Evening Links 2-8

Feb 8, 2010 23:34 UTC

Housing rebound in Canada spurs talk of new bubble (Dvorak, WSJ) Last week Paul Krugman toasted the sobriety of Canadian banks. Among other things, he said that low rates aren’t enough to cause a bubble since Canadian rates are low and, well, they don’t have a bubble. If this article is to be believed, Krugman didn’t look closely enough. Banks may use less leverage in Canada, but low rates are encouraging households to borrow big — debt to disposable income is a bubbly 1.42x. Key quote in this piece is near the bottom, where a real estate agent notes that rising prices mean rents are only barely covering mortgage payments for real estate investments. The best definition of a bubble is when debt service payments finally eclipse rents. Then buyers/lenders are betting on continued appreciation, which can only be driven by still-easier credit. Canadian real estate appears to be headed in that direction.

Fed’s Bullard: Housing should be key in reg reform (Daly, Reuters) A good point. And the Fed should use its authority under HOEPA to make sure all mortgages are underwritten so that borrowers can make a full payment.

Fed group eyes insurance fund for repo market (Cooke/Comlay, Reuters) Insurance funds are dangerous. They have a habit of increasing moral hazard.

Fed to bare tightening plan (Hilsenrath, WSJ) Wouldn’t it be better to increase reserve requirements than to increase interest rates paid on excess reserves? The second plan pays banks to do something the Fed could simply require if it wanted to…

Hedge-funder sues to keep rent at $380 (Dealbook)

Red Mist: Who matters in China’s financial system is barely understood (Economist)

Madison WI bus driver highest paid city employee (Mosiman, WIStJournal) $159k….thanks to a great union contract.

The world capital of killing (Kritsof, NYT)

WW1 camoflauge to defeat Uboats (Twistedsifter) Fascinating.

Worst airline ad ever?

worst airline ad


“Wouldn’t it be better to increase reserve requirements than to increase interest rates paid on excess reserves?”

Yup, but that wouldn’t stealthily recapitalize banks still stuffed with toxic assets. I think they’re counting on the complexity of the issue, and “exit strategy” headline to paper over the stealth handout.

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2010: Walking away will gain cachet

Dec 31, 2009 01:27 UTC

Why bother? That’s the question more underwater Americans are asking themselves about their mortgage.

Trapped in the abyss of negative equity, more will decide to quit paying. As they should.

About a quarter of all mortgages in the United States are on houses that are worth less than the unpaid balance of the mortgage, according to real estate consultant First American CoreLogic. About half of that group, 5.3 million borrowers, are 20 percent or more underwater. For 2.2 million, the property is worth less than half the mortgage balance.

Those folks are called “homeowners,” but “homeborrowers” would be more accurate. All they own is an obligation to whatever entity services their mortgage. They’re essentially renters paying above-market prices.

But that “ownership” tag is often felt to be important. Americans who are trained to believe that a mortgage is a moral obligation fear punishment or a bad conscience if they walk away.

But foreclosure is hardly the mark of Cain, especially in states like California and Arizona, where lenders have no practical recourse to pursue a borrower’s other assets.

As more underwater homeowners realize there’s no hope to regain their equity, more will cut their losses. The reduction of liabilities brings immediate debt relief and often a lower cash outlay — on rent — for comparable housing. The financial shot in the arm should outweigh the stigma of foreclosure.

Financial self-interest is likely to be contagious. A study by three economists suggests that when a few borrowers in a neighborhood just say no, others are likely to follow.

Lenders do what they can to keep the disease of economic rationality from spreading. They try to “extend and pretend” with lower interest rates, extended terms, and the pretence that eventually the borrower will make good. Anything, really, to avoid the hit to capital that comes from a writedown of the principal.

Until now, borrower guilt has helped protect bank balance sheets. That is likely to change. If it does, the next chapter of the financial crisis could be a painful one.


The economy is terribly interesting right now.

Pimco was shouting from the rooftops that the Fed needs to not merely stabilize but actually reflate. In other words, they felt it was important for the Fed to bring house equity levels back toward where they were so people aren’t underwater in large numbers. They are not convinced that reflation has happened.

Pimco is now actually backing the truck up on long bonds, which on its face seems crazy with quantitative easing and the like. But they are terribly smart. Apparently they have judged that deflation is winning. Tightening of lending standards together with debt repudiation by Americans is shrinking the money supply steeply.

Meanwhile, efficiency and productivity by companies and prudence and thrift by individuals is soaring. While that’s terrific, it means high unemployment for quite a while.

We are in for a slog. The decline in the money supply caused by the collapse of lending is in the tens of trillions.

