Friday, November 30, 2007

Federal Housing Bailout Punishes New Homebuyers

How do you make an omelet without breaking an egg?

United States Federal Government Treasury Secretary Henry Paulson and others continue to talk in circles about how their bailout is not a bailout and about how they will influence the housing market without influencing the housing market.

"The whole idea in the initiative ... is to make sure as many can be saved as possible without disrupting the market," [Office of Federal Housing Enterprise Oversight (OFHEO) Director] James Lockhart told Reuters on the sidelines of a conference in New York" (Reuters).

The other side of the coin:
Treasury, Fed, OFHEO, etc. throw new homebuyers to the wolves.

The "rescuers" (bailouters) try to obscure the fact that any bailout usually harms someone else because what is good for owners/sellers is generally bad for buyers:
  • More bailouts = less inventory for sale (supply/demand) = consumers/homebuyers pay higher prices.
  • More bailouts = higher "comps" (comparable prices in the neighborhood) = consumers/homebuyers pay higher prices.
  • More bailouts = moral hazard = more risky borrowers enter the market to bid against you = consumers/homebuyers pay higher prices.
  • More bailouts = propped-up housing bubble prices = propped-up property tax bubble = consumers/homebuyers/taxpayers pay higher prices/taxes.
Bailouts keep housing unaffordable for you or your children.

You could try to believe that the government can make an omelet without breaking an egg--although its track record is to break a dozen eggs without producing the promised omelet at all.

Please pay at the register anyway--and don't forget to leave Paulson a tip.

Federal Reserve Poole Drinks the Bailout Kool-Aid and Learns To Love the Fed Put

Fed Doublespeak:
"Fixing" (breaking) the "non-functioning" (functioning) Markets

St. Louis Federal Reserve President William Poole, previously more of an inflation hawk in the Fed, has flipped into a bailout apologist with his whitewash paper today, "Market Bailouts and the Fed Put" (11/30/07).

Calculated Risk commenters did a good job of exposing the flaws in Poole's whitewash.

The root absurdity of the Fed's claim that its interventions are fixing a non-functioning credit market is (like most allegations of market failure) most easily illustrated by an eBay auction:

  • Seller lists item.
  • No one bids.
  • Auction ends without a sale.
This is an example of a working market, not a broken market.

Sometimes the correct action is no sale.

Functioning free markets do not guarantee churning commissions.

Functioning free markets do not guarantee any particular level of trading activity.

The markets were working fine in August 2007 by spiking the overnight inter-bank lending rate to 6% in response to the latest information of overlooked risk in overpriced housing assets/securities.

Of course, a price-fixing (interest-rate setting) central bank is anathema to a free market, so Fed hostility to a properly functioning free market is unsurprising.

Thursday, November 29, 2007

SEC NRSRO Causes Asset Mispricing?

When is the government not the answer?

When it caused the problem in the first place.

Bailouts are bad for the same reason that other government interventions are frequently bad, because the quick cry for government regulation often overlooks the embarrassing fact that, not only did a financial disaster occur under the government's watch, but government regulation actually caused or worsened the financial disaster.

The global credit crisis resulted from the subprime mortgage mess partly because the big ratings agencies mis-priced the financial assets and risk:

"But when it comes to using ratings, many large investors' hands are tied. Pension funds, banks and insurance companies can only buy debt that's been rated by a Nationally Recognized Statistical Rating Organization. NRSRO for short. The Securities and Exchange Commission awards that seal of approval. Until just a few years ago, the only NRSROs were, you guessed it, Standard and Poor's, Moody's and Fitch. Joseph Mason teaches finance at Drexel University" (Marketplace radio program).

Those big 3 SEC favorites retained an implicit government-approved authority which they used to rubber-stamp the housing bubble's gross overpriced mis-valuations of homes and mortgage-backed securities (MBS).

Meanwhile, the rating company Egan-Jones has been trying unsuccessfully to get the NRSRO certification but the SEC has shut-out Egan-Jones for 10 years while various accounting and financial scandals occurred under the SEC's watch:
[Sean Egan stated:] "With Enron and Worldcom we were often times the lone voice raising these concerns."
US Federal government financial regulations discouraged consumers/shareholders from using accurate information.

The government's hand in creating the global asset bubble and credit crisis does not instill any confidence that any of its bailout plans will make economic conditions better. The bailouts might make the economic situation worse.

Sunday, November 11, 2007

Did Government Create Mortgage Securities Mess? Is It about To Repeat Its Mistake?

Another Deja Vu Nightmare from Schumer, HUD, and the rest of the Federal Government

Who cares about the Hollywood writer's strike when we have the daily farce of government bailout policy?

The US federal Housing and Urban Development (HUD) website boasts that it was the federal government which invented and pushed mortgage securities, a tool that some analysts and pundits now accuse of causing/enabling the housing bubble crash, subprime mortgage mess, foreclosures epidemic, institutional financial losses, teetering stock market, and global credit crisis:

"[HUD's] Ginnie Mae is a wholly owned government corporation within the U.S. Department of Housing and Urban Development. Ginnie Mae pioneered the mortgage-backed security (MBS), issuing the very first security in 1970. An MBS enables a mortgage lender to aggregate and sell mortgage loans as a security to investors. Ginnie Mae securities carry the full faith and credit guaranty of the United States government, which means that, even in difficult times, an investment in Ginnie Mae is one of the safest an investor can make" (HUD).
The "safety" means that you the US taxpayer are liable for all the risk, so you can pay a debt-defaulter's mortgage to make sure that a Wall Streeter does not lose money. That guarantee is quite a blessing if you spend your days trying to figure out ways to pay other people's mortgages and spend your nights worrying about Wall Streeters losing money.

Take a moment to absorb the irony of all the politicians now decrying mortgage securities when politicians created and pushed mortgage securities.

Senator Charles E. "Chuck" Schumer (D-NY) complained to the Federal Reserve, Treasury, HUD, FDIC, SEC, and others:

"Over the past several decades, innovations in the mortgage markets have made it much more difficult for too many homeowners to refinance their loans when they need to. Furthermore, the prevalence of unscrupulous lending fueled by the increased appetite for subprime mortgage securitizations has resulted in a growing number of homeowners facing payment shocks as rates reset that could cause them to lose their homes. In order for them to keep their homes, their loans must be modified. Twenty years ago, most of these borrowers could go to the bank that held their mortgage and seek assistance. Today, with their loans sliced and diced into many pieces held by a variety of unaffiliated market participants, there is no one on the scene to help beleaguered homeowners do loan workouts" (Schumer press release, 8/22/07).

Schumer's new "solution" is to put the same fox in charge of the same henhouse again (Schumer's press release then referred to him in the third person):

"Schumer has supported the empowering of non-profit agencies, sanctioned by the Department of Housing and Urban Development, to play this role of facilitator" (Schumer press release, 8/22/07).

Schumer concluded his solution with a call for more, untested, government tinkering in the housing markets:

"The reality of today’s mortgage market calls for new and creative thinking by the regulators" (Schumer press release, 8/22/07).
HUD's response to the flood of bad mortgage securities is to announce its creation of yet another mortgage security:
"The new security will be a multiple-issuer pool type under the Ginnie Mae II Mortgage-Backed Securities Program, and will be available for pool issuances beginning December 1, 2007" (HUD 10/16/07 press release).
So the timeline is:
  • Government decides it must invent new creative financing for housing.
  • Government creates Mortgage Backed Securities (MBS) to divide/resell the debt/risk.
  • Government accuses Mortgage Backed Securities (MBS) divided/resold debt/risk of causing housing disaster.
  • Government decides it must invent new creative financing for housing.
  • Government creates new Mortgage Backed Securities (MBS) to divide/resell the debt/risk.
You can't make this stuff up.

Saturday, November 10, 2007

You Paid $100k for Pictures of Your Fearless Government Leaders

Housing is imploding, the dollar is imploding, the economy is imploding, and US federal Housing and Urban Development (HUD) Secretary Alphonso Jackson ordered you to pay $100k to paint his portrait and the portraits of other HUD secretaries.

