As plugged-in people are well aware, the super/jumbo conforming loan limits that provide for federally backed mortgages up to $729,750 in high cost areas like San Francisco were first passed as part of an economic stimulus bill back in 2008, were extended by President Obama last year, and are currently set to expire on September 30, 2011.
This past May, the New York Times quoted an Obama administration’s position paper on reforming the housing market stating: “Larger loans for more expensive homes will once again be funded only through the private market.” In other words, another extension was not to be expected.
Today, it’s a plugged-in reader that points to a research note by Capital Alpha Partners in Washington DC that suggests the Obama Administration has decided to support a two-year extension for the higher conforming loan limits.
∙ If Lowering Rates Isn’t Working, Perhaps Increasing Limits Will [SocketSite]
∙ Another Year For Super Conforming Limits (Assuming Obama Signs) [SocketSite]
∙ Super Conforming Limits In San Francisco Set To Expire September 30 [SocketSite]
genius. 1) print more money; 2) encourage larger loans; 3) claim (nomimal) prices are going up or have stabilized!
I forgot, 4) stomp your feet if your rating goes south and then 5) force the firing of S&P’s ceo to teach others a lesson;
oh and 6) get uncle out of jail.
at least, bush told us to “go spend” our own money rather than encouraging us to “lever up”.
Hey moron, let’s not kid ourselves here. Bush encouraged borrowing through the goddamn roof and got us into this stupid mess. Those mortgages nobody could actually afford — remember those?
And now he can hit up brokers of higher-priced real estate and large dollar mortgages for campaign contributions. Should come in handy since the Wall St./Hedge fund crowd has given up on him and has directed most of their money and support to the Repubs.
In 2008 the Feds nationalized real estate lending to prevent a meltdown. It’s now clear that they have no exit strategy. None whatsoever. Eventually we’ll have to stop throwing money onto this bonfire…
Extend and pretend, thanks dudes. As I mentioned before, this is incredibly poor policy. I think I’m turning Japanese…
i’m surprised this is a surprise to anyone… of course they are going to extend this…. who is going to complain? in the scheme of things this means nothing. we can use it here in SF, but this doesn’t effect the majority of the country.
i also don’t see the value in a free falling real estate market – i understand those of you who get joy out of other’s misery, but you do realize that free falling real estate prices effects the economy as a whole. so why wouldn’t you encourage knife catchers and the “paint drying” as exSFer puts it?
Of course I expected this to be extended.
“Nothing is so permanent than a temporary government program”.
I think this is a win-win for Obama and republicans (eventually the citizens lose in the long run)
Obama excuse would be that he wants to create more jobs in real-estate, stabilize the market and therefore win 60% of home-owners vote.
Republicans would say this is a indirect tax break, as this would decrease the mortgage rates. Again, target the 60% of home-owners vote.
I also don’t see a value in free falling real estate market, but this program only helps rich people (compared to average American – not SF). I cannot see anyone who supports this supporting for higher taxes for other revenue.
Make sense if you understand that Obama is a moderate republican.
I don’t think this really matters one way or another in SF prime for SFHs. But it is certainly not a surprise; except for those that think we should must let the whole system collapse.
a few thoughts:
IMO this is just a trial balloon to see what the public thinks of increasing the conforming limits. Obama is (in)famous for doing this. it does not seem politically doable IMO at this point. How to argue for high priced mortgage support in an era of austerity? we’re going to cut grandma’s social security but give further support to mortgages costing $700k or more? Uncle Joe can’t have his diabetes medicine but Brittney the 6 figure tech worker can get a cheaper $1M mortgage? Republicans and Tea Party are going to vote for this when they said they were adamant about NO NEW GOVT SPENDING and when they have openly stated many times their goal is destruction of Fannie/Freddie? “Flyover” staters will vote for this when this is really all about just a few locales (CA, NY, DC etc).
dubious IMO.
If it should pass, an extension of higher jumbo conforming limits will be supportive of the RE market but it isn’t enough to meaningfully boost valuations.
in order to BOOST valuation, one must BOOST a variable. This possible change in rule is keeping a variable the same, not boosting it.
As I’ve said for some time, RE depends on aggregate buyer income PLUS aggregate buyer savings PLUS aggregate buyer credit.
Aggregate buyer income will continue to fall given that we are now in the austerity phase of the prolonged credit contraction.
aggregate buyer savings also shows no significant sign of near term increase.
IMO making high priced consumption purchases like SF or Bay Area RE is very very risky now. Better to wait and see what our fool politicians do the next few months.
we are in turbulent times with global stress that is unprecedented in our lifetimes.
To know SF RE unfortunately one must continue to watch DC politics. I just don’t see the DC politics favoring this right now, but could be wrong. Maybe it will be addended to some other appropriations bill or something.
It’s now clear that they have no exit strategy
True. although I’ve argued this point for about 1-2 years now. The Fed/Federal Govt never had an exit strategy. It was ad hoc “solutions” cobbled together from one emergency to another. (and these solutions all support the big banks.)
I think I’m turning Japanese…
if we’re lucky.
Initially (back in 2007) I thought we might turn Japanese. Now I think it’s our best case scenario.
You have to question why he would do this. If he doesn’t, he might still be able to argue with a straight face that the Republicans are the party of the rich and the bankers. If he does this, that argument is pretty much lost.
But you have to wonder what he sees that’s even worse. A sinking economy between now and the next elections, so his only chance is to try to turn the economy around any way he can? Is providing a quarter point interest reduction to a small segment of affluent buyers going to do that much to “save” the economy?
I think what he gains pales in comparison to what he loses politically.
ex SF-er wrote:
> IMO this is just a trial balloon to see
> what the public thinks of increasing the
> conforming limits.
Since we are looking at Peninsula “starter” homes between $1 and $2mm I am interested to see if values drop even more if the high conforming limits go away.
I don’t think that the “public” thinks about the limits much since very few people I talk to (even some Realtors) know anything about the higher conforming limits…
I don’t think that the “public” thinks about the limits much since very few people I talk to (even some Realtors) know anything about the higher conforming limits…
2 thoughts:
1)
I agree sort of. The general public doesn’t have overt awareness of all these programs. Thus, a change of the limits won’t help in a hopey-changey sort of way. (sorry… “restoring confidence” sort of way).
But it will matter if/when the limits go down and people try to finance a new purchase. They will presumably see higher mortgage rates if the Jumbo Conforming limits are lowered.
2)
I worded my above post poorly. I didn’t really mean public as in general public, I should have said “general investing and political community”. Team O floated this to see what Bill Gross and hedgies and bankers and CNBC folk and Tea Partiers and FireBaggers etc think about it.
We must not take our eyes off the ball. the proposed option is NOT meant to help the public or the general economy. It is meant to help the Banks, just like HAMP and other failed policies were.
The big banks are drowning in foreclosures and mounting legal challenges. Almost every one of them is still insolvent (but not illiquid thanks to the Fed), with BofA currently the most obvious problem (others are better at hiding like Wells). BofA is a slow moving train wreck and can not survive a significant future downturn in housing. They are Too Big To Fail and also Too Big To Save. They own the Repubs and Dems, and thus our leaders are throwing everything at the board trying to covertly save them… including trying to shovel all the crap from BofA to Fannie/Freddie, keeping conforming limits high, trying to block litigation against BofA, impede discovery from Eric Schneiderman (the NY AG) who is the first to actually look at all the fraud and theft…
as I said above, I don’t think this politically doable yet, for the reasons elucidated above. Thus, Team Trojan Horse President is floating the trial balloon to see how “the market” receives it.
if housing or equities (especially bank stocks) start to dive again you’ll see another Trial balloon at that time.
So for those of you who are not opposed to this, or were not surprised, what’s your long-term solution to this problem? We go on pretending American real estate is worth more than it really is in perpetuity?
This charade has already cost us hundreds of billions. Estimates range from $130 – $317 billion already spent, with a total projected cost around a trillion dollars. Should we all just shrug it off and go around bleating about how resilient the market is?
Keep in mind that this is money we’re NOT spending on infrastructure, education, et al. Does anyone who isn’t a realtor or over-levered homemoaner honestly think this is a good thing?
I agree almost totally with ex-SFer.* This is a trial balloon, or more precisely, a bone thrown to the real estate interests. Obama has no intention of pushing for this because his masters don’t want him to push for it. The bankers are more important than the realtors or builders. Obama’s masters wanted the government to give housing some support right during the immediate collapse–but now that the criminals have unloaded their unwanted baggage on the American people they really don’t care much for propping up real estate and are more than happy to let the bubble slowly deflate. First it will be the conforming loan limit, then it will be requiring 20% down on government loans. Obama will still support the real estate interests though–and allow them to continue manipulating the market by keeping the shadow inventory in the shadows and allowing corporate interests to convert much housing to rental stock.
But I agree that austerity is the name of the game and I don’t see Congress passing this. I once had a different opinion and thought the government would prop up homeowners no matter what. But if they go ahead and allow these limits to be raised then I will be even more certain that the mortgage interest deduction will end soon as well (as part of a grand bargain that will also lower income taxes).
*Except for the odd usage of “Firebagger.” The usage of this term better defines the person using it than it does the group it purportedly describes.
@Legacy Dude —
IMHO the problem hasn’t stemmed from the size of the loan so much as the people giving and receiving the loans.
The real estate is worth what people will pay for it. As long as we tighten up a bit and use better discretion regarding who actually qualifies I don’t see a problem with responsible borrowing of any magnitude.
As we’ve already seen, it’s just getting harder for people to qualify. Prices will probably stagnate, which is totally healthy. In the end that’s a more stable solution than a free fall market, which would be devastating to our local economy.
“You have to question why he would do this.”
As people have noted above, this mostly affects high cost areas like SF. And Nancy Pelosi is still the house minority leader which counts for something, at least among democrats.
As ex-SF alludes to, if you are a congressman from a locale which is below the super-conforming limit this would be a complete loser vote. And I’d guess you’d need some type of quid pro quo even within party lines. If the democrats had the house and Pelosi was speaker, she could most likely get this done. I’m not sure why Republicans, especially TP, would go for this though.
My understanding is that since loans have to clear by Sept 30 to get the old limits, banks have already started the wheels turning to implement the reduced limits.
@kg: speaking generally, we live in country where the government is the de facto provider of 95% of the mortgages that get written. The fact that the private market isn’t competing tells you that government loans are too cheap, too large, and too easy to get. This is confirmed by the large REO inventory.
Real estate is not worth what people will pay for it. It’s worth what they can get financed (obviously I’m overlooking the multi-million $ trophy market, but that’s an insignificant slice of the national pie anyway).
Example: if a couple making $200K/year has $50K to put down on their Bay Area starter home, how much can they buy if a lender needs 20% down and charges 8% interest? What about a gov’t loan with 3.5% down at 4% interest? So who really drives the decision on what it’s worth?
Look, I’m not suggesting unwinding the centrally planned monopoly overnight and causing financial ragnarok. But it would be good to see policies leaning towards a return to sensible standards and sustainable practices. Instead the drunk just begs for one more highball and swears he’ll sober up tomorrow.
This is pretty funny, or sad:
Standard & Poor’s is giving a higher rating to securities backed by subprime home loans, the same type of investments that led to the worst financial crisis since the Great Depression, than it assigns the U.S. government.
S&P is poised to provide AAA grades to 59 percent of Springleaf Mortgage Loan Trust 2011-1, a set of bonds tied to $497 million lent to homeowners with below-average credit scores and almost no equity in their properties.
http://www.bloomberg.com/news/2011-08-31/subprime-mortgage-bonds-getting-aaa-rating-s-p-denies-to-u-s-treasuries.html
Clearly the US hasn’t paid enough money to S&P to deserve an AAA rating. What could is owning a printing press if you don’t print money and give it to S&P? If the government isn’t willing to do that it must mean it is more likely to default.
Legacy Dude,
All of us are paying the costs of the housing bubble the fascists created. The fascist criminals are still profiting off of their crimes but the ‘real’ economy has taken a sucker punch in the form of higher housing costs. We all pay more to live in our abodes than would have otherwise been the case without the fascist cabal running our government. Who knows if the effects can be quantified. It’s got to be a huge number.
