Archive for the 'Housing' Category

Summer Reading III

July 21, 2010

by Jerry O’Driscoll

According to Reinhart and Rogoff, “for the advanced economies during 1800-2008, the picture that emerges is one of serial banking crises.” In This Time is Different, the authors bring us up to the present by examining the history of banking crises. Banking crises are not only frequent , but often accompanied by other kind of crises.  These include exchange rate crises, domestic and foreign debt crises and inflation crises.  The current financial crisis is still unfolding, but we have already seen the clustering of crises.

They observe that banking crises are often preceded by surges in capital flows.  This finding may be controversial, but they detail it at length.

Banking crises are often associated with an asset bubble in housing. They compare the current housing and banking crises to others stretching back to one in Norway during 1898-1905. They devote considerable time to inflationary crises, which are quite common aftermaths both in earlier and more recent history (1500-1799 and 1800-2008).

That brings them to the subprime meltdown and what they term “the Second Great Contraction” (after the great Contraction, 1929-33).  It is an excellent and thorough presentation. They note historical studies calling into question the Fed’s policy of “benign neglect” toward the housing bubble under Greenspan and Bernanke.

The history of the aftermath of banking crises is sobering.  One salient fact: in the aftermath of 21 banking crises involving a housing boom and bust, real housing prices declined on average 35.5% over 6 years. By that record, we are but halfway through the housing bust. They find that “for banking crises, real housing prices are nearly at the top of the list of reliable indicators” (p. 279).  Once again, the Fed’s attitude toward the boom in housing prices is called into question by historical experience.

I recommend this book to all for serious summer reading.

Connecting Dots to Financial Crisis

June 10, 2010

By Chidem Kurdas

There are enough books about the events of 2008-2009 to fill a library. Nevertheless, there is no coherent framework that integrates the various factors in the dramatic boom-and-bust cycle that goes back to the late 1990s and may still be with us yet.  Bruce Yandle offers a welcome synthesis in the Independent Review, centered on trust-building devices and their dissolution. Read the rest of this entry »

Understanding Efficient Markets

June 2, 2010

By Chidem Kurdas

Headline topics like derivatives are part of the larger issue of how markets function.  About this big question there’s been profound confusion in the past two years.  Peter Boettke’s article in the Winter 2010 issue of the Independent Review clarifies the muddle.

A particular mathematical interpretation of what an efficient market is has hogged the limelight.  Read the rest of this entry »

Goldman Sachs Hate Week

April 28, 2010

by Chidem Kurdas

George Orwell’s classic novel, Nineteen Eighty-Four, describes a political ceremony called the Two Minute Hate, featuring Public Enemy Number One, a reprobate named Goldstein. People attend official rituals to work up a frenzy of hatred against Goldstein and love for their protector, Big Brother, or B-B.

To quote Orwell, at the climax of the Two Minute Hate, “the entire group of people broke into a deep, slow, rhythmical chant of “B-B! … B-B! …B-B!” – over and over again…” This daily rite is supplemented with elaborately prepared Hate Weeks.

In the past week there has been a similar fury in the media against Goldman Sachs, with herds of pundits all expressing their horror of the derivatives deal that is at the center of the Securities and Exchange Commission’s fraud case against the investment bank. This campaign starts with chants of “Social Benefit! Social Benefit! Social Benefit!” and climaxes with “Regulation! Regulation! Regulation!” Thus a mythical regulator stands in for B-B.

To pick one example out of many, George Soros writes that “Whether or not Goldman is guilty, the transaction in question clearly had no social benefit.” Mr. Soros is wise to hedge his bet about Goldman’s guilt—the SEC complaint contains holes the size of the real estate bubble. But was the mortgage-based collateralized debt obligation really devoid of social value? Read the rest of this entry »

The Price You See is Not Always the Price that is Relevant: The Housing Bubble

March 12, 2010

by Mario Rizzo  

To argue successfully that a low Fed interest rate policy was the fundamental cause of the housing boom-bubble is not a slam dunk. A relatively small reduction in the mortgage rates available at the time should not alone have a generated so much of a boom.   Read the rest of this entry »

Just What We “Need”

November 27, 2009

by Mario Rizzo

Investors’ eagerness to invest in mortgage debt helped drive mortgage rates to all-time lows this week, Freddie Mac said.

