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Archive for the ‘Housing Crisis’ Category

This is it for me, at least for this chapter.  I am off to join some people who don’t much appreciate voices singing out of key, and while they might be able to get over my public disdain for coaches who punt in opposing territory, it would be rather awkward to continue to point out the incompetence of the administration.  So for now, it’s probably best to hang it up.

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I am enjoying the goings-on in Dubai tremendously.  It’s like the field mouse of an economics drug trial: take every extreme symptom, jam it into one place of absolutely no global consequence, and then try to figure out the cure.

Suppose you had a tiny country that decided it wanted to be important.  Playing on confusion with its oil-rich neighbors, it goes out and borrows a lot of money to build buildings.  Taking the Paris Hilton strategy that if you insist on your caricature long enough others will eventually believe it, the country makes a big show of people piling into the buildings.  Real estate developers, the ultimate momentum players, pile in.  The country goes the offshore tax haven route – no income taxes – and throws in absolutely no labor standards to ensure that construction can proceed on whatever blistering pace can be achieved by malnourished Thais and Pakistanis welding in 115F heat.  Eventually it hits the wall – for reasons completely beyond its control, at some point people look around and realize they have the world’s largest Potemkin village.  There is no market.  The locals are preposterously corrupt.  Islam is not compatible with the hedge fund lifestyle.  What then? (more…)

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If I may quote myself, from September 4:

When you find yourself in a hole, stop digging. Except the Bernanke/Summers/Geithner team, who seem to believe you try to dig your way through to the other side of the earth. Call it the Martingale Strategy of government finance.

Like every other problem gambler, this team is discovering that the law of large numbers does not work in favor of bad bets: (more…)

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Two Russians, Ivan and Peter, struggle to survive in farm country. Eventually Ivan gets a goat. His life improves; he has milk and help with the grasses. A genie comes to Peter and says “I can grant you your deepest wish.” Peter is shocked. “You’re going to kill Ivan’s goat?”

That was always the gallows humor about Russia: the country was made for communism because the population was so consumed with envy that it preferred the company of mutual poverty.

I wonder if we couldn’t use a bit of that pessimism. At least some acceptance of finite resources that was not used as a blind support of the status quo. (more…)

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Courtesy of Mike Konczal at Rortybomb (itself a thoughtful compilation of a variety of articles, especially this one from Interfluidity), this gem from the Mortgage Bankers Association:

The centerpiece of MBA’s recommendation is the creation of a new line of mortgage-backed securities (MBS).  Each security would have two components – a loan level guarantee provided by a privately-owned, government-chartered and regulated mortgage credit-guarantor entity (MCGE) and a security-level, federal government-guaranteed wrap.  The wrap would be an explicit government guarantee focused on the credit risk of these mortgage securities.

That takes balls.  Know what takes even more balls?  The self-congratulatory blurb at the end of the press release: (more…)

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Courtesy of Calculated Risk, a fantastic example of the government’s inability to grasp the root cause of our economic woes:

The Federal Housing Administration, hit by increasing mortgage-related losses, is in danger of seeing its reserves fall below the level demanded by Congress…”They’re probably going to need a bailout at some point because they’re making loans in a riskier environment,” says Edward Pinto, a mortgage-industry consultant and former chief credit officer at Fannie Mae. “…I’ve never seen an entity successfully outrun a situation like this.”

In the past two years, the number of loans insured by the FHA has soared and its market share reached 23% in the second quarter, up from 2.7% in 2006, according to Inside Mortgage Finance. FHA-backed loans outstanding totaled $429 billion in fiscal 2008, a number projected to hit $627 billion this year.

When you find yourself in a hole, stop digging.  Except the Bernanke/Summers/Geithner team, who seem to believe you try to dig your way through to the other side of the earth.  Call it the Martingale Strategy of government finance.

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Mike Konczal has been writing at Rortybomb and now Baseline about structural fixes to the housing market.  I thought of his work when reading this Times article on the real estate appraisal business:

On May 1, a sweeping change took effect that was meant to reduce the conflicts of interest in home appraisals while safeguarding the independence of the people who do them.  Brokers and real estate agents can no longer order appraisals. Lenders now control the entire process.

Why do we have appraisals at all?

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Via Rortybomb, Dean Baker’s proposal in the Guardian to address foreclosures:

In recognition of the extraordinary situation created by the housing bubble and its collapse, Congress could approve a temporary change to the rules governing the foreclosure process. This change would give homeowners facing foreclosure the right to stay in their homes, paying the market rent for a substantial period of time (eg seven to 10 years).

This seems like a truly terrible idea – so bad, and recommended by such an astute commentator, that I wonder if there is some aspect of it I fail to understand.

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On July 3, 1863, the Army of Northern Virginia was defeated at Gettysburg by the Army of the Potomac.  As was fitting for a conflict in which each side simultaneously advocated the right of the minority to be free from the majority and the majority’s right to dominate the minority, the South attacked from the north and the North attacked from the south.  Defeat crushed the Army of Northern Virginia’s offensive capability, ended any hope of European intervention, and gave Lincoln the confidence to refuse to meet Confederate Vice President Alexander Stephens, who had proposed a conversation about prisoner exchange that would likely have touched on ending the conflict.  In every meaningful sense, it was the day the Confederacy lost its chance at independence.

General George Meade was nervous about his victory.  He had been in command for all of eight days.  Robert E. Lee moved to a defensive formation, anticipating a final attack.  The attack never came; Meade knew General Hooker’s forces were shredded at Chancellorsville with similar numerical advantage and didn’t want to press his luck.  He let Lee’s army ford the Potomac and escape back to Virginia.  For that – and for getting into a fight with a newspaper reporter – the story went out that Meade lost the battle.  He was replaced by Grant at the end of the year.  It’s not about what happened, it’s about what people think happened.  Call it the Liberty Valence Hypothesis.

We are already seeing this sort of revisionist history in the financial crisis.

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AIG Again

Michael Lewis has a piece in Vanity Fair that could as easily have been titled The Banality of Derivatives.

Yet the A.I.G. F.P. traders left behind, much as they despise him personally, refuse to believe Cassano was engaged in any kind of fraud. The problem is that they knew him. And they believe that his crime was not mere legal fraudulence but the deeper kind: a need for subservience in others and an unwillingness to acknowledge his own weaknesses. “When he said that he could not envision losses, that we wouldn’t lose a dime, I am positive that he believed that,” says one of the traders. The problem with Joe Cassano wasn’t that he knew he was wrong. It was that it was too important to him that he be right. More than anything, Joe Cassano wanted to be one of Wall Street’s big shots. He wound up being its perfect customer.

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