(Update 11/11/07: While Hurricane Katrina victims claim that their federal FEMA trailers are poisoning them with toxic levels of carcinogenic formaldehyde, HUD is busy decorating its shiny new auditorium in Washington DC with $100k of paintings.)

Maybe people could afford their mortgages if they did not have to pay $100k for pictures of their dear leaders.

I suppose we could disband HUD and consider the resulting tax savings as a "bailout" for taxpayers.

Let Jackson keep his portrait as his severance package.

Update: Alphonso Jackson update: HUD Secretary Jackson Steps Down amid Probe (3/31/08) by Libby Lewis

See also:
You Owe 9 Trillion Dollars
Political Humor: Ron Paul, Alan Greenspan, Ben Bernanke

Thursday, November 8, 2007

You Owe 9 Trillion Dollars

Crossposted from Home Finance Freedom:

Congratulations, the United States gross national debt now exceeds $9 trillion.

You owe $30k. Your baby owes $30k. Your family of 4 owes $120k.

Your government put you in all this debt to make you richer, in case you were wondering why your life has felt so easy and virtually cost-free all these years.

Remember that when choosing a
presidential candidate.

Friday, November 2, 2007

FOMC's 5 O'Clock Follies Continue: Bernanke's Halloween Trick

Great Depression Syndrome Meets Vietnam Syndrome

This week the Federal Reserve Federal Open Market Committee (FOMC) met, and Chairman Ben Bernanke announced another cut to the benchmark Fed funds overnight interest rate (25 basis points (bps)).

Bernanke's surreal tap dance about the housing bubble crash, subprime mortgages mess, global credit crunch, inflation, unreported M3 money supply, and incipient US recession is reminiscent of the Vietnam War's "5 O,Clock Follies," the farcical US government press briefings (in Saigon) of war progress for reporters willing to print the government's canned press releases as news stories.

To recap, the Fed's position is:

"There is no housing bubble. There is a housing bubble but it will not crash. It is crashing but it will not affect the rest of the economy. It is affecting the rest of the economy but it is contained. Well it wasn't completely contained before but it is now. Don't worry we contained it again. No really this third time it's extra contained."
The most oxymoronic internet defense of Fed policy was that the containment was "expanding," which sounds as effective as the containment by 2 other government programs, the New Orleans levees and the Teton Dam.

Bernanke realizes that this might look uncontained to the untrained eye:

Friday, October 5, 2007

False Justification for Fed Rate Cut: August Jobs Revised, Government Causes Market Turmoil

It must be difficult for the government to predict the future when it cannot even report the past accurately.

The Bureau of Labor Statistics (BLS) revised the August jobs figures from a 4,000 loss to an 89,000 gain.

The "loss" (and its implication of a slowing economy and reduced inflation pressure) was part of the justification for the Federal Reserve's September 50 basis points (bps) slash to the benchmark Fed funds interest rate.

Now we have a statistics revision as I warned.

Government Causes Market Turmoil

The government has the markets bouncing like a yo-yo. The jobs revision caused the Chicago Board of Trade's Fed futures market to plummet the chance of an October 25bps rate cut from 72% to 48% since yesterday.

Meanwhile, some analysts assert that Wall Street already has "priced-in" an expected October rate cut from Fed Chairman "Helicopter Ben" Bernanke, which means that a Halloween hold (no cut) might kill the stock rally and put the stock market right back where it was in its August decline.

Will the Fed admit its blunder of injecting adrenaline into an already warm economy?

If the Fed can keep its stories straight for a moment, it might remember that the alleged jobs loss was a reason that allegedly allowed the drastic rate cut without an inflation fear. Since apparently there was no jobs loss after all, the deflationary estimate was wrong, and the Fed did not have room to cut rates without inflation, so the Fed did create unecessary inflation pressure.

August '07 was only the squall before the 2008 hurricane.

Meanwhile, the unemployment rate edged up to 4.7% despite the absolute job gains, and the housing crash continues unabated with more adjustable-rate resets due in early 2008.

Do you think that Bernanke will counteract his mistaken 50bps cut to 4.75% with a 100bps rise to 5.75% (50bps over the August rate of 5.25% to counter the mistaken 50bps reduction from the August rate)?

Alternatively, will he dream up a new reason to cut rates again at the October 30/31 Federal Open Market Committee (FOMC) meeting?

Federal Reserve Nonsense Monetary Policy: Shifting Standards of Convenience

Did Ben Bernanke play croquet with Alice in Wonderland?

  • When food and energy and real estate prices rose, the Federal Reserve ignored those price hikes, asserted that those inflations did not count as "inflation," donned its food/energy/asset blinders, looked only at “core” PCE inflation, and declared "low inflation."
  • When food and energy prices eased briefly and real estate prices began to deflate, suddenly the Fed decided that those prices do count and again declared low inflation (allegedly caused by those same food/energy/asset prices that allegedy did not matter when they were rising), so it could launch an inflationary interest-rate cut of 50 basis points (bps) to the benchmark Fed funds rate.
Fed statements might artfully evade a direct contradiction but the Fed seems happy to let the media trumpet "lower" food/energy/asset prices as the reason the Fed rate cut.

Do not be surprised if the figures used to justify the rate cuts are later quietly revised.

Everything means low inflation?

So Fed logic is that food/energy/asset price hikes mean low inflation, and food/energy/asset price drops also mean low inflation.

If people disagree, off with their heads.

Wednesday, September 19, 2007

Bernanke's Zimbabwe Plan for the US Economy

Fed Raids Your Paycheck and Bank Account To Bailout Banks, Wall Steet, and Mortgage Delinquents

Note: A lower dollar is not necessarily bad per se but the current dollar dive is a symptom of bad policy (such as structural savings, budget, trade, and current-accounts deficits) and the Fed's September 18 rate cut looks misguided for many reasons: 10 Reasons against a Federal Reserve Rate Cut.

The United States Federal Reserve yesterday chose an inflationary plan by lowering the Fed funds benchmark interest rate 50 Basis Points (bps) to 4.75%. The US dollar immediately reacted to the news by falling against major world currencies and commodities:

  • The dollar fell to a record low against the Euro.
  • The dollar fell to less than half the value of the British Pound Sterling.
  • The dollar fell to a record low against a barrel of oil (i.e., oil hit a record high over $82 per barrel).
Debasing your currency and reducing your buying power as an alleged road to prosperity is an old trick to attempt to hide financial problems and to attempt to avoid paying debts (e.g. paying you back in devalued money worth less than what was borrowed--so the government can pay you your Social Security with "Monopoly money").
"Social Security is a cash program and the government can always print more cash" (Alan Greenspan, 9/20 interview).
Sometimes, the policy is "successful" insofar as it fleeces the average consumer without the consumer being aware of the pickpocketing "inflation tax." Other times, the policy runs so far out of control that the scam becomes obvious even to the most inattentive. The German Weimer Republic tried it and the social unrest led to Hitler. Zimbabwe tried it recently and its economy collapsed:
  • The International Money Fund (IMF) warns that Zimbabwe inflation might reach a 100,000% annual rate.
  • The Zimbabwe government "solution" includes printing a Z$200,000 bill to make it easier to carry baskets of cash to buy everyday items.
  • 2006 Zimbabwe prices included Z$50,000 for 2 eggs and Z$110,000 for a loaf of bread.

By the way, the destruction of Zimbabwe's economy began with the Robert Mugabe government's real estate policies for "fair" widespread ownership (initially subsidized by the United States).

Does trying to socially engineer widespread real estate ownership sound familiar?

Thank the Fed for reducing your purchasing power.

Bernanke's double-cut of 50bps has planted both feet firmly on the Zimbabwe side of the fence.

Welcome to Zimbabwe?

