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Posts Tagged ‘Dan Gross’

[Non Non-Heinous] Past Performance is No Guarantee of Future Results

February 9, 2009 | 10:27 pm | |

Daniel Gross has an insightful post at Slate called Declining Declinism: Don’t believe the historians and economists who say America’s best days are behind us.

Aside from Declining Declinism, I would also could consider Recessionary Recess and Falling Fallout. My kids remind me often of the double-negative wonder of “That’s totally non non-heinous” used effectively in Bill & Ted’s Excellent Adventure.

Bill and Ted take this to the extreme and use it to their advantage to really emphasize words. If something is heinous it is bad. If it’s non-heinous that’s one negative and it becomes good. It’s it’s non-non-heinous then the negatives cancel each other out but the emphasis of the word heinous becomes double, so it becomes really bad.

Here’s the gist from Dan:

Economic prognostication is hamstrung by a tendency to extrapolate from recent trends far into the future. It happens at the top of a cycle—the Dow is going to 36,000! Housing prices will never fall!—and it happens when we plunge into a ditch.

Of course that was part of the problem with the way the bad news was delivered by Robert Shiller and Nouriel Roubini a few years ago. For some reason the former hasn’t retained his momentum and the latter is now loved by the media. Perhaps its more about the way they party.

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Pirate Theory Of Credit Crunch Aversion

November 19, 2008 | 1:03 am | |

It started with Tom Friedman’s McDonald’s Theory of War:

No country with a McDonald’s outlet, the theory contends, has ever gone to war with another.

which was based on the premise that countries with an educated middle class that would sustain a McDonald’s are less likely to go to war…this theory held since 1996 until Georgia and Russia fought this past summer. Perhaps, they needed more happy meals?

Dan Gross brings us the Starbucks theory of international economics: >The higher the concentration of expensive, nautically themed, faux-Italian-branded Frappuccino joints in a country’s financial capital, the more likely the country is to have suffered catastrophic financial losses. Gross contends that Starbucks fueled the housing boom as “The Seattle-based coffee chain followed new housing developments into the suburbs and exurbs, where its outlets became pit stops for real-estate brokers and their clients. It also carpet-bombed the business districts of large cities, especially the financial centers, with nearly 200 in Manhattan alone.” Incidentally, the company is named for Captain Ahab’s first mate – Starbuck in Moby-Dick.

Well I’ve got my own (admittedly very thin, but please give it to me, I’ve never had an economic theory before) economic theory/correlation/indicator: Pirate theory of credit crunch aversion:

It’s been exactly two months since Talk Like A Pirate Day and apparently pirates are dominating the high seas (well, it pays better than fishing).

My pirate theory goes like this:

[Take a look at the ICC Commercial Crime Services Piracy Map for 2008.]

Piracy (the boarding of ships to steal their cargo) originates from countries that didn’t participate in the credit market run-up – namely participate in the proliferation of faulty mortgage securities that wreaked havoc on much of the global financial system. According to recent news, poor countries with limited financial sophistication tend to be the source of much the pirate activity.

(the map shows the locations of the activity, not the source)

What does this all mean? Well for starters, pirates are not likely eating at McDonald’s for lunch while sipping a mocha frappuccino grande with enough whipped cream to be esthetically pleasing, after boarding a container ship full of tanks and guns.

And they don’t have a 2/28 subprime ARM with a 2% teaser rate about to reset to a fully indexed rate of 11% with a significant pre-payment penalty. They merely get paid the ransom for the crew or get shot.

And of course, Somalian coffee served at Starbucks is quite good.

UPDATE: Infectious Greed: Somali Pirates and TARP

UPDATE2: Freakonomics: Spreading the Pirate Booty Around

arrgh!

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[Acronym Update] EESA

October 6, 2008 | 12:01 am | |

The impact of the bailout law known as EESA (Emergency Economic Stabilization Act) voted into law by the House on Friday is not known.

