But whatever destruction these excesses wrought, they are part of a creative process that probably couldn't be accomplished any other way. How can we find the limits of any economic venture without testing those limits, even exceeding them once in a while?
A friend of mine, back in the 80s, worked for a thrift whose portfolio manager got them into some serious trouble. The guy was a regular source of gossip, since he was paid so much (especially compared to the folks like my friend who had to clean up his messes). As I recall, he spent one day--during a nasty bond-market mess when he should have been selling some loans--calling local junkyards to see if anyone had a Mercedes hood ornament he could buy to put on his golf cart.
I volunteered to take his job at half his salary. My theory was that I could lose that much money for the bank much more cheaply. Sure, he had the finance background that I didn't, but was it helping?
Please. I thought the "creative destruction" thing went out with the low-rise pants.
And now we have a healthy $1 trillion junk market, that low rise pants too? Nah, by all means, let's stop te damn clock unless we can be perfect, or in your terms "precise."
Agreed. Once again we bears can but gasp in astonished disbelief at the unforseen (to us) turn of events which changes the status quo and advances the world on its current rotational path.
First time coastal homebuyers have been locked out of FHA's programs for years and that is the way it should stay.
One of the things that occurs to me is that there used to be a decent tradeoff going on. If you lived in an employment/educational/cultural center, you spent more on housing. You may well have made more income; you certainly worried less about stability, since other jobs were there.
If you lived in Podunk because you were, oh, an agricultural implements dealer, you spent less on housing. You probably earned less, and in any case you had limited options if the job you had went away.
FHA was something like an equalizer. It didn't help the folks in the high-cost areas as much as it helped the folks in the low-cost areas.
The problem right now, it seems to me, is a bubble, not just a "high-cost area." Hence my horror at the idea that FHA should be used to lever more home sales there.
I'm open to good-faith arguments that the economy I sketched above is now different, and therefore FHA should change accordingly. But do I think that's what Alphonso Jackson is up to? Not in this lifetime.
I'm with CR any action the Government can take to "allow FHA to function as a drag on runaway home price appreciation by limiting financing options and thus helping to force prices downward" is uh, um, you know, a good thing.
rt, I have devoted more hours of my life, that I will never get back, to the truncate-vs-round problems than I care to think about.
In any given sale of mortgage loans, the probability that 50% of the loans' P&I payments will be off by $0.01 from the purchaser's calculation approaches 1.
We even have certain calculations named after the calculator. If my APR doesn't match your APR, I will say, "mine's Monroe." You'll go, "Oh, mine's HP."
And don't get me started on the ARM notes out there that silently slipped in a "round up to the nearest eighth" where the standard Fannie/Freddie notes all say "round to the nearest eighth."
Some of us earn our keep by watching nickels and dimes. Unglamorous jobs, frequent objects of derision from the high-rollers. But such is fate. The world does not need all UberNerds, but it needs some UberNerds.
I'm as willing as tanta to make fun of the language in press releases.
Under the old complex system, lenders had to access a web page to find out the maximum loan in their area. Under our new simple system, lenders need only access a web page to find out the maximum loan in their area!
But only in the comments do we start to get into the meat of it all. Currently, we have a lot of subprime lending, which we think is sometimes on lousy terms for the borrower, and we think doesn't involve much taxpayer exposure. Under FHA, we know we have much better terms for the borrower, but we get taxpayer exposure. Is it all worth it?
Why can't some of this politcal energy for ownership go into say .... allowing first time buyers to withdraw more than $10,000 from their IRA's? Or how about letting anyone withdraw whatever they want from an IRA for a home, every 10 years?
It sould stimulate saving. People would make down payments. Sheesh.
Mort_fin, don't we first have to decide how much "taxpayer exposure" is there?
There's "taxpayer exposure" all over the place, including in a lot of those "subprime programs" that aren't FHA. So until we try to sort all that out, we just fall into the "government program" vs. "private sector" war of generalities.
My own view tends toward the idea that if the taxpayers backstop the MMIF, and they do to some extent, then the risk-taking of the program had damned well better have broad public benefit, including potentially benefits that are designed to equalize lending capital across areas of the country. Those benefits need to be examined carefully.
If the idea is just to keep the RE party going, count me out.
From another blog - Is that what most people see/think:
"I had dinner with my inlaws tonight. We are renting. They were throwing stories around about how much real estate has gone up and what a great investment it is. They built a house in 1997 for $250K and they figure it could sell now for $500K. Not too late to get in. Numerous stories of everyone making money like crazy. Why throw your money away renting ? They figure the subprime thing is overblown and housing will only go up.
They bought their first house in 1970 for $40K and sold it for $85K in 1997. They figure they made a fortune. Never mind that interest was 19% in the early 1980s and they could have rented for way less than interest.
I cant tell them nothing. Oh, stocks ? Yeah, they lost their shirt in the dot com crash and that makes them too risky. They are about to retire and they are thinking of building another house. Easy way to make $200K.
"
When middle-class employed people on the coasts start feeling that life is unfair, they can do several things.
They can look for ways to remove the capital/liquidity/investment distortion problems that keep pushing their housing costs out of control.
Or, they can feel unfairly discriminated against because FHA gives a loan to person in Omaha that covers most of the purchase price of a home in Omaha, but doesn't give a loan to a person in San Diego that covers most of the purchase price of a home in San Diego.
Does everyone understand that FHA's "limits" are only a matter of maximum loan amount? That there is no maximum income level? No maximum credit score? No minimum LTV? The whole idea of the program was that it would "subsidize" only moderately-priced properties, by limiting the loan amount to less than 100% of the Fannie/Freddie limit.
These angry cries, mostly on Tanta's threads, to let the mortgage market "self correct" coincide with Washington's new impetus to do exactly the opposite. It makes me wonder if any econobrains have ever explored the idea that the threat of regulation is in fact, regulation in and of itself.
It's a bit like a toddler whining "I'll be good! I'll be good!" as mom stands over him with a paddle. In years past, mom was nowhere to be found, and the cookie jar got emptied out and broken. But there's a new mom in town, one not willfully blind to the damage done.
So, suddenly, we hear all the cries of "we can self-regulate! we can fix ourselves!" as lenders rush to "self-correct" before govt does it for them-- then slap themselves proudly on the back for behaving. Except, of course, that the good behavior is simply done under duress--under implicit regulation. And except, of course, that the damage has already been done.
If the markets could really "self correct" they would have been honest and wise and self-preserving enough to see what was coming, oh, about 3 years ago. But now, as always, they correction comes too little too late --meaning not at all.
Here we are, banks a bustin', populace soaked in debt, and no small number of foreclosed folks destined to be social burdens for years to come, and messmakers who got us there still can't see beyond the end of their grubbing digits.
Some, I see, even have the temerity to do a superior dance on the crap pile they've created -- it's like listening to a crack addict or an unfaithful spouse grandiosely victim-blame to obfuscate their own trail of damage.
As you all have seen in recent posts of late, we won't have to wait until an RTC happens to pay for this con. I'm paying for it now, and so are you. There will be no self-correcting market to handle the blight, crime, and unemployment and other social costs this bust is just beginning to create.
And it's idiotic at this point to ask governments to let their populaces self-correct into Hoovervilles or Mogadishus. If they won't pay to keep blight out of their communites, they (and the rest of us) may pay dearly later.
There should be some way to force these credit pimps to pay for the damage they've wrought, but oops, that would require laws with teeth - that'd requrie (gasp) regulation.
An ounce of regulatory prevention could have worked wonders-instead of fantasizing that we have a "free market"-- all that has meant is a free license to cheat and steal - that just ends up badly for all parties -- even the businesses doing the stealing.
Businesses are not built to self-correct, they are built to pursue short term profits by whatever means necessary. It's up to the rest of us to decide how much of that behavior a civilized republic can stomach and still survive.
Like Tanta says FHA should be for white farmers in Podunk like it's always been, not those other people. We gave them their freedom and one man one vote. What more do they want? If subprime dries up for them, well so be it, nobody is entitled to access to financing, except for us "agricultural implements dealers" who need the "equalizer".
how much taxpayer exposure is a good question. unfortunately, we won't get the answer, or if we do, only when it's too late. About 10 years ago Fed economists (I'll guess maybe Canner and or Passmore) did a paper assessing who held the credit risk on mortgages. It took some digging, but they could do it. Depositories held x%, GSEs held y%, PMIs held z%, etc. In the modern world of hedge funds and CDOs I'm not sure we'll ever know. But I do think the taxpayer is fairly remote - there's at least maybe some, and maybe a lot (who knows) of equity capital before the taxpayer gets tapped. Unless there's a bailout of course - then we find out that it was the taxpayer holding the risk all along.
I'm not sure why you're vague about taxpayers bakking the MMIF (FHA's insurance fund). The folks paying the insurance premium first cover the loss, and if that isn't enough it's pretty darn clear that the taxpayer picks up the rest.
The stated reasons for changing FHA have usually been because it's a better deal for borrowers. Assessing those benefits, and the cost of taking the risk, would seem to be the relevant pieces of the policy discussion (OK, and making fun of press releases is always entertaining).
Banker: The problem isn't extending credit into subprime and trying to create a market out of it. The problem is the degree to which the products developed were not developed in good faith. If the only time that subprime borrowers can afford to be in their own house is during positive home price appreciation, then you really haven't come up with a solution at all. Either the finance industry has an IQ below 50 or they are trying to rip somebody's face off. But to argue that there is some market innovation taking place without criticial regard for the facts or the sustainability of the solution... have you ever thought of running for President?
Vote Free Lunch Party 2008!
Party For The Creatively Destroyed!
Wealthy established elites like a 'banker' calling for more 'creative destruction' makes me laugh.
I actually read Schumpeter, believe he coupled innovation & the business cycle better than anyone. The entrepreneur is NOT the friend of the established order.
Creative destruction means grinding established businesses like bankers to dust to make room for the new order.
But that part of 'creative' some how gets lost in the translation I guess.
From the article linked by Banker:
"In a market with a robust $1 trillion in estimated total value, the number of junk-bond issuers defaulting on their scheduled payments fell to a 25-year low of 1.6 percent in 2006, according to Moody's Investors Service."
This simply reflects the torrent of easy money being poured into our financial markets by the Asian mercantilists, and the desperate pursuit of yield into which various institutional investors are being forced by the accompanying low interest rates on investment-grade securities.
Just as any individual able to fog a mirror has been able to get a low-rate mortgage, so has any business able to fog a mirror been able to sell junk bonds at rates completely out of line with their risks.
Banker is right, it doesn't get any better than this. But he doesn't seem to perceive that it follows as does the night the day that the next thing to happen is it gets worse.
Banker obviously isn't worried about this. He seems to personify that statement by Keynes, that "a sound banker, alas, is not one who forsees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him."
Of course, since we don't have a free-market banking system, but rather a lemon socialism one in which the major banks are guaranteed profit and survival by an FRB pledged to always bail them out of losses by setting the discount rate however low it needs to be for them to repair their balance sheets, the only people ruined when bankers don't avoid danger are the taxpayers, and the small-saver holders of CDs and passbook accounts whose interest rates are held at negative real levels for years at a time.
Good point. FHA should stick to full doc first-time home buyers. Everytime it tries to get creative , it loses money and my wallet starts to cry out in pain.
Thanks for that link, and especially from you, Banker.
I wonder if the depth of that article, or rather the voice that we reconstruct through the language used there, hits you the same way that reading Tanta's post here does.
We are accustomed to reading for information at the expense of many other dimensions (and I could expand to make similar remarks about training and education) and even there, for confirmation rather than critical assessments of that information.
If you are missing the humor, this is such a small post for you and Tanta is just such a long-winded gal.
The Business article is longer, but so much less.
I feel like a Libertarian at heart, but have come to the conclusion that society has too many f**ktards that don't grasp responsibility and don't care about the mess they make for others.
Unregulated capitalism worked OK, in a largely self supporting agricultural country with a low population.
But an urbanized country of 300 million needs some regulations, to keep us from gutting each other. At least, one that has our current level of self discipline.
Kind of in tune with Tanta's theme - it doesn't bother me to cough up some bank statements and tax returns to get a loan, even if my own FICO is ostensibly good enough. It gives me peace of mind that the other party is practicing sound business. I don't need an answer in 5 minutes. A home purchase is a years-long decision.
What in the hell is the matter with people on the race issue?
I mean, what is it? You think that the only reason that minorities with good credit records are overrepresented in subprime is because FHA's loan limit is too low? Are you suggesting that all nonwhites are poor? I guess if that's true, you'll have to keep reminding me. I live in Prince George's County, Maryland. Unless things have changed in the last year or so, my county is the wealthiest minority-majority county in the country. My next-door neighbors do not necessarily aspire to a moderately-priced home. Yes, we have poor folk here in PG. But saying that some nonwhites are poor isn't quite the same thing as saying all nonwhites are poor, is it?
What burden of wisdom of these snotty comments am I missing?
"Creative destruction" in the financial industry? It's lemon socialism central. About every ten or fifteen years the hotshots at Citi manage to lose enough money to wipe out their stockholder equity, but are always bailed out by the Fed. We now have innumerable firms like them that are "too big to fail", and can never be creatively destroyed.
I'm not sure why you're vague about taxpayers bakking the MMIF (FHA's insurance fund). The folks paying the insurance premium first cover the loss, and if that isn't enough it's pretty darn clear that the taxpayer picks up the rest.
Well, there are a few more steps there. Like Ginnie's guarantee fees and HUD's ability to deny claims to egregious lenders. The problem is that I simply run into too many people who forget that the MMIF is borrower-paid insurance, and who think of it as an "entitlement," like VA. So, awkward formulation.
And yes, I am saying that "a better deal for borrowers" is a question that doesn't have an obvious answer. I do not consider "ability to get even deeper into hock on overpriced housing" to be, necessarily, a benefit.
Tanta could you please interpret what this would mean for high value areas like the Bay Area with median prices in the 850K-900K range?
"Another change proposed in FHA Modernization is to increase FHA's loan limits. Members of Congress from high-cost states have repeatedly asked FHA to do something about our antiquated loan limits. This proposal answers those concerns. FHA's loan limit in high-cost areas would rise from 87 to 100 percent of the GSE conforming loan limit; in lower-cost areas, the limit would rise from 48 to 65 percent of the conforming loan limit. In between high- and lower-cost areas, FHA's loan limit will increase from 95 to 100 percent of the local median home price. This change is extremely important and crucial in today's housing market. In many areas of the country, the existing FHA limits are lower than the cost of new construction. Buyers of new homes can't choose FHA financing in these markets. In other areas, most notably California, FHA has simply been priced out of the market"
ron,
in and of itself it raises the FHA limit to the GSE limit, which is now $4xx K (is I wasn't so lazy I'd look up the precise number). But other legislation is out there to raise the GSE limit, so if both pieces of legislation passed it could go a lot higher.
Tantas right there is no connection with race and access to financing and housing. Its ridiculous. FHA was always meant like she said to be for us agricultural implementation dealers in Podunk as an equalizer. An equalizer, got it? Whats racial about that? Nothing whatsoever. Its always been that way and should stay that way. Always. If some of them coastal unwhites see their subprime access to financing dry up, so be it. Its always been that way so why should they complain now? Its ridiculous.
Mozo has it exactly, if we could all play by a set of rules and follow them to the letter libertarianism would be a workable solution.
Hey Banker, back in the old days did you ever wonder who was on the other side of those wonderful junk bond deals that went south?
Now if the failure rate hits 12% are you still going to be so smug in the junkspace? Funny I can remember well the early 90's when a bunch of those junk bonds died. Anybody want some American Contiental? Lincoln Savings?
I am still paying higher electric rates because Pinnacle West dipsh*ts just had to blow a billion dollars buying Merabank.
Pardon me if my blood pressure goes up when I hear that junk bonds are safe- maybe for your dollars, but not mine.
FHA loan limits should be adjusted to allow the purchase of a home that is affordable to the median income of a MSA with 5% down and 30% of income. Dang wouldn't that be simple to calculate. Of course houses seem to be a tad expensive right now, but more will be able to be purchased under the current limits shortly.
Ron, the current conforming loan limit is $417,000. So at 87%, the maximum FHA limit would be $363,000 in a "high cost area" under the current limit and $417,000 under the proposed limit. The Bay area is definitely a high-cost area.
Motown, on the other hand, is a lower-cost area. Its maximum loan amount would increase from $226,000 to $271,000 under the proposal.
The lowest cost area current limit is $200,160.
Mort_fin mentioned the cool new improved complex web lookup, but didn't supply the link:
Somewhat OT but I'm noticing more signs of pain in the Prime and Alt-A arena related to stiffer funding requirements by warehouse lenders -- TPO or wholesale loan outfits are being required to take on more of the funding for loans they handle -- case in point is the recent closing of LoanCity (S.J. lender LoanCity closes up shop - San Jose Mercury News, a private wholesale mortgage lender based in San Jose.
To try to bring this back to topic, credit tightening may begin to trump loan quality, but regardless this somehow must work itself out. It doesn't matter who gets the blame for the rampant inflation in home prices, those prices must come down or at least stay flat until productivity and wages catch up a bit.
The alternative as far as I can tell is only more of what we have now with, perhaps, government agencies such as FHA stepping in an attempt to fill the growing fissures in our financial system. Frankly that strikes me as akin to dropping cement balls into a mud geyser (Indonesia prepares to try plugging mud geyser with giant concrete balls | Embassy of Indonesia Ottawa only with less chance of success. I am not arguing that government intervention is necessarily a bad idea but unless it really is 'different this time' continued expansion of the credit bubble can not be a solution.
Apropos a point further up in the comments above, what is going on is only a market failure if one believes markets are predictors of future events; this side of self-fulfilling prophecy I am not aware of any systematic evidence that is actually the case.
How does being able to use a spreadsheet make one more capable of precisely calculating risk? More loans, more mortgages, more foreclosures, more repossessions, more defaults, benefits who?
After reading the junk bond article I agree with you.
This whole entire economy boom was based on turning debt and call it income. The question is how to avoid this massive debt conversion to income gonna blow up in our face:
Reduce interest/pump up real estate again to keep it going.
Raise rate to slow down inflation, put most american out on the street.
create another stock bubble to replace the real estate bubble.
Let inflation run wild, invade Iran. Force the world to cary our debt and continue spending cracy.
I completely agree that FHA should stay where it's at and better yet be shut down altogether. And subprime can't collapse fast enough for my taste. The sooner we flush those people out of the system the sooner the rest of can buy the nice homes we deserve, not those cruddy starter homes like our parents had.
PeterP, how true. In fact, I think we should just get rid of this whole "median" crap itself. I believe that everyone should have above-average homes, and I'm tired of these economists who try to fool us all with fancy smancy statistics.
The boyz at FHA must have smelled blood in the water. With Freddie and Fannie disasters(2003, 2005) it seems to be the right time to make their move. That`s the way to go boyz!
The Federal Reserve as mortgage lender of last resort!
One half percent of your house price as a no down mortgage for 20 years and the house is yours! Simple, no investors, scummy servicers or wall street mummers!!!
First with the new socialist bailout de jure!!! I like it- 2% for twenty years program- copyright Allenm and BenBer!
The stock market is rigged. The statistics coming out of government and financial institutions are manipulated. The Fed and the Treasury are F#cking around with money and debt to an unprecedented degree, and all without oversight, audit, controls, regulation, or transparency. Fundamentals no longer apply.
The story is not about mortgages but about the rapidly increasing inability for PEOPLE to PAY their mortgage.
The story is not about debating if its the banks fault for lending or the PEOPLES fault for borrowing. ITS THE ECONOMY STUPED! Its not a partisan issue.
It is time for economists, economic annalists and financial industry advisors and prognosticators to stand up and say enough is enough.
No more analysis of the symptoms and effects. These efforts are not helping anyone. Enough of the innuendo, the inference, the open ended commentary meant to have us ask ourselves is this right, is this OK?