Tuesday, September 18, 2007

Federal Reserve Bailouts Create Crisis after Crisis, Government "Fixes" Keep Driving Americans into More Debt

Government Doublespeak: 5.25% is too low. No, too high. No, too low. No, too high. . . .

The Fed already, instead of solving a problem, has created an additional problem. The Fed’s August bailouts and promises have led the markets to (1) believe that the current rate is "too high" and (2) expect a September cut to the benchmark Fed funds rate of 25-50 basis points (bp, 0.25-0.50%), according to the Chicago Board of Trade’s Fed-funds futures market.

The Fed created this "reality" and now has to live with it.

Wall Street might throw a tantrum if it does not get its “fix” of easy money through a nominal rate cut. Wall Street might ignore that a rate hold (no cut, no increase) could be a relative cut (in global context). Wall Street might display Delirium Tremens if the Fed raises the rate 25bp.

The potential September market “crisis” (if the Fed does not cut rates today) is an unnecessary crisis that the Fed has manufactured for itself.

Did the Fed deliberately paint itself into a corner to give itself a “systemic” excuse to bailout speculators, or is the Fed incompetent at managing expectations?

If the Fed does ambush the markets with a rate hold (no cut), remember that the turmoil will include anger and confusion over the Fed’s policy deception, not only the interest rate per se.

Do not blame a “crisis” on “high” interest rates which are not high at all.

Government pro-debt doublespeak sings the opposite song to consumers.

Indeed, meanwhile, recent National Association of Realtor (NAR) advertising and government pro-debt propaganda have argued to consumers that 5.25% is already dirt cheap, to get Americans to keep spending money they do not have by ignoring the past rate rises that increased the Fed funds benchmark rate from 1% to 5.25%:

"[T]ake advantage of historically low mortgage rates" (Today's Colorado Federal Savings Bank, based on 5.25% Fed funds benchmark rate, before today's FOMC meeting results. Actually, Fed rate cuts have limited impact on mortgage rates but they are a favorite sales pitch for home sellers).

US interest rates should be higher than the current 5.25% based on fundamentals such as the US savings rate, current accounts balance, and foreign currency exchange rates, so the current 5.25% is already an anti-recessionary, stimulating, low rate.

Thursday, September 13, 2007

Swiss RAISE Interest Rates 25 Basis Points, Mr. Bernanke

The Swiss National Bank increased its benchmark interest rate 25 basis points (bps) from 2.50% to 2.75%

European Central Banks Differ Amid Crunch (Wall Street Journal)

See Reason #10 for the implications: 10 Reasons Against Federal Reserve Rate Cut

Wednesday, September 12, 2007

10 Reasons against Federal Reserve Rate Cut

Previous: Federal Reserve Pushing on a String

Cutting interest rates to bailout markets will have 1 of 2 possible results: bad or horrible. Either the Federal Reserve will fail to prop up inflated asset prices but throw a wrench into the works while trying, or the Fed will succeed for a time and cause years of more bad decisions based on faulty pricing.

  1. Rate cuts to increase the credit supply are misguided when the current economic condition is a healthy credit-demand crunch.
  2. Rate cuts, and the Fed’s acceptance of mortgage securities as collateral alongside Treasury debt, perpetuate the information crunch about what a good investment is, not solve it.
  3. Rate cuts to increase credit/debt worsen rather than help the savings crunch.
  4. Rate cuts caused the inflated prices and bad debt problems, and more rate cuts prevent the market solution (temporary credit-demand crunch during re-pricing) from working.
  5. Rate cuts are not good for the economy as a whole, they are “good” for imperiously picking winners and losers by changing the rules in the middle of the game, so slick traders caught with the hot potato can unload junk on the next greater fool (maybe you). The Fed also burned smart investors who "shorted" the market (bet on a downturn) when the Fed changed the rules overnight with liquidity bailouts that favored one interest group at the expense of others.
  6. Rate cuts now are a panicky, profligate overreaction when the housing bubble bust has scarcely begun and at least a year (up to 5 years) of foreclosure-causing adjustable-rate mortgage (ARM) resets of interest rates remain on the horizon.
  7. Rate cuts are too late to stop the ongoing foreclosure meltdown and will do little or nothing to help the cherry-picked "poster-children" dragged in front of the TV cameras to justify a bailout--but the cuts will benefit people that you might not want to help. First, a Fed rate cut might subsidize healthy, wealthy prime borrowers who do not need help yet fail to save subprime borrowers during resets with increasing risk premiums (the rate gap between good and bad borrowers). Second, troubled borrowers are more likely to have ARMs, and most ARMs are based not on Fed funds but on the London Inter-Bank Offered Rate (LIBOR), and LIBOR has been diverging up and away from the effective Fed-funds rate, so Fed cuts are quite useless against all the adjustable LIBOR-indexed mortgages. Third, prime fixed mortgage rates are related to 10-year Treasury notes which are set by market trades, not the Fed, and are based on market expectations of long-term inflation rates, not short-term Fed-fund rates, and today's markets might be less likely to believe Greenspan's Goldilocks fairytale of non-inflationary cuts, so an inflationary rate cut might cause the standard 30-year fixed-rate mortgage rate to increase, not decrease. Fourth, Fed-fund rate cuts might have little direct downward effect on mortgage rates in today's conditions (mostly only on prime, non-LIBOR ARMs) but rate cuts will bailout the biggest fans of lower short-term US interest rates, Wall Street and financial-sector stocks.
  8. Rate cuts might be ineffective or dangerously extreme: If a 1% Fed funds rate was "needed" in the blissfully ignorant days of the bubble's birth with no excess housing supply and low unemployment, how low a rate is needed now that the much demanded tighter lending standards have obliterated swaths of buyers, remaining potential buyers (solvent investors, including dollar-rich foreigners) are gun-shy of junk assets, and there is a housing glut?
  9. Rate cuts now might cause a "liquidity trap" by plunging interest rates to near 0% interest to avoid the bubble correction and thereby leaving no room to stimulate the overall economy when the recession arrives.
  10. Rate cuts might cause a further plunge in the dollar’s exchange rate. The Bank of England and (despite continuing liquidity infusions) the European Central Bank (ECB) each announced an upward policy bias with an eye toward raising interest rates, which in itself can act like a relative Fed cut to weaken the dollar (investors expect European returns to be higher relative to US returns, so they need fewer dollars but need more Pounds or Euros to buy European investments). The Fed would have to raise rates to match the European increases simply to maintain the existing rate spread to keep the dollar competitive. A Fed rate-hold while Europe increases is like a relative Fed cut. A Fed rate cut while Europe raises rates could double the run on the dollar.

*Swiss RAISE Interest Rates 25 Basis Points, Mr. Bernanke
*Federal Reserve Bailouts Create Crisis after Crisis, Government "Fixes" Keep Driving Americans into More Debt
*Bernanke's Zimbabwe Plan for the US Economy

Friday, September 7, 2007

Greenspan Needs YOU to Bail HIM Out?

Brother, Can You Spare a Trillion?

Greenspan's Financial Conflict of Interest

Can you find it in your heart to accept more inflation eating away your paycheck before poor Alan is down to a measly $4 million?

Thursday, September 6, 2007

$31billion Federal Reserve Bailout Today

Previous: $57billion European Central Bank Bailout Today

The ECB leads the Fed by the nose again:

UPDATE 2-Fed pumps in sizable funds after ECB (Reuters)

Fed Panics Again

The effective Fed funds rate trended up to 5.31%, above the 5.25% target rate, but the Fed did not have to intervene (the effective rate neared 6% in August) yet the Fed overreacted again to stop any hint of a market correction to interest rates. As Not One Cent predicted, Fed open-market actions (and small reductions to interest rates) appease only temporarily because they do almost nothing to remove the fundamental information, collateral, and insolvency problems:

Federal Reserve Pushing on a String

Should Ben Bernanke Resign? Who Should Be the New Federal Reserve Chair?