I was listening to The Big Money Podcast while I was getting ready for work one more morning recently and heard Dan Gross describe his step by step reaction to the bailout bill as events unfolded:

  1. OMG

  2. LOL

  3. WTF

  4. BS

I burst out laughing and cut myself shaving. When I told Dan it was his all fault, he told me:

oops! Maybe the House of Representatives can slip a provision in the bailout bill appropriating some cash for appraisers in New York to buy band-aids. After all, you’re just another victim of the credit crunch.

And don’t forget about LIBOR and those pesky wooden arrows for children.


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[Mark To Market] To Buy A Fat Pig

October 2, 2008 | 12:29 am | | Radio |

Dan Gross over at Newsweek/Slate makes a great case for the argument that the bailout is a lot like a hedge fund.

It’s massively leveraged, It’s buying distressed assets, It’s taking equity stakes.

Mother Goose probably had no idea that she was to be in the conversation of hedge funds, equity investors investment banks and commercial banks.

To market, to market, to buy a fat pig,
Home again, home again, dancing a jig;…

Ok, ok so I tweaked the wording a bit, but the whining associated with the mark to market pricing concept of mortgage backed securities comes to mind. Apparently now accountants are to blame for the credit crunch because of Statement No. 157: Fair Value Measurements.

Mark to market explained: In accounting, mark to market is the act of assigning a value to a position held in a financial instrument based on the current market price for the instrument or similar instruments.

Much like market value estimates of properties derived from a typical residential mortgage appraisal, the state of the market at the present time frames the value of the asset. But what if there is no value because there is no market? We had this situation come up in Manhattan just after 9/11 because there were no sales. How do you estimate market value if there is no activity? I have long held that there is no market at that moment in time and therefore a value estimate is moot.

One of the biggest issues and the driver for the bailout is to be able to move the toxic mortgage junk off the balance sheets of lenders so they will not have the same capitalization requirements, which will free up capital to re-enter the markets to provide more mortgage money to homeowners.

Well the US Senate tried again and succeeded in passing the bailout wednesday, which was described as having more “lard” added to it (ahem… pork). Say what you want about Senator Dodd and his poor judgement in accepting favorable mortgage rates from Countrywide, he sounded pretty sharp even with the obligatory political posturing in this interview with IMUS just before first bailout bill vote.

And nearly every politician is fired up about mark to market in Washington and reversing the 50 year trend toward fair value accounting.

the big complaint at the moment is that markets for some mortgage-related securities have so totally broken down that marking them to market dramatically understates their value and makes banks’ finances look much shakier than they really are.

In Justin Fox’s Curious Capitalist blog over at Time he concludes in his Suspending mark-to-market is for zombies.

investors and regulators and reporters and corporate executives need to learn not to take any financial reporting numbers, whether marked-to-market or not, at face value. The health of a bank or any corporation can never be adequately measured by a single bottom-line number. Understanding the assumptions and uncertainties inherent in accounting numbers is crucial to understanding how to use them.

Think of it as a balance sheet with lipstick.


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[Banking On Recovery] Did The Glass-Steagall Repeal Cause Our Insecuritization?

September 29, 2008 | 12:15 am | |

There has been a lot of debate on whether the repeal of Glass-Steagall on November 13, 1999 via the Gramm-Leach-Bliley Financial Services Modernization Act was the beginning of the end of the separation of financial church and state. The Glass-Steagall Act, also known as the Banking Act of 1933 was created to prevent commercial banks from entering the investment bank business.

If you’ve been abducted by aliens for the past three weeks, here’s a great way to catch up on the bailout.

And when you are caught up (assuming the alien thing was accurate), here’s a once in a while requirement from Matrix. A required reading assignment: What’s Free About Free Enterprise?

The first is the risk of moral hazard within the bailout itself. That is, if government is going to make good so many losses throughout the system, why would anyone set limits on future risk-taking? The situation could turn into a free-for-all that makes the recent disregard of risk look like child’s play.

The second problem is more philosophical, involving what the bailout plan reveals about the functioning of the free enterprise system. This raises disturbing questions. Although I agree with President Bush’s observation that “the risk of not acting would be far higher,” we should be aware of the secondary effects of what we are getting into.

Analysis of an IMF study on bank failures shows that the average recovery rate in a banking crisis averaged just 18 percent of the gross costs. Barrons seems to think the taxpayer will come out ahead.