NO damn it it is not OK. Its not moral, its not ethical, its not cleaver to profit from all of this as if money or gold or what ever you prefer and wherever you cleverly put it will help you if the vast majority of the population is hurting bad.
This is not your grandfathers financial crash. All indicators illustrate that a whole s#it load of factors are loaded and set to go at all at once. And the factors for recovery are declining rapidly (energy) or simply not there. Its 10 times more dangerous than in the 1920s. People are not going to roam around politely asking for a job or some bread.
There are no winners, no safe havens for the wealthy as many think. The strategy of quietly getting as much as you can before TSHTF is faulty. Where ya gona go huh? Think about it very carefully because there is no where that wont be affected and do you really want to try and find that secure, gated location and live with a loaded gun at hand at all times, jumping at every sound?
Stand up now and tell it like it is. And tell the story of how we can restructure if we just acknowledge the truth, bring together the best minds and create a future, some kind of future that we AMERICANS can knuckle down and work for. Its TIME we get down to some real work.
No you will not be ostracized for being the one who starts the panic, you will respected as one who had the courage to stand up.
Tanta - so what's the news from Lake Wobegon? Where all the houses are above median?
Not Tanta - but I live near Lake Wobegon... there are NO houses above median if you mean NATIONAL median in Lake Wobegon. Minneapolis ya sure... Lake Wobegon, not so much.
That is unless some of those houses come with 500 acres or so of high corn base farm land.
Which makes me ask... if they raise FHA limits for coasters can I say buy 1000 acres of farm land with say zero down... with a FHA guaranteed loans that is?
If so then um... I change my mind. Raise the limits.
dryfly - no FHA and corn. There are limits on the house/farm ratio that would preclude your FHA choice. You'll need the Rural Housing Service (maybe) or the Farm Credit System and/or Farmer Mac for your government affiliated loan, ya hey.
Well I for one consider this thread to be a watershed marking the point where we can now come right out, as Tamta has had the guts to do, and flatly state that the FHA should function as a force to "drag on runaway home price appreciation by limiting financing options and thus helping to force prices downward".
Hear hear!
Also, let's from now on be honest enough to say that FHA was, is, and always should be for:
"If you lived in Podunk because you were, oh, an agricultural implements dealer, you spent less on housing. You probably earned less, and in any case you had limited options if the job you had went away.
FHA was something like an equalizer."
This is of course NOT to be confused with those people who "earn less" and have "limited options if the job you had went away" but just happen to live in the poor areas of "high cost" cities, i.e., those, you know, other people. In those cases FHA is manifestly NOT "something like an equalizer".
What a tragedy: The Fed goes neutral, housing numbers suprise UP, the sub-primo-gasm wad turns into an embarassing little premature bear-stain, and the ChiComm meltdown?
"Total housing inventory levels rose 5.9 percent at the end of February to 3.75 million existing homes available for sale, which represents a 6.7-month supply at the current sales pace compared with a 6.6-month supply in January. Raw inventories peaked last July at 3.86 million, and supplies topped at 7.4 months in October."
"Single-family home sales increased ... in February from ... January, but are 3.4 percent below the 6.09 million-unit pace in February 2006. The median existing single-family home price was $211,100 in February, down 1.5 percent from a year ago."
So inventories are already back to within a few percent of the last July's peak, while year-over-year sales are down 3.4%. But Pig chortles that housing has supplied to the upside. Sigh.
"Kind of in tune with Tanta's theme - it doesn't bother me to cough up some bank statements and tax returns to get a loan, even if my own FICO is ostensibly good enough. It gives me peace of mind that the other party is practicing sound business. I don't need an answer in 5 minutes. A home purchase is a years-long decision."
Yep and that's why there are full doc programs still around and lenders that take 3 weeks to tell that you're approved. Not many of them left...
70+ years of regulations and they consider themselfs in the "dark ages". Shame on them! All that good work (tons of paper) weisted. No wonder Tanta is so mad. Her last hope seems to be fading away. Revolutions do eat their children!
Coastal residents contribute the most to US productivity, and if the US is ever going to ever fix its trade balance and pay off its debt it needs to keep its most productive workers working. It will be harder for them to retire if their homes are expensive. Offering FHA loans to low income residents of coastal areas will not only help the poor, but if it results in higher home prices it will both mitigate the impending damage to the social security system and help the US economy by making it harder for the these more productive, more educated coastal workers to retire. Greenspan and others at the Federal Reserve have mentioned that there is a growing inequity in the US and FHA homes on the coast should mitigate that inequity.
As I recall, he spent one day--during a nasty bond-market mess when he should have been selling some loans--calling local junkyards to see if anyone had a Mercedes hood ornament he could buy to put on his golf cart.
Now there may be one more thing to consider before investing in a stock: Does the CEO own a trophy house? Finance professors David Yermack of New York University and Crocker Liu of Arizona State University looked at the relationship between stock performance and the size of a CEO's home. The bigger or pricier the house, they found, the greater the risk of lackluster shares. "If [the CEO] buys a big mansion, sell the stock," Yermack says. "Many of these guys have been super performers, but at some point that stops, and they reap the benefits."
Ah, Morton. Ask the minorities, especially the ones who barely speak English and just got shovelled into option ARM mortgages how they feel in a year....
IMO, people who demonstrate no ability to save are generally better off without a mortgage. Once you have that bill hanging over your head it is hard to learn. It seems to me that the "innovations" in home financing have pushed a lot of people backwards financially, and generally those people are the least astute financially.
The ugly fact is that once you own a home you have to save to maintain it anyway. If they can't save a 3% downpayment, very few borrowers are likely to keep the house unless appreciation bails them out, and that often doesn't happen.
No matter how you slice and dice it, it's many of those first time homebuyers in 2004, 2005 and 2006 who are taking a licking on this one. An awful lot of people made money, but few of them will end up in that position.
Marie A, I think I may have managed to confuse everyone (it's a gift).
I am not suggesting that FHA should be only for agricultural implements dealers in Podunk. On the other hand, I happen to think that the agricultural/rural economy is deserving of more than contempt. Perhaps I am a snob? In any case, I happen to think there's an argument to be made for using government resources to help keep regional credit crunches from plaguing the economy. Plus, I like to see those nice folks in Podunk have the chance to buy a house here and there. If they all had to rent trailers, those smart-asses on the coasts would make fun of them or something.
Of course FHA will allow larger loans to, let's say, convenience store clerks in East St. Louis--no, wait, that's not coastal, I meant Watts. It's almost as if FHA is "equalizing" for housing costs. And it is. It works both ways. It simply has always been the backbone of a lot of "uncompetitive" housing markets. That was what I meant by the other "equalizing." Those who live in high-demand areas tend to forget this.
In the high cost area, you can borrow more money. In the low cost area, you can borrow less money. It is possible that in the high cost area, even the higher loan limit will not be enough to finance the moderately priced home. This is a big problem. Tanta has real sympathy for people in this situation. (Have I mentioned that I am a renter in a coastal MSA with outrageous home prices? Would you like to know what percent of the area median I make? Would that give me some street cred?) I am suggesting that before we decide to solve this problem by just encouraging those underpaid folk with little job stability in the high-cost areas to borrow more and pay more, we might consider letting the Big Bad Government throw its weight around on the other side: to drag against that price inflation rather than helping it along. (I always think of Medicare and drug prices, for some reason.)
It is within the realm of possibility that your average low-to-mod income city dweller might prefer to pay less for the home, and therefore borrow less, which costs them less. It's even possible that "they" understand this math, and don't need to have it explained to them by Marie Antoinette or Czarina Tanta.
In any case, I suggest that folks on the coasts who want bigger FHA loans take a brief tour of Detroit or Columbus or St. Louis or Nashville first.
I also suggest that we should stop equating FHA and subprime.
When the silly fools heard the Chief Thief in the Whitehouse say, "I want an ownership society", wasn't what the fools thought it meant. It's an ownership society alright.... And we're all owned by the supply side voodoo doctors. We have a whole lot of repair work to do on this hollowed out economy and it will start with getting rid of the "no new taxes" ideologues.
What a tragedy: The Fed goes neutral, housing numbers suprise UP, the sub-primo-gasm wad turns into an embarassing little premature bear-stain, and the ChiComm meltdown?
Now if they only traded reefer on the board of trade we all be smokin'
And one more thing. If you think my English is bad, you should call one of the HUD offices. I used to do it just to congratulate myself after that.
How do you know what you think is English is really English? Hmmmm?
Just as an example - my college roommate was from Turkey. In our circle of friends & apartment complex we had a kid from NYC, one from Boston, a Kiwi from Christ Church NZ, a fellow engineering buddy from New Delhi India, myself & others from rural Minnesota, his girl friend from North Dakota and a rugby buddy from South Africa.
When we threw a party it looked like one of those colors of Benetton ads from the 80s. After a few drinks we all but needed translators to communicate.
And this was at Mediocre State University - we aren't talking Stanford or NYU.
On top of that, we all grew up with English as our 'first language'... what we all believed was 'correct English'... even the Indian guy (whose family worked in gov't & mingled with people from so many different parts of India they mostly spoke English).
I was doing that earlier today - in between watching college hockey & threatening to slit my wrists. I needed to take breaks and calm down - here - where the discourse is always polite & congenial.
"The National Association of Realtors reports that last year 43 percent of first-time homebuyers purchased their homes with no downpayment. Of those who did make a downpayment, the majority put down two percent or less."
That 43% figure is something I've seen repeatedly, but the second line seems absurd, "Of those who did make a downpayment, the majority put down two percent or less."
That would mean the average loan was LTV ca. 99%.
But even ignoring that and looking at the 43% no-down-payment figure. How does that jive with what the lenders report? Almost all claim something less than 80% LTV on average.
Is this a smeantic issue, i.e., LTV vs. CLTV?
Or is it that they keep the lower LTV loans on their books, and all the 100% loans are going into the bond market?
I hate to be one of the people seeming to page Tanta on these questions, but I kind of doubt many others would know the answer. And thanks for the last response, Tanta. Things are moving much faster here now-a-days and I find myself losing track of what I've posted to. PLus I was doing my taxes the last week or so.... (I am now a firm believer in the flat tax.
You don't see the FHA thing as another wasteful attempt by the Government to "do something" about a problem that is beyond their abilities? This happens every time crises break into the public arena.
Actually, since you are all opiniated, semi-financially oriented people, let me float my flat tax idea.
Everyone gets to deduct the medium income for their state (ca. $48,000). Everything above that is taxed at one rate set by the FED based on how much Congess spends plus the sate of the economy.
The Fed would keep the rate close to covering spending (maybe making allowances for long-term capital spending.) So if Congress spends too much, tax payers will feel it immediately, and they will likewise at the next election.
And if we head into recession, the Fed could decide to let things go into the red for a few quarters.
You don't see the FHA thing as another wasteful attempt by the Government to "do something" about a problem that is beyond their abilities?
It will be if they don't do a better job of defining the mandate & managing the execution.
There is NO way the FHA or anyone gov't or private can make places like NYC or SF affordable for everyone... no chance in hell. If they try a half dozen or so of my neighbors will move there tomorrow and soak up some of that largese.
I mean where would YOU rather 'affordably' live... in a place that's exciting & happenin' like the Bay Area or in a sleepy old river town that hasn't changed much since steam boats plowed the muddy water?
The only thing that keeps them down on the farm is the fact they can afford to live down on the farm.
This isn't right or wrong it just is. If they try to make it easier for locals in SF & NYC to afford their dwellings they are going to get to enjoy a many more new locals. Including one of my cousins & maybe my daughter.
Bob-in_Ma - the NAR figure is for first time homebuyers, who are typically less than a quarter of the market (half purchase, half refi, and of the purchase less than half first timers). Also, I presume the NAR number is CLTV - with an 80-15 you'd be making 5% down, but there's a lender who gets to report an 80.
Not that this ties into anything we're discussing here... but it's interesting that some of he biggest bubble markets (CA,AZ,FL) are suffering from extreme drought.
You want the Federal Reserve, to make decisions regarding taxes??? NO WAY. The FED represents banks. How can we expect them to balance the responsibility of maintaining healthy and sound banks, with a newfound responsibility for taxes? The Constitution gives that power to Congress (actually the The Constitution says Congress can't tax the people but they do). The FEDs ability to exist comes from Congress and they are there for specific purposes and not to make decisions regarding tax revenue. Furthermore, the Fed is supposed to be bipartisan and taxes are a very partisan issue. That is why Fed Heads never will never even give advice when quizzed by Congress about the possible outcome of different tax policies. It would be a very bad idea.
Flat income tax? What kind of idiot would even suggest it? There is stupidity abound when some 50k/yr wage slave, befuddled and simplistic in his thinking, gets involved in matters far beyond his capacity and suggests a flat tax.
I will grant the "befuddled and simplistic in his thinking" part, but I am not a wage slave. I can state categorically, I have not been a wage earner since the early '90s. I'm 48 years old, and I only worked 9-5 for 6 months, I think it was back in the early 80s. I take great pride in that, of course the flip side is that I'm befuddled and simplistic in my thinking.
Bob_in_MA, I can't say I've ever been a flat-taxer. But I like your idea of the feedback loop.
You know how TurboTax has that little running balance on the screen of your liability/refund? Perhaps we should get the IRS to build a big online realtime tax return portal. It displays the running balance of the current budget deficit. We all have to keep logging in and decreasing our standard deduction until the number hits zero, then we can all file. Alternately, we can march on Capitol Hill until they cut appropriations for something--wars come to mind--and then we can put our deductions back.
Tanta,
You reminded me of something I encountered. I was doing my state taxes today and at one point I came to a line, "Multiply by .053... if choosing the optional 5.85% rate, multiply by .0585."
I hadn't noticed that before so I searched all over to find out what the optional 5.85% was. Well, it's for Massachusettsians who felt guilty when the state income tax was reduced from 5.85% to 5.3% to lodge their protest by paying more!
Now, it occurred to me that anyone who might be so inclined in a theorhetical sense, would not be so inclined in the midst of doing their taxes (I think I encountered a circular loop on Form HEEC that required me to reference a number to calculate the next line that could not be calculated until I had the results of that calculation... thank god we don't use computers to file our taxes!
I will investigate further and see if I can find out just how many citizens of the People's Republic (whoops!) I mean, Commonwealth of Massachusetts partake of said option and report back to the membership here.
re: Doing things to control excessive house price inflation. I'll link to this article again. It helps to understand why we have had two asset bubbles in 10 years and why we will likely have more. IMHO, prices will tend to revert to normal levels over a period of years without government intervention. Prudent people will wait and not buy on the "dead cat bounce". Of course, the flippers in the bubble markets in the most trouble today are likely not "prudent".
Tanta, I completely agree with you that raising the FHA limit is a BAD idea, regulating subprime to virtual death is a GOOD idea, and that NIETHER of those positions is racially based even though they might have substantial racial consequences. I am also, like you, a renter who feels I should be able to buy a home, a NICE home, with conventional loan - BUT I CAN'T, and that makes me mad. It offends my sense fairness when I look at my semi-covered parking space that someone has confiscated, and think of some of the people that are buying homes that I should be able to easily afford...
And I completely agree with you that:
"we might consider letting the Big Bad Government throw its weight around on the other side: to drag against that price inflation"
Right on!
The US Government "throwing its weight around" to drive down housing prices is a GREAT idea and would really help us renters at the expense of homeowners.
Let's all renters join hands in a circle of love and MAKE THIS HAPPEN
Over any long-term period, stocks have always outperformed real estate in one excludes implied rents.
Alo,
Businesses dont self-correct, markets do, big difference.
Dr. Strangemoney (great name)
Banker: The problem isn't extending credit into subprime and trying to create a market out of it. The problem is the degree to which the products developed were not developed in good faith. If the only time that subprime borrowers can afford to be in their own house is during positive home price appreciation, then you really haven't come up with a solution at all.
I wasnt trying to. Punish fraud.
Either the finance industry has an IQ below 50 or they are trying to rip somebody's face off. But to argue that there is some market innovation taking place without criticial regard for the facts or the sustainability of the solution... have you ever thought of running for President?
So trying new things without perfect foresight shouldnt be done? Luddites of the world! Unite!
Dryfly,
Wealthy established elites like a 'banker' calling for more 'creative destruction' makes me laugh.
Established elites? You have no idea who you are talking to. I was a first generation college graduate.
I actually read Schumpeter, believe he coupled innovation & the business cycle better than anyone. The entrepreneur is NOT the friend of the established order.
Um, Dryfly? Thats sorta the whole point. The established order" must constantly be uprooted. It seems to lead to progress.
Creative destruction means grinding established businesses like bankers to dust to make room for the new order.
Exaclty! The that new order is overturned etc. A wonderful thing.
But that part of 'creative' some how gets lost in the translation I guess.
No, you just won the doh post of the day award though. Well done!
JM,
It does nothing oif the sort. It reflects an economy that is more than twice as big as the one in existence when the junk market began. Its the market that built cable TV, Cellular companies and other new industries that would have languished without that capital. Like the technology we are using now. Who do you think financed all the fiber-optic cable? Capital fairies?
Calmo,
Sorry, I dont know what you are saying, I cant respond.
Back to JM,
You havent a clue about Citigroup, just none. Want to see creative destruction in banking? Read through the Blackstone Group S-1 that was just filed andand think about the radical changes coming that implies.
AllenM,
Well, having lived through several corrections in the junk market, as well as every other market I have ever seen I dont see your copmplaint. Where did I ever say they were safe? Stop making things up. What I said was that market works and is an important source of capital. Companies fail every year, welcome to the world.
One cant turn debt and call it income. That idea doesnt even make sense. One is an income statement concept, the other balance sheet. I havent a clue what you are trying to say.
If I missed anyone sorry. Thanks for all your thoughts.
Um, Dryfly? Thats sorta the whole point. The established order" must constantly be uprooted. It seems to lead to progress.
Ummm 'up rooted' is a nice clean term.
Kinda like Lenin... he said you have to crack a few eggs if you want to make an omelet. Wonder what he meant by that.
'Ruined' economically is more like it. That is what unfettered creative destruction is all about. Lose all you have, the company you work for gone, maybe the whole industry & all the savings you have.
No safety net. No easy start. Painful.
Average folks won't stand for it.
Imagine it happening to you at say age 60 - you got another 30-40 years to retrain & get it right again? That's about how long one of these cycles last.
Very few folks experience that anymore - they sure used to before FDR and the dreaded 'new deal nanny state'.
Like I said - read Schumpeter - if not Cliff Notes will have to do...
Schumpeter is sympathetic to Marx's conclusion that capitalism will collapse, although Schumpeter concludes capitalism will be replaced by socialism for non-Marxist reasons. It is in this book that Schumpeter characterized capitalism with the famous phrase "creative destruction", in which the old ways of doing things are endogenously destroyed and replaced by the new.
Schumpeter thinks that the success of capitalism will lead to a form of corporatism and a fostering of values that are hostile to capitalism, especially among intellectuals. The intellectual and social climate needed to allow entrepreneurship to thrive will not exist in advanced capitalism; it will be replaced by socialism in some form. There will not be a revolution, but merely a trend in parliaments to elect social democratic parties of one stripe or another. He argued that capitalism will collapse from within as democratic majorities vote for the creation of a welfare state and place restrictions upon entrepreneurship that will burden and destroy the capitalist structure.
Corporations are the enemy of innovation, not regulators.
You're misreading Shumpeter, at least your Cliff Notes version.
Both regulators and corporations are the enemy of innovation. Yes it is destructive and dangerous and seemingly leads to progress. As usual regarding intellectuals etc, Ol' Joe (Schumpeter, not Stalin) is right on. Just for the record I first read Shumpeter my freshamn year, lo those many years ago. He's a staple as are Hayek and Von Mises.
Paternalism? It's a much shorter trip to bankruptcy, uncompetitiveness and collapse.
I hit upon a closely related item that slipped under the radar with everything else going on the last few weeks.