$57billion European Central Bank Bailout Today

The European Central Bank (ECB) offers 42.2 billion Euros to bailout speculators and prop up inflated global asset bubble:

ECB Offers $57 Billion One-Day FundsIn Bid to Boost Banks' Liquidity (Wall Street Journal)

Australia joined the bailout bandwagon with a liquidity injection and a loosening of security-repurchase standards.

Next: $31billion Federal Reserve Bailout Today

Friday, August 31, 2007

Bush Home Mortgage Bailout Rewards Delinquents with Write-Offs and Tax Deductions

Bush will announce his bailout plan today:

Get a tax deduction for NOT paying your mortgage.

"A suspension of the debt-forgiveness tax could help people who are hoping to work out a reduction in their loan balance -- and payments -- as a way of avoiding foreclosure" (Los Angeles Times, via Bush aims to ease US mortgage woes - report (Forbes)).
Have you been doing things the hard way by paying your mortgage to get a tax deduction?

Update 3/29/08: "Bush Readies Mortgage Aid Plan: At-Risk Owners Could Get Cheaper Loans"

Wednesday, August 29, 2007

Federal Reserve Blind to Housing Bubble: BLS OER V. Case Shiller HPI

Flawed Fed Interest-Rate Policy Based on Rent Inflation, Not House Inflation, Causes Vicious Cycle

Fed Policy: First Identify a Problem . . .

Bloggers for years recognized the housing bubble because house prices diverged from rents. The Fed's John Krainer and Chishen Wei used Federal Housing Enterprise Oversight (OFHEO) data to document the inflated price-rent ratio in 2004 (before the mania of 2005-2006). They argued that expectations of future home-purchase returns drove the divergence but strangely added that "other factors, such as bubbles, do not appear to be empirically important for explaining the behavior of the aggregate price-rent ratio" (Federal Reserve Bank of San Francisco, FRBSF Economic Letter 2004-27, 10/1/04)--even though bubbles are driven by their identified cause, expectations of future returns.

. . . And then Ignore the Problem

The Fed likes to target "core inflation" (without volatile food and energy prices) which uses the Bureau of Labor Statistic's (BLS) Owners' Equivalent Rent (OER). The OER estimates the hypothetical rental value of an owner-occupied, non-rented home and therefore ignores the house's actual purchase price and PITI (Price, Interest, Taxes, Insurance) carrying cost.

Price-rent diverged and the Fed followed the red herring (rent, instead of purchase cost in an "ownership society").

Vicious Cycle of Inflation

The vicious cycle is that the Fed's loose monetary policy through low interest rates causes the housing bubble inflation, but the Fed watches a core-inflation statistic that ignores the house-price inflation it causes, so the Fed underestimates real inflation and keeps interest rates too low, which continues to feed the inflation that is invisible to the Fed.

The Fed is willfully blind because the bubble economy is government policy.

The Fed Is Always a Day Late and a Dollar Short

The Fed's recent bailout of speculators and buttressing of overpriced assets (by lowering the effective Fed funds interest rate and officially cutting the discount-window interest rate) shows that it still ignores the excess inflation that it has caused and is causing.

Wanted: Regression to the Mean

Tim Iacono at Seeking Alpha posted good background on how substituting the Case-Shiller Home Price Index (HPI) Composite 10 for the OER would expose some of the real inflation caused by Fed policy. Iacono however erred by suggesting that the Fed should cut the Fed-funds target rate now because of the recent decline in real-estate prices (deflation). Iacono looked at year-on-year rates but forgot about the magic of compounded inflation rates (like compound interest) from years of misguided monetary policy.

The graph below uses Iacono's chart data (including his core CPI reference, although the Fed tends to watch the Bureau of Economic Analysis' (BEA) core Personal Consumption Expenditures Price Index (PCEPI), which cuts the OER weight in half to 19% of the index) to show that the accumulated inflation from 2000 through 2006 is triple the level that would have occurred at the Fed's stated, desired target of annual 2% core inflation (even the PCEPI-HPI would show real inflation at double the Fed's target).

We now need real price deflation to counteract years of over-inflation and return the economy to a reasonable trend line. Cutting the benchmark Fed funds interest rate (or any other action to increase liquidity) would preserve or expand the over-inflation. If anything, today's monetary policy is still too loose and today's interest rates are still too low--as the markets keep trying to tell the Fed through rises in the effective Fed funds rate.

Friday, August 24, 2007

Ford Begs Bailout Rate Cut from Federal Reserve

That Ol' Black Magic for the Bottom Line

Ford Motor Company Chief Executive Officer (CEO) Alan Mulally pleaded the Federal Reserve to cut interest rates (the Fed funds target rate).

Ford lost $12.6 billion last year and Mulally wants the Fed to flood the economy with cheap credit again so that consumers temporarily feel wealthier and spend more freely.

Feeling wealthier on an inflated bubble economy is what put so many people in the current mess in the first place.

Ford's petition for corporate welfare might not be much of a strategic plan but otherwise it would have to build good cars at a good price.

Wednesday, August 22, 2007

Federal Reserve Pushing on a String

Fed Confuses Supply and Demand, Confuses Problems and Solutions

Federal Reserve Fed funds interest rate cuts are dangerous because Fed policy is based on an alleged credit-supply crunch when the actual condition is a credit-demand crunch. Moreover, the crunch is the solution, not the problem. These pressures are good and necessary for economic health (like your body’s pain signal to tell you to stop doing something harmful) so Fed policy to fight them, with the wrong tools, is doubly stupid.

Being unwilling to lend is completely different from being unable to lend. If the Fed has any concern, it should be the overall availability of credit in the economy as a whole and not how the markets allocate that credit. In other words, from the Fed’s view, banks are part of demand, not supply; the Fed is the supply and “the markets” (lenders and borrowers combined) are the demand.

Less wealth, higher risk premiums, and fewer buyers mean less demand for credit in the economy.

  • It is an information crunch, not a credit crunch: The uncertainty in asset prices limits demand for credit: Investors and lenders wisely do not trust current asset pricing. Junk assets will have a market too—at the right price—but it takes time to re-price. Meanwhile, tirekickers are not buyers.
  • It is a wealth crunch, not a credit crunch: Lower asset values (less wealth) limit the demand for credit: The housing bubble bust that has occurred so far means that, even under old loan-to-value (LTV) formulas, 100% of the house today is a lower credit limit than 100% of the house last year.
  • It is a collateral crunch, not a credit crunch: The limited supply of quality collateral limits demand for credit: There are plenty of people who will offer you junk for collateral but they will think twice before borrowing--and what they are borrowing for--when banks wisely demand the family silver (a known, good value). The banks are correct to demand the family silver and the Fed is exactly wrong to accept mortgage securities to send the opposite message.
  • It is a borrower crunch, not a credit crunch: The limited supply of quality borrowers limits demand for credit: Lenders are wisely not lending to all those people who “had no business getting a loan”—especially after the media and Congress pilloried lenders for lending too much to too many. Remove many fraudsters, gambling real-estate flippers, and other unqualified buyers from the buyer pool.
  • It is a savings crunch, not a credit crunch: Higher downpayment requirements limit demand for credit: A 0% interest rate would be irrelevant at 100% downpayment requirement (no financing allowed). In more realistic terms, lowering mortgage rates from 6% to 5% will have limited impact if minimum downpayments rise from negative 5% (cash back at closing) to positive 10% or 20%. A 0% downpayment on a $500k house creates demand for $500k of credit but a 20% downpayment on the same $500k house creates demand for only $400k of credit. A global move from everything at "zero down" to everything at "20% down" would reduce total credit demand by 20%. Demand for credit further decreases when buyers who lack the cash downpayment leave the buyer pool, regardless of the interest rate.
  • It is a re-pricing crunch, not a credit crunch: Narrower bands in loan pricing limit demand for credit: More accurate pricing of risk wisely includes different interest rates at smaller increments of downpayments (10%, 15%, 20%), which has the double effect of disqualifying bad borrowers (higher rates at the lower end) and giving good borrowers more incentive to borrow less.
  • It is a "beggar thy neighbor" crunch, not a credit crunch: The “debt for you, cash for me” impulse limits demand for credit: Some of the credit demand is the hope that someone will go into debt to finance a higher price for someone else (e.g. a seller does not want credit but wants his/her buyer to have unlimited credit, whereas the buyer would prefer less credit for a lower price). Let your neighbors stimulate the economy with their debt while you collect cash and save: "I wish you had more debt and I had less debt." This non-borrowing Mexican standoff is healthy, contrary to the usual "paradox of thrift" argument (with its absurd notion that, if everyone is smart, we all suffer--and its absurd conclusion that government must force individuals to behave foolishly so the aggregate foolishness will create propserity, somehow). Our current trouble resulted from people NOT being smart and NOT doing what was in their self-interest. In the long run, you want your neighbors to be responsible and thrifty.
  • It is a risk premium crunch, not a credit crunch: An increasing risk premium limits the demand for credit: All the reasons above suggest that lenders/investors are wisely demanding a higher marginal price spread for risk (e.g. a risky borrower who used to be able to get 3% over prime rate now can get only 4% over prime rate). To keep these borrowers/buyers, the Fed would have to cut rates faster than the risk spread rises.