There may be one last bond rally yet! As the next round of resets hit and many cannot refinance, there may be a second deflationary gust. If the fed comes to the rescue again at that time, the decades-long super-rally in treasurys may be over at last!

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Lunchtime Links 12-29

Dec 29, 2009 19:27 UTC

Was the global financial crisis a mathematical error? (Steve Keen, Business Spectator) Keen’s latest. Another great piece explaining the flaws of neoclassical economics. (ht Yves)

Not just Tiger’s temptations (Glanville, NYT) Another great column from ex-Cub/Phillie Doug Glanville.

Housing crash leads to falling divorce rate (Waller, WSJ)

Fed proposes selling term deposits to absorb excess reserves (Torres, BusinessWeek) To prevent banks from lending too much of the free money it gave them, the Fed will sell them CDs.  Earning interest on free money is another reason why it’s good to be a banker…

In new way to edit DNA, hope for treading disease (Wade, NYT) “Only one man seems to have ever been cured of AIDS, a patient who also had leukemia. To treat the leukemia, he received a bone marrow transplant in Berlin from a donor who, as luck would have it, was naturally immune to the AIDS virus.”

Video tour of 96 sq ft house (Unclutterer)

Lots ‘o lights (imgur) Impressive Xmas decorating.

Polar bear attack…



Other than the optics, why is a “term deposit” strategy better for the Fed than just raising or lowering the interest rate paid on excess reserves?

I can only see how soliciting the longer maturity deposits will only be more expensive for the Fed.

Posted by Basho | Report as abusive

Evening Links 12-23

Dec 23, 2009 21:36 UTC

(Reader note 1: posting will be light through the weekend….taking a few days off)

(Reader note 2: Just saw Avatar, the IMAX 3D version. I highly recommend it.)

Food stamps altering how retailers do business (Maestri/Baertlein, Reuters) “At 11 p.m. on the last day of the month, shoppers flock to the nearest Walmart. They load their carts with food and household items and wait for the midnight hour. That’s when food stamp credits are loaded on their electronic benefits transfer cards.”

The Protocol Society (Brooks, NYT) “When the economy was about stuff, economics resembled physics. When it’s about ideas, economics comes to resemble psychology.”

Treasury to seek easing of bailout fund rules (Somerville, Reuters)

One cheer for Barney Frank (WSJ editorial) WSJ editorials tend not to be very useful, but I thought the last line of this one was notable: “Perhaps the House and Senate should simply … start over with a new mission for [financial] regulatory reform: break up the too big to fail racket.More evidence that all sides of the political spectrum agree on this. I wonder how they would propose we do it.

New home sales decrease sharply in November (Calculated Risk) Yesterday’s existing home sales report had everyone exited, but new home sales are far more important for economic growth, and those are still terrible. Bill has dubbed this “the distressing gap.”

Gross’s Total Return Fund now biggest in history (Bhaktavatsalam, Bloomberg) The main reason Gross screamed for government to “support asset prices!” during the crisis….because he and his investors have a ton of paper wealth at stake.

Everyone’s defaulting, why don’t you? (Gross, Slate) I have a short column running later this week in the biz section of NYT on this topic. I’m sympathetic to McArdle’s view that folks who strategically default are gaming the system and leaving the rest of us to pick up the pieces. Yet savers themselves were part of the arrangement. Our savings were intermediated by the banking sector into more home loans. When guys like me say banks messed up and have to eat losses, we mean the shareholders and creditors of banks. That includes depositors. I’m speaking very generally of course, but de-levering the economy means writing down debts on one side of the ledger and paper wealth on the other side.

“Youth Depression” hard on retailers (Stoddard/Sage, Reuters) The authors are referring to the inordinate impact of the economy on youth employment, not youth mental health.

Malcolm Gladwell’s stickiness problem (Wise, Psychology Today) “[Malcolm] Gladwell [is] masterful at brewing up memes so potent that they travel far beyond the realm of where the mere modest truth would go. They spread. And they stick. And having stuck, they proceed to affect the decisions that people make, the policies they implement, the laws that they pass. A normal person, when he is wrong, adds a little drop of erroneousness in the great sea of human conversation. Gladwell, when he is wrong, creates a tsunami of wrong.

View of space shuttle launch from a commercial flight (better muted)

NYT: Fight to extend the house tax credit

Sep 16, 2009 22:26 UTC

It’s perhaps no surprise that the National Association of Realtors is fighting to extend the tax credit for homebuyers. They also want the credit enlarged and they want it to apply to everyone. From NYT:

The real estate industry, including the powerful 1.1 million-member National Association of Realtors, wants Congress to extend the credit at least through next summer. The group hopes to expand the program to $15,000 [from $8,000] and to allow all buyers, not just those who have been out of the market for at least three years, to qualify. The price tag on that plan: $50 billion to $100 billion.