On March 15, the Chairman of the Mortgage Bankers Association testified before a Senate subcommittee, pushing for the FHA spigot to be opened to pickup the subprime slack.
I'm convinced the real bailout will come through Fannie/Freddie/FHA in an indirect manner (they will be pushed to lend on money-losing terms to subprime borrowers, with taxpayers picking up the tab down the road upon their insolvency. There are some real gems in this guys testimony:
homeownership remains the most effective wealth-building tool available to the average American family. -- Spoken as the housing market falls off a cliff and millions head to financial ruin in March 2007. These words will haunt this guy for the next decade.
"important changes to the National Housing Act if the Federal Housing Administration (FHA) is to continue to be a financially sound tool for lenders" -- these changes include Hybrid ARMs, Zero Down Loans and 40 year terms. Financially sound??? At least he's representative of mortgage brokers!
Corporations are the enemy of innovation, not regulators.
By that I mean corporations are the ones really at risk from creative destruction... they are the ones with the clout in parliaments & congress... they are the ones who will write the rules. The pols will all say its for the little people - like the S&L bailout. It won't be, it will be of and for the established order.
And in all honesty - if we allowed full bore creative destruction - we'd probably see revolutions about every half century. Storming of the Bastille & October Revolution like things. CD is not very pretty.
You want a Noble Prize in Economics... devise an actionable model where CD can flourish that doesn't cause all the societal pain resulting from said CD. It is our 'avoidance' of that pain (rich & poor alike) that makes Socialism almost inevitable (either through revolution OR the ballot box).
You don't like Socialism - focus on eliminating the pain of change in a way that still fosters aggressive no turn back change. I'd vote for you if you do.
You're dead right on corporations as I said. Disruption is something they fear and over time a general good. Disruption should be promoted through lower or eliminated capital gains taxes etc.
As for eliminating the pain etc. It isn't possible. Had we tried to save the buggy whip business through subsidies etc we would have delayed the rise of the automobile etc. The dead-weight cost of doing that? The cost of the subsidy plus the lost auto jobs, plus the related tire manufactuirng jobs, plus the glass workers for windshields etc. Of course in the end the auto wins and the buggy whip folks have to find something else to do anyway. Period. There is simply no stopping it. All you can do by trying is drive wealth and new jobs and industries into other countries while yours whithers. The disruption, which is a function of speed, is necessary for the MINIMAL costs of transition to be achieved.
Me? Stop making unemployment payments and instead provide vouchers for colleges or technical schools would be a start.
But your fears are overblown (please don't start the "you'd change your tune if a family member etc," I've been through it all, ok?). Go back 150 years and see how dramtically our economy has changed in each generation, and is changing now and think about how flexible our culture really is. Read Laslett's "The World We Have Lost" for a starting point (It's England, but still). Fascinating stuff.
You vote for me? Only happen if I'd had a brain injury.
westsidegeorge: The FHA bill is the same that passed the house last year but failed in the Senate. They would be required to follow the New Federal lending requirements. The key would be getting the GSE limit raised but the Federal Reserve is firmly against, note big Ben before the Senate on the subject.
One of the recent posters called the FHA situation noise which is a pretty good description.
Just for the record I first read Shumpeter my freshamn year, lo those many years ago. He's a staple as are Hayek and Von Mises.
Schumpeter was a fruit in a lot of ways else he'd be read more today. But he got innovation right. I read him because my father made me read him (LOL) He was an economist & said all engineers need to understand the REAL forces behind innovation. That was a few moons ago as well.
I've never liked either Hayek or Von Mises - because while their rhetorical theories might sound appealing - the problem is the political again. Nothing would lead to a revolution faster than following their prescriptions after a bubble bursts. That 'pain' thing - people will not 'eat cake'.
What do you think Hayek or Von Mises would say today about our 'credit environment'? Think they'd approve? I think not.
Again find a way to moderate the pain of necessary change & these policies might work. Otherwise its all academic.
You had a wise Father! History simply says your concerns are overblown in American culture. Agriculture to industrialization (rampant population movements, families divided, creation of miners etc etc, no revolution), industrialization to specialized industrialization (the craftsman largely dissappears, lost to a cheaper laborer and a machine, no revolution), industrialization to global inductrialization (Read "The Reckoning" on this one, specialized laborer in basic industries under wage pressure from workers abroad, steel industry shrinks dramtically, auto industry rapidly changes, shipguilding disappears, no revolution), movement to information age (higher tech machine industries go abroad, specialized labor getting whipped, no revolution), to now in some ways we are returning to Laslett's kind of world. Workers closer to home, more independent, craftsman in some ways again, still no revolution.
It is pretty amazing when looked at that way. Indistries and jobs swept away again and again and again. Waht happens? we get wealthier and live longer, especially the poor. Revolutions? Economic one's all over the place. Political ones? Not so much.
I'm outta here, I'll read tomorrow. Thanks for your thoughts.
What did you find most radical about Blackstone's S1 filing? I found several things. First, no real voting rights, and by offering up only a 10% stake in the firm it will likely exclude financial institutions, including merchant bank shareholders, from any input into management decisions at Blackstone, which they would have had under the 1995 Private Securities Litigation Reform Act (PSLRA) and the 1998 Graham Leach Bliley Act. I think Blackstone will be free of suits by shareholders, including their largest shareholders. The downside is that financial holding companies are still pretty much in their infancy and some of the safety nets they must have counted on were PSLRA and GLBA rights -- if financial holding companies are weakened, then are banks they own not also weaker?
Also, Blackstone will not give earnings guidance, which I appreciate. Perceptions (expectations) are not reality and they tend to cause bubbles. But if other firms follow Blackstone's lead and drop guidance it will tend to undo the lift that was given to the market in 1995 by the PSLRA's "Safe Harbor" rule whereby for the first time since 1933 shareholders could no longer sue firms for not performing in line with expectations (guidance). It is ironic that just when guidance and managing expectations become the tools of the day for the Fed the corporations are drop them. Maybe the master plan is ticking along, but somehow I have to wonder if we are headed for an out-of-sync economic phase.
Gee, buggy whips are luxury items as are carriage makers and blacksmiths. Just what is your point?
While I do not remember if buggy whip folks got govt handouts, railroads and their ancestor, canals did. Steel mill owners and railroads could call out the national guard to put down strikes. Business owned government in the last 19th century, poor man had no chance against city hall or the courts against business. All non monetary subsidies. Today intellectual property of corporations are defended to the threat of national action while the poor worker jobs just get sent overseas in the name of a free market.
A lot of Mises stuff is religion, it might work in a perfect place, but no place is perfect. In a nutshell, the late subprime thing is excused as a central bank problem rather than a free market problem and if the discussion goes to how the fed is powerless then the BOJ or PBOC is blamed. Always always someone to blame.
The world is not perfect. My view is that capitalism is best because fewest folks die in the conflicts. $s and power are fought over by the elites and the peasants are left mostly alone. But once a group gets wealthy they will buy protection and thus creative destruction will not happen or not happen as effective as theory.
Banker, take it from me. You can not fight ideology. In the end it comes down to "we need more and more and more regulations". Perpetum mobile- if my memory serves me well.
Vouchers are fine. But you think a person who loses a million dollar So Cal home and is handed vouchers is going to 'vote' for that? I don't. He could retrain, spend half the rest of his life & never catch back up.
BTW - the problem really isn't that the guy is going to 'starve', we could easily see to it that they don't... its the status he loses, the stuff he associates the good life with. Thorestien Veblen - Maslov type gobbledy gook.
I don't have an answer for that.
And if you just let the guy to stay in his house pain free... or provide easy FHA mortgages... he isn't going to make the necessary change. Look at how 'institutional' the dole became in England.
I don't have the answer for that either.
The problem is execution - how do you make good theory actionable yet politically stable & acceptable. I don't have a clue and I've been thinking about this for almost 30 years.
On Cap Gains Tax Cuts...
Even though I'm a small biz guy I think its over-rated. I don't know a single guy like me who would be 'encouraged' to expand based on zero cap gains rate. It has to be part of a larger package.
I'd rather see 'tax harmonization'... income, estate, cap gains all harmonized so they in effect mark to the same rate schedules. Takes away the incentive to game the code.
What I WOULD do to promote innovation is allow for instantaneous depreciation AND capital class exchange. Example:
Buy a piece a machinery & expense immediately... sell that piece of machinery & include the sale as revenue (taxable)... buy a new piece of machinery & expense that. Basically does the same thing as eliminating cap gains tax IF you invest & grow. If you only sell capital (and don't reinvest) its taxed like any other 'income'... that harmony thing again.
So I'm curious...our entire banking system is built around the fed, which is a government entity which is granted exclusive rights and powers. If we are to buy into the unregulated capitalism viewpoint in a consistent manner, then the entire banking system should be discarded, and we should go to a "print your currency if you can" free for all. Is anyone really advocating this? If not, it seems the only issue here is where to draw the regulatory line, and we should accept this and drop all the pretense about "free-market" vs. "socialist" or whatever other vague label you want to apply.
The world is not perfect. My view is that capitalism is best because fewest folks die in the conflicts.
Exactly. At least REGULATED capitalism is best.
I'm not sure completely unfettered capitalism is more or less likely to foster conflicts. Is there even a single case in history to point to? Every single case of capitalism I can think of there is (1) government and (2) the economic actors influence gov't on their behalf and at the expense of others. Show me one & I might buy in.
If we are to buy into the unregulated capitalism viewpoint in a consistent manner, then the entire banking system should be discarded, and we should go to a "print your currency if you can" free for all. Is anyone really advocating this?
Only on the 'internets'. LOL.
Seriously - you hit the nail on the head. The same folks who scream free market free market are often the ones with the fingers deepest into the gov't pie. Few more so than the financial industry.
Gold bugs would say abolish the Fed & go to a 'Gold Standard'... But then who manages the gold... do we all walk around with gold? How do I get my itunes with gold coins? Who makes the gold coins? Who tests the gold coins they make? Who arbitrates differences?
So somewhere there is still a pretty sophisticated entity that has to manage something even as medieval as a 'gold standard'... else we all end up with metallography labs in our basement.
MaxedOutMomma summed this whole argument up pretty well earlier... we got regulation, like it or not... now we gotta decide what to regulate, how much and how.
Again tactics & execution is always harder than theory & strategy.
The 'free traders' don't like that - they'd rather focus on the 'theory' & 'ideology'.
The things you cite, while interesting aren't the radical I was talking about.
-No real voting rights? Media companies, NYT included, have had that structure for thiry years or more. KKR's European issuer has that as well
-No earnings guidance? Google was the big fish that began that.
-Blackstone isn't a bank and I don't think it owns one either. If it does it is immaterial.So the Fed isn't a factor.
-Nothing precludes shareholder suits. If anything they are more likely as it is the only way for Blackstone shareholders to get any voice at all.
No the radical things Blackstone is doing are much more important. It is going to have 50ish% of exalted Goldman's market cap with only 2.5% of Goldman's Employee count. 2.5%. Think that Lloyd Blankfein is thinking about what that implies? Think that Merrill's, Morgan Stanley's etc boards are going to push for some changes?
Blackstone is going to have no compensation committee. It is going to pay its people what Steve Schwarzmann thinks they should be paid thank you very much. Don't like it? Don't by the stock.
Blackstone's long-term equity and real estate funds have simply destroyed the stock market averages over a long period. Destroyed them. Think the techniques they are using might now be reverse engineered to the degree possible? You betcha! Also, doesn't it raise the question whether privately run companies can dramatically outperform public ones and doesn't that argue that our whole oversight process is perhaps bought at a far higher price than we all thought?
Read the whole S-1. it'll blow your mind. The last one I read that made me realize just how much the world was about to change was Google.
I am fine with your specific proposal. But you are missing the point on Capital gains taxes. It isn't the existing biz where the impact is had, it is the new business trying to get funded. Capital gains tax impose a major cost moving from an existing investment to a new one for providers of capital. It forces new companies and projects to obtain a higher return than they would ordinarily have to in order to compensate investors for that incremental transaction cost. Those that offer a good return, but can't generate the incremental return aren't funded and would be with no capital gains tax. Eliminating it means faster innovation, more new job creation etc.
But once a group gets wealthy they will buy protection and thus creative destruction will not happen or not happen as effective as theory
Simply not true. Look at the history of General Motors or IBM or US Steel or the fate of Sears or Woolworth's or Shearson or Salomon Brothers. Folks try to do what you say. But it doesn't work.
Lets say there is a place with an effective 99% tax rate, but you can make a million dollars profit after taxes.
Or a place with 1% effective tax rate but you make a thousand dollars profit after taxes.
Where oh where do I establish my business.
Oh did someone assert tax rates drive business decisions. No my friend, profits drive it(at least in theology). You have choice of a high tax state like Calif or Mass to do high tech or you can do it in Alabama or Mississippi, low tax states.
Remember I live in Alabama and not only that but in what passes for high tech part. Low taxes and low tech.
Intelligent taxes buy things that business want. Educated workers and customers, infrastructure to get and move goods. A culture of buying valued added stuff instead of just surviving.
Ever hear of John Malone? He built TCI into a cable TV giant and now runs Liberty Media. He is widely recognized as an unusually astute businessman. In ameeting one day I asked he how he spent his time among his various businesses etc. Know what he told me? Since taxes were far and away his biggest controllable expense? He spent 70% of his time on tax issues. 70%. Talk about a waste of a enormously productive mind. But given the system, that was the rational decision.
I'll let you reconsider what you said after you take a moment to reflect that I am a history buff and my POV spans centuries not just the last few years.
Take Bham, where I live. In my dad's day US steel ruled the city.
ditto for most of your examples. Even Salomon Brothers depends on the govt acting as the lender of last resort.
Never the less, lets take the recording industry which instead of embracing new tech and a new business paradigm, got new copy right legislation passed in order to keep selling a $1 product for $15. Creative Destruction of them has been delayed at least a decade. But they are being destroyed bit by bit.
Microsoft used the government to enforce draconian copyright laws to put off the day of judgement and they just rolled out Vista to the sound of one hand clapping to a megabuck ad campaign. They will survive on the quality of their product but having a friendly govt to allow them to force PC makers to bundle Windows and effectively punish anyone wanting say Linux on their PC instead.
It isn't the existing biz where the impact is had, it is the new business trying to get funded
No I get that. The guy I described is the guy getting the funds & buying the machines. It could apply farther down stream too.
Invest in company A... grows like a weed, investor cashes out. Tax will be due as regular income.
But take income and buy company B and expense investment wiping out 'gain' from investment in company A. Rinse, repeat.
Effectively no cap gains tax UNTIL they stop investing in companies and instead buy luxury yachts, etc. Then its income and they pay taxes at regular rates.
It would be the mother of all IRAs... for everyone. Bill Gates or me.
And even as a liberal, I'm okay with that if it grows jobs & wealth for all. All I want is that when Bill eventually starts taking those cash outs as income that he pays taxes on the gains like his workers... same tax schedule for both.
Otherwise I'm fine with it being expensed & deferred & growing 'invisibly'.
Similar issue with inheritance/estate. Allow for it to be treated like a large capital gain account at zero basis. No tax until taken as 'income' then tax at regular income tax rates.
If you didn't know already, I have a family full of tax attorneys.
Folks try to do what you say. But it doesn't work.
Not forever maybe but a long time. GM is case in point. They've been tangled with gov't (to GM's benefit) since at least the early 70s.
UAW has helped too. They might fight like brothers but quickly unify to fight the neighbor.
My sister is trying to get a grant to write the 'history of the bankruptcy code'. She is one of those tax attorneys I mentioned above who left Law to get a PhD in History (she made money & saved it then did what she really wanted). Smart gal.
Corporate-gov't meddling plays a big part of that story.
dryfly, how about " a little bit pregnant"? Same goes with regulated capitalism.
That argument was decided when we decided to have government at all (legislation courts executive branch cops money property laws, etc.).
Once you make the decision that we need SOME gov't (to at least keep order, manage disputes, whatever) then you are effectively 'pregnant'. The question after that is how do you raise the child.
That's what we're arguing about now... how to raise the child.
Look at your examples again. Bethlehem went belly (as did Phoenix Steel, where I spent my teenage years), Salomon no longer exists, the others are gone or shadows of what they were. Even Microsoft. It is no longer the growth monster it once was. Now it pays dividends because it can't use it's capital effectively.
What is to take back?
What monopoly does John Malone enjoy? Direct TV competes with Dish and Cable, Starz competes with HBO and Showtime etc. The Game Show network competes with all the current gameshows and other niche networks, The Atlanta Braves? QVC competes with HSN. What is the monopoly of which you speak?
Goldmine Slacks is gonna LOVE the Blackstone IPO even though they weren't invited to participate. Why? Blackstone will be valued at 20 to 25 p/e, while Goldmine is currently, what, 9?
On your tax proposal, you are imitating the Starkers 1031 exchange so common in real estate. Applying it to industry is a GREAT idea. Not often I get an ephiphany like that. I'm going to think about your idea some more, tweak it some insignificant way and then claim it as my own and trumpet it far and wide.
The valuation difference is exactly the point. Goldman's relative valuation says it has an inferior business model. If Goldman was going to spike big in response to Blackstone it would already have done so. It is up less than 5% in the past week. Think about it this way. At Blackstone's expected value, if the two merged, Blackstone shareholders would own roughly 1/3 of the combined companies. That is astounding.
Banker seems unable to fathom that innovation is not the same as improvement, and that if the profitability of some hotshot new business idea is so poor that we need to subsidize it with tax breaks to make it an attractive investment, then it doesn't deserve to live.
Amazingly, he seems seems to think that the orgy of malinvestment and fraud that was the telecoms debacle was all worth it because it's given us so much cheap optical fiber bandwidth. The possibility that the aggregate harm to those who suffered serious losses due to the depredations of Worldcom, Global Crossing, Qwest, et al. might outweigh the aggregate benefit of that surplus bandwidth to the rest of us doesn't seem to have crossed his mind.
It's always seemed to me that the reason properly constituted market economies work well is the one stressed so strongly by Milton Friedman in "Free to Choose" -- that market prices are a means by which we communicate to each other the relative value of our various inputs to economic activity, and that if someone is able to take inputs so valued at some amount X and produce output that can be sold for more than X (i.e., run a truly profitable business), then society is better off. Companies like Global Crossing, Worldcom and Nortel use other people's money to purchase inputs valued at X, but produce output that can be sold only for less than X, do not benefit society. It is not sufficient that the value of the output to be non-zero, it must be greater than the value of the inputs. Moreover, it should be greater than the value others could have produced through alternative uses of those inputs, so if others are able to run businesses that can pay their taxes and be profitable, then any business unable to compete and be equally profitable on the same basis is an inferior user of those inputs.
But perhaps I'm misinterpreting Banker. It is often rather hard to understand exactly what he is trying to say. Funny, I've never had that problem with Tanta.
Think of it another way. If Goldmine split into two companies - Private Equity (including asset management) and Sales and Trading, you'd be looking at a 300 to 350 dollar stock.
BTW, the scenario dryfly outlined about selling out of company X and "1031'ing" into company Y wasn't theoretical - it is done all the time.
jm, it is much easier with Tanta. It is like with those barteders who think that biz. would collapse without them. How lucky those owners to have such great minds working for them!
I gotta admint JM, that is so funny I snarfed my soda all over the keyboard. Also, I don't even know what a "malinvestment" is. I looked it up even, no go.
Of course innovation doesn't equal improvement, at least not a single one, but in the aggragate? History speaks. The telecom stuff? Obviously worked out in the end, the numbers aren't even close. That even includes the fraud (Worldcom), which I have previously said should be prosecuted. I think the rest is what some call a strawman.
Regarding Goldman, that's the kind of thinking that I bet Lloyd Blankfein is considering. If that's what you initially meant by "loving it" then I agree. But dividing Goldman that way would be culturally very tough. The essence of its approach is linking its businesses.
On the 1031 issue, on the corporate side I get that, but how does a VC (FOR EXAMPLE) do it?