People wrongly infer that “credit crunch” indicates a lack of available credit in the economy as a whole when actually there is a lack of known credit-worthy investments (information crunch).

The Fed, like most government, has little power to create good investments, so it panics and hits the button it does have, to increase credit, even if that makes the situation worse. Fed Chairman Ben Bernanke treats the wise solutions of market participants as problems to be stamped out with more of the loose monetary policy that caused the predicament. Bernanke seems to know that the issue is not the Fed’s supply of credit but the economy’s demand for credit, because he made a pitiful telemarketing call to increase the demand for Fed credit.

Fed interest rate cuts push on a string.

Many of these listed effects on demand for credit are inelastic to interest rate changes (not sensitive to small changes in the price of borrowing) or completely independent of interest rate changes (downpayment requirements), so small interest rate cuts are as ineffective as pushing on a string at stopping the seismic processes underway, despite psychological Wall Street rallies.

While everything has a selling price (ING bought Barings Bank for 1 British Pound (<$2) in 1995), and non-buyers will become buyers at a certain price, the genie is out of the bottle in so many regards that small cuts might have little lasting positive effect, yet large cuts could be disastrous in so many other ways.

Next: 10 Reasons Against Federal Reserve Rate Cut

Senator Chris Dodd's Housing Bailout Plans

The road to the White House is paved with your paychecks.

Senator Chris Dodd (D-CT) wants to do “everything possible” to pump more liquidity into the economy, according to his statement aired on NPR this morning.

Presidential hopeful Dodd had been telemarketing to give away your money by asking everyone he could find in the housing bubble bust what "he" could do for them.

Dodd now wants to "print" more money by loosening monetary policy further. He met yesterday in a closed-door meeting with Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson.

Of course, the powerful Senate Banking Committe Chairman Dodd asserted that he did not exert any political pressure on these guardians of our currency. He merely wanted to meet them personally in a closed room so the public cannot know what he said.

Opening up the printing presses (increasing liquidity) gives away your money in a sense because it devalues each dollar that you own, hence the term "inflation tax."

Dodd wants to do everything possible to increase your inflation tax to bailout mortgage delinquents, speculators, banks, and Wall Street.

Dodd updates:
Financial Homeland Security: Obama Tries Nationalizing Power Grab, Dodd Tries To Profit from Credit Crisis

NewDeal, SarbanesOxley, HomelandSecurity Recidivism: Financial Regulation Stupidity Roundup

Friday, August 17, 2007

Federal Reserve Pushes Debt in Conference Call to Banks

Federal Reserve Chairman Ben Bernanke reduces himself to an "easy money" telemarketer to push more debt onto the economy.

Did Bernanke remember to call when the banks were in the middle of dinner?

The Fed claims that it is pumping cash into the markets only because they need it for normal operations. However, if the markets truly needed extra money, they would not need a hard-sell telemarketing call from the Fed to get them to use the discount window (from which the Fed loans directly to financial institutions).

Is Fed policy a "solution" in search of a problem?

Investors first need to assess accurate asset value and the markets are trying to repair the misinformation of pricing that the Fed's loose monetary policy instigated. Yes, while Congress is running around like a chicken with its head cut off to dream up new regulations, the markets are trying to self-regulate for the simple reason that bad loans can lose money--except that the government (Fed and certain politicians) keeps trying to push the markets back into the same, bad decisions.

Fed Policy: When you are too far in debt, borrow more.

"Fed officials know the discount window action will only be effective if banks either use it, or the knowledge of its availability, to expand their own lending to high-quality counterparties such as high quality mortgage borrowers" (WSJ) (italics added).
The Fed apparently wants the discount-window's easy cash and its promise as a future bailout to encourage banks to go back out on a limb at the new, more indebted level. People who argue that the discount window's loans are limited overlook this ripple effect of relying on the promise of Fed money to "free up" and then "max out" lending of non-Fed money. It is the difference between handing credit cards to your teenagers, and handing credit cards to your teenagers while telling them not to worry if they go over their limits and cannot make their payments.

The Fed's "Refinance Now! Our records indicate that you qualify for our special rates!" telemarketing is a bad precedent. Is there any way that we can get the banks on a "Do Not Call" list?

Hat Tip: Calculated Risk

Federal Reserve Cuts Discount Rate 0.5%

The Federal Reserve announced a 0.5% cut to the discount rate, the rate it charges to financial institutions (whereas the more discussed Fed funds rate is the overnight rate which institutions charge each other). The Fed not only sprang this surprise cut to the less-watched rate, it doubled the bailout by the unusual action of extending the loan term to 30 days.

Should Ben Bernanke Resign? Who Should Be the New Federal Reserve Chair?

Should Ben Bernanke Resign? Who Should Be the New Federal Reserve Chair?

Bernanke’s Bailout Destroys His Credibility
in wrong response to banks incresing effective Fed funds rate toward 6%

Federal Reserve Chairman Ben Bernanke replaced Alan Greenspan and, like all new central bankers and substitute teachers, sought to establish authority and credibility immediately. However, Bernanke has been like a deer frozen in the headlights by freezing the official target Fed funds interest rate at 5.25% (the Fed declares a target and works to maintain it but the “effective rate” is what the market actually does).

The problem with 5.25% is that credit is still too cheap and risk is still too underpriced (the cost margin between low and high risk is too small). Worse, many special interests are lobbying to cut the rates back to the dangerous levels of easy (but depreciated) money that caused the bubble recklessness and put us in the current predicament in the first place.

Greenspan loosened monetary policy in the 1990s, organized the 1998 bailout of Long-Term Capital Management (LTCM) hedge fund, and began slashing the Fed funds target interest rate on January 3, 2001 (during the Clinton administration before 9/11, contrary to frequent punditry) through June 25, 2003's 1% rate and kept 1% for over a year until June 30, 2004, never since returning to the May 16, 2000 6.5% rate despite all the talk of a "Goldilocks ecocomy" prosperity, and meanwhile igniting the housing bubble and feeding the subprime beast a steady diet of loose credit. Greenspan was known to the markets as a soft touch because they felt that the infamous “Greenspan put” (his willingness to bailout the markets by pumping more cheap money into the system) always would postpone the day of reckoning yet again.

Fed Needed New Spine, Got New Face Instead

Bernanke has destroyed any potential authority he might have had by caving in to the first signs of volatility and pumping tens of billions of dollars into the markets in the last 2 weeks. One commentator argued that people are overreacting to the Fed’s actions because the liquidity is “temporary.” However, it does not matter that much of those injections have been returned to the Fed when (1) the Fed issued a “blank check” by stating that it was ready at all times to bailout whenever “necessary” and (2) the typical 14-day limit to each liquidity injection does not matter if the Fed is willing to refinance perpetually with fresh injections.