But anecdotal experience also demonstrates this:
For instance, look at the housing stock in the East Bay flat lands. This housing stock is in worse shape than it was 50 years ago,* but it pretty much serves the same function and probably houses a similar class of person. The main difference is the average person pays way more to live there now then they did then.
*I don’t see the same investment that one sees in Noe Valley for instance.
The key to helping the housing market is to allow everyone to refinance even if they have negative equity but are still making payments through the government (GSE’s), but the big banks and the GSE’s won’t allow for it due to the huge spreads they’re making. I think Boxer has a bill working its way through Congress to this affect. This would free up some discretionary income that can go to reducing debt, savings or what the government would prefer; spending.
I’m no liberal, but for people stuck and can’t refinance at these low rates the Fed has engineered, they should be given the opportunity. Then again, that means a hit to the bank’s profits, and we know who wins those battles. Socialize the losses, privatize the gains.
“This housing stock is in worse shape than it was 50 years ago,* but it pretty much serves the same function and probably houses a similar class of person. The main difference is the average person pays way more to live there now then they did then.”
Not that I agree with SFHawkguy about fascist conspiracies or other such stuff, but it is a very valid point that increasing the cost of something like housing without a corresponding increase in value is no benefit to the overall economy.
This charade has already cost us hundreds of billions. Estimates range from $130 – $317 billion already spent, with a total projected cost around a trillion dollars.
Where do you get these numbers from? I don’t think it has cost taxpayers anything (yet), though it may well in the future. During the whole bubble period, Fannie Mae and Freddie Mac were private corporations Legacy Dude. It was a failure of the free market that caused the worst of the housing bubble. Since they have been nationalized after their collapse, the government has been trying to clean up the mess. Letting housing prices collapse is not answer as it will lead to a deflationary depression.
The long term answer is to slowly let the bubble out. We are much closer to historical home prices nationwide than we were 5 years ago. Probably not quite there yet, but close.
Well tc_sf, if it’s not a fascist conspiracy then it must be the inherent internal contradictions of capitalism collapsing upon itself, no? It must be that capitalism itself creates these massive greed-based bubbles that are a net negative for humanity?
Because surely theft of this scale has to involve more than individuals simply acting alone. This massive fraud could not have simply appeared out of thin air and only involving totally innocent people making individual decisions without any involvement with other people? Surely you recognize that the legal definition of conspiracy is much broader than this and is not a crazy concept. The use of ‘conspiracy’ as pejorative is used to hide the truth. It’s not crazy that groups of people act together to pursue their interests. That’s reality and has happened throughout history.
In fact, corporations are conspiracies in themselves as it allows a group of people to act in ways they wouldn’t act as individuals and they are not held responsible as individuals. Look at how PG&E is shielded from the murder they committed in San Bruno because it is a powerful corporation–if it were a partnership of a couple of small timers whose faulty equipment burned a whole community down they would be in prison.
Conspiracy is a pretty low bar to meet and in fact many banks have been accused by attorney generals and many more legitimate people than me of engaging in conspiracies. It’s not radical concept and one must remember who benefits from the notion that it’s “crazy” to think that a small group of elite run this country and engaged in crimes together. In fact, it’s the people that persist in romantic notions of American Exceptionalism and democracy that are truly deluded.
I have often thought of the whole housing bubble as a massive ponzi scheme, on a scale never really seen before.
On some level it is hard to tell the difference between mass delusion and an engineered conspiracy.
Maybe it doesn’t really make any difference.
@ SFHawkguy — A large number of people on this site and off want housing prices to keep going up. But in my view this is more self interest, then a fascist conspiracy. A guy who sells houses wants to sell more and pricier houses, a guy who hangs drywall wants to hang more drywall, a guy who has his whole net worth in a house want his home value to go up. I don’t think any of these people needed to do much conspiring to act in their self interest.
@NVJ — Fannie/Freddie has always been quasi-governmental. Considering the very content of this thread deal with all the political issues involved with congress potentially changing the fannie/freddie loan limits it’s hard to see how fannie/freedie is or was anywhere close to the free market.
A quick google gives this:
“In the second quarter, it needed $5.1 billion from the U.S. Treasury, also down from its first quarter need request of $8.5 billion. At this time, taxpayers have plowed $103.8 billion into the troubled company. Together with Freddie Mac’s Treasury requests through the first quarter, the mortgage companies’ bailout now totals $168.5 billion”
http://www.theatlantic.com/business/archive/2011/08/fannies-bailout-grows-by-5-billion-as-it-squeezes-bank-of-america/243178/
I’ve seen higher estimated for losses incurred but not yet billed to Treasury based on estimates of problem loans, but these are by nature more subjective
“I have often thought of the whole housing bubble as a massive ponzi scheme, on a scale never really seen before.”
The classic text on this, published in 1841, shows that there is nothing new under the sun.
http://en.wikipedia.org/wiki/Extraordinary_Popular_Delusions_and_the_Madness_of_Crowds
tc_sf, you have simply identified the scam, you haven’t disproved that there were criminal conspiracies associated with the bubble. Sure, people bought into the American Dream
But what really allowed the bubble to take off was the government allowing unregulated gambling by the elite in the late 90s and then the securitization craze. That created a bubble. The desire by the American people for the American dream didn’t create the bubble–it fed it.
What I suspect, is that the powerful knew precisely what they were doing. They knew that huge amounts of money that were being gambled in unregulated markets like derivatives and MBS was going to blow up. They knew it was based on fraud. And the politicians covered for them with their BS “ownership society” crap and their false hope for underwater homeowners crap.
The problem is the criminals are so powerful that there is no forum to convict them of these crimes. They are above the law. So your defense of them does not pass the test; you’ve simply identified the hook they used to scam their victims. The victims are not the cause of the bubble.
I’ll take “fascism” over communism any day of the week thrice over. Maybe then the Muni will run on time.
The housing bubble happening here also is happening now in China (oh, I forget, that’s not a “real” communist country – those only exist in dreams). Any such bubble is not a function of “capitalism” which is not a “system” but merely normal human interaction over thousands of years, but rather a result of human greed an idiocy. Since most of those who were greedy and acted idiotically ended up in foreclosures, the system is self-correcting.
What IS however offensive is the government which purposefully is attempting to reinflate the bubble.
Housing prices in SF will fall – it’s better that the fall were faster and done with but it seems our short-sighted leaders are intent on taking 100 trips to the dentist’s rather than one.
There is an excellent article in today’s WSJ about DOJ going after banks who now refuse to lend to certain people based on a theory that such refusal to lend is discrimination – solely based on alleged disparate impact (i.e., without any showing actual discrimination). This is the same DOJ that weeks earlier was pounding the banks for having “seduced” gullible [] into taking out risky loans. I am not a fan of the banks but if you are a bank exec you have to be seriously tearing your hair out.
In the meantime, the government will likely continue this wonderful plan of keeping nonconforming loans afloat so that the housing market can be reinflated.
Until people stop and think that housing is a “wasting” asset rather than a “growing” asset like corporate stock, the bubble mentality will persist.
“tc_sf, you have simply identified the scam, you haven’t disproved that there were criminal conspiracies associated with the bubble. Sure, people bought into the American Dream”
I think the burden of proof is on the person trying to establish a conspiracy.
“What I suspect, is that the powerful knew precisely what they were doing. They knew that huge amounts of money that were being gambled in unregulated markets like derivatives and MBS was going to blow up. They knew it was based on fraud. And the politicians covered for them with their BS “ownership society” crap and their false hope for underwater homeowners crap.”
Yes, the “powerful” [Illuminati?] are all knowing and all devious – so much so that they decided to drive those tools of proletariat – Lehman, Bear, AIG, WaMu, Wachovia and ML (not to mention BofA) – into the ground.
As for the “ownership society” of course it’s BS. Not everyone should own a house – just like not everyone should be driving a Lexus.
Question:
How does a truly, no kidding, real live “communist” country have a bubble in property values?
also, don’t forget we’re gearing up for QE3 – buy gold, silver, Swiss franks!
Answer:
it doesn’t – it also will never exist; which is why your labeling everything “capitalist” is meaningless – capitalism is all there is – just different gradations;
@NoeValleyJim: The CBO recently submitted a doc to the House showing $130 billion already shredded in the GSE black hole, plus a $187 billion fair-value deficit, bringing full cost to taxpayers to $317 billion through March ’11 (see name link – warning: pdf).
The full cost until they’re unwound and private lending returns, if that ever happens, is admittedly a wild guess at this stage. $1 trillion has been thrown out by various pundits and is not outside the realm of possiblity. Again, we’re 3 years into this and the Feds have no exit strategy whatsoever.
wrath…last time I checked, North Korea and Cuba still exist and neither has a bubble in property values. That’s not to say that both don’t have serious problems (and I wouldn’t want to live in either one) but they exist and are functioning.
brahma: “serious shortcomings”? really? what’s your view of Nazi Germany? worse yet, Soviet Union? Are they in the “mistakes were made” categories?
and by that definition, was there ever a country that you think did not function?
or is your point that these ARE Communist countries? If the latter, is that where we want to head to avoid bubbles and “unscrupulous” bankers?
no doubt we could also eliminate all drugs if we shot drug users on sight and devoted 90% of GDP to the task;
but seriously, the reason North Korea or Cuba don’t have a bubble (educated guess, I haven’t visited and don’t intend to) is b/c 99% of the population has been disenfranchised in every possible way; once you eliminate all opposition (not just political but economic) no bubbles are possible; extermination reduces demand while doing nothing to the supply; then the ruling clique, as a practical matter, owns 100% of everything;
if that’s the path you want to go, I suggest that you hand all political power in SF to me and also hand over all real estate in SF. I will own all of Pacific Heights in the name of the “people” and you will love and adore me;
Backing off a bit from Nazis & Communists vs Banksters, and looking at our own governments intervention in the housing market.
Even someone like SFHawkguy who is less then enamored with capitalism, pointed out that merely increasing the price of housing is no real economic benefit. And given that it has so far cost $300B to inflict this economic harm I find it pretty straightforward that this intervention was and is a losing proposition.
Regardless of if the policy is implemented by a dictator or elected representatives, if I proposed a plan to triple the price of corn and wheat at a cost of $300B it should be pretty clear that this would not increase the general welfare. Although farmers and grain salesmen might be quite enamored by it.
Note that this is true for a cost rising without a change in the good’s benefit. If the government (or private industry or a commune,…) spends $300B and doubles crop yields which causes farmland prices to increase less then 2x, then some actual benefit has accrued. Similarly if an area goes from orange groves to web companies and salaries go from farm worker to google worker, then a corresponding increase in housing costs is not a negative economic indicator.
And with a comment at 2:17 PM, wrath provides another data point in support of Godwin’s Law.
The point was merely to cite two communist countries that are in existence. You said that “capitalism is all there is”.
You also ahistorically describe capitalism in the 12:38 PM comment as “merely normal human interaction”, as if capitalism appeared fully formed with the onset of human civilization with no predecessor. Try looking up ‘feudalism’ since you were absent in middle school history class when they were discussing the western world as it existed “normally” before 1600.
It doesn’t at all surprise me that you’re attempting to blame the people for whatever reason who were caught in the bubble—ordinary people trying to get a mortgage to finance a home purchase—rather than the financial types who profited from the bubble, both on the expansion and contraction sides.
Rick Santelli and the Wall St. Journal Editorial Board would be proud that you’ve partaken of the right-wing Kool-Aid with so little prodding.
@tc_sf: Agreed with you theoretically. But for those that were already owners pre-bubble, or those who jumped in early, the mania allowed them to get pretend-rich and then “liberate” their equity to spend on must-haves like monster trucks, ski cabins, boats, and calf enhancements/calf reductions. Those expenditures helped partially drive the real economy.
Depending on what estimates you go by, we’ve lost around $16 trillion of fake wealth in 4 years in this country (Fed number tracking household net worth). That ain’t coming back anytime soon, regardless of how much stimulus Krugman and his apostles think the government should be pushing.
