Home Lending Absurdities
The AP via MyWay News: US government takes on big role in mortgage market
Uncle Sam has just become the 800 pound gorilla in the U.S. mortgage market.
Because, of course, the feds were merely just the 750 pound gorilla a few days ago.
But private analysts worried that it may not be enough to stabilize the slumping housing market given the glut of vacant homes for sale, rising foreclosures, rising unemployment and weak consumer confidence.[...]
Treasury Secretary Henry Paulson said allowing the companies to fail would have extracted a far higher price on consumers by driving up the cost of home loans and all other types of borrowing because the failures would "create great turmoil in our financial markets here at home and around the globe."
The establishment is pathologically frightened of instability. They ought to be, since so much of it is normally their fault. However, they do not recognize their role in the problem because if they did, they wouldn't be demanding greater state control over the market.
In a statement, President Bush said, "Americans should be confident that the actions taken today will strengthen our ability to weather the housing correction and are critical to returning the economy to stronger sustained growth."
I can forgive Bush for speaking gibberish. It's basically his job and one of the few things he does well. But I can't forgive the people who call themselves professionals who offer their advice to him.
No matter how flawed their economics, they know what a "housing correction" properly means. It means the outright failure of financial institutions that lent money they never really owned to people who couldn't afford to pay it back. It means severe reductions in the market capitalization of firms who sought to use these shitty loans as investments. It means the associated industries of construction, architecture, real estate, and others watching in horror as new orders for homes plummet. It means some home buyers getting booted from property because they essentially lied on their lending forms and some home buyers kicked out because they simply didn't pay attention to the fine print.
In other words, the kind of "housing correction" we're talking about here is basically the same as any other market correction that needs to occur after a state-created boom: the punishment of the actors responsible for making bad decisions and predicting the future of their market. This is hardly the first such boom and at some point the parade of evidence ceases to be an instrument of learning and becomes a sick joke. In a just world, the executives who signed off on this garbage would lose their jobs and watch their reputations implode as fast as the home buyers watched their dreams whither under increasing monthly payments.
Paulson was careful not to blame Daniel Mudd, the outgoing CEO of Fannie Mae, or Freddie Mac's departing CEO Richard Syron for the companies' current problems.But the state is stepping in to "weather the storm" which really boils down to "protecting the culprits." Too many interconnected relationships to properly discard of these people as they deserve, you see. Besides, there's always the danger of questioning the wisdom of the state that got these people into power in the first place!
Analysts were split on how much the takeover could eventually cost taxpayers although they all agreed the up-front costs will be substantial, possibly hitting $100 billion as the Treasury is called upon to bolster the capital cushions at both institutions.Copyright 2008 Associated Press. All right reserved.
So here we are. People who had nothing to do with others' inability to live up to their mortgage contracts, people who had nothing to do with financial companies' laughable business practices, people who had nothing to do with the third- and fourth-order decisions by investors to dump these "securities" once they realized how little they were worth...now every American taxpayer is stuck - once again - with the bill to clean up the messes made by others.
To illustrate the stark insanity of this situation, consider this:
Home buyers who were foreclosed off their property will be taxed to support the same policies that snared them and to protect the establishment that created the conditions for their homelessness.
Innocents will be victimized, the bewildered will be screwed, and most of the guilty sneak by under the radar.
Just another day in the United States.
Comments
Unfortunately, this "too big to fail" meme is actually true.
I'm going to point you and your readers to http://www.marginalrevolution.com - an economics blog. There are several good posts about this issue there, but I'm going to go ahead and quote this one:
"... [L]et's say that the Treasury did not support the debt of the mortgage agencies. The Chinese bought over $300 billion of that stuff and they were told that it is essentially riskless. The flow of capital from them and from other central banks, sovereign wealth funds, and plain old ordinary investors would shut down very quickly. The dollar would fall say 30-40 percent in a week, there would be payments system gridlock, margin calls at the clearinghouses would go unmet, and only a trading shutdown would stop the Dow from shedding half its value. Most of the U.S. banking system would be insolvent. Emergency Fed/Treasury action would recapitalize the FDIC but we would lose an independent central bank and setting the money supply would be a crapshoot. The rate of unemployment would climb into double digits and stay there. Many Americans would not have access to their savings. The future supply of foreign investment would be noticeably lower. The Federal government would lose its AAA rating and we would pay much more in borrowing costs. The deficit would skyrocket."
http://www.marginalrevolution.com/marginalrevolution/2008/09/could-you-clari.html
Deep in our hearts, many of us wonder why we should be on the hook for someone else's mistakes, but when you study the situation more you realize these economic forces are not something that can just affect those that were responsible. We're all involved now.
Posted by: TheFlamingoKing | September 9, 2008 05:37 PM
All TBTF amounts to is a framework that mentally locks us within the status quo. No one will define exactly what the threshold is from "small enough to fail" and "too big to fail" so the idea just sits there grinning at us while we shrink from analyzing it.
I'm aware of MR and have read them on again and off again for a few years. They write some great things. I can't say whether or not their prediction (and the others similar to it I've read) is accurate.
Regardless...the choice is either near-term corrective pain or future corrective misery. The powers-that-be simply cannot continue to ignore the contradictions at the heart of the system. This "conservatorship" action is a delaying tactic, the least-bad (in a very limited sense) of a narrowing array of options they can take.
The system is rotting from within and that rot will not go away with these half-measures. My argument is that these half-measures are responsible for the slow rot in the first place. To be as clear as I can: the system is failing and we need to allow it to fail.
This has nothing to do with any crypto-revolutionary glimmers in my eye. I don't want to see savings shredded, industries wiped out, and families starving. But you have to understand that nationalizing the mortgage industry is just piling the problems higher on themselves and while it does put off the corrective turnaround we fear, it also sets the stage for a much larger one later. This is a doubling-down of a terrible bet.
We may escape OK (or won't care because we'll be near the end of our lives), but our children will be fucked far harder than we might be.
Posted by: Drizzten | September 10, 2008 09:55 AM