Thanks all, I'm out for the evening...I mean it this time!
Trying to find data on ARM recasts I came across recasting from LTV caps (which Tanta discussed) AND automatic recasts by time period, usually 5 or 10 years. Could you address the latter???
Can anyone name examples where new regulations were rolled back to old standards? (Not merely modified because they were not working as desired.)
Prohibition is the best example I can think of. And perhaps some cases where we implemented a tax of some kind, that was later removed.
But I think it is true, that we rarely roll back to doing things as they were under the "old rules". People wanting to see 80/20 lending reasserted across the board are probably going to be disappointed.
On the 1031 issue, on the corporate side I get that, but how does a VC (FOR EXAMPLE) do it?
And it should be doable. As a liberal I'm all for soaking the rich when its conspicuous consumption... but not until its actual consumption (income) not true investment.
Maybe its just the rube in me that hates to see anyone eat the seed corn... that stuff has to get planted. After its in & harvested, that's when we argue about who gets what.
I knew exchanges were done in RE but didn't know what they were called or how they work. Something like it needs to be allowed in capital funds as well as at the plant operational level too.
A good politician could sell it to both liberals & conservatives if part of a larger, more comprehensive reform. That's why I think overall tax code harmonization is so important. We've sub-optimized the code for various tax classifications badly.
A gold mine for tax accountants & attorneys though - I hear about it at holidays.
Gee, ya think Mozo? How about strangling subprime, restricting the FHA or, better yet, the government actively moving to decrease the value of homes and therefore the net worth of almost 70% of it's citizens?
Amato, I view the collapse of subprime as one of those cases where regulatory agencies stepped in, and reminded the players to watch the field lines. We haven't really reversed much, just asserted the rules that were being ignored...
I'm talking about real reversal of regulation. That is rare. There is talk sometimes about repealing Prop 13 in California, or repealing the clean air act, etc. But the momentum just usually isn't there to unde these things.
Reversals such as with Prohibition take place when the regulations were so odious and stupid, that we just couldn't live with them.
Banker / dryfly,
I have deferred profits from the sale of a business by rolling them into starting a new business, i.e., the business equivelent of a RE 1031 tax deferred exchange. Depending on the structure of a VC outfit, I don't know why they couldn't internally accomplish a similiar result, but I AM JUST A SMALL OPERATOR and have no actual knowledge of HOW.
You're all misguided. FHA product is the unsung hero of both mortgage bankers and home owners across the country. It has been criticized for being too exhaustive in its requirements to evalulate income and colateral, which in light of the subprime fiasco, has been its saving grace.
Banker, the question was company control of government and that lasted until the 30s.
The fact that they eventually died, does not mitigate the fact that they used government to protect monopolies until the mindset of the companies precluded flexible thinking and then got whacked.
The whacking only happening after govt stop their monopoly.
Re John, he is in the cable business and that is a monopoly in most places. Now as to his obsession of taxes, it appears that he is figuring ways to get govt favouritism for his outfit just like the other folks. If it was current tax law, then his minions could hand that. That is why tax professions exist. Your story sound fishy in so many ways. Not to argue his answer, but his motives.
I kind of agree, really. There are too many people in the country without savings, that want to buy a home. It is a market that will be served, although it may have to scurry out of sight of the FDIC insured institutions.
"The telecom stuff? Obviously worked out in the end, the numbers aren't even close."
"... Obviously ..."
I beg to differ.
"...the numbers aren't even close."
What numbers? Would you care to provide some references we can peruse?
"That even includes the fraud (Worldcom), ..."
Not only did the various and sundry frauds wreak grievous harm on shareholders, bondholders, and employees, the NASDAQ bubble and ensuing collapse they helped cause was the major impetus for the Fed's slashing short-term interest rates to negative real levels, which led in turn to the loose lending and housing bubble with whose aftermaths we must now somehow deal. By the time this plays out, the net harm will have been enormous.
You have placed yourself under a serious obligation to show us a rigorous quantitative analysis that demonstrates that the uses to which those economic inputs were harnessed produced a net outcome of value greater than the inputs, and greater than outcomes we could have gotten from alternative uses to which we might reasonably assume those inputs would have been harnessed absent the fraud.
There are too many people in the country without savings, that want to buy a home.
Tough sh!t.
Mozo, did these people not exist before the boom?
80/20 existed not because anyone wanted it, but because it had to be. Risk has to be mitigated, either via sufficient skin or higher rates.
People that are good risks get better terms; those that are not do not. Sometimes the terms for "bad risks" are too onerous to overcome -- those people shouldn't own homes, simple as that.
Um, John Malone isn't in the cable TV buisness anymore and hasn't been for several years. Ya gotta get current brother. TCI was sold to ATT and then Comcast.
On Page 13 it claims that from 1996 to 2003 $1.8 trillion wasn invested in telecom in the US. That's an average of $300-$400 billion per year. This article VON Magazine - October 2006 shows that in 2006 alone telecom capital spending was double that, over $900 billion. Hmmm, sounds like an industry still rocked to me, one that is barely recovering. In fact the articles 2006 sub-title is pretty funny, "Are Telecom's Happy Days coming to an end." The Happy days obviously run through 2006, huh? The article talks a lot about the recent telecom growth. According to TIA, by 2009, telecom capex will be $1.2 trillion ANNUALLY, OR 2/3 of ALL the capex spending during the 6-7 year period you were concerned with. That kind of capital expenditures and growth in sales numbers reflects an industry that is now far bigger than it was a decade ago. Is that enough?
It is apparent that the mighty Wurlitzer has noticed this blog and it's growing audience and has assigned permanent staff to comment. Does any one know Al here?
Wow, just woke up to this hairsplitting stinger from Banker: "Buisnesses don't self-correct, markets do. Big difference."
However you mince it, it works with either word: if you are acknowledging that businesses (which make up markets) can't self-correct, then it follows that your "markets" won't do it either.
Here, I'll use it in a sentence:
"The mortgage 'markets' are 'self-correcting' by privatizing profits, and socializing losses."
It's not a coincidence that folks like Banker and Broker, and the man who um, 'farts through silk baby,' have begun to pepper this thread with grandiose visions of things that don't exist -like free markets, and businesses who always funnel money into innovation and job creation, rather than jacking the gap between rich and poor to new breadths.
The great OZ of deregulation doesn't want you to pay attention to that thief behind the curtain.
All this innovation and creation and destruction strikes me as kind of a red herring. What we have here is the same old bad debt as ever, only more of it this time.
Alo, I agree with you in regard with 'privatising profits and socialising losses'. Thats exactly what happens when Goldman buys MBS from Fannie. My question to you is: Would this be possible it if weret for Fannie? Or if Fannie were a real private company? We woudn`t have ' socialising loses', would we?
You seem to - either intentionally or by accident - dismiss the connection between the blurred credit space lines (subprime/AltA... based on credit scoring) and the underlying collateral's linkage. Weakness in this collateral spills broadly into lender finances and HB business prospects and the employment picture as the housing related businesses contract... & as defaults start to run. Also cuts severely into MEW.
Ignoring the collateral decline influence effectively totally dismisses the early '90s RTC meltdown. It's not merely fiction or theory - it happened. And that crash was set up in the wake of a far tamer bubble.
I remember the 90s crash like it was yesterday. We'll see....
Assume for a moment that John M. obsesses on taxes as much as you says he does. What are his taxes so complicated? Is it because citizens want complicated taxes or there are a lot of obsessive business men gaming the system for their business by having the legislatures pass complex tax laws.
Banker, I would say the effects of the 90's bust lasted until about 1998 in southern Cal. About a year of appreciation had taken place, and I remember the newspapers reminding people that "home price declines are not what traditionally happens in CA - we are returning to a normal market"
The fear of becoming stuck with an asset that you would be unable to sell, by that point was receeding.
I also remember a co-worker with 3 or 4 kids, that was still stuck in a 2 BR condo he and his wife had bought at the peak. I think he finally sold it in late 1999 or early 2000. So "move-up buyers" were still being impacted for quite a while, if their timing was poor.
I can only take the man at his word. He had no reason to lie to us. To ask that question you did displays a basic ignorance of how complex corporate structures can be, the differing tax codes among states and how heavy the tax burden on purchases and sales of assets/equities are for billion dollar enterprises.
Alo,
Your argument is like saying if an arm doesn't breath a body won't either.
I would say the 90s bust lasted 7 years. That bust was set up over a far shorter period without even a tiny fraction of the nutty lending and appreciation was dwarfed by the current bubble. We had inflation at the time and substantially higher interest rates which may have popped the bubble earlier than the current plunge. This one is different since its a bubbly popping itself, without a lot of external influences.
"The US Government "throwing its weight around" to drive down housing prices is a GREAT idea and would really help us renters at the expense of homeowners.
Let's all renters join hands in a circle of love and MAKE THIS HAPPEN"
In response to Banker's 03.25.07 - 4:44 am comment, let's begin by examining the second of Banker's references:
Referring to 2005 results, the article says wireless services revenue increased 14.8% to $118.6 billion, but landline revenue fell 1.4% to $192.3 billion, while internet-access revenue rose 10.2%; though it gives no dollar figure for internet-access revenue, it quotes the an industry report as projecting it will compound 5.3% to reach $24.8 billion in 2009 (so it must have been under $20 billion). It then notes that although optimistic forecasters are extrapolating out the recent trends, "The reality is that the carriers are all starting to cut back on spending as they leverage their recent investments. Their focus now is on generating more cash ... and cleaning up their balance sheets."
Earlier, after quoting the rosy $1.2 trillion industry-association capex extrapolation for 2009 that Banker trumpeted, the article had noted that, "These companies just spent the last four years ratcheting up spending while capital was sloshing around from an aggressive U.S. monetary policy."
Let's review those numbers: wireless, landline, and internet-access revenues (revenues, mind you -- not earnings) for 2005 totalled about $330 billion (about 2.65% of GDP), with overall annual growth of about $15 billion (about 5%). But we are supposed to believe not only that annual capital expenditures in this industry are near $1 trillion, but also that that is good economics. This is ludicrous. If the industry were in fact investing $1000 billion a year to get annual revenue growth of $15 billion, that would be incredibly bad economics. Since they obviously aren't, the only definite things we can say about these numbers are that telecom is not a particularly large fraction of GDP, that it's real growth of about 2% is not at all impressive, and that its industry asociation publishes numbers that are egregiously false.
Now let's look at Banker's first reference (a Nov 2005 paper by two Stevens Institute of Technology professors). Not only do we find nothing in this paper to support Banker's arguments, down in the middle of it we encounter the paragraphs:
After the telecom crash, both the sales volume and retail prices dropped. That effected [sic] directly the R&D spending 2001. Research did not make it through product lifecycles, and launching of new technologies was delayed, e.g., third generation (3G) wireless networks. The over-investment created over-capacity, with the demand side not following the supply. Some argued that the over-supply will drop prices and attract buyers. In reality, that did not happen in the short run.
Unable to meet short term debt obligations, many firms went bankrupt, e.g., World- Com, Adelphia, etc. [24]. The industry experienced major job cuts, talented R&D personnel left, as R&D budgets were cut. Excess capacity is still under-utilized, and the sector has not been fully recovered
Broker and Banker (who mistakes a limb for a vital organ), any MBS problems Fannie has incurred or passed along have nothing to do with it being some kind of socialized entity (if Congress really wanted it to to be, at least there might have been be better oversight -- a GSE's charter specifically promises "limited oversight" and oh boy was it ever limited). Fannie's problems directly stem from corporate greed infecting the market to the point that it infected their behavior too. Gotta be competitive with those lenders offering money to anyone who can draw breath, dontcha know.
I find it amusing that the financial industry, on its customary corner with fishnets and stillettos, would be pointing a dirty fingernail at at the GSE girl on the block, big but bumbling, just trying to get her piece of the action.
''If the only time that subprime borrowers can afford to be in their own house is during positive home price appreciation, then you really haven't come up with a solution at all.''
I wasnt trying to.
Oops, I guess all this financial innovation has me confused. I keep forgetting that the financial system is no longer in the business of making loans that can be repaid.
'''But to argue that there is some market innovation taking place without criticial regard for the facts or the sustainability of the solution...'''
So trying new things without perfect foresight shouldnt be done?
I must have not been entirely clear. Too me it is entirely obvious that teaser rates combined with all time low affordability levels is not a mathematically sound loan product. If I were the innovating type, I probably wouldn't even give it more thought. But if I were the profit-seeking, rip-your-face-off type I might see an opportunity -- not by producing true value of course, but by suckering the unsophisticated fool sitting at my poker table. I guess the difference between us is that I wouldn't develop a damaged product whereas you apparently seem to think selling snake oil is ok as long as it helps develop the pharmaceutical market. As for your overly simplistic, black and white, and logically incorrect inference from my original statement, whether you should embark on an endeavor depends on the probability of a given outcome and the reward level for that outcome. If the odds are high that your new car model is going to explode and kill people then maybe you shouldn't be selling it. Even worse is when Exploding Cars Inc. has the promise of being bailed out with my tax dollars. It's bad enough that I think they are either stupid or deceptive. It becomes unacceptable when I'm forced to underwrite the insurance on their behavior.
Luddites of the world! Unite!
Your call to action is a little late. They have been presiding since 1913.
Banker - Let me say that I find you make logical leaps. Someone claims (roughly) that the well-off can buy political access and game the system and you reply with a list of corporations that have fallen from the top. Surely you realize your claim does nothing to contradict his, which is prime facie trivial.
Also, markets may be self-correcting (in fact, as you must realize, they over-correct), but that says nothing about the mess they make before they correct. Leaving the markets alone has advantages and disadvantages. It seems to me that it is a complicated matter to decide which is best in which case, but I doubt very much that you can establish that it was best to leave the housing markets as they were in 2004 to 2006. As near as I can see, you are just blowing hot air.
Accept my apologies if I am misreading you; in fact I hope I am.
The leaders of the Federal Housing Administration (FHA) talk the talk when it comes to encouraging mortgage brokers to offer FHA loans, but three recent incidents have shown me that with the FHA its all talk and no walk, all show and no go.
As anyone with a few years in the mortgage business knows, over the years, fewer and fewer originators have offered the often-cumbersome (although now somewhat- streamlined) FHA program. Not too long ago, so-called govies, like FHA and VA, were almost 25% of the mortgage market; now, they comprise less than three percent.
There are many reasons for the steep decline - primarily the rise of subprime - but there is another cause of the decline, and it is perhaps the primary cause: Mortgage brokers, who now originate between 50 and 75 percent of all residential mortgage loans in this country, are effectively barred from originating FHA loans because of burdensome paperwork and expensive audit requirements (I am told as much as $11,000 annually for an audit). If you dont supply Wal-mart with your product, chances are few American consumers will purchase it. Same here - mortgage brokers and the originators who work for them are the nations mortgage sales force, and they dont have the FHA arrow in their quivers. The product isnt being pushed to the American mortgage consumer because the group that is most in touch with that consumer doesnt have that product on its shelf.
But the FHA doesnt seem to get this. Stuck in the past, preferring to deal with banks and mortgage bankers, HUD has failed to ensure that the largest mortgage sales force in the country has ready access to its products.
As a board member and charter member of the National Association of Responsible Loan Officers (http://www.NARLO.com) I met with FHA Commissioner Brian Montgomery and his staff at his HUD office last year. Although they were polite and accommodating, I quickly came to realize that they just dont get it; its like they think we are still in the 1950s and everyone goes to their local bank for a mortgage loan. I left the meeting distressed and puzzled by how little the FHA understands about todays mortgage product delivery system. I told Montgomery that the FHA was going to have to do a lot of work to get brokers to offer their product since, as far as I was concerned, they had dissed us for most of the past twenty years.
Weve done quite well without you, I told him, and we can continue to do quite well without you. Youve got a lot of bridge-building to do.
Im not sure, based on the two incidents that followed, that he understood, or took to heart, what I was telling him.
Lets call that meeting strike one.
Then, a few months ago in Philadelphia at the annual convention of the National Association of Mortgage Brokers, where many wholesale lenders had huge and expensive booths staffed by large numbers of enthusiastic sales and underwriting staff, the FHA had a small table staffed by
Tanta,
I posted this in the thread below, but it seems to apply better here.
Subprime woes akin to junk bond saga
What would you have proposed for the junk market in the late 1980's?
But whatever destruction these excesses wrought, they are part of a creative process that probably couldn't be accomplished any other way. How can we find the limits of any economic venture without testing those limits, even exceeding them once in a while?
A friend of mine, back in the 80s, worked for a thrift whose portfolio manager got them into some serious trouble. The guy was a regular source of gossip, since he was paid so much (especially compared to the folks like my friend who had to clean up his messes). As I recall, he spent one day--during a nasty bond-market mess when he should have been selling some loans--calling local junkyards to see if anyone had a Mercedes hood ornament he could buy to put on his golf cart.
I volunteered to take his job at half his salary. My theory was that I could lose that much money for the bank much more cheaply. Sure, he had the finance background that I didn't, but was it helping?
Please. I thought the "creative destruction" thing went out with the low-rise pants.
OT but goes well with the "Ownership Society Dictionary."
Rising Hegemon: Bill Maher New Rules 3/23
rt
And now we have a healthy $1 trillion junk market, that low rise pants too? Nah, by all means, let's stop te damn clock unless we can be perfect, or in your terms "precise."
Yeah, lotta progress will come that way.
How about
Accessability: Using postal clerks as FHA loan officers.
Agreed. Once again we bears can but gasp in astonished disbelief at the unforseen (to us) turn of events which changes the status quo and advances the world on its current rotational path.
First time coastal homebuyers have been locked out of FHA's programs for years and that is the way it should stay.
Banker, I am not now, nor have I ever suggested that no one should take any risk.
I am suggesting that there's more than one way to manage risk.
I also happen to believe that there is more than one reward.
And that the richer you are, the less you tend to worry about "rounding errors."
The richer you are the better you can afford friends that tell you and everyone else how great you are.
When financial calculations are done are the intermediate calculations or the end result rounded or are they truncated?
Anyone know?
thanx
rt
One of the things that occurs to me is that there used to be a decent tradeoff going on. If you lived in an employment/educational/cultural center, you spent more on housing. You may well have made more income; you certainly worried less about stability, since other jobs were there.
If you lived in Podunk because you were, oh, an agricultural implements dealer, you spent less on housing. You probably earned less, and in any case you had limited options if the job you had went away.
FHA was something like an equalizer. It didn't help the folks in the high-cost areas as much as it helped the folks in the low-cost areas.
The problem right now, it seems to me, is a bubble, not just a "high-cost area." Hence my horror at the idea that FHA should be used to lever more home sales there.
I'm open to good-faith arguments that the economy I sketched above is now different, and therefore FHA should change accordingly. But do I think that's what Alphonso Jackson is up to? Not in this lifetime.
I'm with CR any action the Government can take to "allow FHA to function as a drag on runaway home price appreciation by limiting financing options and thus helping to force prices downward" is uh, um, you know, a good thing.
Right?
rt, I have devoted more hours of my life, that I will never get back, to the truncate-vs-round problems than I care to think about.
In any given sale of mortgage loans, the probability that 50% of the loans' P&I payments will be off by $0.01 from the purchaser's calculation approaches 1.
We even have certain calculations named after the calculator. If my APR doesn't match your APR, I will say, "mine's Monroe." You'll go, "Oh, mine's HP."
And don't get me started on the ARM notes out there that silently slipped in a "round up to the nearest eighth" where the standard Fannie/Freddie notes all say "round to the nearest eighth."
Some of us earn our keep by watching nickels and dimes. Unglamorous jobs, frequent objects of derision from the high-rollers. But such is fate. The world does not need all UberNerds, but it needs some UberNerds.
Lenny, don't blame CR for Tanta's posts.
I'm as willing as tanta to make fun of the language in press releases.
Under the old complex system, lenders had to access a web page to find out the maximum loan in their area. Under our new simple system, lenders need only access a web page to find out the maximum loan in their area!