Godwin’s law? I threw in Germany quite gratuitously to aid in your understanding of the point – had I just kept the reference to the Soviet Union – most SF denizens would have responded with their best Tony the Tiger impression “duhhh, what do you mean? The Soviet Union was GREEATT”.
I see you deal with labels. You were taught there was feudalism then capitalism, etc. by people who call themselves (afactually) social “scientists” dealing in false taxonomies.
Was there no trade during your “feudalism”? Were there no banks? Was there no property and property rights? Why should the fact that serfs were being exploited make the least bit of difference? Was the South not capitalist during the years of slavery?
Or do you believe “capitalism” only started with the industrial revolution? If so, what’s needed for it? machines, plants? By that measure what’s left of the US industrial base is rapidly departing for parts unknown. Is a world where Google owns IP and charges royalties a “capitalist” world? Maybe then you got a break we don’t live in capitalism anymore?
And on the other side of the “feudal” divide, are you saying that the Romans did not believe in private property?
I don’t know what you mean by “capitalism” but most people mean by it system where people make, provide and trade goods and services. That to me is just normal human existence. That has always been the case. The fact that at various times, various groups of people (slaves, serfs, slaves again etc.) were (on top of that) exploited to varying degrees and not permitted to
share in the spoils is completely irrelevant to the question of whether trade/commerce, etc. existed.
You seem to live in a bipolar world. I do blame bankers for being stupid and I do blame the goverment for bailing them out. But I also don’t believe “ordinary people” “were caught in the bubble” were on a $50k salary they took out a $1m ARM (some of whom were not even legally here). Many of them lied on their applications through their teeth (to the extent they had any).
Also, I am not sure who are the bankers/financial types who profitted on the “contraction” side? Who? John Paulson and maybe three other guys – is that your argument? Plus some of those who did manage to short the market had nothing to do with creating the frothy spectacle in the first place so I have no problem with kudos being given. Have you seen the employment rolls for most US investment banks for the last few years? Who do you think had a more stable job over that time – an associate at an IBank or the average hotel worker in SF?
WSJ/Santelli would be proud? Great!
Can a citizen living in a real communist country even own a property? If not, then bubble in the values doesn’t exist. Everything is owned by the government, isn’t it?
Fannie/Freddie has always been quasi-governmental.
This is absolutely not true. They were privatized 1968 and were publicly traded companies on the stock market. This was one of our earlier mistakes in “deregulating” the financial sector.
http://en.wikipedia.org/wiki/Fannie_Mae
They were dissolved as public entities and nationalized in 2008. Since then they have been larded up with bad debt from various banks.
So yes, now the government controls them, but during the period that they racked up most of their losses, they were private entities, albeit ones with a corrupt relationship with Congress.
It’s just the law of diffuse groups.
where all own something then no one owns it – or, more specifically, in a world like that (Korea, Cuba) the ruling clique “owns” it all. As I said, eliminating all competition eliminates competing demand so no bubbles – do you want to live in that world?
(it’s like some US corporations where shareholders own it all which really means the CEO/board clique owns it; or US democracy where, since each one of us (no matter how retarded) has a vote, our “voting” ownership means zilch).
@NVJ: from your own wikepedia cite:
1) FM was “founded as part of FDR’s New Deal”; was the New Deal some sort of a private program? who was this mysterious CEO – FDR?;
2) In 1992 their charter was amended to reflect Congress’ view that they “have an affirmative obligation to facilitate the financing of affordable housing for low-income and moderate-income families”; initial annual goal for low-income and moderate-income mortgage purchases for each GSE was 30% of the total number of dwelling units financed by mortgage purchases[16] and increased to 55% by 2007;
were other private companies subject to such requirements?
3) how much of the stock of these entities was actually in the public float? I mean, could a corporate raider have acquired 100% of it? Then maybe he could have changed the charter to remove the above requirements?
4) And who were the CEOs of Fannie and Freddie? Who were their “middle management”? How were they selected?
The only private thing about FM were the private stockholders who foolishly invested in a corrupt governmental entity and rightfully got screwed (kinda like Chinese ADRs where you’re not actually investing in the company that owns the assets or like Google where your stock is worth 1/10 of the founders’);
@Legacy Dude — “Those expenditures helped partially drive the real economy.”
I’d note here that metrics like GDP measure economic activity not necessarily productive or useful activity. So some things may help the stats that are used to measure the economy, without making any real contribution to the nation. What actual benefit accrued to the nation by giving people jet skis and whatnot?
Going forward the same issue arises when people suggest that the government pays to have livable homes demolished only later to be rebuilt. This increases GDP since there is a cost to demolish and buidlers get paid to rebuild, but in the end we’re back where we started.
@ NoeValleyJim — Your Wikipedia link directly calls Fannie a ” government-sponsored enterprise”, the article lists numerous instances where Congress directly controlled their operating procedures, does not say that they were nationalized, rather that they were placed in conservatorship (which is akin to bankruptcy for a GSE).
If by law Congress writes your charter, then you are in no way representing the free market.
The actual government entities that guarantee mortgages, organizations like VHA, did not participate in the big housing ponzi scheme and have not saddled the taxpayers with losses.
@ tc_sf, you are not carefully reading the wikpedia article. Whebn Fannie Mae and Freddie Mac were placed in “conservatorship” stock was issued giving the government 79.9% ownership.
Before that, 13 of the 18 members of the board of directors were appointed by share holders and 5 were appointed by the President. So yes, someone could have theoretically bought up all the shares of Fannie Mae and done what they wanted with the org within the rules that they were charted under. They certainly could have dissolved the org and shut it down. Just like all financial institutions, they were regulated by a charter. What do you think a Chartered Bank is?
@wrath, read the wikipedia article, it will answer your questions. If you read it and still have questions, I will be happy to answer as best I can.
The organization was indeed thoroughly corrupt and legally bribed politicians on both side of the aisle. Here is a good Slate article about how it operated:
http://www.slate.com/id/2200160/
” Whebn Fannie Mae and Freddie Mac were placed in “conservatorship” stock was issued giving the government 79.9% ownership.”
How does this conflict with anything said above by wrath or I?
“Just like all financial institutions, they were regulated by a charter. What do you think a Chartered Bank is?”
There’s a diference between filing a charter and having your charter and operational details such as how much and what you can lend against written directly by Congress.
http://www.law.cornell.edu/uscode/html/uscode12/usc_sec_12_00001717—-000-.html
Even the NYT and Barney Frank, hardly conservative shills, call them GSE’s.
Can you cite anybody remotely credible that considers them purely private?
I have a question for you wrath:
1) What percentage of mortgages were insured by the GSEs in during the period from 2004-2007, when the bubble really got cray?
2) Who was issuing and insuring mortgages in their stead during that period?
3) Who got left holding the bag for cleaning up the mess from risky loans issued during this period?
No doubt Fannie Mae and Freddie Mac were some weird hybrid organization that combined some of the worst excesses of private corporations with the ability to implicitly tap the public purse to fund those excesses. But you can’t let the private sector off the hook here. Most of the money to blow up the housing bubble came from Wall Street.
When the government goes from owning 0% of your stock to 80% and dissolves the board and appoints a new one, that is for all intents and purposes nationalization, is it not tc_sf?
To paraphrase someone’s quote, my general feeling is that capitalism is the worst economic system, except for all the other ones!
It seems like a losing proposition to argue that everything done by banks and private capital was without sin and for the benefit of mankind, but before giving more monopoly power to government in this market it’s worth thinking about why they’d be any better.
I don’t have the exact numbers in front of me, but generally I remember that pre-2004 the GSE’s had huge market share and despite huge market share and the power of government was unable to stop the bubble, then post 2004 dropped to a bit under half of the market still was unable to stop the bubble and now they have a near monopoly, are $300B in the hole and still appear to have no real exit strategy.
Monopolies are dangerous and government monopolies doubly so since when government becomes an active market participant (and with a significant market share even during the bubble) it compromises government’s regulatory function since independent regulation now becomes self regulation. Sometimes the benefit of a government monopoly outweighs the cost, but in this case what did we get for our $300B loss and large grant of market share to the government? Why would I want to give them more money and market power?
I am not letting Wall Street “off the hook” – as repeatedly stated above, I think much of the bailout was pure thievery that Bush and Obama both got duped into pursuing (and will continue to do so – see BofA soon – maybe Citicorp too).
My point, for you, was that characterizing FNMA as a private enterpise is absurd. FNMA was part of various agencies – eventually becoming part of HUD (its charter actually was quite specific – referring to the [Association] “which shall be in the [HUD]”).
Here is a non-wikipedia link:
http://www.fanniemae.com/global/pdf/aboutfm/understanding/charter.pdf
Further, it says (now even) “The Association shall have succession until dissolved by Act of Congress. It shall maintain its principal office in the District of Columbia and shall be deemed, for purposes of venue in civil actions, to be a resident thereof.”
Here is an entity created by Congress which cannot be liquidated except by an Act of Congress. So shareholders can’t just liquidate it. In fact, its charter cannot be changed except by an Act of Congress. Not only that, it has to maintain an office in DC (what a nice boondoggle – no offshoring guaranteed).
So the shares they bought on the exchanges were just lottery tickets – now, granted, a corporate takeover and actual ownership is not something that most will engage in – but here even Mike Milken could not have engineered this;
Any time the government “interacts” with the private sector, there is potential for corruption but this was institutionalized. The difference b/t the Wall Street bankers and FNMA is that my money does not go to pay Wall Street bankers (or at least it didn’t before continental illinois) – I know they’re greedy and try to state away. It’s like the difference b/t being beat up by a local thuggee and a cop – somehow there are always protests against the latter – why? For the same reason – we expect more from our government.
I merely objected to your characterizing Fannie as a “private” enterprise, apparently, to fit the whole thing into a scheme of thinking where private bankers ripped of taxpayers and the government was at best hapless.
“When the government goes from owning 0% of your stock to 80% and dissolves the board and appoints a new one, that is for all intents and purposes nationalization, is it not tc_sf?”
What makes it more like a reorganization/bankruptcy is that shareholders got a capital infusion in return for dilution. And were that capital not provided the stock would certainly have been worthless.
And yet somehow this entire mechanism worked just fine until we started deregulating the financial sector. It was deregulation that brought about the first big financial bubble: the Savings and Loan Crises and we “learned” from that one and deregulated the entire financial sector.
FNME was indeed a strange hybrid organization and if its charter even when it was still a private corporation said that it could not be dissolved except by act of Congress, then I stand corrected.
Banks always get bailed out after big credit collapses, not just in the United States. The only time they don’t get bailed out is when there is a revolution. That is because the cost of not bailing them out is too high. This is why banks need to be tightly regulated: to avoid exactly what happened, where the gains are privatized and the losses socialized. I think you realize that too, by your Continental Illinois reference.
This goes doubly true for a private-public partnership like Fannie Mae, I think we are in agreement here.
“And yet somehow this entire mechanism worked just fine until we started deregulating the financial sector. ”
There are ample examples of government run economies and industries that have not worked out just fine.
I think one big issue involves how any deregulation is done. Generally opponents of deregulation just oppose it rather then work to ensure a good outcome for the deregulated system. If they lose the fight then the resulting system can be heavily biased towards the encumbants
Hilarious. Obama and Bush got “duped” into doing exactly what the fascist oligarchs wanted. That’s extremely naive. If you listen carefully the criminal politicians of both parties will even admit that the “bankers own the place” and that corporate money and lobbying dictates policy.
Plus, I find your thinking to be scattered and all over the map. On one hand you are imagining elaborate corporate takeovers of super capitalists that will efficiently exploit any weakness, but then claim that the bankers and the politicians were all hapless bystanders in the Great Housing Fraud and that there was definitely no scheme, intent, or conspiracy to unload fraudulent crap onto the public. It simply materialized out of thin air. Right. You are conveniently forgetting the fear card Bush and Obama used to get their bailouts (“this sucker is going to blow”, etc.) You are forgetting the lies . . . . heck, we just found out recently that they were secretly bailing out banks and not even telling the public! The fed bought trillions of dollars of mortgages from private holders of MBA, and not GSEs, right? There have been no concerted effort by the Obama administration to indict these criminals, and the few settlements (where bankers admitted to conspiracies) resulted in slaps to the wrist.