The average rate on 30-year fixed-rate mortgages was 4.78%, the agency said Wednesday, matching a record low set in April. That was down from 4.83% from the previous week and 5.97% a year ago

I am amazed that aggregate-demand economists can look at the housing market and simply wonder how to bring it back to normalcy. Today the Wall Street Journal reports that investors are flocking to invest in mortgage-backed securities now that the Fed has been buying them. Freddie and Fannie are too big to fail, and so forth. The risk premium relative to Treasuries has fallen to the narrowest point this year.

From the investor’s perspective these are relatively safe problem-free investments. On the other hand, from the social perspective these investments delay the necessary adjustment of resources out of housing — remember: the over-expanded bubble sector?

Our aggregate-demanders (aka “Keynesians”) do not need to worry because during recessions the allocation of resources is not important. All that matters is propping up spending and restoring “confidence” in something called “the economy.”

UPDATE: A New York Times editorial argues that the housing stimulus is not working. What is their standard of “working”? It is hard to tell precisely. The complaints are that new housing construction has fallen, prices of houses are expected to fall still further and that more homeowners have negative equity. So presumably a policy that “worked” would have increased housing construction, propped up prices, and prevented the spread of negative equity. No readjustment in their play book! What is more disturbing, but predictable, is that the drumbeat for reconsidering the Fed’s plan to begin exiting the housing market has begun:

And the Federal Reserve, whose interventions have sustained the housing market over the past year, must show flexibility. The Fed has made it clear that it would prefer to begin withdrawing support for the market in the months ahead. But without other strong and successful fiscal measures in place, that could do more harm than good.

Stay tuned.

Pain in the Fannie

November 10, 2009

by Chidem Kurdas

As Fannie Mae goes for its next withdrawal from the $200 billion kitty the US Treasury graciously made available to this government-created and -sustained mortgage financer, it may be useful to look beyond the current housing slump and consider what it augers for the future.

Having made yet another loss, the government-sponsored enterprise needs more money. A report Fannie filed with the Securities and Exchange Commission attributes the $19 billion third-quarter loss to the housing slump and mortgage defaults.  “We do not expect to operate profitably in the foreseeable future,” says  the company.

I always thought it was a great triumph of government public relations to come up with the sweet-sounding Fannie Mae moniker for an entity officially called the Federal National Mortgage Association.  Now I understand what the nickname really means—a pain in the taxpayers’ backside for the foreseeable future.

The business has been adversely affected by helping delinquent or imminently-in-default borrowers to modify their mortgages so as to reduce their monthly payments. As the economy recovers, defaults will decline, and presumably this aid will no longer be needed. But it is not clear when – or even if – the subsidy program will end.

In fact, it may be extended.  Fannie “may recommend supplementing the program with other initiatives that would allow us, pursuant to our mission, to assist more homeowners.” Read the rest of this entry »

Behold: The Recovery Is At Hand

October 31, 2009

by Mario Rizzo  

The Gross Domestic Product (GDP) is growing again at an annual 3.5% rate for the third quarter of 2009. Some people say this means that the recession is over. Apart from the much-touted stubborn unemployment problem, does this make sense?  Read the rest of this entry »

Reflating the Bubble, Part II

September 30, 2009

by Mario Rizzo

In a recent post I criticized the extension of the Fed’s policy of buying mortgage-backed securities. Then I was told by a quite-knowledgeable economist that I may have misread the report in the Wall Street Journal. The first sentence states:

The Federal Reserve, in a move aimed at keeping interest rates low for home buyers through early next year, decided to extend and gradually phase out its purchase of mortgage-backed securities. (Emphasis added)

So while it is true that the Fed is extending the program, it also plans to phase it out. I replied (in private email) that I preferred to pay attention to what the Fed is actually doing rather than to what it is promising to do. Read the rest of this entry »

Reflating the Bubble?

September 25, 2009

by Mario Rizzo  

The Fed has decided to extend, at least through early next year, its program of purchasing mortgage-backed securities. The Wall Street Journal reports:  

“The Fed’s action signals its belief that the economy, while in recovery, remains fragile and that housing, which has seen some improvement in recent months, has only started to pull out of its slump.”  

What is the objective of their action? When will they know they have succeeded? Read the rest of this entry »

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