Not everyone thinks the bailout is a great idea.

I should add, though, that I don’t think the people spearheading the bailout have a clear idea about what they’re doing either. They remind me of the old saying: “Something must be done. This is something. Therefore this must be done.” I’m a former student of Chairman Ben Bernanke and his behavior during this mess has been a big disappointment.

Robert Shiller writes an opinion piece in the Washington Post this weekend telling everyone to calm down – government intervention is not unusual and not a bad thing. Everybody Calm Down. A Government Hand In the Economy Is as Old as the Republic. He makes the argument that capitalism evolves and is not etched in stone. He makes a compelling argument.

Megan McArdle in The Atlantic says its not about the Glass-Steagall repeal at all because securitization has been around for a while and Gramm Leach didn’t impact lending standards at commercial banks, among other items.

But Dan Gross at Slate and Newsweek says that the repeal is the end of an era and perhaps infers, that it caused the situation we are in today.

The policy response was to erect a wall between investment banking and commercial banking. It outlasted the Berlin Wall by a few decades. In the 1990s, as another bull market took hold, momentum built to overturn Glass-Steagall. Commercial banks were eager to get into high-margin businesses like underwriting hot tech stocks. Brokerage firms saw commercial banks, with their massive customer bases, as great distribution channels for stocks, mutual funds, and other financial products that they created. Generally speaking, the investment banks were the aggressors.

While I don’t blame the credit carnage all on the repeal of Glass-Steagall, it sure is a compelling milestone and played a role. Banks and investment banks had blurred lines of distinction and regulators were no match for the investment banks. Of course, JPMorgan Chase, who seems to be coming up roses with recent mopup efforts, was the merger of an investment bank and a commercial bank.

The mindset was free markets need to be free because market forces were self-regulating. Of course, that purist view may very well have caused one of the most constraining regulatory environments in the modern era going forward.


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[The Surge Redefined] This Time It’s Financial, International

September 9, 2008 | 1:08 am |

Not surprisingly the Dow surged today, signaling the US Treasury is moving in the right direction. This size of this action was beyond the ability of the Fed’s balance sheet.

Do you really think this action was taken to protect the housing market? The GSEs were too big to fail? Dan Gross at Newsweek sees things a bit differently:

The bailout of Fannie Mae and Freddie Mac will be sold and marketed as efforts to shore up the U.S. housing market. That could be. But they are really meant at shoring up our damaged international financial standing, preserving leadership and making sure the U.S. Treasury Secretary doesn’t get tarred and feathered at the next G-8 meeting. In a world of significant global financial imbalances, the doctrine of “too big to fail,” has been replaced by the doctrine of “too international to fail.”

There is a very well laid out explanation of the US government’s balance sheet in Randall Forsyth’s column in Barrons called: Beginning of the Financial “Surge”. If you don’t subscribe to Barrons Online, you should consider since the financial markets and the housing/credit market are now joined at the hip.

The Treasury Sunday acknowledged the federal government’s role in creating the “ambiguity” leading investors to assume it would stand behind Fannie and Freddie debt and MBS. Now it said it had a “responsibility” to “avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings of GSE debt and mortgage backed securities,” totaling some $5 trillion held by investors around the globe. That doesn’t include the trillions more in derivatives contracts entered into by Fannie and Freddie.

Trillions: I wonder what those derivatives contracts are worth in relation to outstanding MBS? My very limited experience working with Wall Street and housing related derivative products last year tells me it has got to be a mind boggling amount. All the more important to facilitate stabilization now.

Another Barrons piece by Steven Sears, “The Fannie Mae, Freddie Mac takeover signals big trouble, not an all-clear.

indicates there are a lot of market gyrations in the future for investors…

“Once the euphoria ends, we need to decide where to go,” Credit Suisse’s strategists told clients…Investment-bank traders, who cannot be identified because they are not allowed to speak to media, say trading is very slow and what they are seeing gravitates toward adjusting bearish positions. “No call buyers,” is what one trader said.

In other words, its really a new playing field. Let’s not let our expectations surge too soon.