The markets “got” the message that “Helicopter Ben” Bernanke will come to the rescue and the party can continue: The effective Fed funds rate sank below the Fed’s target of 5.25% and some deals hit the basement of 0% interest. Further, the Fed-funds futures market responded by expecting a rate cut at the next Federal Open Market Committee (FOMC) meeting.

Fed Failure

  • Bernanke’s Fed claimed that it intervened last week because the always-fluctuating effective Fed funds rate was not at the target rate. However, the Fed’s overreaction to understandable market volatility, and to the desirable market correction in pricing (banks raising the effective rate to price risk better), left the effective rate still off target (not higher anymore but lower than the target rate, which is worse than the initial “problem”).
  • The Fed’s action also interfered with the market healing itself just as participants finally were trying to grapple with more-realistic prices.
  • Actions speak louder than words and Fed protestations that it will not bailout investors pale against its panicky interventions to stop panic. Traders can see who is panicky and they know an easy mark when they see one.
The Fed has increased moral hazard. The markets will expect more bailouts in the future. Each Fed bailout increases the pressure for the next bailout.

Meanwhile, each bailout placates only temporarily but at the cost of repeating the over-liquidity mistake that caused the mis-pricing problem in the first place.

The market initiated the solution and the Fed stepped in to sabotage the solution.

Friday, August 10, 2007

Federal Reserve's $38 Billion Binge Bails out Markets--for Today

The Federal Reserve cannot shake the easy-money monkey off its back.

The Federal Reserve slipped out and found its crack dealer again and burned up another $38 billion in emergency liquidity to prop up housing and stock prices even though they might still be overpriced at current levels.

Do you feel good now, Chairman Bernanke? You needed $24 billion yesterday. You needed $38 billion today. What about Monday? How much will you need on Monday?

"Fed funds climbed above 6% on Friday, reflecting uncertainty in the financial system, and the Federal Reserve Board said it was providing liquidity to facilitate the orderly functioning of financial markets" (Forbes).
If we all marched off a cliff, would it be OK if we did it orderly?

Has the Federal Reserve ever heard of Adam Smith and the invisible hand of the market?

The Fed funds climbing above 6% is the market trying to tell the government that politicians are trying to force an unnatural, unsustainable policy--i.e., not only should the Fed not cut rates, borrowing is still too cheap.

Hillary Clinton's Billion-Dollar Housing Bailout and Economic Illiteracy

Add Hillary to the bipartisan list

Your cost: $2 billion

Hillary Clinton showed that she has no idea what she is talking about but wants to spend at least $1 billion of your money doing it.

Hillary’s subsidy to the rich (tax cuts for rich bad, but subsidies for rich good?)

Hillary Clinton proposed a federal government $1 billion fund of your tax dollars to bailout home-mortgage delinquents, banks, and Wall Street investors (since the mortgage payment goes to the banks and investors).

Her website's 8/7/07 press release appeared to call for a second billion-dollar fund, for a total of at least $2 billion.

Hillary’s economic illiteracy

Clinton began to show her misunderstanding of basic economics in her CNBC interview by praising the recent tightening of lending standards as a way to prevent foreclosures, even though tightened lending standards do the opposite and will increase foreclosures in current conditions.

She announced in her website's 8/7/07 press release, "If I were President, I would . . . increase the supply of affordable housing." Apparently, she has no idea that (1) it is the currently huge housing inventory (supply) that contributed to the housing crash and foreclosure problem (lower home values, new homes available cheaper than an over-indebted seller's mortgage), and (2) market crashes automatically make housing more affordable (prices drop) but her bailout policies will prop up inflated prices and keep housing less affordable.

She apparently cannot decide whether she wants housing to be less expensive or more expensive because moments later her press release declared war on lower home prices, "To make matters worse, home prices are weakening."

Hillary’s elitism: “Let them eat cake”

Clinton started the patented family sob story in her CNBC interview but then showed more confusion by also stating that it was good that fewer low-income people can get loans because low-income people getting loans contributed to the housing bubble. She asserted that some people "just had no business getting into homeownership.”

It certainly was unwise for people at all income levels to take as much credit as anyone would give them but Clinton seems unable to decide whether she wants to increase the high liquidity that caused the housing problem (her $2 billion bailout) or decrease liquidity and restrict credit.

Hillary can’t spend your money unless you mail it to her

Clinton quickly followed her interview's “struggling family” routine with her other concern, “but it's also about the impact that this is having, and could very dramatically, have on our economy going forward." Remember that a bad economy decreases tax revenue to the government and many politicians do not like it when you send less money to fill their coffers--so stay at your galley oar.

Hat Tip: Another F#cked Borrower

Thursday, August 9, 2007

European Central Bank Bailout for US Housing Bubble

European Central Bank Throws Gasoline on the Liquidity Fire

The European Central Bank (ECB) injected 95 billion Euros ($131 billion) at low 4% interest rates in response to a $2.2 billion suspension crisis at France's largest bank, BNP Paribas SA, which is suffering from an inability to fairly value its US subprime mortgage securities.

Loose credit caused the subprime mortgage mess of bad housing bubble loans making some mortgage securities worthless, so the ECB's bailout repeats the causes of the problem, extends the problem, and magnifies the problem by telling lenders, borrowers, and investors to continue to make stupid decisions because the government will bail you out at the expense of others (i.e. creates moral hazard).

Governments' indecisive bailout policy creates uncertainty and impairs our rational decision-making ability.

The US Federal Reserve added $24 billion of liquidity even though its recent Federal Open Market Committee (FOMC) decision not to cut the federal funds target rate was a refusal to add liquidity.

The bailout attempts reignite the loose monetary policy (over-liquidity) problem, increase moral hazard, send confusing mixed signals to markets, and could backfire by creating a panic.

Friday, July 20, 2007

More Media Economic Illiteracy on Housing Bubble -by Associated Press this Time

Previous: Reuters' Economic Illiteracy Denies Housing Bailout Will Cost Taxpayers Any Money
The Associated Press asserted:

"Massachusetts is among many states that have recently sought to ease spiking foreclosure rates by tightening lending regulations" (AP Business Writer Mark Jewell at
No, the opposite is true.

Tighter lending now increases foreclosures now by eliminating the top 2 options for a person who wants to get out of his/her bad loan by closing the account with a full repayment (no default):
  • Reselling to Yourself (Refinancing): A troubled borrower who got in over his/her head is unable to refinance (same credit score no longer meets new standard when you "raise the bar").
  • Reselling to Others: A troubled borrower who cannot afford his/her home finds fewer shoppers who can afford his/her home (the same tighter standards that prevent the "owner"'s refinancing also prevents potential buyers from qualifying for a mortgage to close the sale).
Tighter lending standards in the past would have prevented many foreclosures today (but that horse already has bolted), and tighter lending standards now might lower the forclosure rate in the future, but the immediate effect of new tighter lending standards today will be to increase the current spike in home mortgage foreclosures.

The article's claim that tighter lending regulations will ease the current foreclosure spike means that the AP is clueless about economic policy, or the state of Massachusetts is clueless about economic policy, or both.

Monday, July 16, 2007

Reuters' Economic Illiteracy Denies Housing Bailout Will Cost Taxpayers Any Money

Reuters apparently believes in the free-money-falling-from-sky theory of bailouts:

"The Massachusetts Housing Finance Agency will contribute $60 million, while Fannie Mae, the largest U.S. home funding source, will add $190 million, to the new fund.
Massachusetts taxpayers will not be asked to bail out borrowers, often with poor credit histories, who were wooed by subprime lenders' offers of attractive initial rates that often skyrocketed later.
Rather, the money for the fund will be raised when MassHousing sells taxable bonds with variable and fixed rates to private investors in the coming weeks, an agency spokesman said" (Reuters).
Where does Reuters think Massachusetts gets the money to pay the interest on the bonds?

