Friday Thoughts

Calculated Risk can't believe there is actually legislation in motion to provide credit to "help alleviate the severe lack of credit for acquisition, development and construction (AD&C) financing that threatens to end the budding housing recovery before it has time to take root."   Felix Salmon wrote a follow up on the same subject, getting input from the author of the bill, Brad Miller.  As I noted in Felix's comments, I think there is a massive flaw, and that's Miller's claim: "The bill requires that the loans only be in “viable” markets, which means not comically overbuilt markets. Treasury should be able to tell the difference, and banks need to as well."   I think we've already proven that neither the Treasury nor the banks adequately altered their behavior during the housing bubble, so why should we expect them to be able to self-medicate this time?

Michael Panzner quotes the Of Two Minds blog at length.  My favorite snippet (emphasis NOT mine):

"The key phrase here is "borrowing," not "home ownership." The key feature of State support of housing is not legitimate "home ownership," it is the enabling of massive new sources of income and transactional churn for lenders and Wall Street loan and derivatives packagers. 

Home "ownership" when there is no equity in the purchase and no equity being built via principal payments is a simulacrum of ownership.

 

If a buyer puts almost no money into the purchase--even now, FHA and VA loans can be had with a mere 3% down payment--and the loan is of the interest-only or adustable-rate (ARM) variety favored during the housing bubble's heyday, then there is no principal payment being made and thus no equity being built. 

These "buyers" don't "own" anything; all they're doing is renting the money in the hopes that rising home prices will create equity for them out of thin air. What they "own" is essentially an option on a property which they "rent" monthly. If the government manages to reinflate the housing bubble (it won't, but hope and greed spring eternal), then the option will pay off handsomely. The "owner" put no money into the speculative bet, but they can then sell their option for a huge profit. 

If housing plummets, then the "bet" was lost. But since "renting" the mortgage didn't cost much more than renting a real house, and there was no capital at risk, then the downside is modest indeed. 

In other words, heavily subsidized mortgages at low rates with little money down incentivizes not home "ownership" but speculation in credit-based bubbles.

 

In the "old days" (circa 1994), the expectation was that equity would be built by paying off the mortgage principal over time. Equity was a result of reducing the mortgage due, not the result of speculative gambling on future asset bubbles."

Some humor from the Reformed Broker, Josh Brown: "Free Advice to the Stars RE: Ponzi Schemes"

1.  Anyone who refers to himself as a "Financier" is full of sh*t.

2.  Your financial advisor is not supposed to play polo or wear designer sunglasses, nor should he ever have a popped up collar under any circumstances.  He must never wear shoes without socks or wear a watch with a diamond bezel.

click through for the full list.

And in case you missed any of my posts from the last week, focus on these:

Morgenson Misses the Mark

Vegas: Resort Fees?

Senator Bunning's Office Responds

Finally, two rebuttals to David Einhorn's NY Times Op-ed.  First, I want to explain one thing:  the WSJ sniped that Einhorn was "talking his book."  Look - you should assume that everything you read anywhere is someone talking his book.  The great thing about Einhorn is that he makes no secrets about what his positions are.  He lays them out there, and explains his view.  If you're going to critique his thoughts, you have to do it on the basis of his arguments, not on the irrelevant fact that he's talking his book - OF COURSE HE"S TALKING HIS BOOK!  The Times Op-ED was very much related to a speech he gave the night before at the Ira Sohn Conference, a hedge fund charity dinner where the primary purpose is to give smart people the opportunity to share ideas - aka - talk their book.

Now, back to the point: Einhorn's actual argument - which is what these two posts take aim at:

1) The Pragmatic Capitalist

2) Billy Blog

Since I've already been hazed by the MMT crowd, you'll notice that I deliberately avoided quoting the parts of the op-ed that TPC and Bill Mitchell are most critical of.  I agree very much with all of the sections that I quoted in my previous post, and the one thing I'd mention about TPC and Bilbo is that they both specifically pick on Einhorn's claim  "If we wait until the markets force action, as they have in Greece, we might find ourselves negotiating austerity programs with foreign creditors."  As I've said many times, the analogy of Greece doesn't translate to the US as a whole - the two links above explain repeatedly how we are different.  But it DOES apply to our states.  I've written this analogy before:  Greece : European Union :: Troubled States (CA, NJ, MI, NY) : United States.   Greece is a model for the pending budgetary crises in our respective municipalities, who cannot print their own currencies.

-KD