for this publication for a number of years and enjoy the national perspective submitted by each of the member banks. However, one thing I worry about is their ability to forecast with the rapid changes of late in the economy. Bernanke seems to be resigned to relying on the numbers as they come in, which of course, is behind the curve. Its like relying on the upwardly revised 2Q GDP numbers made irrelevant with the credit meltdown under our belt in 3Q.

The financial markets are probably expecting a half point drop at the next FOMC meeting on September 18th, so the impact of a generic 25 basis point adjustment is probably already built in. The Fed seems to be saying they will take action but probably not as aggressive as 50 basis points (1/2 percent) A 25 basis point move probably means no real impact on investor confidence in mortgage paper quality, no impact on rising non-conforming mortgage rates, no change to the housing market. With the full force of the housing downturn not to impact the economy until 2008 when resets peak, anything short of 50 basis points will be invisible.

If we get what we (I) wish for, a 50 basis point drop might actually make everyone even more nervous. In other words, the markets may think the Fed must know something we don’t because thats a bigger drop than we have seen in a long time. Crazy, isn’t it?

Recent distress in financial markets has “deepened” the housing slump, but the overall economy has seen little impact so far, the Federal Reserve said Wednesday in its beige book report. That assessment suggests that while a rate cut in two weeks may still be likely, officials may not see the same need for aggressive easing that financial markets expect.

Whether its a 1/4 point or 1/2 point drop, its not going to make any immediate difference to the housing market. Its a baby step towards investors getting back in the game, even though it doesn’t resolve the main issue: mortgage portfolios are laced with crap (sub-prime tranches) that no one seems to have a handle on.

As far as the perception of a Fed rate cut being a Wall Street bailout, I disagree. Its a moot point. I am more worried about the overall economy. The impact of housing as a drag on the economy hasn’t hit full force yet. I suspect not until mid-2008 or 2009. Mortgage resets are reported to be peaking in 2008 and the impact of a significantly lower number of sales transactions is just now beginning to hammer markets that are already weak.

The housing market is anything but beige.


Tags: , , ,


Its Time For A Big Media Morality Lecture

August 27, 2007 | 12:01 am | |

In Time Magazine’s commentary piece by Michal Kinsley in last week’s issue

Your House Is Worth Less? Good

we get lectured on how no one benefits from rising housing prices except for the elderly. Its a surprisingly simplistic take on the housing market problem (albeit commentary) from a national publication, and I guess thats the problem in general. No one really seems to have their arms around whats wrong with the housing market.

Some, mostly young folks, are trying to buy their first home. Some, at various stages of midlife, own a home but will trade up someday, or at least think about it. And some, mostly older, are trying to sell and downsize. Who is served by soaring house prices? Not the first group: rising prices make it hard for those people to get into the game. Not the second group: what it will have to pay for a bigger house is probably increasing faster than what it can get for the current one.

The author indicates that a real estate collapse could be a good thing:

  • Greed takes it on the chin: ie easy money, foolish buyers and lenders, they all get theirs, etc. Renters look at buyers and are able to say I told you so, that sort of thing.
  • Houses don’t produce anything: When they sell, its like selling a used record (my analogy), the artist and record company don’t make a dime when it sells again. Of course, it produces shelter, which is needed by the population. He uses an onion analogy (which makes me want to cry). He says there aren’t millions of onion owners counting on the value of their onions to keep going up year after year.

People want the government to do something, and presidential candidates are beavering away at plans. But any plan that would prevent home prices from declining would be foolishness squared. Genuine tragedy deserves sympathy and help, even if it is the result of your own foolishness. But when we do not even guarantee basic health care, it would be nuts to think about making protection against real estate losses part of the social safety net.

I don’t think it is the government’s charge to rescue investors who made poor decisions. Of course, fraud is another story. Let the markets decide. I think thats why Bernanke waited so long to take action before the rate cut and gave the impression of waffling on whether or not to take action. He was hoping the markets would figure it out, and maybe they will.

However, bad choices or not, fraud or not, the housing problems are spilling into the overall economic picture, which for goodness’ sakes, many of us have been saying for more than a year. Much has changed over the past month with the mortgage market turmoil.

I now think the Fed has no choice but to lower the federal funds rate and the markets are predicting it. It probably won’t have any near term affect on mortgage rates, but will help the other areas of credit. A recession is no one’s friend.