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[GSE Reminder] Hey, There Are No Guarantees

July 21, 2008 | 1:58 pm | |

Fannie Mae and Freddie Mac are government sponsored enterprises (GSE). Yet they have shareholders and are profit driven. They play a critical role in the stability of the US mortgage market (and housing) by promoting liquidity, helping mortgage rates and availability consistent throughout the country.

One of the things that made them have a competitive advantage over others was their inferred backing by the federal government.

In the New Yorker this week, James Surowiecki writes in his column Sponsoring Recklessness

The two companies have long been required to tell investors that their securities are not guaranteed by the federal government. But in the financial markets everyone has always assumed that this demurral was just window-dressing, and everyone, it turns out, was right. Last week, when fears of a possible collapse of the two companies threatened to spark a major financial crisis, the Treasury Department and the Federal Reserve quickly came up with a rescue package. What had been an implicit guarantee became an explicit one

Fannie was privatized in 1968 so president Johnson could move the debt off the federal books to help sell the Vietnam War budget, not to help the mortgage market.

Help to the consumer in terms of their impact on keeping low mortgage rates may be exagerated.

A paper by the economist Wayne Passmore, of the Federal Reserve, suggests that in fact Fannie and Freddie have only a small effect on the interest rates that homeowners pay, saving them less than one-tenth of a percentage point.

The GSE self-preservation mechanism has been aggressive lobbying using former high placed government officials, very effective in enabling them to grow to $5 trillion in mortgage debt. A blip on the radar could cause more damage than Congress is able to burden the taxpayers with.

More than $10 billion in losses in the past two quarters, the GSEs (and FHA) are looking for more money to capitalize to help bailout the housing market at Congress’ urging.

Holden Lewis over at Bankrate wrote a great post on this last week called The GSEs and moral hazard.

Daniel Gross, my friend over at Slate and Newsweek, makes a better argument for the help GSEs provide to the taxpayer/homeowner suggesting that a bailout of the GSEs would actually be a bargain.

I guess I have a hard time accepting that anything the federal government would do would be a bargain and the long term concept of nationalization of the GSEs would be cost effective, but hey, I don’t have to refinance my mortgage.


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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.


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[Housing On Fire] Blogoshere Hose-Down, Heaven Can Wait Edition

May 30, 2008 | 12:01 am | |

Periodically, I like to round-up some of my favorite recent blog posts or articles that are housing market/credit/economy related. It’s journalism heaven: housing provides an endless supply of stuff to write about and this week was no exception.


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[Riding The Bus] For Closure Of Optimism

February 19, 2008 | 11:02 pm | |

As I sit an look at how we got here, its apparent to me that no one really has a clue about how we got here in the housing market. Its a “cover my you know what” scenario now, but its really our nature to look on the bright side while its happening and the dark side after its over.

Unbridled optimism got us here.

The Dark Side of Optimism [Salon] via Naked Capitalism: Why looking on the bright side keeps us from thinking critically,” management consultant Susan Webber argues yes. In her view, “the financial and business communities dismissed all the warnings” about the housing meltdown/credit crunch bearing down upon them because they wilfully adhered to an always-sunny-side-up view of life.

Ok back to reality…

Foreclosed homes that sit vacant are sometimes a better option for homeless because the utilities are still running.

“Many homeless people see the foreclosure crisis as an opportunity to find low-cost housing (FREE!) with some privacy,” Brian Davis, director of the Northeast Ohio Coalition for the Homeless, said in the summary of the latest census of homeless sleeping outside in downtown Cleveland.

That’s not the optimism I was expecting.

Daniel Gross in his Moneybox Column on Slate explores the proposed restrictions on foreclosures. He argues that these actions simply delay the inevitable process of “price discovery“, a process where the market determines a price based on supply and demand.

In other words, the optimism that got the mortgage industry and borrowers in trouble has carried through to the political process, whose optimism will delay getting out of this quagmire.

The carnage in subprime loans has led to a spate of foreclosures. When banks or investors take over properties, they recoup whatever they can by placing it on the market quickly and accepting any reasonable offer.

