Friday, August 31, 2007

Chasing bad products with bad policy

It is not all quiet on the western front this morning. The subprime mess has become so overwhelming that even a Republican president in the US is speaking out about "helping the people." Of course, ol' Georgie does it under the guise of "mortgage insurance" and "tax-cuts" but make no mistake about it, GW is bailing out big businesses and investors that made bad decisions by giving money to people who had no business owning homes that they couldn't afford.

But Georgie isn't alone. When Greenspan left the Fed, you'd think that the policies he'd implemented would have been scrutinized prior to their continued use. Apparently Bernanke isn't so much an analyst, more like he's a puppet on a Greenspan string with his statements this morning:
The adjustable-rate subprime mortgages originated in late 2005 and in 2006 have performed the worst, in part because of slippage in underwriting standards, reflected for example in high loan-to-value ratios and incomplete documentation. With many of these borrowers facing their first interest rate resets in coming quarters, and with softness in house prices expected to continue to impede refinancing, delinquencies among this class of mortgages are likely to rise further...

Although this episode appears to have been triggered largely by heightened concerns about subprime mortgages, global financial losses have far exceeded even the most pessimistic projections of credit losses on those loans.

It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions.

The incoming data indicate that the economy continued to expand at a moderate pace into the summer, despite the sharp correction in the housing sector. However, in light of recent financial developments, economic data bearing on past months or quarters may be less useful than usual for our forecasts of economic activity and inflation.

On the other hand, the increased liquidity of home equity may lead consumer spending to respond more than in past years to changes in the values of their homes; some evidence does suggest that the correlation of consumption and house prices is higher in countries, like the United States, that have more sophisticated mortgage markets (Calza, Monacelli, and Stracca, 2007). Whether the development of home equity loans and easier mortgage refinancing has increased the magnitude of the real estate wealth effect--and if so, by how much--is a much-debated question that I will leave to another occasion.
So let's sum up these comments in plain language: ARM's are bad products, predatory even; pessimism in the global markets have led to greater than expected financial losses; the Fed should not bail out the bad product pushers and ignorant investors who bought products they didn't understand; despite housing sector crash, economic growth (and inflation) continue to rise; and surprise, surprise, when people have easy access to low-interest credit (HELOCs) they buy stuff they can't afford--and when that easy access disappears, they look for ways to not pay for what they bought.

Here's where Georgie steps in and turns the homeowner into the "victim."
Bush will direct Treasury Secretary Henry Paulson and Housing Secretary Alphonso Jackson to work on an initiative to help troubled mortgage holders get services and products they need to keep them from defaulting on their loans.

Bush also planned to:

- Urge Congress to pass Federal Housing Administration overhaul legislation that would give the FHA more flexibility in assisting mortgage holders with subprime mortgages.

- Pledge to work with Congress to reform the tax code to help troubled borrowers rework their loans.

- Call for rigorously enforcing predatory lending laws and strengthening lending practices.

On behalf of all sane, educated and aware investors out there, I'd just like to say thanks to Georgie and Benny for working so diligently to inspire confidence in our economic systems. I know, I know, we are different up here in The Best Place to Live on Earth TM.

This just in: apparently sane, educated and aware investors are a minority in the marketplace as markets react favorably to Georgie and Benny's "there, there, everything is going to be OK" speeches. How does dumping money into a sinking ship plug the leak?

4 comments:

Village said...

The key word I've heard out of the fed is 'Expectations'. They are primarily focused on managing market expectations and not reality. Reality though has a way of sneaking up behind you a smacking you upside the head with a large fish when you least expect it.

Bernanke's speech was the same we've heard all along. Blah blah protect banking system blah blah. He's a deflation fighter, his focus seems entirely on preventing another deflationary episode. Not everyone in government is an idiot. I expect he was chosen because some people actually saw the writing on the wall and reason why he was chosen. I do expect very text book responses from him. My text book schooling and the real world don't always jive.

As for Bush, his proposal seems insignificant. 1099 tax moratorium is reasonable. I don't particular have a problem with people not being required to pay X in taxes because they went bankrupt and lost a $500k house. Bad credit should (again) be sufficient to punish them and allow the economy to recover slightly quicker. FHA I don't know it's affect. But I thought I read it only counted for those borrowers with good credit and documentation. Just don't see that being all that helpful in the grand scheme of things.

Markets are sure reacting that everything is great though. Time to buy 2 houses and a condo.

vg said...

I only caught a brief bit on it but it seems its a tax writeoff deal that usually is not something you get by picking up the phone. We all know any tax related prgogram can take months to implement and for all those forclosures in the works it's a little too late.

It might lessen the blow somewhat to keep the markets happy and help out the struggling families that only need a couple hundred a month to stave off foreclosure.

The part that got me was something along the lines of " helping out the families that only mistake was buying at the wrong time". Gee isn't this what the free market system is all about ? Fraudulent lenders is one thing I despise but thats like saying anyone who makes the biggest purchase of their life and didn't do any homework and bought it like a new car or big screen TV, that the taxpayers who got priced out of the market on the way up should help pay ?? that bothers me huge.

hhv said...

"The part that got me was something along the lines of ' helping out the families that only mistake was buying at the wrong time'. Gee isn't this what the free market system is all about ? Fraudulent lenders is one thing I despise but thats like saying anyone who makes the biggest purchase of their life and didn't do any homework and bought it like a new car or big screen TV, that the taxpayers who got priced out of the market on the way up should help pay ?? that bothers me huge."

That's pretty much my beef in a nutshell. These "tactics" being played by the powers that speak them are simply to prevent, in the short term, significant erosion of market capitalization. As the markets correct, the probability of a one-day quadruple point decline rises.

That kind of downslide would sink the economy. No one wants to see anyone get hurt. I want to see markets correct back closer to historical norms sooner than later for the exact reason that the pain will be less now than, say, a year from now. Speeches like today have the opposite effect; irrational speculators figure they can make more for just a little bit longer before reality hits; and ignorant MF/bond investors who toss money into the markets without anything related to educated diligence just get towed into the froth and set free to drift wondering where their ride will end.

I can't decide which is worse: captains afraid to go down with their ships, or the economic sheeple too lazy to read a prospectus and the Saturday economic updates in the financial sections of their local newspapers. Since when has not taking financial responsibility for one's self become a matter of right that a state should be demanded to intervene and "protect" the "child" from the "spanking" it so desperately needs?

vg said...

WASHINGTON (MarketWatch) -- While President Bush outlined a number of steps on Friday to head off a rising tide of foreclosures, he stopped short of endorsing a full-scale federal bailout for borrowers burned by the crisis in the subprime-lending market.


http://www.marketwatch.com/news/story/story.aspx?guid=%7B40B37913%2DED13%2D4893%2D8606%2D8E508A86C682%7D