the Bernanke put, march 2008 edition
So today the FOMC meets and will announce possible rate cuts at 2:15EST. Most predictions are for a full 1% drop - in addition to the quarter point "emergency" cut from yesterday.

I'm not in favor of this. Why? Here's a nice quick summary. "...Inflation, debasing the dollar, punishing savers, and making travel abroad exhorbitantly expensive..."

This would all be well and good if we were a nation without savings. Oh, wait, that's what got us here in the first place. For the first time in recent history, the average homeowner's equity is less than half of the total value of their house; the national savings rate has been negative or very low for years... the list goes on. It's great for those people; their debt is worth less. For the more fiscally responsible - particularly non-homeowners such as myself - it's a punishment, as our savings is reduced in value by this sort of action.
- posted by vcmc @  3/18/2008 11:11:00 AM  |  0 comments

 
the bubble and securities fraud
Countrywide Financial is being investigated by the FBI for securities fraud...

A step in the right direction, but I take issue with the first sentence of the article, which implies they may be the "Enron of the housing crisis".

Fine, except the problems here are not limited to one company - the issues are systemic, involving mortgage originators, appraisers, real estate agents, mortgage purchasers/repackagers/resellers, bond insurers, etc., to varying degrees. And, of course, two individuals in an identical position - say, mortgage brokers, can have vastly different levels of complicity in the whole thing.

The underlying question here is: at what point do bubbles - which I would say markets are prone to create/participate in from time to time - become a) an ethical issue and b) a legal issue? I think it's all a matter of deceit - closers neglecting to mention the rate reset and approximate new monthly payment after the reset date; banks misrepresenting how their securitized mortgages are performing and misleading investors, etc. These problems may contribute to a bubble, but I don't think they're in any way responsible for the bubble as a whole.

Is Countrywide responsible to some extent? It's quite possible - in a company of that size there are likely to be bad actors somewhere. The extent of the corruption remains to be seen, however - and I'm not sure it'll end up being comparable to Enron, where the problem was more or less systemic.
- posted by vcmc @  3/10/2008 04:59:00 PM  |  0 comments

 
the subprime primer
This has been circulating for a while but it's a rather more amusing and less dry explanation than the one I linked to a few posts back. Yay MS Paint!

http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn&skipauth=true&pl
- posted by vcmc @  3/08/2008 02:44:00 PM  |  0 comments

 
more on the subprime implosion
Congress is pissed at financial execs who left with giant severance packages after their banks lose billions of dollars - a scale large enough to affect the overall US economy, forcing the Fed's hand to drop interest rates in order to retain a modicum of stability and effectively distributing the cost of these failed banks to the general populace through inflation.
(image from indexed.com. click through for original post)

More on financial incentives for bankers which contributed to the bubble/crash. Essentially: the success or failure of these "financial innovations" like CDOs cannot be measured in quarters - realistically, more like 5-10 years; paying out bonuses quarterly creates a structure in which short-term gain is encouraged even at the expense of disastrous long-term results. There's a phrase for this in economics: moral hazard. (This applies to the loan originators as well; incentives for them to come up with as many loans as possible, regardless of quality, were in part due to the complete lack of short-term risk - and only indirect mid- and long-term risk, once loan buyers figure out the originators' loans have a high default rate.)

This is not to say the financial industry players involved in structures where true risk is not understood in the short term should be denied bonuses, but rather, as the article suggests, have them paid out over time based on long-term results. I would go further and have employers' set aside bonuses for payout x years down the line and allow employees to borrow against that amount - imposing significant risk on the individual employee, should their machinations fail them.


Another Financial Times article on a recent Moody's (ratings agency, arguably a big part of the subprime problem) note to their clients in January. Wish I could find the full text of it, it's well-written and spot on in a couple of areas, though it does downplay the ratings agencies' role in recent financial crises...



Bought your house in 2006 or so? Whoops, there goes your equity. You might be able to break even if you sell in 5-10 years...

- posted by vcmc @  3/08/2008 12:58:00 PM  |  0 comments

 
look what i find after that last post...
[revered economist] Anna Schwartz blames Fed for sub-prime crisis

Bernanke's a puppet for Wall Street. Lame....
- posted by vcmc @  3/06/2008 07:27:00 PM  |  0 comments

 
bubble bubble bubble, crash crash crash
3 reasons why the credit/housing bubble is worse than 1929
A bit dated now, but the parallels he draws have proved accurate. A few comments:
- Although he's careful to make the distinction, obviously there's some interrelation between housing/credit crash and the overall economy. How much, though? My portfolio is down about 20% from the highs in October (naively bought too much AXP, whoops) so I'm wary of pulling out at a loss, but if the stock market follows the housing market down - with experts predicting that hits bottom in 2009-2011 - moving it elsewhere may be wise. I'll have to think on that one, in part because choosing a place to put money to offset both the declining dollar and US(and to a somewhat lesser extent, global) economy is difficult... hmm. Gold?
- Another mention of the Fed's complicity in the crash. To be honest, these people have a tough job - history (both of the Fed and other countries' equivalent institutions) shows that mismanaging monetary policy can seriously fuck up a national economy, and even boards of people with doctorates in economics and dozens of years of experience make macro-scale mistakes. Frankly, I don't have a lot of confidence in Bernanke at the moment.

the five stages of a housing bubble
Are we in stage 2? 3? Might depend on the region - the Minneapolis area is obviously less affected than, say, southern california...
- posted by vcmc @  3/06/2008 06:48:00 PM  |  0 comments

 
Collapse of the Great Housing Bubble
A couple of very detailed posts outlining the technical structure which, at least to some extent, allowed the housing bubble/subprime fiasco to take place.

Reads like a textbook, but speaks volumes about why and how the financial systems failed to prevent greed from taking over... after you skip the song lyrics at the beginning of each post, that is.

http://www.irvinehousingblog.com/2008/03/03/structured-finance-101/

http://www.irvinehousingblog.com/2008/03/04/systemic-risk-in-the-housing-market/
- posted by vcmc @  3/04/2008 04:28:00 PM  |  0 comments