But only in the comments do we start to get into the meat of it all. Currently, we have a lot of subprime lending, which we think is sometimes on lousy terms for the borrower, and we think doesn't involve much taxpayer exposure. Under FHA, we know we have much better terms for the borrower, but we get taxpayer exposure. Is it all worth it?
Why can't some of this politcal energy for ownership go into say .... allowing first time buyers to withdraw more than $10,000 from their IRA's? Or how about letting anyone withdraw whatever they want from an IRA for a home, every 10 years?
It sould stimulate saving. People would make down payments. Sheesh.
If we can just keep the coasties out of FHA and the hispanics and negros out of subprime, things will be much better.
Mort_fin, don't we first have to decide how much "taxpayer exposure" is there?
There's "taxpayer exposure" all over the place, including in a lot of those "subprime programs" that aren't FHA. So until we try to sort all that out, we just fall into the "government program" vs. "private sector" war of generalities.
My own view tends toward the idea that if the taxpayers backstop the MMIF, and they do to some extent, then the risk-taking of the program had damned well better have broad public benefit, including potentially benefits that are designed to equalize lending capital across areas of the country. Those benefits need to be examined carefully.
If the idea is just to keep the RE party going, count me out.
Don't feed the troll.
From another blog - Is that what most people see/think:
"I had dinner with my inlaws tonight. We are renting. They were throwing stories around about how much real estate has gone up and what a great investment it is. They built a house in 1997 for $250K and they figure it could sell now for $500K. Not too late to get in. Numerous stories of everyone making money like crazy. Why throw your money away renting ? They figure the subprime thing is overblown and housing will only go up.
They bought their first house in 1970 for $40K and sold it for $85K in 1997. They figure they made a fortune. Never mind that interest was 19% in the early 1980s and they could have rented for way less than interest.
I cant tell them nothing. Oh, stocks ? Yeah, they lost their shirt in the dot com crash and that makes them too risky. They are about to retire and they are thinking of building another house. Easy way to make $200K.
"
Hey! The fire's over here! Bring (more) gasoline!
When middle-class employed people on the coasts start feeling that life is unfair, they can do several things.
They can look for ways to remove the capital/liquidity/investment distortion problems that keep pushing their housing costs out of control.
Or, they can feel unfairly discriminated against because FHA gives a loan to person in Omaha that covers most of the purchase price of a home in Omaha, but doesn't give a loan to a person in San Diego that covers most of the purchase price of a home in San Diego.
Does everyone understand that FHA's "limits" are only a matter of maximum loan amount? That there is no maximum income level? No maximum credit score? No minimum LTV? The whole idea of the program was that it would "subsidize" only moderately-priced properties, by limiting the loan amount to less than 100% of the Fannie/Freddie limit.
These angry cries, mostly on Tanta's threads, to let the mortgage market "self correct" coincide with Washington's new impetus to do exactly the opposite. It makes me wonder if any econobrains have ever explored the idea that the threat of regulation is in fact, regulation in and of itself.
It's a bit like a toddler whining "I'll be good! I'll be good!" as mom stands over him with a paddle. In years past, mom was nowhere to be found, and the cookie jar got emptied out and broken. But there's a new mom in town, one not willfully blind to the damage done.
So, suddenly, we hear all the cries of "we can self-regulate! we can fix ourselves!" as lenders rush to "self-correct" before govt does it for them-- then slap themselves proudly on the back for behaving. Except, of course, that the good behavior is simply done under duress--under implicit regulation. And except, of course, that the damage has already been done.
If the markets could really "self correct" they would have been honest and wise and self-preserving enough to see what was coming, oh, about 3 years ago. But now, as always, they correction comes too little too late --meaning not at all.
Here we are, banks a bustin', populace soaked in debt, and no small number of foreclosed folks destined to be social burdens for years to come, and messmakers who got us there still can't see beyond the end of their grubbing digits.
Some, I see, even have the temerity to do a superior dance on the crap pile they've created -- it's like listening to a crack addict or an unfaithful spouse grandiosely victim-blame to obfuscate their own trail of damage.
As you all have seen in recent posts of late, we won't have to wait until an RTC happens to pay for this con. I'm paying for it now, and so are you. There will be no self-correcting market to handle the blight, crime, and unemployment and other social costs this bust is just beginning to create.
And it's idiotic at this point to ask governments to let their populaces self-correct into Hoovervilles or Mogadishus. If they won't pay to keep blight out of their communites, they (and the rest of us) may pay dearly later.
There should be some way to force these credit pimps to pay for the damage they've wrought, but oops, that would require laws with teeth - that'd requrie (gasp) regulation.
An ounce of regulatory prevention could have worked wonders-instead of fantasizing that we have a "free market"-- all that has meant is a free license to cheat and steal - that just ends up badly for all parties -- even the businesses doing the stealing.
Businesses are not built to self-correct, they are built to pursue short term profits by whatever means necessary. It's up to the rest of us to decide how much of that behavior a civilized republic can stomach and still survive.
Like Tanta says FHA should be for white farmers in Podunk like it's always been, not those other people. We gave them their freedom and one man one vote. What more do they want? If subprime dries up for them, well so be it, nobody is entitled to access to financing, except for us "agricultural implements dealers" who need the "equalizer".
Great post.
how much taxpayer exposure is a good question. unfortunately, we won't get the answer, or if we do, only when it's too late. About 10 years ago Fed economists (I'll guess maybe Canner and or Passmore) did a paper assessing who held the credit risk on mortgages. It took some digging, but they could do it. Depositories held x%, GSEs held y%, PMIs held z%, etc. In the modern world of hedge funds and CDOs I'm not sure we'll ever know. But I do think the taxpayer is fairly remote - there's at least maybe some, and maybe a lot (who knows) of equity capital before the taxpayer gets tapped. Unless there's a bailout of course - then we find out that it was the taxpayer holding the risk all along.
I'm not sure why you're vague about taxpayers bakking the MMIF (FHA's insurance fund). The folks paying the insurance premium first cover the loss, and if that isn't enough it's pretty darn clear that the taxpayer picks up the rest.
The stated reasons for changing FHA have usually been because it's a better deal for borrowers. Assessing those benefits, and the cost of taking the risk, would seem to be the relevant pieces of the policy discussion (OK, and making fun of press releases is always entertaining).
Banker: The problem isn't extending credit into subprime and trying to create a market out of it. The problem is the degree to which the products developed were not developed in good faith. If the only time that subprime borrowers can afford to be in their own house is during positive home price appreciation, then you really haven't come up with a solution at all. Either the finance industry has an IQ below 50 or they are trying to rip somebody's face off. But to argue that there is some market innovation taking place without criticial regard for the facts or the sustainability of the solution... have you ever thought of running for President?
Vote Free Lunch Party 2008!
Party For The Creatively Destroyed!
Wealthy established elites like a 'banker' calling for more 'creative destruction' makes me laugh.
I actually read Schumpeter, believe he coupled innovation & the business cycle better than anyone. The entrepreneur is NOT the friend of the established order.
Creative destruction means grinding established businesses like bankers to dust to make room for the new order.
But that part of 'creative' some how gets lost in the translation I guess.
From the article linked by Banker:
"In a market with a robust $1 trillion in estimated total value, the number of junk-bond issuers defaulting on their scheduled payments fell to a 25-year low of 1.6 percent in 2006, according to Moody's Investors Service."
This simply reflects the torrent of easy money being poured into our financial markets by the Asian mercantilists, and the desperate pursuit of yield into which various institutional investors are being forced by the accompanying low interest rates on investment-grade securities.
Just as any individual able to fog a mirror has been able to get a low-rate mortgage, so has any business able to fog a mirror been able to sell junk bonds at rates completely out of line with their risks.
Banker is right, it doesn't get any better than this. But he doesn't seem to perceive that it follows as does the night the day that the next thing to happen is it gets worse.
Banker obviously isn't worried about this. He seems to personify that statement by Keynes, that "a sound banker, alas, is not one who forsees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him."
Of course, since we don't have a free-market banking system, but rather a lemon socialism one in which the major banks are guaranteed profit and survival by an FRB pledged to always bail them out of losses by setting the discount rate however low it needs to be for them to repair their balance sheets, the only people ruined when bankers don't avoid danger are the taxpayers, and the small-saver holders of CDs and passbook accounts whose interest rates are held at negative real levels for years at a time.
"Is it all worth it?'
Good point. FHA should stick to full doc first-time home buyers. Everytime it tries to get creative , it loses money and my wallet starts to cry out in pain.
Thanks for that link, and especially from you, Banker.
I wonder if the depth of that article, or rather the voice that we reconstruct through the language used there, hits you the same way that reading Tanta's post here does.
We are accustomed to reading for information at the expense of many other dimensions (and I could expand to make similar remarks about training and education) and even there, for confirmation rather than critical assessments of that information.
If you are missing the humor, this is such a small post for you and Tanta is just such a long-winded gal.
The Business article is longer, but so much less.
I feel like a Libertarian at heart, but have come to the conclusion that society has too many f**ktards that don't grasp responsibility and don't care about the mess they make for others.
Unregulated capitalism worked OK, in a largely self supporting agricultural country with a low population.
But an urbanized country of 300 million needs some regulations, to keep us from gutting each other. At least, one that has our current level of self discipline.
Kind of in tune with Tanta's theme - it doesn't bother me to cough up some bank statements and tax returns to get a loan, even if my own FICO is ostensibly good enough. It gives me peace of mind that the other party is practicing sound business. I don't need an answer in 5 minutes. A home purchase is a years-long decision.
The bears lashing out in angry bitterness again?
I'm SHOCKED!
LOL!
What in the hell is the matter with people on the race issue?
I mean, what is it? You think that the only reason that minorities with good credit records are overrepresented in subprime is because FHA's loan limit is too low? Are you suggesting that all nonwhites are poor? I guess if that's true, you'll have to keep reminding me. I live in Prince George's County, Maryland. Unless things have changed in the last year or so, my county is the wealthiest minority-majority county in the country. My next-door neighbors do not necessarily aspire to a moderately-priced home. Yes, we have poor folk here in PG. But saying that some nonwhites are poor isn't quite the same thing as saying all nonwhites are poor, is it?
What burden of wisdom of these snotty comments am I missing?
dryfly, you hit it right on the head.
"Creative destruction" in the financial industry? It's lemon socialism central. About every ten or fifteen years the hotshots at Citi manage to lose enough money to wipe out their stockholder equity, but are always bailed out by the Fed. We now have innumerable firms like them that are "too big to fail", and can never be creatively destroyed.
So, how do we get the government out of the housing market?
Surely these people know that the reason so many are/will be defaulting on their loans is because the price of homes is simply way to high.
And yet the government persists with these schemes to prop up prices- even in the face of a healthy, welcome and long-awaited correction!
It's pretty clear what their priorities are.
So how do we get rid of Fannie/Freddie, FHA for once and for all? Ideas?
I'm not sure why you're vague about taxpayers bakking the MMIF (FHA's insurance fund). The folks paying the insurance premium first cover the loss, and if that isn't enough it's pretty darn clear that the taxpayer picks up the rest.
Well, there are a few more steps there. Like Ginnie's guarantee fees and HUD's ability to deny claims to egregious lenders. The problem is that I simply run into too many people who forget that the MMIF is borrower-paid insurance, and who think of it as an "entitlement," like VA. So, awkward formulation.
And yes, I am saying that "a better deal for borrowers" is a question that doesn't have an obvious answer. I do not consider "ability to get even deeper into hock on overpriced housing" to be, necessarily, a benefit.
Tanta could you please interpret what this would mean for high value areas like the Bay Area with median prices in the 850K-900K range?
"Another change proposed in FHA Modernization is to increase FHA's loan limits. Members of Congress from high-cost states have repeatedly asked FHA to do something about our antiquated loan limits. This proposal answers those concerns. FHA's loan limit in high-cost areas would rise from 87 to 100 percent of the GSE conforming loan limit; in lower-cost areas, the limit would rise from 48 to 65 percent of the conforming loan limit. In between high- and lower-cost areas, FHA's loan limit will increase from 95 to 100 percent of the local median home price. This change is extremely important and crucial in today's housing market. In many areas of the country, the existing FHA limits are lower than the cost of new construction. Buyers of new homes can't choose FHA financing in these markets. In other areas, most notably California, FHA has simply been priced out of the market"
I've been creatively destroyed.
Wasn't much fun.
ron,
in and of itself it raises the FHA limit to the GSE limit, which is now $4xx K (is I wasn't so lazy I'd look up the precise number). But other legislation is out there to raise the GSE limit, so if both pieces of legislation passed it could go a lot higher.
Tantas right there is no connection with race and access to financing and housing. Its ridiculous. FHA was always meant like she said to be for us agricultural implementation dealers in Podunk as an equalizer. An equalizer, got it? Whats racial about that? Nothing whatsoever. Its always been that way and should stay that way. Always. If some of them coastal unwhites see their subprime access to financing dry up, so be it. Its always been that way so why should they complain now? Its ridiculous.
Mozo has it exactly, if we could all play by a set of rules and follow them to the letter libertarianism would be a workable solution.
Hey Banker, back in the old days did you ever wonder who was on the other side of those wonderful junk bond deals that went south?
Now if the failure rate hits 12% are you still going to be so smug in the junkspace? Funny I can remember well the early 90's when a bunch of those junk bonds died. Anybody want some American Contiental? Lincoln Savings?
I am still paying higher electric rates because Pinnacle West dipsh*ts just had to blow a billion dollars buying Merabank.
Pardon me if my blood pressure goes up when I hear that junk bonds are safe- maybe for your dollars, but not mine.
FHA loan limits should be adjusted to allow the purchase of a home that is affordable to the median income of a MSA with 5% down and 30% of income. Dang wouldn't that be simple to calculate. Of course houses seem to be a tad expensive right now, but more will be able to be purchased under the current limits shortly.
Ron, the current conforming loan limit is $417,000. So at 87%, the maximum FHA limit would be $363,000 in a "high cost area" under the current limit and $417,000 under the proposed limit. The Bay area is definitely a high-cost area.
Motown, on the other hand, is a lower-cost area. Its maximum loan amount would increase from $226,000 to $271,000 under the proposal.
The lowest cost area current limit is $200,160.
Mort_fin mentioned the cool new improved complex web lookup, but didn't supply the link:
https://entp.hud.gov/idapp/html/hicostlook.cfm
If you're looking for a major city, the easiest way is to put the city name in "MSA Name." I suppose you civilians don't have county codes memorized.
Somewhat OT but I'm noticing more signs of pain in the Prime and Alt-A arena related to stiffer funding requirements by warehouse lenders -- TPO or wholesale loan outfits are being required to take on more of the funding for loans they handle -- case in point is the recent closing of LoanCity (S.J. lender LoanCity closes up shop - San Jose Mercury News, a private wholesale mortgage lender based in San Jose.
To try to bring this back to topic, credit tightening may begin to trump loan quality, but regardless this somehow must work itself out. It doesn't matter who gets the blame for the rampant inflation in home prices, those prices must come down or at least stay flat until productivity and wages catch up a bit.
The alternative as far as I can tell is only more of what we have now with, perhaps, government agencies such as FHA stepping in an attempt to fill the growing fissures in our financial system. Frankly that strikes me as akin to dropping cement balls into a mud geyser (Indonesia prepares to try plugging mud geyser with giant concrete balls | Embassy of Indonesia Ottawa only with less chance of success. I am not arguing that government intervention is necessarily a bad idea but unless it really is 'different this time' continued expansion of the credit bubble can not be a solution.
Apropos a point further up in the comments above, what is going on is only a market failure if one believes markets are predictors of future events; this side of self-fulfilling prophecy I am not aware of any systematic evidence that is actually the case.
http://bp1.blogger.com/_OjftCEBUcYQ/RgKRcvqnU4I/AAAAAAAAAVw/Tnwb5zMtGMo/s1600-h/sac_number.PNG
How does being able to use a spreadsheet make one more capable of precisely calculating risk? More loans, more mortgages, more foreclosures, more repossessions, more defaults, benefits who?
Banker:
After reading the junk bond article I agree with you.
This whole entire economy boom was based on turning debt and call it income. The question is how to avoid this massive debt conversion to income gonna blow up in our face:
what do you suggest ?
I completely agree that FHA should stay where it's at and better yet be shut down altogether. And subprime can't collapse fast enough for my taste. The sooner we flush those people out of the system the sooner the rest of can buy the nice homes we deserve, not those cruddy starter homes like our parents had.
Thanks for the link Yal. The whole post can be found here:
Week-Over-Week Changes
BTW: Does anybody (besides me) find these stats useful?
PeterP, how true. In fact, I think we should just get rid of this whole "median" crap itself. I believe that everyone should have above-average homes, and I'm tired of these economists who try to fool us all with fancy smancy statistics.
No homeowner left behind!!
So how do we get rid of Fannie/Freddie, FHA for once and for all? Ideas?
I don't want to get rid of Fannie & Freddy... or FHA. Nor student loans... Nor Nat'l Parks & forests. Nor SS or Medicare. Nor FEMA.
I just want reasonable mandates and good management. Is that too much to ask?
The boyz at FHA must have smelled blood in the water. With Freddie and Fannie disasters(2003, 2005) it seems to be the right time to make their move. That`s the way to go boyz!
Tanta - so what's the news from Lake Wobegon? Where all the houses are above median?
Lets take a poll of folks on this blog who consider themselves above average for posters to this blog.
The Federal Reserve as mortgage lender of last resort!
One half percent of your house price as a no down mortgage for 20 years and the house is yours! Simple, no investors, scummy servicers or wall street mummers!!!
First with the new socialist bailout de jure!!! I like it- 2% for twenty years program- copyright Allenm and BenBer!
The stock market is rigged. The statistics coming out of government and financial institutions are manipulated. The Fed and the Treasury are F#cking around with money and debt to an unprecedented degree, and all without oversight, audit, controls, regulation, or transparency. Fundamentals no longer apply.
The story is not about mortgages but about the rapidly increasing inability for PEOPLE to PAY their mortgage.
The story is not about debating if its the banks fault for lending or the PEOPLES fault for borrowing. ITS THE ECONOMY STUPED! Its not a partisan issue.
It is time for economists, economic annalists and financial industry advisors and prognosticators to stand up and say enough is enough.
No more analysis of the symptoms and effects. These efforts are not helping anyone. Enough of the innuendo, the inference, the open ended commentary meant to have us ask ourselves is this right, is this OK?
NO damn it it is not OK. Its not moral, its not ethical, its not cleaver to profit from all of this as if money or gold or what ever you prefer and wherever you cleverly put it will help you if the vast majority of the population is hurting bad.
This is not your grandfathers financial crash. All indicators illustrate that a whole s#it load of factors are loaded and set to go at all at once. And the factors for recovery are declining rapidly (energy) or simply not there. Its 10 times more dangerous than in the 1920s. People are not going to roam around politely asking for a job or some bread.
There are no winners, no safe havens for the wealthy as many think. The strategy of quietly getting as much as you can before TSHTF is faulty. Where ya gona go huh? Think about it very carefully because there is no where that wont be affected and do you really want to try and find that secure, gated location and live with a loaded gun at hand at all times, jumping at every sound?
Stand up now and tell it like it is. And tell the story of how we can restructure if we just acknowledge the truth, bring together the best minds and create a future, some kind of future that we AMERICANS can knuckle down and work for. Its TIME we get down to some real work.
No you will not be ostracized for being the one who starts the panic, you will respected as one who had the courage to stand up.
No more business as usual. That option is over.
Tanta - so what's the news from Lake Wobegon? Where all the houses are above median?
Not Tanta - but I live near Lake Wobegon... there are NO houses above median if you mean NATIONAL median in Lake Wobegon. Minneapolis ya sure... Lake Wobegon, not so much.
That is unless some of those houses come with 500 acres or so of high corn base farm land.