Regarding the GSEs, the capitalists want to have it both ways. It was clearly used to suck up all the mortgages when the private mortgages dried up. Who did this benefit? The people? No, I’m in agreement with tc_sf on the basic economics of it . . . bubbles like this add no value to an economy and only allow a few people to reap the rents. The rest of us overpay for housing, including the people that buy with a GSE mortgage. But the people who really benefit are the bankers who bought enough time to unload their crap and get a lifeline from the government. Now that they are no longer needed the capitalists will devour the GSEs and probably buy back the houses and rent them to us (making sure to manipulate the inventory to extract the highest rents).
Also, all corporations are “chartered” in the sense that they must register with the state and get permission to operate. In modern times corporations are chartered to do any sort of business it wants, but it used to be limited to certain activities. Certain activities that involve all of society, like utilities, were more strictly regulated and “chartered” to benefit the people. The corporation as the beast we know it now is a relatively recent phenomenon. The idea that all businesses should be able to do what they want and any sort of charter is a limit to the inherent right to make a profit is a very modern idea and probably unique to the crony capitalist system in America. It does go to show the power of propaganda. I was just watching a documentary on JFK and the rise of the radical right and was listening to the founder of the Birch Society and it strikes me how what was once a radical concept, free market fundamentalism, is the new American religion.
tc_sf,
Let’s stick to the industry we are talking about: finance. I don’t have the charts handy but finance has taken on an outsized role in our economy. Does this benefit society? And we do have a decades long example of some socialistic regulation of capitalism that seemed to work pretty well in this country for decades. We don’t need to look to other industries or other countries–our experience demonstrates the need for basic regulation of capitalist finance–as does the experience of other countries.
You also seem to be blaming the opponents of deregulation for not working with the deregulators to make deregulation work! But you’ve got it backwards. It should be the uber-capitalists that want to work with the regulators to ensure the system continues. The regulation was meant to control the natural excesses of capitalism but by removing the regulations they were playing with fire and should have treaded carefully. But the fascists that control this country have no interest in moderating capitalism–they want complete victory. That’s why they hated FDR and JFK. That’s why they call any sort of regulation “communism”.
I’m sorry. The people that need to work with the rest of society are the sociopathic capitalists. Not the disenfranchised. You are once again blaming the weak and the victims for not standing up to fascist criminals.
The fascist criminals that run this country are the most to blame and need to be overthrown.
There are no examples of completely unregulated large scale societies that have worked out just fine.
All functioning societies are mixed economies these days, the best functioning ones right now are more tightly regulated and have a larger government sector than the United States does.
We had a good regulated monetary system that got blown apart by the free market fundamentalists. Sadly, I don’t think that we can put that Genie back in the bottle: the entire government seems to have been taken over by rent-seeking forces — those that attempt to use government regulation to gain an unfair advantage over competition. And since Citizen United, it is going to get worse before it gets better.
SFhawkboy:
“The fascist criminals that run this country are the most to blame and need to be overthrown.”
are you suggesting a violent overthrow of the government? sure sounds like that’s what you are doing. on a real estate board too – poor choice of target audience I suppose.
you are frothing at the mouth w/your use of the word “fascist”. Of course, I wish we had (legally elected), fascists running this country – that would mean summer camp for you and unperturbed REAL ESTATE discussions for the rest of us.
Cara al Sol mi amigo
“the best functioning ones right now are more tightly regulated and have a larger government sector than the United States does”
which ones would that be? Portugal, Greece? the UK?
Or do you mean societies based on more, let’s say “voelkish” principles, like Norway, Dennmark or Germany?
I’m not sure we want to replicate that.
“finance. I don’t have the charts handy but finance has taken on an outsized role in our economy. Does this benefit society? ”
As with economic activity in general, some financial activity is and was beneficial, some not.
“You also seem to be blaming the opponents of deregulation for not working with the deregulators to make deregulation work! ”
Questions like blame are a moral issue. From a pragmatic point
of view, if you want effective regulation there has to be someone advocating and working towards that goal.
“There are no examples of completely unregulated large scale societies that have worked out just fine.”
Perhaps some guy in a tri-corner hat was on Fox advocating a completely government free society, but I am not, nor do I see anyone on this thread arguing this. I did mention above, that when government becomes a primary player in a market it actually compromises rather then strengthens the checks and balances that independent regulation normally provides. Both you and SFHawkguy point out issues with government regulatory failures.
Wrath,
Well, you’re calling me “boy” and dreaming that I get sent to a death/work camp and openly admire fascists. Maybe you are the one with the radical tendencies? Maybe you prove my point that fascism is alive and well in America.
I’m simply promoting a mixed economy, which is hardly radical. You are ignorant of basic economic theories so you rely on childish stereotypes and a cartoonish view of economic systems. Frankly, you would fail a Jr. High school test on economic systems. If someone is “frothing” at the mouth it seems to be you with your silly notions of communism and capitalism.
I am indeed angry at our current political/economic system. But my anger is not misplaced and is certainly commensurate with the crimes the fascists have committed.
I don’t use “fascism” loosely or as a meaningless insult (like you use “communism”). The fascists have taken over our government. This is not hyperbole. If you were a fair observer and could think more clearly about concepts like “capitalism”, “communism”, “fascism”, and “mixed economies” it may be worth discussing it with you.
But you are simply a free market fundamentalist propagandist. You can’t think beyond the propaganda and so like many a weak minded propagandist you retreat in to your tribal comfort zone of mindless American exceptionalism and free market fundamentalism. “If you aren’t a free marketeer fundamentalist you are a commie that needs to be killed or move to North Korea!”
I have these discussions here because there are smart people here. I suggest that if you want to hear nothing but free market fundamentalism that you hang out at the Wall St. Journal more or only commiserate with those bankers you talk about who are wringing their hands at the horrible socialism in this country. Mindless propaganda seems to be about all you can handle.
tc_sf,
I agree that many liberals attack a straw man when they attack libertarians. See here: http://successisoverrated.wordpress.com/2011/08/31/the-libertarian-menace/
But I think there is some truth to the critique that many (most) right-leaning libertarians are more comfortable with fascism than a mixed socialist economy. In other words, I do think many right-leaning libertarians would replace a criminal state with a criminal corporate class that will be (is) more oppressive.
So while I am unsure that the state is ultimately a viable institution, in the near term I would rather have democratic socialism than fascism. I disagree that I a corporate monopoly is better than a government monopoly. Let’s just look at the finance sectors or health care sectors. I think it’s indisputable that the state (especially democratically controlled states–which may not even be possible though).is better able to run the health care sector and finance sector. Corporations will seek rents that will end up doing more harm to the majority of people–look at health insurance for a perfect example.
sfhawkboy:
The only thing I prove is that there are still Americans in America.
You don’t use the word fascism “loosely”? Every other adjective is “fascist”. Your repertoire is rather thin mi amigo.
Have you ever lived in a fascist country? I bet you were born with a silver spoon in your mouth, went to private school, maybe flunked out, tried your hand at some non-profit, had no kids (or one who lives in LA and with whom you have a strained relationship), you take public transportation to work (which work you resent b/c you think you have a meaningless job (true) working for people who are dummer than you (not true)) all the while wearing a goatee and a beret (and maybe an earring or two for that “special” look), probably reading volumes of Chumpsky or Alinksy or Luxembourg or Marx or Engels or any one of a half dozen hot air idiots who, like you, were failures in life, but turned their palpable self-hatred into a self-righteous anger at the world that scorned them, by thinking, in their arrogance, that they are the archons of the proletariat or “Gaia” or some other fictional creature or group, and can reorder the world at their will.
And so you spend your time, like the snake primordial, feeding the masses your virulent apple of discontent, striving for meaning, knowing no pleasure or contentment, driven madly only towards your own inevitable destruction, as you coil around shattered body and disappering mind. That is your prerogative.
Don’t take us with you – we love America and we don’t want any “change”;
p.s. I have never said you should move to North Korea.
I am done with this discussion here – time to get back into REAL ESTATE –
-no more time for haters!
Funny that these questions were never answered:
1) What percentage of mortgages were insured by the GSEs in during the period from 2004-2007, when the bubble really got cra[z]y?
2) Who was issuing and insuring mortgages in their stead during that period?
The data is easily available.
wow.
vitriolic debate!
But I think there is some truth to the critique that many (most) right-leaning libertarians are more comfortable with fascism than a mixed socialist economy
I think of this differently:
the Ayn Rand style libertarians have an idealistic world view of capitalism as seen through Ms. Rand’s fictitious society. They have a difficult time understanding what happens when one entity devours all else becoming a monopoly, or an oligopoly. They also don’t usually understand the problem of agent-client conflicts of interest, especially when the agent is the CEO of a company owned by shareholders. (often CEO desires are contrary to the owners!).
Thus, they tend to overly vilify everything as “communist”
it’s not that they would prefer fascism, it’s that they don’t believe that their idealistic system would lead there.
likewise, those on the other side often have an idealistic idea of government. These people have difficulty seeing the problem of revolving door politics and campaign finance leading to overwhelming control, and fake movements that are really astro-turfing… not to mention a government that is rotting down to its core.
These are the type of people who are surprised to find out that the SEC destroyed thousands and thousands of documents of bank wrongdoing, tried to help the cover up the BP oil spill, or that they’re trying to cover up all the BofA wrongdoing instead of prosecuting the criminals for fraud.
So it’s not that either group likes the extreme of their ideals, I think it’s that both groups have difficulty imagining the negatives of what they espouse.
An over-riding monopolist government with full central control is likely not the best economic system for the majority of people (witness N Korea).
likewise
an economy based on oligopolist control is also not likely the best economic system for the majority of people. (I think of places like Somalia that has little to no govt control).
but unfortunately, we have neither.
we have a corporatist government that works in concert with the oligopolies to crush all competition and to pit labor vs capital. Since capital is much more fungible, it will always win over labor if the rules are structured certain ways, as our government and multinational oligopolies have ensured.
“I don’t have the exact numbers in front of me, but generally I remember that pre-2004 the GSE’s had huge market share and despite huge market share and the power of government was unable to stop the bubble, then post 2004 dropped to a bit under half of the market still was unable to stop the bubble and now they have a near monopoly, are $300B in the hole and still appear to have no real exit strategy.”
Roughly say pre-bubble GSE&Government vs Private, 80/20. bubble low, 45/55, now 95/5
There’s a big gap between no-regulation free market fundamentalism and wondering what what benefit accrued from $300B and an 80% market share. Even 45% is a big chunk of the market, and rather then trying to fix the private part of the market Fannie tried (and succeeded) in winning back market share.
“They have a difficult time understanding what happens when one entity devours all else becoming a monopoly,”
Can’t speak for Mrs. Rand and followers, but anti-trust regulation seems to me like a good use of regulation.
The middle ground here is that government should be a referee, not one of the players and certainly not a majority of the players!
No more time for haters, eh “BOY”. I’ve got “hate” in my heart but you simply love apple pie and America when you imagine left-leaning folk to have children that hate them and are “losers in life” that need to be shipped off to death camps. Yeah, just like Nixon you really are showing the haters that hate American how not to hate.
Like I said . . . you’ve got nothing but childish stereotypes. You’re a poor thinker and a knee-jerk authoritarian. You’re a downright patriot in a fascist country (you missed the fact I think we live in a (neo)fascist country so I don’t need to visit one to know what it’s like)!
Like most authoritarians you are projecting: it is your ideology that feeds on hate and abusing your fellow man.
I don’t know if the government guarantee of mortgages is “competition” with the free market, or, rather a subsidy to the mortgage industry.
A lot of this discussion hinges on what new form the GSEs take on. It seems likely they will be replaced or reformed.