Obviously, the only reason that Massachusetts taxpayers are taking out loans (bonds) and paying interest to bondholders is to bailout the delinquent borrowers who cannot pay their mortgages.

Reuters seems confused, since its article's title declared a bailout and then its article denied any taxpayer bailout.

Such nonsensical economic reporting makes one wonder how many Reuters reporters took dodgy mortgages and need a finacial bailout.

PS: California, Colorado, and Wisconsin are eying bailouts similar to the Massachusetts bailout, according to the National Council of State Housing Agency's Director of Housing Advocacy Garth Rieman, via Reuters.

More examples (unfortunately): More Media Economic Illiteracy on Housing Bubble -by Associated Press this Time

Massachusetts' "Big Dig" Housing Bailout Sticks Nation with Bill Again

Quarter-Billion-Dollar Housing Bubble Bailout in Massachusetts

Fed Bailout for the Rich State: Wealthy Massachusetts' "Big Dig" of a Housing Bailout Is a Big Dig into the National Purse . . . Again

The wealthy state of Massachusetts is planning for the rest of the country to foot the bill for its housing bailout by getting most of the quarter-billion dollars ($190 million) in bad-mortgage refinancing from the federally-chartered Fannie Mae. Massachusetts taxpayers are on the hook for the remaining $60 million through a state bond issue.

Homebuilders Seek Taxpayer Bailout in Kansas

Homebuilders Seek Taxpayer Bailout in Kansas

Proposed tax break for home builders studied by Kansas lawmakers

--July 15, 2007 Jim Sullinger article from The Kansas City Star at

Friday, July 13, 2007

Feds Knew Subprime Mortgage Danger 1 1/2 Years Ago

A Confession, a Communist Connection, and a Congress of Academy-Award Nominees

US federal Housing and Urban Development (HUD) Secretary Alphonso Jackson was in Hong Kong shamelessly trying to unload imploding subprime mortgage-backed securities (MBS) on the Chinese with the promise of a bailout by US taxpayers (he mentioned US government backing in a 7/11/07 Bloomberg interview, viewable on BNN Bubble News Network).

Even more telling, Jackson claimed that the federal government including he and Ben Bernanke foresaw today's subprime mess "about a year and a half ago" (late 2005 or early 2006).

Remember Jackson's claim when the politicians do their Casablanca Captain Renault routine that they are shocked--shocked--to learn that there had been risky lending going on in this country.

UPDATE 4/13/08: Jackson was trying to dump MBS on Asia the month before the August 2007 effective Fed funds rate spike and stock-market quake, and the start of Bernanke's panicked bailouts.

Does Jackson's MBS shilling count as insider trading?

Irony or Crime?

Alphonso Jackson update: You Paid $100k for Pictures of Your Fearless Government Leaders

Monday, July 2, 2007

Housing’s New Math: The Seller Pays the Buyer

Previous: Fed Takeover of Subprimes Renews Risk in Mortgage Lending

The LA Times actually tried to portray the federal government’s new taxpayer-backed risky lending as a return to old-fashioned prudence.

You decide:

The old days required a homebuyer to bring a 20% downpayment on a 30-year mortgage, which insured that he/she had his/her own "skin" in the game and an incentive to repay the remaining 80% so as not to forfeit his/her investment.

"Modernizing" and "Bringing the FHA into the 21st Century" with the Fed's New "Home Possible" Lending Practices

Congress is planning to slash the Federal Housing Administration (FHA) lending standard to 0% down and a 40-year mortgage. It is exactly the no downpayment condition, and therefore no home equity, and therefore no risk of the borrower's own money, that makes defaults more likely.

Further, the federally-chartered Freddie Mac offers the "Home Possible 100" with 0% down for up to $417,000 and 3% seller "contributions"--allowing a "buyer" (using the term loosely) to walk into a house worth almost double the national median price with none of his/her own money but with a suitcase full of the seller's money.

Yes, you must pay the buyer to live in your home.

Does that sound like old math or new math?

Fed Takeover of Subprimes Renews Risk in Mortgage Lending

The federal government seems less interested in stopping the subprime mess and more interested in muscling in on the franchise.

Reckless borrowing by unqualified borrowers caused the current housing crash.

Many Congresspeople accused "unregulated" risky lending by the private sector and declared that the solution is authorized risky lending by the government. The difference is that your tax dollars definitely will sit in the pile at the center of the green felt table.

Congress Christens FHA as Our New National Casino

The Federal Housing Administration (FHA) maneuvered to take over the subprime market:

"As an improved alternative to subprime lending practices, Bernardi discussed modernizing the Federal Housing Administration (FHA). 'Reforms must be made for the FHA to adapt to today's marketplace. We have modernized FHA as much as we can but need legislation to truly bring the FHA into the 21st Century. A new FHA could be an antidote for predatory lending and for subprime difficulties,' stated Bernardi" (FHA).
FHA "Modernization" and "Bring the FHA into the 21st Century" Are Euphemisms for Bailout-Backed Recklessness to Keep Housing Prices High

Congress' plan to "modernize" the FHA and "bring the FHA into the 21st Century" simply crowns the FHA as the new subprime king, moving the risk rather than eliminating it. In fact, since the FHA has an implicit promise that you will bailout bad loans with your taxes, one could argue that Congress' FHA "modernization" plan increases risk instead of decreasing it.

It only gets worse when you look at the details of new federal loans:
Housing’s New Math: The Seller Pays the Buyer

Friday, May 11, 2007

Risk Anything for Bailout of Housing Bubble: Real Estate Industry’s Shocking New Tactic

Realtors, property appraisers, mortgage brokers, and risky borrowers cooked the loan books to boost the housing bubble with dodgy loans, then cooked the real-estate sales books for as long as possible to hide the housing-market downturn, and then cooked the public relations to prop up the bubble by claiming that it is a great time to buy and not to worry about a small correction limited to subprime loans already at the bottom of the drop.

Hoisted on Their Own Petard

The bubble-denial backfires on them when it becomes a reason to refuse any taxpayer bailout of the industry, so the conspiracy of silence is cracking.

Orange County real-estate consultant John Burns confessed:

"The housing market has softened much more than is being reported. We have been advising our retainer clients for more than one year about misleading national sales information, both with the Existing Home Sales and New Home Sales data. We are now going public with our concerns because we are concerned that policy makers are relying on national data to conclude that the housing market correction has not been severe" (OCR).
It seems that fear of no bailout is driving industry insiders to a desperate new tactic—telling the truth.

Tuesday, May 1, 2007

Federal Government Threatens Mortgage Lenders with Unprecedented Sanctions

You Have Rights, It's Just Illegal To Use Them

The federal government threatens to punish mortgage lenders if they do not give up their legal contract protections and submit to rewritten terms. The Federal Reserve and 5 other federal agencies recently issued this unprecedented joint statement:

“Institutions will not face regulatory penalties if they pursue reasonable workout arrangements with borrowers” (TMO).

In other words, the federal government will penalize them if they do not surrender their legal rights "voluntarily."

Government Doublespeak Sustains Housing Bubble Inflation

Wanted: New Signs

Treasury Secretary Henry Paulson used the “nothing to see here” tactic:

“All the signs I look at" show "the housing market is at or near the bottom” (TMO).

That is entirely possible—as long as you can get your underlings to show you only the wrong signs.

How To Stop Progress

Senator Chuck Schumer (D-NY) used the opposite, fear-mongering, crisis tactic:

“The subprime mortgage meltdown has economic consequences that will ripple through our communities unless we act” (TMO).

True, as long as you do nothing, housing will become more affordable for millions.

Paulson and Schumer seem opposite at first but both their statements try to keep housing expensive by propping up record high prices (relative to economic fundamentals).

Minneapolis Mayor Slanders Renters, Praises Mortgage Defaulters

Government Logic at Its Finest

Minneapolis Mayor R. T. Rybak said of foreclosed properties:

“And in those properties which were once owned by stable homeowners, they're replacing them with renters who may be very problematic and have proved to be problematic in our neighborhoods” (MPR).