Which makes me ask... if they raise FHA limits for coasters can I say buy 1000 acres of farm land with say zero down... with a FHA guaranteed loans that is?
If so then um... I change my mind. Raise the limits.
GREEEEEN ACRES is the place to be.....
dryfly - no FHA and corn. There are limits on the house/farm ratio that would preclude your FHA choice. You'll need the Rural Housing Service (maybe) or the Farm Credit System and/or Farmer Mac for your government affiliated loan, ya hey.
Well I for one consider this thread to be a watershed marking the point where we can now come right out, as Tamta has had the guts to do, and flatly state that the FHA should function as a force to "drag on runaway home price appreciation by limiting financing options and thus helping to force prices downward".
Hear hear!
Also, let's from now on be honest enough to say that FHA was, is, and always should be for:
"If you lived in Podunk because you were, oh, an agricultural implements dealer, you spent less on housing. You probably earned less, and in any case you had limited options if the job you had went away.
FHA was something like an equalizer."
This is of course NOT to be confused with those people who "earn less" and have "limited options if the job you had went away" but just happen to live in the poor areas of "high cost" cities, i.e., those, you know, other people. In those cases FHA is manifestly NOT "something like an equalizer".
NO way!!
Let them eat subprime.
What a tragedy: The Fed goes neutral, housing numbers suprise UP, the sub-primo-gasm wad turns into an embarassing little premature bear-stain, and the ChiComm meltdown?
Chart of the Day - www.chartoftheday.com
Well, is that all you boys got?
BWAHAHAHAHAHA
I'm fartin' through silk, baby!
How long will we have to wait for CR to delete all those posts we don't like?
Don't feed the trolls for gods sake.
From the NAR report linked by CR:
"Total housing inventory levels rose 5.9 percent at the end of February to 3.75 million existing homes available for sale, which represents a 6.7-month supply at the current sales pace compared with a 6.6-month supply in January. Raw inventories peaked last July at 3.86 million, and supplies topped at 7.4 months in October."
"Single-family home sales increased ... in February from ... January, but are 3.4 percent below the 6.09 million-unit pace in February 2006. The median existing single-family home price was $211,100 in February, down 1.5 percent from a year ago."
So inventories are already back to within a few percent of the last July's peak, while year-over-year sales are down 3.4%. But Pig chortles that housing has supplied to the upside. Sigh.
"Kind of in tune with Tanta's theme - it doesn't bother me to cough up some bank statements and tax returns to get a loan, even if my own FICO is ostensibly good enough. It gives me peace of mind that the other party is practicing sound business. I don't need an answer in 5 minutes. A home purchase is a years-long decision."
Yep and that's why there are full doc programs still around and lenders that take 3 weeks to tell that you're approved. Not many of them left...
70+ years of regulations and they consider themselfs in the "dark ages". Shame on them! All that good work (tons of paper) weisted. No wonder Tanta is so mad. Her last hope seems to be fading away. Revolutions do eat their children!
Coastal residents contribute the most to US productivity, and if the US is ever going to ever fix its trade balance and pay off its debt it needs to keep its most productive workers working. It will be harder for them to retire if their homes are expensive. Offering FHA loans to low income residents of coastal areas will not only help the poor, but if it results in higher home prices it will both mitigate the impending damage to the social security system and help the US economy by making it harder for the these more productive, more educated coastal workers to retire. Greenspan and others at the Federal Reserve have mentioned that there is a growing inequity in the US and FHA homes on the coast should mitigate that inequity.
As I recall, he spent one day--during a nasty bond-market mess when he should have been selling some loans--calling local junkyards to see if anyone had a Mercedes hood ornament he could buy to put on his golf cart.
Here's a relevant article:
Talk Show
The CEO Mega-Mansion Factor
Now there may be one more thing to consider before investing in a stock: Does the CEO own a trophy house? Finance professors David Yermack of New York University and Crocker Liu of Arizona State University looked at the relationship between stock performance and the size of a CEO's home. The bigger or pricier the house, they found, the greater the risk of lackluster shares. "If [the CEO] buys a big mansion, sell the stock," Yermack says. "Many of these guys have been super performers, but at some point that stops, and they reap the benefits."
Ah, Morton. Ask the minorities, especially the ones who barely speak English and just got shovelled into option ARM mortgages how they feel in a year....
IMO, people who demonstrate no ability to save are generally better off without a mortgage. Once you have that bill hanging over your head it is hard to learn. It seems to me that the "innovations" in home financing have pushed a lot of people backwards financially, and generally those people are the least astute financially.
The ugly fact is that once you own a home you have to save to maintain it anyway. If they can't save a 3% downpayment, very few borrowers are likely to keep the house unless appreciation bails them out, and that often doesn't happen.
No matter how you slice and dice it, it's many of those first time homebuyers in 2004, 2005 and 2006 who are taking a licking on this one. An awful lot of people made money, but few of them will end up in that position.
And one more thing. If you think my English is bad, you should call one of the HUD offices. I used to do it just to congratulate myself after that.
Marie A, I think I may have managed to confuse everyone (it's a gift).
I am not suggesting that FHA should be only for agricultural implements dealers in Podunk. On the other hand, I happen to think that the agricultural/rural economy is deserving of more than contempt. Perhaps I am a snob? In any case, I happen to think there's an argument to be made for using government resources to help keep regional credit crunches from plaguing the economy. Plus, I like to see those nice folks in Podunk have the chance to buy a house here and there. If they all had to rent trailers, those smart-asses on the coasts would make fun of them or something.
Of course FHA will allow larger loans to, let's say, convenience store clerks in East St. Louis--no, wait, that's not coastal, I meant Watts. It's almost as if FHA is "equalizing" for housing costs. And it is. It works both ways. It simply has always been the backbone of a lot of "uncompetitive" housing markets. That was what I meant by the other "equalizing." Those who live in high-demand areas tend to forget this.
In the high cost area, you can borrow more money. In the low cost area, you can borrow less money. It is possible that in the high cost area, even the higher loan limit will not be enough to finance the moderately priced home. This is a big problem. Tanta has real sympathy for people in this situation. (Have I mentioned that I am a renter in a coastal MSA with outrageous home prices? Would you like to know what percent of the area median I make? Would that give me some street cred?) I am suggesting that before we decide to solve this problem by just encouraging those underpaid folk with little job stability in the high-cost areas to borrow more and pay more, we might consider letting the Big Bad Government throw its weight around on the other side: to drag against that price inflation rather than helping it along. (I always think of Medicare and drug prices, for some reason.)
It is within the realm of possibility that your average low-to-mod income city dweller might prefer to pay less for the home, and therefore borrow less, which costs them less. It's even possible that "they" understand this math, and don't need to have it explained to them by Marie Antoinette or Czarina Tanta.
In any case, I suggest that folks on the coasts who want bigger FHA loans take a brief tour of Detroit or Columbus or St. Louis or Nashville first.
I also suggest that we should stop equating FHA and subprime.
When the silly fools heard the Chief Thief in the Whitehouse say, "I want an ownership society", wasn't what the fools thought it meant. It's an ownership society alright.... And we're all owned by the supply side voodoo doctors. We have a whole lot of repair work to do on this hollowed out economy and it will start with getting rid of the "no new taxes" ideologues.
What a tragedy: The Fed goes neutral, housing numbers suprise UP, the sub-primo-gasm wad turns into an embarassing little premature bear-stain, and the ChiComm meltdown?
Now if they only traded reefer on the board of trade we all be smokin'
We're just drinkin' the the ethanol, dryfly.
And one more thing. If you think my English is bad, you should call one of the HUD offices. I used to do it just to congratulate myself after that.
How do you know what you think is English is really English? Hmmmm?
Just as an example - my college roommate was from Turkey. In our circle of friends & apartment complex we had a kid from NYC, one from Boston, a Kiwi from Christ Church NZ, a fellow engineering buddy from New Delhi India, myself & others from rural Minnesota, his girl friend from North Dakota and a rugby buddy from South Africa.
When we threw a party it looked like one of those colors of Benetton ads from the 80s. After a few drinks we all but needed translators to communicate.
And this was at Mediocre State University - we aren't talking Stanford or NYU.
On top of that, we all grew up with English as our 'first language'... what we all believed was 'correct English'... even the Indian guy (whose family worked in gov't & mingled with people from so many different parts of India they mostly spoke English).
English is just sorta like that.
We're just drinkin' the the ethanol, dryfly.
I was doing that earlier today - in between watching college hockey & threatening to slit my wrists. I needed to take breaks and calm down - here - where the discourse is always polite & congenial.
I always told you that your Hockey Problem would end you up in the gutter.
Tanta, CR -
Funny thing about the subprime meltdown -- "affordable" housing programs are coming back in vogue, no modernization needed.
I recently ran a story on Housing Wire that addressed the re-emergence of FHA programs. Check it out: High-Risk Game: New Entrants Vying for Vacant Spots in Subprime Lending : HousingWire || financial news for the mortgage market
What's old is new again, right?
"The National Association of Realtors reports that last year 43 percent of first-time homebuyers purchased their homes with no downpayment. Of those who did make a downpayment, the majority put down two percent or less."
That 43% figure is something I've seen repeatedly, but the second line seems absurd, "Of those who did make a downpayment, the majority put down two percent or less."
That would mean the average loan was LTV ca. 99%.
But even ignoring that and looking at the 43% no-down-payment figure. How does that jive with what the lenders report? Almost all claim something less than 80% LTV on average.
Is this a smeantic issue, i.e., LTV vs. CLTV?
Or is it that they keep the lower LTV loans on their books, and all the 100% loans are going into the bond market?
I hate to be one of the people seeming to page Tanta on these questions, but I kind of doubt many others would know the answer. And thanks for the last response, Tanta. Things are moving much faster here now-a-days and I find myself losing track of what I've posted to. PLus I was doing my taxes the last week or so.... (I am now a firm believer in the flat tax.
What's old is new again, right?
You don't see the FHA thing as another wasteful attempt by the Government to "do something" about a problem that is beyond their abilities? This happens every time crises break into the public arena.
The FHA thing is just noise at this point.
Things are moving much faster here now-a-days and I find myself losing track of what I've posted to.
Hey welcome to the club... but then I used to lose track back when Tanta, vader & I were the only ones commenting.
Actually, since you are all opiniated, semi-financially oriented people, let me float my flat tax idea.
Everyone gets to deduct the medium income for their state (ca. $48,000). Everything above that is taxed at one rate set by the FED based on how much Congess spends plus the sate of the economy.
The Fed would keep the rate close to covering spending (maybe making allowances for long-term capital spending.) So if Congress spends too much, tax payers will feel it immediately, and they will likewise at the next election.
And if we head into recession, the Fed could decide to let things go into the red for a few quarters.
But doing your taxes would take 5 minutes.
You don't see the FHA thing as another wasteful attempt by the Government to "do something" about a problem that is beyond their abilities?
It will be if they don't do a better job of defining the mandate & managing the execution.
There is NO way the FHA or anyone gov't or private can make places like NYC or SF affordable for everyone... no chance in hell. If they try a half dozen or so of my neighbors will move there tomorrow and soak up some of that largese.
I mean where would YOU rather 'affordably' live... in a place that's exciting & happenin' like the Bay Area or in a sleepy old river town that hasn't changed much since steam boats plowed the muddy water?
The only thing that keeps them down on the farm is the fact they can afford to live down on the farm.
This isn't right or wrong it just is. If they try to make it easier for locals in SF & NYC to afford their dwellings they are going to get to enjoy a many more new locals. Including one of my cousins & maybe my daughter.
Bob-in_Ma - the NAR figure is for first time homebuyers, who are typically less than a quarter of the market (half purchase, half refi, and of the purchase less than half first timers). Also, I presume the NAR number is CLTV - with an 80-15 you'd be making 5% down, but there's a lender who gets to report an 80.
There is a difference between attempting to make all equal and mitigating the differences between the rich and the not rich.
In the former case, the rich that live in the expensive areas can afford to live there or should not.
In the latter, it is the difference between being in theory at least part of the process or cast out.
mort_fin,
Thanks, I don't know how I missed that reference....
Not that this ties into anything we're discussing here... but it's interesting that some of he biggest bubble markets (CA,AZ,FL) are suffering from extreme drought.
US Drought Monitor
I have to wonder how much longer that can go on before there is water rationing and economic impacts.
Bob-in-MA
You want the Federal Reserve, to make decisions regarding taxes??? NO WAY. The FED represents banks. How can we expect them to balance the responsibility of maintaining healthy and sound banks, with a newfound responsibility for taxes? The Constitution gives that power to Congress (actually the The Constitution says Congress can't tax the people but they do). The FEDs ability to exist comes from Congress and they are there for specific purposes and not to make decisions regarding tax revenue. Furthermore, the Fed is supposed to be bipartisan and taxes are a very partisan issue. That is why Fed Heads never will never even give advice when quizzed by Congress about the possible outcome of different tax policies. It would be a very bad idea.
Flat income tax? What kind of idiot would even suggest it? There is stupidity abound when some 50k/yr wage slave, befuddled and simplistic in his thinking, gets involved in matters far beyond his capacity and suggests a flat tax.
Robert,
I will grant the "befuddled and simplistic in his thinking" part, but I am not a wage slave. I can state categorically, I have not been a wage earner since the early '90s. I'm 48 years old, and I only worked 9-5 for 6 months, I think it was back in the early 80s. I take great pride in that, of course the flip side is that I'm befuddled and simplistic in my thinking.
Bob_in_MA, I can't say I've ever been a flat-taxer. But I like your idea of the feedback loop.
You know how TurboTax has that little running balance on the screen of your liability/refund? Perhaps we should get the IRS to build a big online realtime tax return portal. It displays the running balance of the current budget deficit. We all have to keep logging in and decreasing our standard deduction until the number hits zero, then we can all file. Alternately, we can march on Capitol Hill until they cut appropriations for something--wars come to mind--and then we can put our deductions back.
Yes, I need to give up on the ethanol.
Tanta,
You reminded me of something I encountered. I was doing my state taxes today and at one point I came to a line, "Multiply by .053... if choosing the optional 5.85% rate, multiply by .0585."
I hadn't noticed that before so I searched all over to find out what the optional 5.85% was. Well, it's for Massachusettsians who felt guilty when the state income tax was reduced from 5.85% to 5.3% to lodge their protest by paying more!
Now, it occurred to me that anyone who might be so inclined in a theorhetical sense, would not be so inclined in the midst of doing their taxes (I think I encountered a circular loop on Form HEEC that required me to reference a number to calculate the next line that could not be calculated until I had the results of that calculation... thank god we don't use computers to file our taxes!
I will investigate further and see if I can find out just how many citizens of the People's Republic (whoops!) I mean, Commonwealth of Massachusetts partake of said option and report back to the membership here.
--
"I just want reasonable mandates and good management. Is that too much to ask?"
The reason these agencies need to be gotten rid of is that "good management" is a pipe dream when govt. and tax payers' moneys are involved.
I get a good laugh out of Free Market -- American Style. BTW, whatever happened to the Constitution of the United States?
Jas
re: Doing things to control excessive house price inflation. I'll link to this article again. It helps to understand why we have had two asset bubbles in 10 years and why we will likely have more. IMHO, prices will tend to revert to normal levels over a period of years without government intervention. Prudent people will wait and not buy on the "dead cat bounce". Of course, the flippers in the bubble markets in the most trouble today are likely not "prudent".
Morgan Stanley - Global Economic Forum
What is this constitution you speak of JasJain? Ooopsy.... you mean the one the supplyside tax whiners wiped their ass with?
Tanta, I completely agree with you that raising the FHA limit is a BAD idea, regulating subprime to virtual death is a GOOD idea, and that NIETHER of those positions is racially based even though they might have substantial racial consequences. I am also, like you, a renter who feels I should be able to buy a home, a NICE home, with conventional loan - BUT I CAN'T, and that makes me mad. It offends my sense fairness when I look at my semi-covered parking space that someone has confiscated, and think of some of the people that are buying homes that I should be able to easily afford...
And I completely agree with you that:
"we might consider letting the Big Bad Government throw its weight around on the other side: to drag against that price inflation"
Right on!
The US Government "throwing its weight around" to drive down housing prices is a GREAT idea and would really help us renters at the expense of homeowners.
Let's all renters join hands in a circle of love and MAKE THIS HAPPEN
Wow! Where to start, here we go:
Yal,
Over any long-term period, stocks have always outperformed real estate in one excludes implied rents.
Alo,
Businesses dont self-correct, markets do, big difference.
Dr. Strangemoney (great name)
Banker: The problem isn't extending credit into subprime and trying to create a market out of it. The problem is the degree to which the products developed were not developed in good faith. If the only time that subprime borrowers can afford to be in their own house is during positive home price appreciation, then you really haven't come up with a solution at all.
I wasnt trying to. Punish fraud.
Either the finance industry has an IQ below 50 or they are trying to rip somebody's face off. But to argue that there is some market innovation taking place without criticial regard for the facts or the sustainability of the solution... have you ever thought of running for President?
So trying new things without perfect foresight shouldnt be done? Luddites of the world! Unite!
Dryfly,
Wealthy established elites like a 'banker' calling for more 'creative destruction' makes me laugh.
Established elites? You have no idea who you are talking to. I was a first generation college graduate.
I actually read Schumpeter, believe he coupled innovation & the business cycle better than anyone. The entrepreneur is NOT the friend of the established order.
Um, Dryfly? Thats sorta the whole point. The established order" must constantly be uprooted. It seems to lead to progress.
Creative destruction means grinding established businesses like bankers to dust to make room for the new order.
Exaclty! The that new order is overturned etc. A wonderful thing.
But that part of 'creative' some how gets lost in the translation I guess.
No, you just won the doh post of the day award though. Well done!
JM,
It does nothing oif the sort. It reflects an economy that is more than twice as big as the one in existence when the junk market began. Its the market that built cable TV, Cellular companies and other new industries that would have languished without that capital. Like the technology we are using now. Who do you think financed all the fiber-optic cable? Capital fairies?
Calmo,
Sorry, I dont know what you are saying, I cant respond.
Back to JM,
You havent a clue about Citigroup, just none. Want to see creative destruction in banking? Read through the Blackstone Group S-1 that was just filed andand think about the radical changes coming that implies.
AllenM,
Well, having lived through several corrections in the junk market, as well as every other market I have ever seen I dont see your copmplaint. Where did I ever say they were safe? Stop making things up. What I said was that market works and is an important source of capital. Companies fail every year, welcome to the world.
Back to Yal,
One cant tur
Back to Yal,
One cant turn debt and call it income. That idea doesnt even make sense. One is an income statement concept, the other balance sheet. I havent a clue what you are trying to say.
If I missed anyone sorry. Thanks for all your thoughts.
Sorry this took two posts.
So trying new things without perfect foresight shouldnt be done? Luddites of the world! Unite!
No. Trying-new-things-then-having-the-government-pick-up-the-tab-when-"new-things"-don't-work-out-the-way-you-thought-they-would shouldn't be done.
Not luddite. Capitalist.
Um, Dryfly? Thats sorta the whole point. The established order" must constantly be uprooted. It seems to lead to progress.
Ummm 'up rooted' is a nice clean term.
Kinda like Lenin... he said you have to crack a few eggs if you want to make an omelet. Wonder what he meant by that.
'Ruined' economically is more like it. That is what unfettered creative destruction is all about. Lose all you have, the company you work for gone, maybe the whole industry & all the savings you have.
No safety net. No easy start. Painful.
Average folks won't stand for it.
Imagine it happening to you at say age 60 - you got another 30-40 years to retrain & get it right again? That's about how long one of these cycles last.
Very few folks experience that anymore - they sure used to before FDR and the dreaded 'new deal nanny state'.
Like I said - read Schumpeter - if not Cliff Notes will have to do...
Schumpeter is sympathetic to Marx's conclusion that capitalism will collapse, although Schumpeter concludes capitalism will be replaced by socialism for non-Marxist reasons. It is in this book that Schumpeter characterized capitalism with the famous phrase "creative destruction", in which the old ways of doing things are endogenously destroyed and replaced by the new.