It seems like the Obama administration favors a “hybrid” approach (there are 3 plans, one hot, one cold, and one juuuust right) where the government guarantees the loans but the system is privatized:
“The third option, that apparently many Washington policy wonks are smiling upon, is a hybrid system with private institutions buying mortgages with a government guarantee standing behind them. (Depending on the construction, the government may either guarantee the institution or the mortgage backed security — more likely it will be the latter.) According to a new paper by Moody’s, this sort of hybrid system will reduce the cost of a 30-year mortgage by 90 basis points (9/10ths of a percentage point) compared to a purely privatized system. The Moody’s analysis also calculates that it will raise house prices by 8 percent compared to a privatized system.”
http://www.cepr.net/index.php/blogs/cepr-blog/arithmetic-and-the-fanniefreddie-fix
I ran into this link the other day on the GSEs vs. private loans:
http://www.businessinsider.com/fannie-freddie-karl-smith-2010-9
It’s also worth noting that the reason the GSEs ended up with so many loans is due to the S&L crisis. The trend started then:
http://economistsview.typepad.com/economistsview/2010/09/fannie-and-freddie-didnt-do-it-one-more-time-with-gusto.html
I agree, Fannie and Freddie should be a much lower percentage of the overall mortgage market. We certainly shouldn’t be guaranteeing loans for $729K, and we probably shouldn’t even be guaranteeing loans for $417K.
Good links sfrenegade.
sfhawkGUY (since you want so desperately to be a man (and no less than my “fellow man”!), I will oblige) (BTW is that a reference to your favorite DC Comics character? do you have all the issues in mint condition? mom hasn’t thrown them out yet?):
1) you are obviously delusional; you write:
“you missed the fact [sic] I think we live in a (neo)fascist country so I don’t need to visit one to know what it’s like)!”
that’s like holding a [carrot] and saying, ‘you missed the fact that I think I have a [peach] in my hand so I don’t need to know what [a peach] really looks like!’;
once again, it’s not what you “think” – it’s what the reality “is” – for most people the distance b/t these two is zero – but for the deluded, they are oceans apart;
I suggest a visit to a doctor – they have free clinics in SF, I think (big van – no copay);
2) notice that you do not EVER make any arguments; you just use more and more adjectives and insults; typicaly childish/poor or, the favorite classic – “fascist” (or some variation thereof);
BTW is that also some expression of Godwin’s law? or do you have to draw BO with an Adolf-mustache to reach that level?;
3) Nixon? Why not Taft? You’re dating yourself. Second, of what relevance is someone who was practically a Democrap? The man was worse than today’s RINOs;
4) what death camps do I want to send you to? (first it was work camps, then it became death camps – all the while I didn’t even address that scurrilous charge – the conspiracy just keeps growing – in your head);
5) a characteristic of any fascist regime (or other authoritarian) is that you can’t easily leave – you may test what the US is like by heading for the border – if you pass unhindered (though obviously not unhinged), then you’ll know you don’t live in a fascist state – of course, you can never know for sure, so I would just stay in canada/mexico or wherever you end up…. but wait….. they may be fascist too! Holy Mao’s Little Red Book, what will you do!? better aim for Caracas and hope El Presidente’s chemo is working!);
6) it is curious that you did not try to disprove any of my characterizations – I will take your lack of denials as proof of their correctness in toto – it is rare, even for me, to be batting 1000!;
Why should government guarantee MBS? or a private institution?
We had a financial breakdown, which would have corrected itself if it hadn’t been USG (both Bush and Obama’s administration). Now, we want to put the govt on hook for ever? Why don’t they also guarantee all the other loans (car/ corporate loans/ corporate bonds) and their derivatives? Why do we need insurance at all? Govt guarantees everything.
I would like any solution that would have USG get out of the mortgage industry in a orderly fashion. It could be long term solution (10-20 years). Let the market support itself.
I gotta say…wrath is my favorite new poster on SocketSite. Not that I agree with all of his/her points, but the level of repartee is at least entertaining again. Reminds me of when NoeValleyJim and Satchel used to debate TPTB fighting systemic collapse. Like two bookends channeling Turgenev’s Bazarov and Voltaire’s Candide. Good stuff.
“I would like any solution that would have USG get out of the mortgage industry in a orderly fashion. It could be long term solution (10-20 years). Let the market support itself.”
Yes, a good way to start is to raise fees for government guarantees until it makes more sense for private companies to make mortgages. Will it raise mortgage interest rates? Sure, but that’s a good thing.
This thread went off on an interesting tangent. Trippy to see “Cara al Sol” get referred to on an SF real estate blog of all places.
Pretty far removed, in any case, from the Fondo Sur of the Bernabeu, which is where you are most likely to come across a rendition of it these days.
Does SFHawkguy realize that the way he is able to attack our “fascist” government in a public forum with complete impunity rather disproves his notion that said government is fascist?
Will NoeValleyJim ever realize that he really should stop linking to sources that disprove his arguments?
“Does SFHawkguy realize that the way he is able to attack our “fascist” government in a public forum with complete impunity rather disproves his notion that said government is fascist?”
No. I realize that the tactics a neo-fascist regime like the U.S. uses are more sophisticated than the fascist regimes of the past, like the Nazis (although many of the same corporate elite that supported the Nazis support American fascism and indeed have adopted many of their tactics, see e.g. chemical warfare and psychological experiments on humans).
Surely you realize that our government now completely spies on all communication forms of its citizens in direct violation of the 4th Amendment. Worse, the government claims the right to kill whoever it wants anywhere in the world with no legal recourse, and has secret wars going on in over 100 countries. We have numerous illegal wars going on and our government is completely owned by corporate interests so that crimes like BPs oil spill or PG&Es arsons go mostly unpunished.
Furthermore, our corporate press does a fine job of marginalizing dissent. Look at the big political/economic issues that we discuss here. Most Americans are largeley in agreement. Indeed, I’m in agreement with the libertarians and even the reactionaries on this board, like wrath, on many issues. We probably all agree that subsidies to large corporations should be ended. Or, most Americans want to tax the rich, save Medicare and Social Security, and end our wars. Huge numbers of people of all political stripes want this–even the tea party people. But we are told propaganda from our politicians and the media that this isn’t possible.
Look, they are smart enough to realize that rounding up dissenters is largely unproductive–for now (although they try to do that with certain people, e.g. Wikileaks, environmentalists, antiwar folks, and other left activists). Other people like Ron Paul or the left are marginalized by other, more sophisticated means.
I think the best definition of fascism is the Marxist definition:
“Fascism in power is the open, terroristic dictatorship of the most reactionary, the most chauvinistic, the most imperialistic elements of finance capitalism.”
The main characterisitic of American fascism is the relatively greater reliance on the oligarchy for its power rather than in one person, although the most recent administrations have greatly increased the unilateral power of the president so he can now literally kill any person, even U.S. citizens, with impunity.
I’m also in agreement with wrath (probably) and others here that the government should not back mortgages. It simply increases the cost for all of us and unjustly enriches finance capitalism (see my Dean Baker link above for his math on this). It’s very similar to our education policy where the government guarantees education loans. If the government is going to provide a benefit it should do so directly rather than enriching parasitic middle men. That’s why most other countries provide college education directly rather than simply back the loans. Same thing with housing–I think the government’s role should be to regulate and fill in small gaps where needed (such as providing housing for certain people). Or something like the San Francisco BMR program on a national scale would also be a form of regulation that would be better than the current system.
“a characteristic of any fascist regime (or other authoritarian) is that you can’t easily leave”
Surprisingly (ha), wrath must get his knowledge of history and political systems from right-wing luminaries such as Glenn Beck and Jonah Goldberg. You are misusing the word fascism and conflating it with authoritarianism.* The first two “fascist” governments, Mussolini’s Italy and Nazi Germany had open borders, as far as I know. There is nothing in communism philosophically that requires a closed border. Indeed, the closed borders of the Soviet Union and to some degree China, were justified on unique historical reasons: http://www.berlinermauer.se/BerlinWall/bygg.htm
*It is very interesting to look back at the late 50s and 60s and to see the same propaganda taking place then where you had right-wing reactionaries like the Birch Society intentionally misusing words like “communism” and “fascism” to confuse–and I understand this phenomenon is even older than that though).
Wrath,
I chose Nixon because your attitude reminds me of him and I assumed he was your contemporary. I stand corrected though and I appear to have been right in the first instance; Nixon is too commie for you and you are more like the Birch Society reactionaries.
virtually every country has exit controls – except for the US; last time I checked (the literature) it wasn’t so easy to leave Nazi Germany – or are you suggesting its victims were suicidal?
you say there were “unique historical reasons” for having a locked up border in the USSR and China citing the Berlin Wall? You mean, b/c people didn’t exactly want to stay in the workers’ Eden? They wanted to leave – of course we had to put up that wall! that makes sense
you think the government has the power to spy too much? Probably. But what of Honest Abe and his suspension of habeus corpus? Oh, I forget he was a Republican.
What of your hero FDR and his lying to get the US into a war which did not involve us? In fact what about him locking up the Japanese? (or Germo-Italians, less mentioned)?
then you provide an admittedly (!) marxist definition of fascism:
“Fascism in power is the open, terroristic dictatorship of the most reactionary, the most chauvinistic, the most imperialistic elements of finance capitalism.”
I counted 6 adjectives and virtually no meaning. we find out only that it’s a dictatorship – do you think you live in a dictatorship? and that it’s “imperialistic” – the last time the US added anything to itself was Hawaii, which was 60 years ago. It got zilch land out of Korea, Japan, Germany, Vietnam, Iraq, etc. except maybe a few contracts. If the US is imperialistic, it’s not very good at its job.
FDR is not my hero. He was a capitalist that saved capitalism from a group of radical fascists who were too insane to realize he was helping them. See the Butler rebellion for some historical background http://en.wikipedia.org/wiki/Business_Plot. My point was that even FDR and JFK, who are neoliberals (that is imperialist capitalists), were called “communists” by the reactionary right. FDR was simply introducing basic socialist controls of capitalism to counteract calls for even more drastic socialist measures.
And yes, the undercurrents of fascism have been with us for a long time, from the extermination of Indians (we did a far better job of exterminating the Indians than the Nazis did the Jews) to our racist authoritarian policies (interning the Japanese), to committing massive war crimes (bombing civilians and especially using a nuclear bomb to wipe out hundreds of thousands of innocent people). Likewise, our government has long violated civil liberties mostly by attacking the left in this country.
And you’re wrong that I have a knee-jerk dislike for Republicans. I seek the truth, I am not a tribal political animal. I hate the Democrats probably more than the Republicans. At least you Republicans openly admit your fascism.
Regarding the wall . . . if you read the post I link to it discusses the economic and political factors for the wall. There is no ideological underpinnings for the closed border, and was probaly more of a result of the West actively seeking out the best and brightest from the Soviet sector. If you read history you will see that the U.S. transitioned from WWII to the Cold War very quickly and had many programs to encourage doctors and others to defect, like Operation Paper Clip: http://en.wikipedia.org/wiki/Operation_Paperclip. Indeed, the U.S. secretly recruited Nazi doctors to work on its secret programs of mind control, drugs, and other human experimentation. The corporate fascists that were closely aligned with Nazi Germany came to control most of this government after WWII.
If you have a better definition of fascism let’s see it. Your critique of the Marxist definition as applied to the U.S. is farcical. Not recognizing U.S. imperialism is downright foolish. Even Alan Greenspan and the U.S. government admits its main foreign policy goal is global hegemony and control over World markets (mostly oil). Our imperialism looks a little different than Nazi imperialism but it may be even more pernicious. Again, we are involved in secret wars in over 100 countries and have killed over a million people in the last decade in overt wars in a number of countries (Iraq, Pakistan, Libya, Somalia, Yemen, etc.) that are clearly illegal.
“And you’re wrong that I have a knee-jerk dislike for Republicans. I seek the truth, I am not a tribal political animal. I hate the Democrats probably more than the Republicans”
I’m with youon that.I hate the way any discussioninevitably comes down to Republicans vs Democrats, while the real problems run much deeper than that. They are only two cheeks of the same ass, in my opinion.
Nice link to operation paperclip btw, and very timely given the Guatemalan STD experiements that recently came to light.
This blew my mind also (although it shouldn;’t have done maybe!) but it did show that certain American factions would think nothing of killing Americans and blaming others for it to further political goals. A good read!! Particularly number 8, which falseflag policies have surprising similarities with a certain looming anniversary….
http://en.wikipedia.org/wiki/Operation_Northwoods
Yes indeed REpornaddict!