Deductibility of mortgage interest is already a huge tax subsidy for home buyers. And the $8,000 first time credit is expected to cost $15 billion this year while resulting in only 350,000 home sales that wouldn’t have otherwise happened. That’s $43k per. Give ‘em an inch, they’ll take a mile.

[Update: A readers asks how the math works in the paragraph above. The credit was used for up to 2 million sales. But of those, only 350k wouldn’t have otherwise happened. Since the goal of the program is to spur home sales that wouldn’t happen organically, then the cost of the program is best described in terms of incremental transactions. $15 billion spread over 350,000 extra home sales is $43k per.]


I found it interesting that the Republican Senator from Georgia who is promoting this increase to 15,000 per house with no means tests or restrictions or conditions voted AGAINST the ‘Cash for Clunkers’ Program.

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Banks want accounting rules relaxed

Reuters Staff
May 22, 2008 13:31 UTC

FT is reporting that banks are pressing their case to have fair-value accounting rules relaxed.

The world’s leading banks have stepped up pressure to relax controversial accounting rules with a new plan aimed at breaking the “downward spiral” of huge writedowns, emergency fundraisings and fire-sales of assets.The proposals on “fair value” accounting by the Institute of International Finance, an alliance of 300-plus companies chaired by Josef Ackermann, Deutsche Bank’s chairman, would enable financial companies to cushion the blow of financial crises by valuing illiquid assets using historical, rather than market, prices.

Of course banks would prefer to carry the value of their illiquid assets at “historical” rather than “market” prices. If they’re allowed to do so, they can carry billions in paper losses without actually writing down any assets.

Kudos to the various “accounting standard-setters” who are resisting this pressure. Allowing banks to carry toxic trash on their balance sheet at values they determine themselves threatens to turn the American and European financial sector into Japan circa 1995. Bank writedowns, and even some failures, may be painful in the short-run. But the long-run health of the economy depends on efficient capital formation. It depends on creative destruction to eliminate economic rot.


There is definitely something going on with her “loans” and ability to conjur credit.

Posted by ngogerty | Report as abusive

GSE Chief Regulator: Fan and Fred vulnerable

Reuters Staff
May 18, 2008 02:17 UTC

This blog is dedicated to more than the deterioration of Fannie and Freddie, I promise. I think the reason I devote so much space to the topic is the sheer size of these two entities and the risk they pose to taxpayers.

Three facts to chew on:

  • At $5.3 trillion, the combined debt of Fannie and Freddie is half that of the entire Federal Government
  • “Core capital” at the two companies is less than 2% of that combined total of $5.3 trillion….less than $90 billion.
  • The companies’ exposure to subprime and Alt A mortgage loans (i.e. the most risky ones in the market), exceeded $700 billion at the end of last year.

A 20% fall in the value of their risky assets alone, would be enough to push them towards bankruptcy, forgetting for the moment that there may be billions of losses yet to take in their “prime” portfolios.


Deteriorating Lending Standards at Fan and Fred

Reuters Staff
May 17, 2008 23:52 UTC

Does anyone remember when Fan and Fred were still thought to be “prudent” lenders? Relative to the CFCs and WMs of the world they may always have been, but they still have far more risk in their portfolios than they should given the taxpayer guarantee backstopping their balance sheets.

The WSJ reported two days ago (sorry I’m getting around to this late) that Fan and Fred have decided to scrap a rule that required higher down payments for mortgages in markets that were experiencing especially large price declines.

Why the change in policy?

The change comes in response to protests from vital political allies of the government-sponsored provider of funding for mortgages, including the National Association of Realtors, the National Association of Home Builders and organizations that promote affordable housing for low-income people.

Those various groups have said the policy is hurting an already feeble housing market by shutting out too many potential buyers.

Too many overlevered and unqualified borrowers were the problem that expanded the housing bubble in the first place. When lenders require no down payment and are offering low teaser rates, it makes sense for borrowers to take on debt to buy a house. Their mortgage amounts to a free call option on continued house price appreciation.



Hmmm…take money from an affordable housing program to prop up inflated, unaffordable housing prices. It’s just like the brain trust in DC to come up with such a stupid, self-contradictory idea. Ugh!Government’s ham-handed intervention at this stage of the game will only make matters worse and prolong the recovery. Let the housing market correct itself. Everyone with an ounce of common sense knew that there was a housing bubble. Those who gambled, defied common sense, and got caught should pay the price. Those who patiently and responsibly waited for sanity to return to the market deserve an affordable home. That is fair.