Schumpeter thinks that the success of capitalism will lead to a form of corporatism and a fostering of values that are hostile to capitalism, especially among intellectuals. The intellectual and social climate needed to allow entrepreneurship to thrive will not exist in advanced capitalism; it will be replaced by socialism in some form. There will not be a revolution, but merely a trend in parliaments to elect social democratic parties of one stripe or another. He argued that capitalism will collapse from within as democratic majorities vote for the creation of a welfare state and place restrictions upon entrepreneurship that will burden and destroy the capitalist structure.
Corporations are the enemy of innovation, not regulators.
Dryfly,
You're misreading Shumpeter, at least your Cliff Notes version.
Both regulators and corporations are the enemy of innovation. Yes it is destructive and dangerous and seemingly leads to progress. As usual regarding intellectuals etc, Ol' Joe (Schumpeter, not Stalin) is right on. Just for the record I first read Shumpeter my freshamn year, lo those many years ago. He's a staple as are Hayek and Von Mises.
Paternalism? It's a much shorter trip to bankruptcy, uncompetitiveness and collapse.
Thanks for your thoughts.
Max,
Where exactly is our disagreement?
I hit upon a closely related item that slipped under the radar with everything else going on the last few weeks.
On March 15, the Chairman of the Mortgage Bankers Association testified before a Senate subcommittee, pushing for the FHA spigot to be opened to pickup the subprime slack.
http://tinyurl.com/2h6faz
I'm convinced the real bailout will come through Fannie/Freddie/FHA in an indirect manner (they will be pushed to lend on money-losing terms to subprime borrowers, with taxpayers picking up the tab down the road upon their insolvency. There are some real gems in this guys testimony:
homeownership remains the most effective wealth-building tool available to the average American family. -- Spoken as the housing market falls off a cliff and millions head to financial ruin in March 2007. These words will haunt this guy for the next decade.
"important changes to the National Housing Act if the Federal Housing Administration (FHA) is to continue to be a financially sound tool for lenders" -- these changes include Hybrid ARMs, Zero Down Loans and 40 year terms. Financially sound??? At least he's representative of mortgage brokers!
I pick apart the rest of his testimony at:
http://nohousingbailout.com/?p=44
Corporations are the enemy of innovation, not regulators.
By that I mean corporations are the ones really at risk from creative destruction... they are the ones with the clout in parliaments & congress... they are the ones who will write the rules. The pols will all say its for the little people - like the S&L bailout. It won't be, it will be of and for the established order.
And in all honesty - if we allowed full bore creative destruction - we'd probably see revolutions about every half century. Storming of the Bastille & October Revolution like things. CD is not very pretty.
You want a Noble Prize in Economics... devise an actionable model where CD can flourish that doesn't cause all the societal pain resulting from said CD. It is our 'avoidance' of that pain (rich & poor alike) that makes Socialism almost inevitable (either through revolution OR the ballot box).
You don't like Socialism - focus on eliminating the pain of change in a way that still fosters aggressive no turn back change. I'd vote for you if you do.
Dryfly,
You're dead right on corporations as I said. Disruption is something they fear and over time a general good. Disruption should be promoted through lower or eliminated capital gains taxes etc.
As for eliminating the pain etc. It isn't possible. Had we tried to save the buggy whip business through subsidies etc we would have delayed the rise of the automobile etc. The dead-weight cost of doing that? The cost of the subsidy plus the lost auto jobs, plus the related tire manufactuirng jobs, plus the glass workers for windshields etc. Of course in the end the auto wins and the buggy whip folks have to find something else to do anyway. Period. There is simply no stopping it. All you can do by trying is drive wealth and new jobs and industries into other countries while yours whithers. The disruption, which is a function of speed, is necessary for the MINIMAL costs of transition to be achieved.
Me? Stop making unemployment payments and instead provide vouchers for colleges or technical schools would be a start.
But your fears are overblown (please don't start the "you'd change your tune if a family member etc," I've been through it all, ok?). Go back 150 years and see how dramtically our economy has changed in each generation, and is changing now and think about how flexible our culture really is. Read Laslett's "The World We Have Lost" for a starting point (It's England, but still). Fascinating stuff.
You vote for me? Only happen if I'd had a brain injury.
westsidegeorge: The FHA bill is the same that passed the house last year but failed in the Senate. They would be required to follow the New Federal lending requirements. The key would be getting the GSE limit raised but the Federal Reserve is firmly against, note big Ben before the Senate on the subject.
One of the recent posters called the FHA situation noise which is a pretty good description.
Just for the record I first read Shumpeter my freshamn year, lo those many years ago. He's a staple as are Hayek and Von Mises.
Schumpeter was a fruit in a lot of ways else he'd be read more today. But he got innovation right. I read him because my father made me read him (LOL) He was an economist & said all engineers need to understand the REAL forces behind innovation. That was a few moons ago as well.
I've never liked either Hayek or Von Mises - because while their rhetorical theories might sound appealing - the problem is the political again. Nothing would lead to a revolution faster than following their prescriptions after a bubble bursts. That 'pain' thing - people will not 'eat cake'.
What do you think Hayek or Von Mises would say today about our 'credit environment'? Think they'd approve? I think not.
Again find a way to moderate the pain of necessary change & these policies might work. Otherwise its all academic.
Dryfly,
You had a wise Father! History simply says your concerns are overblown in American culture. Agriculture to industrialization (rampant population movements, families divided, creation of miners etc etc, no revolution), industrialization to specialized industrialization (the craftsman largely dissappears, lost to a cheaper laborer and a machine, no revolution), industrialization to global inductrialization (Read "The Reckoning" on this one, specialized laborer in basic industries under wage pressure from workers abroad, steel industry shrinks dramtically, auto industry rapidly changes, shipguilding disappears, no revolution), movement to information age (higher tech machine industries go abroad, specialized labor getting whipped, no revolution), to now in some ways we are returning to Laslett's kind of world. Workers closer to home, more independent, craftsman in some ways again, still no revolution.
It is pretty amazing when looked at that way. Indistries and jobs swept away again and again and again. Waht happens? we get wealthier and live longer, especially the poor. Revolutions? Economic one's all over the place. Political ones? Not so much.
I'm outta here, I'll read tomorrow. Thanks for your thoughts.
Banker,
What did you find most radical about Blackstone's S1 filing? I found several things. First, no real voting rights, and by offering up only a 10% stake in the firm it will likely exclude financial institutions, including merchant bank shareholders, from any input into management decisions at Blackstone, which they would have had under the 1995 Private Securities Litigation Reform Act (PSLRA) and the 1998 Graham Leach Bliley Act. I think Blackstone will be free of suits by shareholders, including their largest shareholders. The downside is that financial holding companies are still pretty much in their infancy and some of the safety nets they must have counted on were PSLRA and GLBA rights -- if financial holding companies are weakened, then are banks they own not also weaker?
Also, Blackstone will not give earnings guidance, which I appreciate. Perceptions (expectations) are not reality and they tend to cause bubbles. But if other firms follow Blackstone's lead and drop guidance it will tend to undo the lift that was given to the market in 1995 by the PSLRA's "Safe Harbor" rule whereby for the first time since 1933 shareholders could no longer sue firms for not performing in line with expectations (guidance). It is ironic that just when guidance and managing expectations become the tools of the day for the Fed the corporations are drop them. Maybe the master plan is ticking along, but somehow I have to wonder if we are headed for an out-of-sync economic phase.
Gee, buggy whips are luxury items as are carriage makers and blacksmiths. Just what is your point?
While I do not remember if buggy whip folks got govt handouts, railroads and their ancestor, canals did. Steel mill owners and railroads could call out the national guard to put down strikes. Business owned government in the last 19th century, poor man had no chance against city hall or the courts against business. All non monetary subsidies. Today intellectual property of corporations are defended to the threat of national action while the poor worker jobs just get sent overseas in the name of a free market.
A lot of Mises stuff is religion, it might work in a perfect place, but no place is perfect. In a nutshell, the late subprime thing is excused as a central bank problem rather than a free market problem and if the discussion goes to how the fed is powerless then the BOJ or PBOC is blamed. Always always someone to blame.
The world is not perfect. My view is that capitalism is best because fewest folks die in the conflicts. $s and power are fought over by the elites and the peasants are left mostly alone. But once a group gets wealthy they will buy protection and thus creative destruction will not happen or not happen as effective as theory.
Banker, take it from me. You can not fight ideology. In the end it comes down to "we need more and more and more regulations". Perpetum mobile- if my memory serves me well.
On vouchers & capital gains.
Vouchers are fine. But you think a person who loses a million dollar So Cal home and is handed vouchers is going to 'vote' for that? I don't. He could retrain, spend half the rest of his life & never catch back up.
BTW - the problem really isn't that the guy is going to 'starve', we could easily see to it that they don't... its the status he loses, the stuff he associates the good life with. Thorestien Veblen - Maslov type gobbledy gook.
I don't have an answer for that.
And if you just let the guy to stay in his house pain free... or provide easy FHA mortgages... he isn't going to make the necessary change. Look at how 'institutional' the dole became in England.
I don't have the answer for that either.
The problem is execution - how do you make good theory actionable yet politically stable & acceptable. I don't have a clue and I've been thinking about this for almost 30 years.
On Cap Gains Tax Cuts...
Even though I'm a small biz guy I think its over-rated. I don't know a single guy like me who would be 'encouraged' to expand based on zero cap gains rate. It has to be part of a larger package.
I'd rather see 'tax harmonization'... income, estate, cap gains all harmonized so they in effect mark to the same rate schedules. Takes away the incentive to game the code.
What I WOULD do to promote innovation is allow for instantaneous depreciation AND capital class exchange. Example:
Buy a piece a machinery & expense immediately... sell that piece of machinery & include the sale as revenue (taxable)... buy a new piece of machinery & expense that. Basically does the same thing as eliminating cap gains tax IF you invest & grow. If you only sell capital (and don't reinvest) its taxed like any other 'income'... that harmony thing again.
A pretty strong carrot & a stick.
So I'm curious...our entire banking system is built around the fed, which is a government entity which is granted exclusive rights and powers. If we are to buy into the unregulated capitalism viewpoint in a consistent manner, then the entire banking system should be discarded, and we should go to a "print your currency if you can" free for all. Is anyone really advocating this? If not, it seems the only issue here is where to draw the regulatory line, and we should accept this and drop all the pretense about "free-market" vs. "socialist" or whatever other vague label you want to apply.
The world is not perfect. My view is that capitalism is best because fewest folks die in the conflicts.
Exactly. At least REGULATED capitalism is best.
I'm not sure completely unfettered capitalism is more or less likely to foster conflicts. Is there even a single case in history to point to? Every single case of capitalism I can think of there is (1) government and (2) the economic actors influence gov't on their behalf and at the expense of others. Show me one & I might buy in.
If we are to buy into the unregulated capitalism viewpoint in a consistent manner, then the entire banking system should be discarded, and we should go to a "print your currency if you can" free for all. Is anyone really advocating this?
Only on the 'internets'. LOL.
Seriously - you hit the nail on the head. The same folks who scream free market free market are often the ones with the fingers deepest into the gov't pie. Few more so than the financial industry.
Gold bugs would say abolish the Fed & go to a 'Gold Standard'... But then who manages the gold... do we all walk around with gold? How do I get my itunes with gold coins? Who makes the gold coins? Who tests the gold coins they make? Who arbitrates differences?
So somewhere there is still a pretty sophisticated entity that has to manage something even as medieval as a 'gold standard'... else we all end up with metallography labs in our basement.
MaxedOutMomma summed this whole argument up pretty well earlier... we got regulation, like it or not... now we gotta decide what to regulate, how much and how.
Again tactics & execution is always harder than theory & strategy.
The 'free traders' don't like that - they'd rather focus on the 'theory' & 'ideology'.
dryfly, how about " a little bit pregnant"? Same goes with regulated capitalism.
Dammit Renter,
I was outta here and you throw me that juicy one.
The things you cite, while interesting aren't the radical I was talking about.
-No real voting rights? Media companies, NYT included, have had that structure for thiry years or more. KKR's European issuer has that as well
-No earnings guidance? Google was the big fish that began that.
-Blackstone isn't a bank and I don't think it owns one either. If it does it is immaterial.So the Fed isn't a factor.
-Nothing precludes shareholder suits. If anything they are more likely as it is the only way for Blackstone shareholders to get any voice at all.
No the radical things Blackstone is doing are much more important. It is going to have 50ish% of exalted Goldman's market cap with only 2.5% of Goldman's Employee count. 2.5%. Think that Lloyd Blankfein is thinking about what that implies? Think that Merrill's, Morgan Stanley's etc boards are going to push for some changes?
Blackstone is going to have no compensation committee. It is going to pay its people what Steve Schwarzmann thinks they should be paid thank you very much. Don't like it? Don't by the stock.
Blackstone's long-term equity and real estate funds have simply destroyed the stock market averages over a long period. Destroyed them. Think the techniques they are using might now be reverse engineered to the degree possible? You betcha! Also, doesn't it raise the question whether privately run companies can dramatically outperform public ones and doesn't that argue that our whole oversight process is perhaps bought at a far higher price than we all thought?
Read the whole S-1. it'll blow your mind. The last one I read that made me realize just how much the world was about to change was Google.
Renter, thanks for your thoughts.
Dryfly,
I am fine with your specific proposal. But you are missing the point on Capital gains taxes. It isn't the existing biz where the impact is had, it is the new business trying to get funded. Capital gains tax impose a major cost moving from an existing investment to a new one for providers of capital. It forces new companies and projects to obtain a higher return than they would ordinarily have to in order to compensate investors for that incremental transaction cost. Those that offer a good return, but can't generate the incremental return aren't funded and would be with no capital gains tax. Eliminating it means faster innovation, more new job creation etc.
Vader,
But once a group gets wealthy they will buy protection and thus creative destruction will not happen or not happen as effective as theory
Simply not true. Look at the history of General Motors or IBM or US Steel or the fate of Sears or Woolworth's or Shearson or Salomon Brothers. Folks try to do what you say. But it doesn't work.
Lets say there is a place with an effective 99% tax rate, but you can make a million dollars profit after taxes.
Or a place with 1% effective tax rate but you make a thousand dollars profit after taxes.
Where oh where do I establish my business.
Oh did someone assert tax rates drive business decisions. No my friend, profits drive it(at least in theology). You have choice of a high tax state like Calif or Mass to do high tech or you can do it in Alabama or Mississippi, low tax states.
Remember I live in Alabama and not only that but in what passes for high tech part. Low taxes and low tech.
Intelligent taxes buy things that business want. Educated workers and customers, infrastructure to get and move goods. A culture of buying valued added stuff instead of just surviving.
Vader,
Ever hear of John Malone? He built TCI into a cable TV giant and now runs Liberty Media. He is widely recognized as an unusually astute businessman. In ameeting one day I asked he how he spent his time among his various businesses etc. Know what he told me? Since taxes were far and away his biggest controllable expense? He spent 70% of his time on tax issues. 70%. Talk about a waste of a enormously productive mind. But given the system, that was the rational decision.
Banker
I'll let you reconsider what you said after you take a moment to reflect that I am a history buff and my POV spans centuries not just the last few years.
Take Bham, where I live. In my dad's day US steel ruled the city.
ditto for most of your examples. Even Salomon Brothers depends on the govt acting as the lender of last resort.
Never the less, lets take the recording industry which instead of embracing new tech and a new business paradigm, got new copy right legislation passed in order to keep selling a $1 product for $15. Creative Destruction of them has been delayed at least a decade. But they are being destroyed bit by bit.
Microsoft used the government to enforce draconian copyright laws to put off the day of judgement and they just rolled out Vista to the sound of one hand clapping to a megabuck ad campaign. They will survive on the quality of their product but having a friendly govt to allow them to force PC makers to bundle Windows and effectively punish anyone wanting say Linux on their PC instead.
John Malone has an effective monopoly in most areas, not much else to think about other than taxes.
It isn't the existing biz where the impact is had, it is the new business trying to get funded
No I get that. The guy I described is the guy getting the funds & buying the machines. It could apply farther down stream too.
Invest in company A... grows like a weed, investor cashes out. Tax will be due as regular income.
But take income and buy company B and expense investment wiping out 'gain' from investment in company A. Rinse, repeat.
Effectively no cap gains tax UNTIL they stop investing in companies and instead buy luxury yachts, etc. Then its income and they pay taxes at regular rates.
It would be the mother of all IRAs... for everyone. Bill Gates or me.
And even as a liberal, I'm okay with that if it grows jobs & wealth for all. All I want is that when Bill eventually starts taking those cash outs as income that he pays taxes on the gains like his workers... same tax schedule for both.
Otherwise I'm fine with it being expensed & deferred & growing 'invisibly'.
Similar issue with inheritance/estate. Allow for it to be treated like a large capital gain account at zero basis. No tax until taken as 'income' then tax at regular income tax rates.
If you didn't know already, I have a family full of tax attorneys.
Folks try to do what you say. But it doesn't work.
Not forever maybe but a long time. GM is case in point. They've been tangled with gov't (to GM's benefit) since at least the early 70s.
UAW has helped too. They might fight like brothers but quickly unify to fight the neighbor.
My sister is trying to get a grant to write the 'history of the bankruptcy code'. She is one of those tax attorneys I mentioned above who left Law to get a PhD in History (she made money & saved it then did what she really wanted). Smart gal.
Corporate-gov't meddling plays a big part of that story.
dryfly, how about " a little bit pregnant"? Same goes with regulated capitalism.
That argument was decided when we decided to have government at all (legislation courts executive branch cops money property laws, etc.).
Once you make the decision that we need SOME gov't (to at least keep order, manage disputes, whatever) then you are effectively 'pregnant'. The question after that is how do you raise the child.
That's what we're arguing about now... how to raise the child.
Vader,
Look at your examples again. Bethlehem went belly (as did Phoenix Steel, where I spent my teenage years), Salomon no longer exists, the others are gone or shadows of what they were. Even Microsoft. It is no longer the growth monster it once was. Now it pays dividends because it can't use it's capital effectively.
What is to take back?
What monopoly does John Malone enjoy? Direct TV competes with Dish and Cable, Starz competes with HBO and Showtime etc. The Game Show network competes with all the current gameshows and other niche networks, The Atlanta Braves? QVC competes with HSN. What is the monopoly of which you speak?
By the way, can the appeal to your own authority. Claiming "I am a history buff" to one who is the same isn't a compelling argument. But here's a deal. The best history book I've read recently was this
Amazon.com: The Classical World: An Epic History from Homer to Hadrian (9780465024964): Robin Lane Fox: Books
An excellent general overview if you haven't focused on the ancient world. If you already have? The try Feagles' most recent Aeneid. Amazon.com: The Aeneid (9780670038039): Virgil, Robert Fagles, Bernard Knox: Books
Now you owe me a recommendation.
Goldmine Slacks is gonna LOVE the Blackstone IPO even though they weren't invited to participate. Why? Blackstone will be valued at 20 to 25 p/e, while Goldmine is currently, what, 9?
dryfly, sorry but you don`t make any sense.
Dryfly,
On your tax proposal, you are imitating the Starkers 1031 exchange so common in real estate. Applying it to industry is a GREAT idea. Not often I get an ephiphany like that. I'm going to think about your idea some more, tweak it some insignificant way and then claim it as my own and trumpet it far and wide.
My condoloneces on the tax attorney's as family.
Amato,
The valuation difference is exactly the point. Goldman's relative valuation says it has an inferior business model. If Goldman was going to spike big in response to Blackstone it would already have done so. It is up less than 5% in the past week. Think about it this way. At Blackstone's expected value, if the two merged, Blackstone shareholders would own roughly 1/3 of the combined companies. That is astounding.