And about that same time that the Joint Chiefs of Staff recommended a terrorist attack on the people of the U.S. (!), the fascists were also disobeying JFK and running operations in Cuba and around the World against his orders! They invaded Cuba without his permission, and just like FDR before him, JFK hid the true nature of the fascist takeover of our government from us. He pushed back by going after some in the C.I.A., which may have cost him his life, but he was obviously intimidated by them and tried to keep his enemies close to him. In fact, as the whole World was about to blow up in the Cuban Missile Crisis, some in the CIA were still running secret terrorist attacks on Cuba! Talk about reckless. JFK said that these fascists in the U.S. government “had a death wish for the entire planet.”
And you’re right about the tests in Guatemala. The U.S. had lots of secret programs like this and it’s something that is largely hidden from many Americans–that we adopted many of the Nazi fascist programs. The U.S. experimented on blacks, latinos, and prisoners. Also, the U.S. had an extensive chemical warfare program and tested the use of drugs on people. At least one major U.S. scientist working on these issues appears to have been killed by the U.S. government to cover up the crimes our government committed in the last half of the 20th century: http://www.frankolsonproject.org/Articulations/Script-CodeNameArtichoke.html
“It will be seen that, as used, the word ‘Fascism’ is almost entirely meaningless.” – George Orwell
Will NoeValleyJim ever realize that he really should stop linking to sources that disprove his arguments?
@nnona
You haven’t really figured out why I post here, have you?
I am done with this discussion here – time to get back into REAL ESTATE
@wrath
I notice that you can’t seem to help yourself here. Maybe you could kindly answer my questions, though sfrenegade made it too easy by providing you with them in his link to the Economist’s View blog.
The money quote here is During the peak of the housing bubble, Fannie and Freddie basically stopped providing net lending for home purchases, while private securitizers rushed in. . So blaming the GSEs for the housing bubble misses the point, by about 180 degrees! During the bubble low (in 2004) they secured almost none of the loans, because the private sector was doing so much “better” a job at it! It wasn’t the job of Fannie Mae to regulate the private sector and stop it from making stupid no-doc no-down loans was it?
Who dropped the ball here?
$300B seems like a big loss but it is a drop in the bucket compared to what the financial sector as a whole lost during this period. I think the exit strategy is blindingly obvious but I guess so many other’s don’t so I will spell it out: prop up the housing sector until it recovers then slowly withdraw support.
I don’t know if that is how it is going to play out, but it is at least a possibility.
Like two bookends channeling Turgenev’s Bazarov and Voltaire’s Candide.
I get to be Candide here right? At least you didn’t give me the role of Pangloss 😉
“Will NoeValleyJim ever realize that he really should stop linking to sources that disprove his arguments?”
Perhaps using other people’s links which disprove your arguments is serving you no better.
First off, having no net change in mortgage holdings is not necessarily good if you sell off old performing mortgages and replace them with less solid ones.
From the Rajan post that Krugman is attempting to rebutt:
“Not only did Fannie and Freddie purchase whole sub-prime loans that were not securitized (and are thus not counted in its share of securitizations), they also bought substantial amounts of private-label mortgage-backed securities issued by others. When these are taken into account, Fannie and Freddie’s share of the sub-prime market financing did increase even in those years.”
Second, look at the change in holding from 2004 to the bubble peak in 2007. It’s increasing. And contrary to Krugman 2004 was not “very late in the game”
And again from Krugman himself:
“Partly that’s because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off.”
Indicating that the drop in holding was not driven by an attempt to cool the market (also obvious from the post 2004 increase in share), but because of regulatory constraints due to an accounting scandal.
tc_sf, you asked me earlier for a statement from a reliable source that Freddie was a private corporation, here it is:
Clearly, everything Fannie and Freddie did was because of the profit motive — after all, they were private corporations.
From the Rajan article, who you have approvingly quoted above. And yes, I read the rest of the paragraph, you do not need to bother repeating it back to me.
Did you see Krugman’s reply to Rajan? I personally do not agree with Krugman that the GSEs are blameless for the housing bubble, but I think that they were bit players.
Have you read Rajan’s book _Fault_Lines_? It looks interesting, I will have to pick it up.
From your statement about the GSE drop in participation I take it then you agree that the GSEs were reducing their participation in financing the housing market just as housing prices really started taking off? The fact that they did so due to Congressional oversight is an indication that that oversight was working, is it not?
Here is the best simple graph I can find of their percentage participation in the MBS market:
http://modeledbehavior.files.wordpress.com/2010/08/image7.png
I agree with you that the GSEs had no business buying Alt-As and should have stayed out of sub-prime loans entirely.
What percentage of their losses today are due to being required to pick up the pieces (eg. subsidizing bank losses) after 2008? I honestly don’t know what the answer to this one is, but I suspect that the answer is most of them.
“tc_sf, you asked me earlier for a statement from a reliable source that Freddie was a private corporation, here it is:”
Point taken, although he is clearly trying to point out how he believes Krugman has changed his tune.
“Have you read Rajan’s book _Fault_Lines_? It looks interesting, I will have to pick it up.”
It does look interesting and I have not yet read it. Posner endorsed it which is a good sign in my book.
” The fact that they did so due to Congressional oversight is an indication that that oversight was working, is it not?”
Having their mortgage book reduced due to an accounting scandal isn’t quite the same is try to stop (or even stay out of) the trouble going on in the mortgage market at the time.
I’d have to put them in as more then a bit player, but less then “The Cause”.
Sfhawk: I can’t help you. Nobody could be this crazy. I am impressed you didn’t bring the Jews into this until post 90 or so.
I have faith in some rationatlity in this world so I will just assume you are an FBI plant trying to stir up the masses in order to get some arrests going. Operation Real Estate Blog Penetration isn’t going well for you so looks like no bonus check this month.
NVJ: I am taking off for labor day. I will be celebrating the labor of my employees (they’ll be working in the fields of course – to the sounds of an hortator’s drum) by spending some time on my yacht paid for with the sweat of little nicaraguan (I think) children. bless their hearts.
I will respond to you when we’re at port next week;
The extension makes plenty of sense.
1.) Ending the extension is a further hit to the housing market, which is clearly one of the economies largest strains.
2.) Ending the extension prevents the ability to refinance for some homeowners (would rather employ capital elsewhere or don’t have it liquid). Refinancing clearly helps consumer spending.
3.) Don’t have numbers in front of me, but I’d assume jumbo conforming borrowers are at lower risk of default (LTV requirements are the same or more strict, incomes are higher)
I’m looking to refinance my jumbo conforming loan with a $720k balance at these rates (4.12%). I’m in a two income household and can cover the mortgage easily with either one of our incomes. Why shouldn’t I be allowed to refinance?
“Why shouldn’t I be allowed to refinance?”
No one has ever prevented you from refinancing except for either a bank or you for not meeting underwriting standards. The question is whether you should get a massive government subsidy while doing so.
What will improve the housing market is lower prices so that more people will want to buy, instead of propping up bubble prices and zombie banksters.
I meant – Why shouldn’t I be able to refinance at comparable rates to people with lower credit scores and lower LTV ratios?
I have over 20% down, FICO at 800 and could fulfill income requirements on either of our household’s two incomes. Why should I be forced to lock up another 100k in capital simply because conforming loan sizes are not properly scaled to an area’s cost of housing and median incomes?
Raising conforming loan limits is not a government subsidy. Refinancing doesn’t prop up bubble prices. You’re refinancing – not purchasing another home.
“Raising conforming loan limits is not a government subsidy. ”
If it weren’t a subsidy, then private lenders would be willing to loan to you at that rate.
Now, why someone with low credit and high LTV is getting a subsidy is a different question.
“Refinancing doesn’t prop up bubble prices. You’re refinancing – not purchasing another home.”
True, but people promote government refi plans as some sort of housing fix, and your point is one reason why they aren’t really that effective in our current situation. A great deal of money gets shuttled to people who don’t really need it and won’t increase their consumption of housing with relatively little marginal increase in new home purchases. And thus little gain in construction employment.
tc_sf, you let Jumbo Boy off too easy. Sure, in their particular case, “refinancing doesn’t prop up bubble prices” because they are in a home they can currently afford and just want to save money on the loan by refinancing at a lower rate. But this isn’t true of all borrowers.
To the extent that some (other) borrowers are currently in homes that they can’t really afford, enabling widespread refinancing which allows them to stay in that home rather than moving out, selling it and/or giving it back to the bank to put on the market does in fact “prop up bubble prices” because it reduces the number of distressed properties on the market, thus supporting an overall price level higher than the fundamentals would indicate.
Fundamentals change with the yield curve and other opportunities to employ capital. You think 4.1% is cheap when the 10yr is below 2%? Versus historic spreads that’s actually expensive. That number will probably come down in the next few months when we see the inevitable twist in the yield curve. Then we’ll see sub 4% 30yr fixed.
Your argument about less distressed properties on the market propping up prices is somewhat true, but if somebody wants to refinance to a rate that makes their home affordable, then that’s the market equilibrium supply. Should they have owned the home in the first place? Probably not, but at this point I don’t believe in the massive pain now and start the healing theories.
if you let everyone re-fi at 4% regardless of whether they or their home qualify (for example, a person with a 500 credit score, and a $400k loan on a $300k property can not re-fi now) you will do two things… 1) stabilize RE prices because fewer people will sell, distressed or otherwise, and 2) make a lot more money available to pay down other debt and/or add to GDP juicing consumption.
of course arguing over this is pointless because i don’t see the Govt allowing blanket re-fi’s because the banks won’t allow it.
as for who was responsible for the bubble and how we got here – Hyman Minsky predicted it in 1977 – “Time to Read some Minsky” posted on Steve Keen’s debtwatch in March of 2008 – BEFORE the global financial crisis became national news – describes Minky’s “Financial Instability Hypothesis” which he said (again in 1977) deregulation will always lead to debt fueled bubbles.
Maybe it’s time for our politicians to read some Minsky, because the financial industry still has this country by their deregulated balls
“Your argument about less distressed properties on the market propping up prices is somewhat true, but if somebody wants to refinance to a rate that makes their home affordable, then that’s the market equilibrium supply. ”
The market rate equilibrium for interest rates is when lenders feel they can lend with enough margin for expected risk plus some profit combined with market borrowers feeling that borrowing at that rate is an acceptable deal.(i.e. the rate at which both borrowers and lenders would make a deal of their own free will) Government setting loan limits and pushing down rates is the antithesis of a market rate equilibrium.
” But this isn’t true of all borrowers.”
Agreed, but I think unemployment and being underwater are much stronger drivers of default then small changes in interest rate. Every action will have some desired consequences and some un-desired ones.
In out current situation with high unemployment, high homeownership rates, high but falling home prices and relatively low nominal rates, I think that broad-based refi and interest rate lowering programs will have fairly small desired effects. And I’d be concerned that rolling re-fi fees into loan balances and restarting the amortization clock may actually hurt overall household balance sheets.
Now if we had a low homeownership rate, with low but rising home prices, low unemployment and high rates, then I think you’d see a greater impact from money spent to lower rates. (Not that I’m arguing in either case that such intervention would be a good idea, but rather that in one case I’d expect each intervention dollar to be much more effective then in the other)
“Maybe it’s time for our politicians to read some Minsky, because the financial industry still has this country by their deregulated balls”
Someone who has over 2x the income to buy a home in one of the countries most expensive markets hoping that Congress will give them some more spending money illustrates the perils of government control of markets not any sort of problem with deregulation or the financial industry.
i’m not i understand your statement. but i’d argue it isn’t gov who controls our markets. the financial industry and wall st has been in control. and if you want to blame the Gov, you can blame the money influence of Wall St over the gov.
the Fed turned a blind eye to the shananigans that allowed mortgage backed securities to create a massive need for deadbeat borrowers all because Greenspan and Bernanke had zero understanding of the role of private sector debt in the role of the economy. I’d call the Gov “enablers” and not “controllers”.
“i’m not i understand your statement. ”
The topic of this thread in general and JumboBoy’s complaint specifically (“Why shouldn’t I be allowed to refinance?”) is about what action Congress may or may not take to allow some people to borrow at a government subsidized rate.