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Morgenson: Trash for Cash

Reuters Staff
May 17, 2008 23:48 UTC

Gretchen Morgenson’s column in tomorrow’s NYT is a decent discussion of the creative lending facilities to which the Fed has resorted to help out troubled banks.

SAVING the nation’s financial system from reckless banks and brokerage firms is an enormous job, heaven knows. But somebody’s got to do it, so the Federal Reserve Board, with its taxpayer-funded balance sheet, stepped in.

To grease the gears of the nation’s seized-up credit markets, the New York Fed in recent months created three new lending entities. Together, they allow banks and financial firms to swap up to $350 billion of securities they cannot sell for cash or United States Treasuries.

The entities will stay in business as long as the markets for mortgage securities and other orphaned “investments” are closed, the Fed said. This allows institutions to exchange their trash for cash that they can turn around and lend to corporations or individuals.

The nature of these new Fed lending facilities is not without risks, of course. One of those risks is that taxpayers may have to cover losses if a firm or bank fails to repay a loan.



nice summary of something that is seriously scary.

Posted by ngogerty | Report as abusive

Volcker warns: Don’t repeat the 70s

Reuters Staff
May 15, 2008 21:44 UTC

If Ben Bernanke keeps his present course, former Fed Chairman Paul Volcker warns we could repeat the 70s. “Core” inflation is still within the Fed’s “comfort zone,” but at a certain point, rising food and energy costs may pull other prices along with them. That’s the opposite of what the Fed is assuming will happen. The Fed appears to believe that food and energy costs will come back down as the economy slows.

But that may give the U.S. a lot more credit that it deserves for driving oil demand. What if demand growth outside the U.S. is enough to offset declines here at home, keeping oil prices high? It’s not far-fetched to believe that can happen:

Despite China’s fantastic growth, and very inefficient use of fossil fuels, the U.S. is still the largest consumer of oil worldwide. The stats at that link are from 2007, and China’s economy has probably grown another 10% since then. So figure we consume 21 million barrels of oil per day and China consumes 7.2 million. I confess I don’t know enough about the dynamics of the oil market to know the impact of, for instance, a 2% decline in U.S. GDP would do to oil demand. But for simplicity figure oil demand growth matches economic growth.

To offset a 2% decline in U.S. demand for oil, Chinese demand would merely have to rise 6%. They’re certainly on track to grow faster than that the next few years.

Herein lies the problem with the Fed’s plan I think, and the reason people ignore Paul Volcker at their own peril:


Is the Oracle Optimistic?

Reuters Staff
May 5, 2008 02:43 UTC

Warren Buffett hosted the annual shareholders meeting in Omaha today. If the investing world has a rock star, Buffett is it:

31,000 people attended the meeting. Once upon a time (when I was in junior high) I wrote a letter to him, recommending a stock. [Cracker Barrel, ticker CBRL: seems I was enthralled with the synergy of selling tchotchkes in a restaurant.] And I got a letter back! Which I lost. He (=his ghost-writing secretary) wrote back that I had a good nose for stocks and included an invite to the annual meeting….I never made it.

Probably a mistake. As my nose for stocks wasn’t really that well developed:


FT: Treasury proposes new powers for Fed

Reuters Staff
Apr 30, 2008 01:25 UTC

This article isn’t long on details. Treasury feels “enhanced regulatory powers” would be a “better tool than interest rates” to “contain asset price bubbles.”

Hmmm. The Fed isn’t currently charged with the task of containing asset bubbles to begin with. Its job is to maintain low inflation consistent with full employment. The prevailing view of the Fed’s role vis-a-vis asset bubbles during the Greenspan years was summed up by the man himself in 2004:

It is far from obvious that bubbles, even if identified early, can be pre-empted at a lower cost than a substantial economic contraction and possible financial destabilization,” Greenspan told the American Economic Association in 2004.

The Fed has been rethinking this view of late.



Knute: That’s the problem with Jimbo’s argument it seems to me (though I confess I don’t understand his math): what happens if we’re headed for a Japan style deflationary bust? One that forces the Fed to drop interest rates to zero?The difference with Japan is that they had a very large balance of payments surplus. Keeping interest rates low in the U.S., where we have a large trade deficit, is much more reliant on foreigners’ willingness to buy our debt at low interest rates. They probably won’t go along. Interest rates head back up and home prices resume their decent.

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Homes are still too expensive, but by how much?