Banker, some opinion on Blackstone:
House of Cards
Blackstone: House of Cards
Blackstone: House of Cards-Minyanville
Banker seems unable to fathom that innovation is not the same as improvement, and that if the profitability of some hotshot new business idea is so poor that we need to subsidize it with tax breaks to make it an attractive investment, then it doesn't deserve to live.
Amazingly, he seems seems to think that the orgy of malinvestment and fraud that was the telecoms debacle was all worth it because it's given us so much cheap optical fiber bandwidth. The possibility that the aggregate harm to those who suffered serious losses due to the depredations of Worldcom, Global Crossing, Qwest, et al. might outweigh the aggregate benefit of that surplus bandwidth to the rest of us doesn't seem to have crossed his mind.
It's always seemed to me that the reason properly constituted market economies work well is the one stressed so strongly by Milton Friedman in "Free to Choose" -- that market prices are a means by which we communicate to each other the relative value of our various inputs to economic activity, and that if someone is able to take inputs so valued at some amount X and produce output that can be sold for more than X (i.e., run a truly profitable business), then society is better off. Companies like Global Crossing, Worldcom and Nortel use other people's money to purchase inputs valued at X, but produce output that can be sold only for less than X, do not benefit society. It is not sufficient that the value of the output to be non-zero, it must be greater than the value of the inputs. Moreover, it should be greater than the value others could have produced through alternative uses of those inputs, so if others are able to run businesses that can pay their taxes and be profitable, then any business unable to compete and be equally profitable on the same basis is an inferior user of those inputs.
But perhaps I'm misinterpreting Banker. It is often rather hard to understand exactly what he is trying to say. Funny, I've never had that problem with Tanta.
Countrywide has a new rate sheet, prices up, max stated CLTV now is 90%. Lower FICO pricing has gone up a lot.
Think of it another way. If Goldmine split into two companies - Private Equity (including asset management) and Sales and Trading, you'd be looking at a 300 to 350 dollar stock.
BTW, the scenario dryfly outlined about selling out of company X and "1031'ing" into company Y wasn't theoretical - it is done all the time.
jm, it is much easier with Tanta. It is like with those barteders who think that biz. would collapse without them. How lucky those owners to have such great minds working for them!
Subsidizing business creation through tax breaks.
I gotta admint JM, that is so funny I snarfed my soda all over the keyboard. Also, I don't even know what a "malinvestment" is. I looked it up even, no go.
Of course innovation doesn't equal improvement, at least not a single one, but in the aggragate? History speaks. The telecom stuff? Obviously worked out in the end, the numbers aren't even close. That even includes the fraud (Worldcom), which I have previously said should be prosecuted. I think the rest is what some call a strawman.
I agree Tanta is simple to understand
Amato,
Regarding Goldman, that's the kind of thinking that I bet Lloyd Blankfein is considering. If that's what you initially meant by "loving it" then I agree. But dividing Goldman that way would be culturally very tough. The essence of its approach is linking its businesses.
On the 1031 issue, on the corporate side I get that, but how does a VC (FOR EXAMPLE) do it?
Thanks all, I'm out for the evening...I mean it this time!
CR and/or Tanta,
Trying to find data on ARM recasts I came across recasting from LTV caps (which Tanta discussed) AND automatic recasts by time period, usually 5 or 10 years. Could you address the latter???
Can anyone name examples where new regulations were rolled back to old standards? (Not merely modified because they were not working as desired.)
Prohibition is the best example I can think of. And perhaps some cases where we implemented a tax of some kind, that was later removed.
But I think it is true, that we rarely roll back to doing things as they were under the "old rules". People wanting to see 80/20 lending reasserted across the board are probably going to be disappointed.
On the 1031 issue, on the corporate side I get that, but how does a VC (FOR EXAMPLE) do it?
And it should be doable. As a liberal I'm all for soaking the rich when its conspicuous consumption... but not until its actual consumption (income) not true investment.
Maybe its just the rube in me that hates to see anyone eat the seed corn... that stuff has to get planted. After its in & harvested, that's when we argue about who gets what.
I knew exchanges were done in RE but didn't know what they were called or how they work. Something like it needs to be allowed in capital funds as well as at the plant operational level too.
A good politician could sell it to both liberals & conservatives if part of a larger, more comprehensive reform. That's why I think overall tax code harmonization is so important. We've sub-optimized the code for various tax classifications badly.
A gold mine for tax accountants & attorneys though - I hear about it at holidays.
Mozo, 80/20 would kill FHA, Fannie and Freddie. You are right. Add them all up and you can see for yourself.
Gee, ya think Mozo? How about strangling subprime, restricting the FHA or, better yet, the government actively moving to decrease the value of homes and therefore the net worth of almost 70% of it's citizens?
LOL!
Good point Amato!
Amato, I view the collapse of subprime as one of those cases where regulatory agencies stepped in, and reminded the players to watch the field lines. We haven't really reversed much, just asserted the rules that were being ignored...
I'm talking about real reversal of regulation. That is rare. There is talk sometimes about repealing Prop 13 in California, or repealing the clean air act, etc. But the momentum just usually isn't there to unde these things.
Reversals such as with Prohibition take place when the regulations were so odious and stupid, that we just couldn't live with them.
Banker / dryfly,
I have deferred profits from the sale of a business by rolling them into starting a new business, i.e., the business equivelent of a RE 1031 tax deferred exchange. Depending on the structure of a VC outfit, I don't know why they couldn't internally accomplish a similiar result, but I AM JUST A SMALL OPERATOR and have no actual knowledge of HOW.
You're all misguided. FHA product is the unsung hero of both mortgage bankers and home owners across the country. It has been criticized for being too exhaustive in its requirements to evalulate income and colateral, which in light of the subprime fiasco, has been its saving grace.
Banker, the question was company control of government and that lasted until the 30s.
The fact that they eventually died, does not mitigate the fact that they used government to protect monopolies until the mindset of the companies precluded flexible thinking and then got whacked.
The whacking only happening after govt stop their monopoly.
Re John, he is in the cable business and that is a monopoly in most places. Now as to his obsession of taxes, it appears that he is figuring ways to get govt favouritism for his outfit just like the other folks. If it was current tax law, then his minions could hand that. That is why tax professions exist. Your story sound fishy in so many ways. Not to argue his answer, but his motives.
Mozo, believe that subprime has "collapsed" if you choose, but be prepared to see it "rise from the dead".
I kind of agree, really. There are too many people in the country without savings, that want to buy a home. It is a market that will be served, although it may have to scurry out of sight of the FDIC insured institutions.
Banker writes:
"The telecom stuff? Obviously worked out in the end, the numbers aren't even close."
"... Obviously ..."
I beg to differ.
"...the numbers aren't even close."
What numbers? Would you care to provide some references we can peruse?
"That even includes the fraud (Worldcom), ..."
Not only did the various and sundry frauds wreak grievous harm on shareholders, bondholders, and employees, the NASDAQ bubble and ensuing collapse they helped cause was the major impetus for the Fed's slashing short-term interest rates to negative real levels, which led in turn to the loose lending and housing bubble with whose aftermaths we must now somehow deal. By the time this plays out, the net harm will have been enormous.
You have placed yourself under a serious obligation to show us a rigorous quantitative analysis that demonstrates that the uses to which those economic inputs were harnessed produced a net outcome of value greater than the inputs, and greater than outcomes we could have gotten from alternative uses to which we might reasonably assume those inputs would have been harnessed absent the fraud.
There are too many people in the country without savings, that want to buy a home.
Tough sh!t.
Mozo, did these people not exist before the boom?
80/20 existed not because anyone wanted it, but because it had to be. Risk has to be mitigated, either via sufficient skin or higher rates.
People that are good risks get better terms; those that are not do not. Sometimes the terms for "bad risks" are too onerous to overcome -- those people shouldn't own homes, simple as that.
Vader,
Um, John Malone isn't in the cable TV buisness anymore and hasn't been for several years. Ya gotta get current brother. TCI was sold to ATT and then Comcast.
JM,
I'm under no obligation to do your work for you, ever, period. But in the interest of comity, here's a study SSRN-Key Determinants of R&D Expenditures in the US Telecommunications Equipment Industry by Fotios Harmantzis, Venkata Tanguturi
On Page 13 it claims that from 1996 to 2003 $1.8 trillion wasn invested in telecom in the US. That's an average of $300-$400 billion per year. This article VON Magazine - October 2006 shows that in 2006 alone telecom capital spending was double that, over $900 billion. Hmmm, sounds like an industry still rocked to me, one that is barely recovering. In fact the articles 2006 sub-title is pretty funny, "Are Telecom's Happy Days coming to an end." The Happy days obviously run through 2006, huh? The article talks a lot about the recent telecom growth. According to TIA, by 2009, telecom capex will be $1.2 trillion ANNUALLY, OR 2/3 of ALL the capex spending during the 6-7 year period you were concerned with. That kind of capital expenditures and growth in sales numbers reflects an industry that is now far bigger than it was a decade ago. Is that enough?
Jesus wept. Why bother? It will just crawl back whining with more complaints and demands.
Better to just tell it to feck off and be done with it.
It is apparent that the mighty Wurlitzer has noticed this blog and it's growing audience and has assigned permanent staff to comment. Does any one know Al here?
The ability to rapidly fire off shining baubles of pure horse-shit exceeds the speed of rational discussion.
Wow, just woke up to this hairsplitting stinger from Banker: "Buisnesses don't self-correct, markets do. Big difference."
However you mince it, it works with either word: if you are acknowledging that businesses (which make up markets) can't self-correct, then it follows that your "markets" won't do it either.
Here, I'll use it in a sentence:
"The mortgage 'markets' are 'self-correcting' by privatizing profits, and socializing losses."
It's not a coincidence that folks like Banker and Broker, and the man who um, 'farts through silk baby,' have begun to pepper this thread with grandiose visions of things that don't exist -like free markets, and businesses who always funnel money into innovation and job creation, rather than jacking the gap between rich and poor to new breadths.
The great OZ of deregulation doesn't want you to pay attention to that thief behind the curtain.
All this innovation and creation and destruction strikes me as kind of a red herring. What we have here is the same old bad debt as ever, only more of it this time.
Alo, I agree with you in regard with 'privatising profits and socialising losses'. Thats exactly what happens when Goldman buys MBS from Fannie. My question to you is: Would this be possible it if weret for Fannie? Or if Fannie were a real private company? We woudn`t have ' socialising loses', would we?
Banker, Back to containment of subprime...
You seem to - either intentionally or by accident - dismiss the connection between the blurred credit space lines (subprime/AltA... based on credit scoring) and the underlying collateral's linkage. Weakness in this collateral spills broadly into lender finances and HB business prospects and the employment picture as the housing related businesses contract... & as defaults start to run. Also cuts severely into MEW.
Ignoring the collateral decline influence effectively totally dismisses the early '90s RTC meltdown. It's not merely fiction or theory - it happened. And that crash was set up in the wake of a far tamer bubble.
I remember the 90s crash like it was yesterday. We'll see....
Barely,
What came out of the RTC meltdown? How long-lasting were the effects?
Banker
Assume for a moment that John M. obsesses on taxes as much as you says he does. What are his taxes so complicated? Is it because citizens want complicated taxes or there are a lot of obsessive business men gaming the system for their business by having the legislatures pass complex tax laws.
Banker, I would say the effects of the 90's bust lasted until about 1998 in southern Cal. About a year of appreciation had taken place, and I remember the newspapers reminding people that "home price declines are not what traditionally happens in CA - we are returning to a normal market"
The fear of becoming stuck with an asset that you would be unable to sell, by that point was receeding.
I also remember a co-worker with 3 or 4 kids, that was still stuck in a 2 BR condo he and his wife had bought at the peak. I think he finally sold it in late 1999 or early 2000. So "move-up buyers" were still being impacted for quite a while, if their timing was poor.
Vader,
I can only take the man at his word. He had no reason to lie to us. To ask that question you did displays a basic ignorance of how complex corporate structures can be, the differing tax codes among states and how heavy the tax burden on purchases and sales of assets/equities are for billion dollar enterprises.
Alo,
Your argument is like saying if an arm doesn't breath a body won't either.
I would say the 90s bust lasted 7 years. That bust was set up over a far shorter period without even a tiny fraction of the nutty lending and appreciation was dwarfed by the current bubble. We had inflation at the time and substantially higher interest rates which may have popped the bubble earlier than the current plunge. This one is different since its a bubbly popping itself, without a lot of external influences.
This time the bubble is the economic disruption.
"The US Government "throwing its weight around" to drive down housing prices is a GREAT idea and would really help us renters at the expense of homeowners.
Let's all renters join hands in a circle of love and MAKE THIS HAPPEN"
Right On Stalin...
In response to Banker's 03.25.07 - 4:44 am comment, let's begin by examining the second of Banker's references:
Referring to 2005 results, the article says wireless services revenue increased 14.8% to $118.6 billion, but landline revenue fell 1.4% to $192.3 billion, while internet-access revenue rose 10.2%; though it gives no dollar figure for internet-access revenue, it quotes the an industry report as projecting it will compound 5.3% to reach $24.8 billion in 2009 (so it must have been under $20 billion). It then notes that although optimistic forecasters are extrapolating out the recent trends, "The reality is that the carriers are all starting to cut back on spending as they leverage their recent investments. Their focus now is on generating more cash ... and cleaning up their balance sheets."
Earlier, after quoting the rosy $1.2 trillion industry-association capex extrapolation for 2009 that Banker trumpeted, the article had noted that, "These companies just spent the last four years ratcheting up spending while capital was sloshing around from an aggressive U.S. monetary policy."
Let's review those numbers: wireless, landline, and internet-access revenues (revenues, mind you -- not earnings) for 2005 totalled about $330 billion (about 2.65% of GDP), with overall annual growth of about $15 billion (about 5%). But we are supposed to believe not only that annual capital expenditures in this industry are near $1 trillion, but also that that is good economics. This is ludicrous. If the industry were in fact investing $1000 billion a year to get annual revenue growth of $15 billion, that would be incredibly bad economics. Since they obviously aren't, the only definite things we can say about these numbers are that telecom is not a particularly large fraction of GDP, that it's real growth of about 2% is not at all impressive, and that its industry asociation publishes numbers that are egregiously false.
Now let's look at Banker's first reference (a Nov 2005 paper by two Stevens Institute of Technology professors). Not only do we find nothing in this paper to support Banker's arguments, down in the middle of it we encounter the paragraphs:
After the telecom crash, both the sales volume and retail prices dropped. That effected [sic] directly the R&D spending 2001. Research did not make it through product lifecycles, and launching of new technologies was delayed, e.g., third generation (3G) wireless networks. The over-investment created over-capacity, with the demand side not following the supply. Some argued that the over-supply will drop prices and attract buyers. In reality, that did not happen in the short run.
Unable to meet short term debt obligations, many firms went bankrupt, e.g., World- Com, Adelphia, etc. [24]. The industry experienced major job cuts, talented R&D personnel left, as R&D budgets were cut. Excess capacity is still under-utilized, and the sector has not been fully recovered
Broker and Banker (who mistakes a limb for a vital organ), any MBS problems Fannie has incurred or passed along have nothing to do with it being some kind of socialized entity (if Congress really wanted it to to be, at least there might have been be better oversight -- a GSE's charter specifically promises "limited oversight" and oh boy was it ever limited). Fannie's problems directly stem from corporate greed infecting the market to the point that it infected their behavior too. Gotta be competitive with those lenders offering money to anyone who can draw breath, dontcha know.
I find it amusing that the financial industry, on its customary corner with fishnets and stillettos, would be pointing a dirty fingernail at at the GSE girl on the block, big but bumbling, just trying to get her piece of the action.
''If the only time that subprime borrowers can afford to be in their own house is during positive home price appreciation, then you really haven't come up with a solution at all.''
I wasnt trying to.
Oops, I guess all this financial innovation has me confused. I keep forgetting that the financial system is no longer in the business of making loans that can be repaid.
'''But to argue that there is some market innovation taking place without criticial regard for the facts or the sustainability of the solution...'''
So trying new things without perfect foresight shouldnt be done?
I must have not been entirely clear. Too me it is entirely obvious that teaser rates combined with all time low affordability levels is not a mathematically sound loan product. If I were the innovating type, I probably wouldn't even give it more thought. But if I were the profit-seeking, rip-your-face-off type I might see an opportunity -- not by producing true value of course, but by suckering the unsophisticated fool sitting at my poker table. I guess the difference between us is that I wouldn't develop a damaged product whereas you apparently seem to think selling snake oil is ok as long as it helps develop the pharmaceutical market. As for your overly simplistic, black and white, and logically incorrect inference from my original statement, whether you should embark on an endeavor depends on the probability of a given outcome and the reward level for that outcome. If the odds are high that your new car model is going to explode and kill people then maybe you shouldn't be selling it. Even worse is when Exploding Cars Inc. has the promise of being bailed out with my tax dollars. It's bad enough that I think they are either stupid or deceptive. It becomes unacceptable when I'm forced to underwrite the insurance on their behavior.
Luddites of the world! Unite!
Your call to action is a little late. They have been presiding since 1913.
Banker - Let me say that I find you make logical leaps. Someone claims (roughly) that the well-off can buy political access and game the system and you reply with a list of corporations that have fallen from the top. Surely you realize your claim does nothing to contradict his, which is prime facie trivial.
Also, markets may be self-correcting (in fact, as you must realize, they over-correct), but that says nothing about the mess they make before they correct. Leaving the markets alone has advantages and disadvantages. It seems to me that it is a complicated matter to decide which is best in which case, but I doubt very much that you can establish that it was best to leave the housing markets as they were in 2004 to 2006. As near as I can see, you are just blowing hot air.
Accept my apologies if I am misreading you; in fact I hope I am.
The leaders of the Federal Housing Administration (FHA) talk the talk when it comes to encouraging mortgage brokers to offer FHA loans, but three recent incidents have shown me that with the FHA its all talk and no walk, all show and no go.
As anyone with a few years in the mortgage business knows, over the years, fewer and fewer originators have offered the often-cumbersome (although now somewhat- streamlined) FHA program. Not too long ago, so-called govies, like FHA and VA, were almost 25% of the mortgage market; now, they comprise less than three percent.
There are many reasons for the steep decline - primarily the rise of subprime - but there is another cause of the decline, and it is perhaps the primary cause: Mortgage brokers, who now originate between 50 and 75 percent of all residential mortgage loans in this country, are effectively barred from originating FHA loans because of burdensome paperwork and expensive audit requirements (I am told as much as $11,000 annually for an audit). If you dont supply Wal-mart with your product, chances are few American consumers will purchase it. Same here - mortgage brokers and the originators who work for them are the nations mortgage sales force, and they dont have the FHA arrow in their quivers. The product isnt being pushed to the American mortgage consumer because the group that is most in touch with that consumer doesnt have that product on its shelf.
But the FHA doesnt seem to get this. Stuck in the past, preferring to deal with banks and mortgage bankers, HUD has failed to ensure that the largest mortgage sales force in the country has ready access to its products.
As a board member and charter member of the National Association of Responsible Loan Officers (http://www.NARLO.com) I met with FHA Commissioner Brian Montgomery and his staff at his HUD office last year. Although they were polite and accommodating, I quickly came to realize that they just dont get it; its like they think we are still in the 1950s and everyone goes to their local bank for a mortgage loan. I left the meeting distressed and puzzled by how little the FHA understands about todays mortgage product delivery system. I told Montgomery that the FHA was going to have to do a lot of work to get brokers to offer their product since, as far as I was concerned, they had dissed us for most of the past twenty years.
Weve done quite well without you, I told him, and we can continue to do quite well without you. Youve got a lot of bridge-building to do.
Im not sure, based on the two incidents that followed, that he understood, or took to heart, what I was telling him.
Lets call that meeting strike one.
Then, a few months ago in Philadelphia at the annual convention of the National Association of Mortgage Brokers, where many wholesale lenders had huge and expensive booths staffed by large numbers of enthusiastic sales and underwriting staff, the FHA had a small table staffed by