When congress itself is voting on the size of your loan, this is a sign you are not in a free market.
if by “free market” you mean the one in which banks gouge the public’s eyes out – then i’ll take the non-free market.
the delusional belief that markets are pure and gov is evil is what big biz and right win pols would like you to believe. the fact is the real GDP and wages have been falling for decades. the imaginery GDP you’ve seen is all debt fueled.
now that private sector debt is deleveraging we’re discovering that by focusing on financial engineering and stock market performance we’ve taken our eye off true productivity.
our “free market” isn’t free. it is broken. arguing over anything else seems pointless.
“the delusional belief that markets are pure and gov is evil is what big biz and right win pols would like you to believe.”
That’s a straw man. What is clear is that people voting themselves cheeper mortgage rates and more expensive houses is towards the worse end of the use of government.
Consider that also from a productivity point of view, how does voting to have government support the housing market or reduce mortgage rates create true productivity?
As a local analogy, what if the SF government were to clean up the Mission to make is as nice as Noe and as a result housing prices there went up $100k on average? Contrast this use of government to a situation where Mission residents were to vote to have the SF city cut them each a check for $100k.
maybe i’ll just step away from the argument because my point is that the argument is pointless. it looks to me like one side of the argument is saying the can should be kicked down the road with the left foot, and the other side of the argument is to kick it down the road with the right foot. the “free” market needs to be fixed – and i support the can kicking that keeps the economy from sinking into the abyss until such time that the structural issues are addressed.
the banks, big money and big business are running this country, and they got their “free market” unregulated desires met – and what did they do with it? they paid millions of dollars to the smartest whiz kids who should have been working on the cure for cancer, or alternative energies – and instead they worked on dirivitives and ran our country into the biggest financial mess since the great depression.
watching the political parties argue over the wrong things is maddening.
“Why should I be forced to lock up another 100k in capital simply because conforming loan sizes are not properly scaled to an area’s cost of housing and median incomes?”
If you have 2X the income needed, then your argument that conforming loans aren’t scaled up properly is very silly. Once again, the current extremely high super-conforming rate is already out of whack with the original intent of the program. There’s no good policy reason to raise it further.
What you’re fishing for is a government handout, since as tc_sf said, you’re not finding any private lenders giving you a rate you’d prefer. Even as to your point that the 10-year is below 2%, so the risk premium is still high, damn right the risk premium is high — the risk is higher. If private lenders aren’t willing to go into the market for a 2.1+% premium, that should tell you something.
hangemhi, I don’t disagree with what you’re saying, but I’m not sure what the solution is. The powers that be have decided that this is how it should be, and it’s sad that the masses are so willing to be duped.
” it looks to me like one side of the argument is saying the can should be kicked down the road with the left foot, and the other side of the argument is to kick it down the road with the right foot.”
Well, to be specific about structural issues, I think that securitization and associated infrastructure was and is beneficial and while clearly not perfect there is still plenty of work for smart whiz kids to do in that area with commensurate compensation.
As far as the default risk part of the industry, the only guy who really cares enough about that to put real work into it is the guy who actually stands to lose real money if/when loans are not repaid. In a theoretical world this could be the government, but in the real world the government’s main interest is re-election so this requires private capital with a real live risk of loss. Maybe you have FHA/VA/Fannie with a total single digit market share to fix actual market failures but the lion’s share of the risk & market is private. The guy who risks the loss gets to make the rules, so no government setting of rates or loan terms.
If it weren’t a subsidy, then private lenders would be willing to loan to you at that rate.
You are making the huge assumption here that the private lending market is able to accurately price and assess risk. We know that this was not true in the bubble years, when the banks were financing all kinds of no-doc, no-down payment loans for far under their true risk-adjusted cost.
The GSEs should come in and make the finance market more efficient when the private system does not and I think this is a good example of one of those times.
Right now the banks need to make back their losses from the their earlier blunders, which is why they can’t lend at lower rates.
“I think that securitization and associated infrastructure was and is beneficial and while clearly not perfect there is still plenty of work for smart whiz kids to do in that area with commensurate compensation.”
No one doubts that securitization is useful. It’s just that it should be the more boring version we had before the boom where it was about predictable default rates and reasonable lending criteria.
Now all we have is irresponsible people bitching for handouts and expecting permanently low rates instead of true market rates that make sense.
“You are making the huge assumption here that the private lending market is able to accurately price and assess risk. We know that this was not true in the bubble years, ”
Partly there was a bubble which like all manias ensnared a large fraction of the population. But the important thing to look at then and now is what incentive is there to price risk correctly? If someone out there is underpricing risk and/or willing to provide an explicit or implicit guarantee then the financially rational choice is to let them take the risk and build your business around some other part of the system.
Fannie/Freddie’s low borrowing rates back then are pretty telling that the market believed them to be implicitly guaranteed by the government. A belief which turned out to be spot on. Others who took risks assuming an implicit guarantee were also spot on. You can also look at a private company like AIG and note that they were also essentially foolishly underpricing risk. The key difference here is that a private company doing this will eventually go bankrupt (Absent a government bailout of course, but with a bailout the problem is exactly that government chose to bail out the firm) and that with private companies there’s not much worry of implicit guarantees. (i.e. If microsoft were to be going bankrupt it’s not likely that apple would just cut them a check for the good of the computer industry)
Going forward who has an incentive to do a good job here?
As sfrenegade points out with Fannie loans there’s a 2% margin over treasuries. Looking at the national market with high unemployment, ~22% of homes underwater and you have a competitor accepting a 2% margin and essentially infinitely deep pockets? Where’s the business case in trying to be good at assessing the default risk?
As I mentioned above the way to ensure that someone will even try to accurately price risk is to make sure that they are exposed to actual risk of loss. Not that private industry is perfect here, with “heads I win, tails you lose” bonus structures and all that, but rather that government is worse with an unlimited capacity for risk at the taxpayers expense and a strong incentive to heed the call of the voters for cheeper rates and more expensive housing.
“…government is worse with an unlimited capacity for risk at the taxpayers expense…”
It is only at taxpayer expense if the gov decides to place it on tax payers heads. The gov has a magic money printing machine, so the idea of “unfunded liabilities” or “someone has to pay for it” is the real dupe here. The printing press can pay for it – and it has to now because so much money is being destroyed.
Buffett called dirivatives “financial weapons of mass destruction”. They do more harm than good. First they created imaginery money, then spread it, and then they destroyed it – and it is still being destroyed via deleveraging. They have created next to nothing, but destoyed a lot.
And now that the smartest whiz kids all go to wall street, it is only getting worse. Letting the whiz kids focus on ever more damaging dirivatives and financial engineering (that not only doesn’t create wealth, it destroys it) means that our society’s productive capacity keeps going down.
“Going forward who has an incentive to do a good job here?”
Their incentive is what’s in front of their nose – and that is their paycheck and their bonus. No one thought one iota about whether or not the governement would eventually bail them out. They deluded themselves into thinking there was no risk because they were getting paid millions of dollars to believe that. They took the risk on, and sold it as fast as they could. AIG woke up one day and stopped taking on that risk – and Wall Street just found other buyers who didn’t realize what just happened.
Figure out what the incentives are encouraging, and you’ll figure out how to fix the system. And right now we are encouraging more of the same.
and by saying “we’re encouraging more of the same” i’m not talking about the gov keeping rates low. that’s the fly on the elephant’s butt. the elephant is the financial industry or the “banksters” as satchel enjoyed calling them
“The gov has a magic money printing machine, so the idea of “unfunded liabilities” or “someone has to pay for it” is the real dupe here. The printing press can pay for it – ”
Unless there’s irony that I’m missing here, your statement is my worst case scenario for a government controlled mortgage market. Why should anyone in government put any effort or thought into how to lend to people or what to charge if “The printing press can pay for it”?
How is just running the presses whenever you need something at all related to the true productivity that you mention above?
Believing that you can just run the presses whenever you need something, trying to arbitrarily set mortgage rates low or home prices high are all precisely problems of trying to get something for nothing. i.e. Set a result without even attempting to get the productivity gains required for that result.
Lower mortgage rates as a result of a more advanced lending system or a better ability to triage good borrowers from bad would be great. Higher home prices due to higher incomes or increased economic stability would be great. Printing more money to ensure a stable currency in a growing economy would be great. But in all these cases trying to get the tail to wag the dog will lead to nothing but tears.
In the short run, we need to keep pumping out as much money as it takes to keep deflation from catching hold. And propping up the housing market too, at least to the extent that it deflates slowly instead of collapsing outright. It is much easier for people and the economy in general to adjust to graduate changes rather than sudden shocks.
Usually the 30 year fixed rate mortgage is between 1 and 2 percentage points over the 30 year Treasury, when set by “market” forces:
http://mortgage-x.com/images/graph/t_bond_30_frm.gif
So I think a strong case can be made this is one of those market failure cases. The whole notion that the cost of borrowing money is set by market forces in general is a farce though, the entire banking system depends on what the Fed decides to do with rates. And it is not just the GSEs that are too big to fail, if anything they are the smallest part of it: the entire banking system was teetering on the edge of collapse. WaMu was allowed to go down, but letting AIG and Bank of America go would have meant a systemic collapse.
with a bailout the problem is exactly that government chose to bail out the firm
Do you think that AIG should have been allowed to default? What do you think that would have done to the banking system and the overall economy?
In the longer run, I agree with you that the GSEs should be a small fraction of the lending market, mostly in cases of market failure. In the longer run, the entire financial system needs tighter regulation so that it cannot take on the kinds of risk that it did in the 2000’s. Because the banking system overall will always be too big to fail.
Is that what will really happen? I sure don’t know but I am sure we won’t get there from here without significant political leadership much better than the kind we have had over the last 30 years.
No easy answer on housing. Lots of pent up supply (let’s see if this embed works):
San Francisco,CA – Foreclosure Inventories
And not much demand. If one thinks this is a problem (reasonable minds may differ), then we need to stimulate demand. Throwing more cheap money at it might help, but I doubt it.
“Why should anyone in government put any effort…. if “The printing press can pay for it”?
Firstly, just because turning on the printing press might be a bad idea doesn’t mean you should ignore that fact. It doesn’t make the fact that ‘the US Gov has an unlimited supply of dollars’ a false statement. It is the fiat system we live within – at anytime, the Gov can step in and print our way out of this mess.
And focusing on Gov debt is the wrong focus – it isn’t really debt when it can be paid for with the magic of a few key strokes. Gov “debt” is really money, it isn’t debt. The fear, that when the population and the politicians understand that we can print and don’t really borrow to fund ourselves, that we will then print endlessly and create hyperinflation, is akin to having an open bar at a wedding and just assume that everyone will get blind drunk just because it is free. There are consequences to printing money, but it doesn’t change the fact that the US Gov can print anything they want at any time.
For example, there is no such thing as “unfunded liabilities” ala Social Security. The US Gov can fund it anytime they want. You say but it is $60 trillion short. OK, let’s print $100 trillion right now, and stick it in the “now it is funded unfunded liabilities fund” so that it is there for future social security recipients.
Bad or idea or good idea? It doesn’t matter, that’s not the point. The point is the US Gov can fund anything it wants, and doesn’t need to borrow anything from anyone to do it. You worry about future endless printing and resulting hyperinflation? I say, don’t worry, we are trillions and trillions of dollars away from that. Everyone is in debt – real debt i mean – private sector debt. And until that debt is reduced there won’t be an inflationary event.
So we’re freed up from worry about the country going bankrupt, or Social Security not being there, now let’s focus on the real problems – of the increasing number of people below the poverty line, or the decreasing middle class, of the transfer of wealth to the wealthy, of waste, fraud, finacial weapons of mass destruction, and lack of real productivity in this country.
We should not print ourselves out of this mess mess if we don’t fix the structural problems that caused it in the first place. To me those problems are mostly bankster related (per my above points). The masses will run up another asset bubble, and put themselves in another hole, that mommy and daddy US gov needs to bail them out of if we don’t fix the financial sector.
I agree with NVJ that we should try to slowly deflate. Money is being destroyed via deleveraging. Only the US Gov’s printing press can counteract that. Putting reserves in ala QE2 does nothing. The money has to make it into the real economy.