Reuters Staff
Apr 19, 2008 23:53 UTC

Using a phrase like “too expensive” would seem to be subjective. But compare median house prices with median income (via Patrick). If people’s incomes aren’t climbing, how can they afford so much more house? (Click on the image to see a larger version of the chart….and the back button to return to the post)

Median Income vs. Median House Price

This is a very common argument peddled by housing bears. Home prices have to fall to re-establish their historical relationship with median income. (I’ve made the argument myself on this blog). Then I went back and looked at interest rates:


Maybe I’m missing something here, but it strikes me as obvious that house prices relative to income were lowest in 1982…interest rates were 18%!

With a fixed rate 30-year mortgage of 18%, a $2000 monthly payment will buy $132,000 worth of home. Cut the interest rate to 6% and the same $2000 payment will buy $334,000 worth of home.

In this example, home prices may be higher, but the total cost of the home purchase–using only price and mortgage interest as inputs–is the same.

While I agree overall that house prices have to fall, I’ve become skeptical about conclusions drawn from the first chart above. The fundamental flaw–you probably know where I’m going with this–is that it is based on a home’s price, not the total cost of home ownership.

So an important consideration has to be, where are interest rates headed? If mortgage rates stay around 6%, then objectively-speaking, house prices should remain well above the “historical” relationship with median income since below “average” interest rates would support above “average” prices.

And yet I certainly wouldn’t argue that low interest rates will keep prices from falling farther nationally. In those markets with exploding inventories (the Inland Empires and McHenry Counties and Sarasota) prices are sure to keep falling until inventories have returned to normal.

The Newswire

Reuters Staff
Apr 16, 2008 16:24 UTC

A few interesting items to pass along today.

The first is an interesting interview with an anonymous hedge fund manager (via JL). It’s a longish interview, but a good insider’s view on everything from the credit crunch to the downfall of Bear Stearns to the hedge fund business itself. A highlight:

Bear is not a commercial bank, it’s an investment bank: it doesn’t have these capital adequacy rules, it’s not regulated by the Fed, and Bear, if your average bank had a capital adequacy rate supporting 10:1 leverage, Bear is more like 30:1. And that is one of the reasons confidence evaporated so quickly: people looked at the balance sheet and realized that if assets have to be written down even a small amount, Bear can be insolvent. And that creates a panic.In reality I don’t think they had a solvency issue, but when the capital cushion is so small it creates instability.

The other investment banks are also levered in the 30:1 range, including Lehman/Merrill/Goldman. Bear was, in many ways, more vulnerable to a run on the bank, so to speak. But we’re not through the woods yet and bigger banks may fail.

That’s a good segue into two good articles on the cover of today’s WSJ. The first tells the story of Merrill’s misadventures in the CDO world. The second discusses LIBOR, the London Interbank Offered Rate, which is a benchmark rate banks charge each other for loans. The spread of LIBOR over U.S. Treasuries has been a remarkable barometer of market panic. That indicator, well, indicates that the worldwide financial system is still in trouble.

And as the WSJ article notes, there are those that think this rate (which is based on data self-reported by banks themselves) may be understated….


You seem to be assuming that the average home buyer is making $6000. to $8000. a month. Forget the interest, forget the percentages, forget the inflation and indexes. The average person is making much less than $6000. a month (take home , after other monthly expenses)and should be able to afford a home. I might make around $2000. profit in good month yet I purchased a home in 1995 for about $35,000. and a second home in 2001 for about $80,000. Both were paid off quickly by selling off collections of items (I don’t buy anything new). Somewhere between those two numbers is where the price of homes should be and should stay. I have been offering between $40,000 and $65,000 for homes in my area and the asking prices have been falling from the $220,00 to $300,000. range down to the $80,000 to $160,000 range. Some have sold in the $70,000. to $100,000. range , so even if I’m low, I’m closer to the selling price than the original asking price is. Forget trying to make a bundle off your home and just live in it.

Posted by Henry Kinney | Report as abusive

Should CDS be regulated like insurance?

Reuters Staff
Apr 10, 2008 00:46 UTC

Arthur Kimball-Stanley published a fascinating op-ed on Credit Default Swaps in the Providence Journal on Monday. I spoke with the author and he gave me permission to republish his piece in its entirety. A 30-page version of this argument was accepted for publication in a law journal to be published this fall. The author gave me a recent draft, though the article below offers the essential elements of the argument. Hopefully it gets traction……



He did it, and they’re doing it, and it’s too late for us responsible people. Thank goodness my credit cards are zero-balance… I suggest that everyone else do the same A.S.A.P.

Posted by Justin | Report as abusive