Tags:


Staking Revisionist Mortgage Market History Yields Different Tomatoes

August 21, 2007 | 7:49 am | |

My son planted about 30 tomato plants in our garden this year so needless to say, I am now full of tomatoes.

One of the things that have come out of all the upheaval in the mortgage markets has been the frequency and clarity of explanations as to what happened and how the markets got into this predicament. Hindsight is 20/20 so they say. It was not long ago that people were scratching their heads about how prices can rise at an expotentially higher rate than income for a seemingly indefinite period of time.

It was all about the Benjamins mortgages and how easily the payments could be managed. Downpayment became monthly payment in the dialog between buyers and lenders. Lenders reduced underwriting requirements to bare bones, appraisers were encouraged to become form fillers. The lending community came up with mortgage products to stimulate transactions and Wall Street responded, creating a labrynth of tranches designed to move risk around to the right places…except investors ulitmately figured out that few on Wall Street really understood the risk. And then the world changed.

As Jim Grant wrote in Time Magazine (special thanks to “the man who wears shirts that look like graph paper.”):

That is the way great ideas end, not with a bang, not with a whimper, but through reductio ad absurdum. You know investment bankers are not satisfied until every good idea is driven into the ground like a tomato stake.

Here’s a few recent summaries of what happened over this period of mortgage excess that I found particularly interesting.

How Missed Signs Contributed to a Mortgage Meltdown [New York Times] with a very cool chart. Things were moving so quickly but we should have seen it coming.

As far back as 2001, advocates for low-income homeowners had argued that mortgage providers were making loans to borrowers without regard to their ability to repay. Many could not even scrape together the money for a down payment and were being approved with little or no documentation of their income or assets.

In December, the first subprime lenders started failing as more borrowers began falling behind on payments, often shortly after they received the loans.

Reaping What You Sow: Hedge Fund and Housing Bubble Edition [Huffington Post]. This article suggests that a Fed rate cut represents help for the wealthy and not the masses.

Last week we got to watch as the markets went wild with the realization they were over leveraged on bad debt, until Bernanke rode in with a huge bailout, answering a question (and settling some bets) on whether he was an inflation fighter, or an inflationist (he’s an inflationist, and he has now proved it.)

Bloody and Bloodier – The subprime-lending crisis is worse than you think, and could crush financial and real-estate markets for years. [New York Magazine]. Besides sharing dentists, I can empathize with Jim Cramer’s pain as of late. Barron’s Magazine dedicated its cover story to analyzing how wrong his advice has been in his CNBC show Mad Money in the article: Shorting Cramer.

You’re losing money right now. This very minute. You’re losing money if you own an apartment. You’re losing money if you own a country home. You’re losing money if you own a stock or bond mutual fund. You’re losing money if you have a pension plan. You’re probably losing money here or there, you’re probably losing money everywhere (except maybe from your savings account and wallet). But this is no Dr. Seuss story. It’s more of a John Steinbeck tale, and we are the victims, a new generation of Tom Joads, and it’s the damn bankermen who broke us. No, there won’t be a police officer to investigate, and the government, at least this federal government, won’t save us.

Panic on Wall Street [Salon]. It starts with an obligatory blame Greenspan bent but goes deeper.

There is a standard explanation included as a paragraph in almost every story attempting to explain the current turmoil. It goes like this: Anxious to goose the U.S. economy out of its dot-com-bust doldrums, Alan Greenspan and the Federal Reserve Bank lowered interest rates to rock bottom in 2001. The resulting flood of cheap money encouraged an orgy of borrowing at every level of the U.S. and world economies. Whether you wanted to buy a house or a multibillion-dollar conglomerate, lenders were your best friends, falling over themselves to offer you whatever amount of capital you desired — and charging low, low rates of interest. Cheap money led to a growing complacency about risk. If you ran into trouble, you could just refinance your house, or borrow a few billion more dollars today to pay off the billions you might owe tomorrow.

Tags: , , , ,

Get Weekly Insights and Research

Housing Notes by Jonathan Miller

Receive Jonathan Miller's 'Housing Notes' and get regular market insights, the market report series for Douglas Elliman Real Estate as well as interviews, columns, blog posts and other content.

Follow Jonathan on Twitter

#Housing analyst, #realestate, #appraiser, podcaster/blogger, non-economist, Miller Samuel CEO, family man, maker of snow and lobster fisherman (order varies)
NYC CT Hamptons DC Miami LA Aspen
millersamuel.com/housing-notes
Joined October 2007