Lower interest rates help, but it’s a bandaide on a gapping wound. Sure it props up the RE market artificially, but what do you expect after allowing it to get to where it is in the first place?
Either way, extend and pretend is no good. Extend and fix is the way to go.
“The point is the US Gov can fund anything it wants, and doesn’t need to borrow anything from anyone to do it. You worry about future endless printing and resulting hyperinflation? I say, don’t worry, we are trillions and trillions of dollars away from that. Everyone is in debt – real debt i mean – private sector debt. And until that debt is reduced there won’t be an inflationary event.”
But if the govt “printed” those trillions and trillions of dollars, much of it would be used to pay down that private sector debt and – voila – massive inflation. The gov’t can print its way out of this, but not w/o bringing the economy to a massive collapse. That’s another way of saying the govt can’t print its way out of this.
well we all know the gov isn’t going to just print trillions of dollars. firstly, no one understands that us gov “debt” isn’t actually debt. the republican party debates are all about “how are we going to pay for this” and the strongest voices are the tea-party austerity crowd. so we don’t have to worry about massive inflation because there are trillions of dollars of private sector debt that need to be deflated while we argue how to take even more money out of the system.
we can deflate slowly as these bandaide measures are allowing us to do (at least those of us who realize that our personal debt is the real problem), or we do one big massive default and send the economy into a tail spin, or we can pay it all off via gov printing – which would be moral hazard for main street which will result in more speculation and more asset bubbles and voila we’re right back where we started.
so i vote for some printing via job programs, tax cuts, low rates, and support of social programs, while we re-regulate or entirely dismantle the finacial industry.
“In the short run, we need to keep pumping out as much money as it takes to keep deflation from catching hold. ”
I completely agree here. Having an unstable currency (deflation or excessive inflation) would only add to our current problems.
” The whole notion that the cost of borrowing money is set by market forces in general is a farce though, the entire banking system depends on what the Fed decides to do with rates. A”
The Fed just sets short term rates and so long as they are doing so with the main aim of stabilizing the currency I don’t see much of a farce. I’m not sure that looking just at historic spreads from mortgage rates to treasuries without considering current risks to lending given current unemployment and home price levels is painting a clear picture of market failure. It seems to me that the lending risk premium should actually be fairly high right now.
The real farce is in the spread between agency borrowing rates and treasuries. Then or now I don’t think anyone would have lent to them at such low spreads if there wasn’t extremely high confidence that they were implicitly going to be backed by the government. By contrast and to give a sense of scale when people fear an actual loss, consider Greece where the market does not seem to be expecting a full bailout. Their one year bond now yields 135% with the two year at 77%!
“Do you think that AIG should have been allowed to default? What do you think that would have done to the banking system and the overall economy?”
Mostly yes. Maybe you cut out AIG-FP from the insurance side and have some type of structured bankruptcy. But the execs should walk away with nothing. Government might have to put some cash in, but I do think everyone involved (bond holders, institutional customers,…) should have to take a haircut.
“Firstly, just because turning on the printing press might be a bad idea doesn’t mean you should ignore that fact. It doesn’t make the fact that ‘the US Gov has an unlimited supply of dollars’ a false statement.”
No one is denying that the USG has a printing press. My point is that a mortgage lending system whereby the government lends out money without much regard for the value of collateral or if the money is repaid since the printing press can pay for it, does’t sound like a system worth shooting for and certainly doesn’t seem better then our current system today.
And since you believe that derivatives are harmful because you believe they create imaginary money, why do you think that creating imaginary money by printing it is somehow beneficial?
I vote for that too, but I know that this is a very unlikely outcome. Deficit spending is pretty politically unpopular these days.
Who wins and loses in a deflationary collapse, who wins and loses with inflation and who wins and loses in a Japan style “lost decade” of below potential growth?
Our current government is almost entirely of the rich, by the rich and for the rich so you have to take that into considering when deciding which course of action is the most likely.
Combine that with the only middle class populist movement calling for austerity measures. They are apparently economic and probably functional illiterates as well since the ones who will be hurt most by austerity will be the middle class, not the bankers that they are so upset with.
You say that extend and fix is the way to go but how exactly do you go about fixing the mess we are in?
I think that letting AIG default and making everyone involved take a haircut would have led to a massive system wide deflationary collapse once all the debts were settled. After AIG a few large banks would have gone down as well and sucked trillions out of the system. We would have led to much higher rates of unemployment than we have now. Spain is at 20% unemployment and our financial system was leveraged up even higher than theirs.
If this would have led to a short V-shaped recovery that might be tolerable, but historical experience with these kinds of banking collapses indicates that they can take a very long time to recover from.
What do you think would have happened?
“Who wins and loses in a deflationary collapse, who wins and loses with inflation and who wins and loses in a Japan style “lost decade” of below potential growth?”
A key thing to look at here is the term structure of debt. If you have a $1M credit card bill and start to look shaky to lenders and your rate goes up you’re in trouble since you have to roll over your debt every month, owing $1M on a 30-year mortgage is a different story.
Similarly for countries if they have a long average maturity, like the UK, they’re in a better position to screw their creditors via inflation then with a shorter average maturity. Creditors know this obviously, so worried creditors can push towards the shorter end of the spectrum. Some people worry about china dumping our debt, but they need to do something with the dollars we buy their goods with so the real issue is do they buy 6mo or 30 year bonds with those dollars?
“I think that letting AIG default and making everyone involved take a haircut would have led to a massive system wide deflationary collapse once all the debts were settled.”
One issue here is that that some of the derivative numbers quoted in the press were gross numbers. i.e. $1B long and $1.1B short shows up as $2.1B exposure, whereas the real exposure is the net of $100m. With private contracts that are not on a central clearing house it’s hard to estimate what the net exposure out there was, but I’m not certain that it would have been that much worse net then all the bailout money we’ve ended up spending. eg. Goldman famously claimed that they were hedged to net zero exposure to AIG
After all, with large numbers of people defaulting and even larger numbers not paying their mortgage someone has to eat that loss no matter how you slice it. Any probably some government money had to be put in to ease that pain, but I think it matters alot how that pain is distributed.
I’m going to comment on the actual substance of the above shortly, but this part was too easy to put off until later:
This is easy. They’ve already started tapering off the bond purchases and their agitating for a replacement world reserve currency. So, you’ll ask, what do they purchase with all those dollars?
Hard assets, such as real estate and mines, and entire companies, exactly as the Japanese were doing when they were kicking our butts in the neomercantilist real economy circa 1988 (well, maybe the Japanese weren’t interested in mines then to the extent that the Chinese are now, but still).
We got lucky then and they imploded while we had the personal computer, computer software, and then internet booms one after the other.
The Chinese aren’t going to make that mistake.
we don’t need the chinese to buy our debt – because they don’t buy our debt. they are putting their money (made from selling us made-in-china crap) into a savings account and collecting interest.
if they don’t want to buy treasuries – then by all means buy Pebble Beach as the Japanese did.
btw, China is simply printing money and spending it. It’s funny – we looked in awe at Japan in the 80’s and then they collapsed. We followed with our own debt bubble, and now we are collapsing. Now the Chinese are doing it and everyone is too stupid to see that they are on that same path.
and tc – just because the US can create money out of thin air doesn’t mean they should – they should NOT do if the economy is booming. But they should when private sector money is being destroyed. And just because i point that out does NOT mean I think they should throw it away or waste it. I support printing money via PRODUCTIVE activity like infrastructure spending. I don’t like gov waste anymore than you do. All I’m saying is if we stop being duped that the US is about to run out of money, just maybe we will have a real conversation as a country about how we can make a better country for everyone rather than the financial industry and those who are in on that con game
“I think that letting AIG default and making everyone involved take a haircut would have led to a massive system wide deflationary collapse once all the debts were settled. After AIG a few large banks would have gone down as well and sucked trillions out of the system. We would have led to much higher rates of unemployment than we have now. Spain is at 20% unemployment and our financial system was leveraged up even higher than theirs.”
Now that AIG is a ward of you, me, and everyone else, it’d be nice to see someone model out a pre-packaged bankruptcy. Would it really have caused a catastrophe, or would it just have been mildly unpleasant? We don’t actually know and we are really relying on banksters lies here. As tc_sf mentioned, a lot of the transactions were off-setting.
We’re still working off a massive credit bubble and will be working it down for a long time at this pace, with banksters mostly reaping the benefits. As tc_sf said, we’re distributing the pain all wrong.
The government debt reduction nonsense by the tea party-types isn’t the solution and will just reduce GDP without any real benefit. Yes, we need to do cut back government debt eventually, but not now.
No doubt Goldman was net zero, but how about all the TBTF banks, like BofA, Citi, JP Morgan, Well’s Fargo, etc? Considering they were all leveraged 30:1 or so, it wouldn’t have taken much realized loss to bring them all down. A deflationary spiral feeds on itself in the form of a liquidity trap and we have at least so far avoided that fate.
Does the phrase Monday morning quarterback mean anything to you?
I agree that the perpetrators of the fraud should have borne the brunt of the pain and considering that a much small financial catastrophe — the Savings and Loan crises — led to over 1000 prosecutions, it is kind of amazing that there have been so many fewer this time. And no big fish, like Keating and Milken. But nothing short of sharpening the guillotine will change that.
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I don’t personally believe that mortgages for borrowers with good credit and large down payments or substantial equity at 4% are any more or less mis-priced than 10 year Treasuries at 1.9%. The same economic effects should be influencing both of them.
It would be an interesting exercise to model out a hypothetical AIG bankruptcy. But it would be an expensive forensics exercise with no real purpose, so it will never get done.
On NVJ’s point about Goldman, I recently finished up a matter involving a hedge fund that was short several billion dollars in 2007-08 (largely CDS plays — extremely profitable for the partners). On the other side was Goldman. But Goldman had passed the risk along to AIG. So if AIG had collapsed, Goldman would have still been on the hook. And our guy was just one of dozens of such plays that Goldman had pawed off on AIG. So an AIG bankruptcy clearly would have brought down Goldman. And I’m quite confident it would have brought down many, many other banks and investment banks. Who knows if it was ultimately worth it to bail out AIG, but it plainly would have been a far deeper crisis and recession had we not done so (we can debate whether it would have been shorter, however).
“So, you’ll ask, what do they purchase with all those dollars?
Hard assets, such as real estate and mines, ”
I don’t doubt there’ll be some of that, but they have about $1 trillion in treasuries so it takes a lot of real estate to move the needle there (even at SF prices!). My main point was that the term structure of both our debt and their holdings are very important but discussion of this seems absent in the mainstream.
“Do you think that AIG should have been allowed to default? What do you think that would have done to the banking system and the overall economy?”
…
“Does the phrase Monday morning quarterback mean anything to you?”
Why ask if you didn’t want an answer?
I do think that more leeway should be given to people making hard decisions under fire, but it doesn’t mean that those decisions should never be revisited. Unlike AT, I’d think that the upcoming years will produce many a book and research paper that digs deeply into this and other decisions made during the crisis.
If you note that these real time decisions are in fact hard to make and also believe that they were made incorrectly it leads you appreciate certain systemic fixes people have suggested such as encouraging more derivatives to be standardized and traded through a common clearing house. Easier to check net positions, impose capital requirements and sort out any messes. Companies with systemically important positions could be required to have a “living will” in place which would contain some structure for what should be done in case of insolvency.
” And our guy was just one of dozens of such plays that Goldman had pawed off on AIG. So an AIG bankruptcy clearly would have brought down Goldman.”
The thing is that you can’t actually know this without knowing what (if anything) Goldman did to offset AIG’s counterparty risk. Could they be lying or incompetent regarding their net zero risk? Absolutly. But if they put some of the devious minds there to the task of ensuring that if AIG fell they’d still have cash in pocket, then I’m sure they could accomplish that.
“Who knows if it was ultimately worth it to bail out AIG, but it plainly would have been a far deeper crisis and recession had we not done so (we can debate whether it would have been shorter, however).”
I doubt there’ll be a definitive answer on this without years of scholarship, but my gut feel is there wouldn’t have been much more net pain but rather a different (and probably more fair) distribution.