Rybek claims that people who lost their homes because they did not pay their debts are “stable” but renters, including people who patiently wait and save and responsibly resisted the overbuying housing-bubble mania, “may be very problematic” (or are the problematic renters the ones who rent now only because they previously defaulted on their mortgages?).

Minnesota Bailout Rewards Defaulters, Sustains Inflation? Call To Federalize Bailout

Minnesota State Government Hates Affordable Housing?

The Minnesota state government is creating a loan and grant program to have the Greater Metropolitan Housing Corporation buy foreclosed homes in an effort to stop “predatory buying” by bargain hunters. Maybe the government also can make it illegal for you to use coupons or buy anything on sale (admit it; you predatorily have bought things below MSRP).

The MPR article gave few details but any increased sales price that reduces the defaulter’s debt would be a taxpayer bailout at the expense of taxpayers and home buyers. Basic economics says that the government’s entry as a rival buyer will bid up housing prices (increase demand), so taxpayers can overpay for other people’s houses and sustain the housing bubble that keeps homes overpriced and unaffordable.

Call To Nationalize the Home Mortgage Bailout

Minnesota Housing Finance Agency Commissioner Tim Marx said:

“We know much more needs to be done and if we're going to address this issue it's going to take many, many hands from the national government the state government and the local government, the entire homeownership industry, lenders (and) realtors to really work together and drill down and address this issue” (MPR).

Massachusetts 2-Month Mortgage Bailout Increases Moral Hazards

Bailout Escalation for Bean Town

Foreclosures in Massachusetts have almost doubled in the past year. The Massachusetts state government already has been making phone calls on behalf of delinquent home borrowers to change the terms of mortgage contracts. Now, the Massachusetts Division of Banks further increases moral hazard by seeking a 2-month financial vacation for home-mortgage delinquents.

Friday, April 20, 2007

Subprime Mortgage Bailout: Windfall to Lawyers

Christmas comes early to the legal profession if the government-sponsored bailouts by Fannie Mae and Freddie Mac proceed.

From CNN/Money:

"Tax regulations make it difficult to rewrite the terms of securitized loans. . . . To cover its responsibilities, the servicer would probably want to clear the details of each case through counsel, which can take lots of billable hours, and wait until the loan is in arrears by 60 days or more. The delay often means the borrower gets deeper in debt."

The IRS and lawyers are involved, so what could go wrong?

Hat Tip: Matt's comment at The Housing Bubble

Tuesday, April 17, 2007

Bipartisan Bloodlust for Mortgage Lenders but Congress Blind to Borrower Fraud?

Congress Investigates Housing Bubble Mortgage Lenders: Bipartisan Inquisition Starts Today.

Congress today eyes new restrictions on your access to money:

“Ideas that seemed out of the mainstream today may become mainstream in the future”— Andy Laperriere, International Strategy and Investment, quoted by Caroline Baum at

Bipartisan Bloodlust . . . but Blind to Borrower Fraud?

Barney Frank (D-MA) and Spencer Bachus (R-AL), party leaders of the House Financial Services Committee, vowed to hold mortgage-bond investors liable for deceptive lending practices—but I saw no intention to investigate deceptive borrowing practices.

Does predatory borrowing get a free pass?

Check your C-Span listings and make the popcorn.

Thursday, April 12, 2007

Jobs Sustain Bubble: Await Recession for Final Reckoning

From Investor's Business Daily:This is bad news for 3 reasons:

  1. California is a monumental housing bubble still waiting to pop.
  2. The jobs explanation tells us that it is a mistake to fixate on subprimes when they are only the posterboy du jour for massive overleveraging under a wide array of guises and financial instruments (all the non-subprimers who nevertheless stretched to bid above asking price or are otherwise overleveraged and one paycheck away from default).
  3. The bank-blaming bailouters will not let these facts get in the way of slick politicking--but they might use these facts to exploit the old rustbelt constituency and expand their bailouts to Chrysler, Ford, and General Motors . . . again.

Wednesday, April 11, 2007

Lobbyists Mobilize To Demand Mortgage Bailout

"Activists" and "civil rights groups" blame business for lending people money and threaten lawsuits to avenge "victims."

Quoted from

"We've heard one heartbreaking story after another of borrowers with limited incomes being sold mortgages they could not afford," Sen. Sherrod Brown, D-Ohio, said at a briefing on Capitol Hill.

"We want to send out hope to the victims of the subprime lending crisis," said Bruce Marks, NACA's chief executive.

Activist and community groups are stepping up efforts to aid homeowners affected by the housing market's woes. They argue that banks and mortgage brokers_not borrowers_bear most of the blame for the industry's problems.

Last week, civil rights groups called for a six-month moratorium on foreclosures resulting from high-risk loans given to people with shaky credit, arguing that lenders could face lawsuits if they don't help borrowers.

Senator Schumer Rushes Federal Mortgage Bailout

Senator Chuck Schumer (D-NY) jumped on the bailout bandwagon by pledging a federal “infusion” of hundreds of millions of dollars. Schumer stated that he will introduce bailout legislation soon and that it must be done right away.

Thursday, April 5, 2007 Adds No-Bailout Letter created a no-housing-bailout letter. Please, read it, comment on it, compare it to Marinite's letters, and consider sending it or your own version to the powers that be.

Please tell them that Not One Cent sent you.

Maybe we should post a no-housing-bailout-letter roundup.

Housing Bust Raises Unemployment Nationally

"U.S. Initial Jobless Claims Rose to 321,000 Last Week."

"Construction and housing-related businesses and auto makers are trimming staff."

Today, the Labor Department reported increased unemployment. The news could be dismissed as a modest correction in an overall stable labor environment or as the first signs of increased recession risk.

More jobless might mean more foreclosures and more unsold homes (fewer buyers).

However, more jobless might mean more chance that the Federal Reserve might cut interest rates and thereby lower adjustable mortgage rates (not likely at the moment).

What does all this mean for odds on any housing bailout?

Tuesday, April 3, 2007

Banks Lose Bailout Bonus in Moody's Ratings

Moody's removes government guarantees from risk calculations:

Subprime market downturn stings major U.S. banks

Rate Bubble Bailout News Tool

I added Google News below the header to help us keep up to date on housing bubble bailout proposals. You can see the search phrase at the left and then the relevant link. Let us know what you think or suggest a search phrase.

Thank you.

Sunday, April 1, 2007

Wiki letters

My wiki now has two letters of opposition against the bail-outs for people to copy-and-paste into an email or whatever. Here's the first one. Here's the second one.

Saturday, March 31, 2007

Remember the S&L Bailout like You Remember the Alamo

Westside Bubble recommended the LA Times article "Sweeping mortgage bailout unlikely."

The first problem is that these types of headlines are supposed to put us to sleep so a later massive bailout can be excused as "less than sweeping."

Remember that the 1980-90s Savings & Loan (S&L) bailout threw budget deficit concerns aside and exceeded the official federal guarantee by waiving the FSLIC $100,000 deposit limit.

The government bailout's Resolution Trust Corporation (RTC) failed to follow its own contracting procedures, mis-selected loans for auction, and provided inaccurate information to investors.

United States General Accounting Office (GAO), "Report to the Deputy and Acting Chief Executive Officer, Resolution Trust Corporation," Resolution Trust Corporation: Better Data Could Improve Effectiveness of Nonperforming Loan Auctions, GGD-95-1, B-257808, November 14, 1994

PDF version of GAO RTC report

Update: The government loves to provide bad information to consumers: SEC NRSRO Causes Asset Mispricing?


Save the Savers

This is the pro-saver blog. Discuss bailouts in general and the proposed housing bailouts in particular.

This is intended as a multi-author blog to act as a clearing house and to keep us up to date.

Bloggers, post an exclusive or a cross-post from your regular blog.

Email me to join the pro-saver team.

Please keep it clean and courteous.

Thank you.