Foreclosure also has the effect of hastening price discovery on the mortgages on those homes, and on the bonds backing them. Here, again, the impact can be devastating to those who bought the assets with a great deal of leverage. Hedge funds and other institutions sitting on the depreciating debt either had to put up more collateral to maintain their leveraged positions, or dump the assets to raise cash. Bond insurers must increase reserves to prepare for defaults of the bonds they insured. And if the bond insurers fail, the financial firms that purchased insurance from them will have to take their own write-downs.

Optimism is met with an equal and opposite reaction: Pessimism.

Banks are blacklisting condo projects to minimize their damage. Major lenders have created blacklists. This seems like a prudent decision…avoid certain projects to avoid issuing a high risk mortgage. But doesn’t this accomplish exactly opposite by poisoning a local market delaying its recovery and placing performing assets in the market at higher risk?

Warning to developers: this will make it extremely difficult for most buyers to come to close on Miami’s newest buildings.

Unbridled pessimism brings unforseen risks just like optimism does by inserting external forces that fight the natural order of supply and demand.

Of course, there is another way to deal with our natural housing optimism: take a bus and get a boxed lunch on a foreclosure tour.


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Of Recessions, Overtime Wins And Hydrox Cookies

January 21, 2008 | 10:21 pm | |

This was a good weekend: both my 9-year and 14-year olds’ respective basketball teams won their games in overtime and the New York Giants beat the Green Bay Packers in OT in sub zero weather to go to the Superbowl in two weeks.

So why I do I feel out of sorts? No, its not because Hydrox cookies are being discontinued [hat tip to The Stalwart]. Hydrox cookies were mediocre at best, while the original Oreo cookies always ruled.

Its that pesky recession talk that keeps coming back to the front burner of economic discourse. I happen to think we are already in a recession, but we just don’t know it yet. Here’s a useful Q & A.

Michael Santoli of Barron’s wrote a great piece in his Up and Down Wall Street column called ‘Til Next Paycheck, a Stimulus

Its funny how just 6 months ago, the economy was described more optimistically. I have been concerned about the economic impact of a housing slow down leading to a recession and the disconnect with federal policy makers for quite a while.

Bloomberg columnist Caroline Baum deals with this discussion in Recession Theorists Confront Recession Reality:

Most recessions are consumer driven, which makes sense since the consumer accounts for more than 70 percent of total spending. The 2001 slump, on the other hand, was driven by a sharp cutback in investment in equipment and software following a technology bubble, with too much money allocated to too much fiber-optic cable for which there was no possible use.

So what will the 2008 recession look like? Driven by home- loan defaults, falling home prices and cascading credit problems at financial institutions that have the potential to curtail lending to the rest of the economy, the recession may look something like the one in 1990-1991, which came on the heels of the savings and loan crisis.

Daniel Gross at Slate has an interesting take on recession perspective. A recession will:

  • cause inhabitants of the formerly high-flying sectors that got us into the mess—real estate and Wall Street—being laid low.
  • iron out distortions in the housing market, thus allowing them to move into previously unaffordable neighborhoods.
  • make econo-fretters hold out hope that reduced imports and the weaker dollar—both likely byproducts of a recession—will help close the trade deficit.
  • cause a few killjoys believe recessions can be morally uplifting. “High costs of living and high living will come down. People will work harder, live a more moral life,” as Treasury Secretary Andrew Mellon put it in the disastrous aftermath of the 1929 crash and ensuing Depression.

Whatever your spin or take on it, the markets seem to be showing recession concerns right now.

Its now overtime for the housing market. Housing may have been the last straw or the straw that pushed the US economy into recession.

Even ample supplies of Oreo DoubleStuff cookies won’t be enough to fix the problem.

UPDATE: Bring back the Hydrox, the FOMC just dropped the federal funds rate 75 basis points to 3.5%

The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.

UDATE 2: A Recession, If It Comes, Could Be Worse Than Those of Recent Past [WSJ]

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Contrarian Economics Of Housing Is Being Written

November 16, 2007 | 12:01 am | |

This is the golden era of contrarian economics. Its simply heaven. Its a pleasure to take a break from dry rambling economic theory that is detached from the real world.

There are a slew of great writers out with a lot of new ways to think and see the housing market. Here are a few recent articles that were written by some of my favorites:

But I digress…

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