Via the Albany Project, the 2008 Bush plan for dealing with the housing downturn:
The Administration has aggressively pursued policies to help deal with current challenges. Facing declines in housing markets of the past two years, the Administration has made proposals for modernization of the Federal Housing Administration (FHA)…
[….]These policies are intended to help provide transition relief-without any direct costly “bailout” from the Federal Government for individuals or institutions that had taken on excessive speculative risk and without interfering with the effective functioning of the free market.
No one could have predicted. We will be greeted as liberators. Blah blah blah.
DougJ
What I haven’t figure out yet is how much of the failure was Bill Clinton’s fault and how much was Obama’s fault.
Joshua Norton
And their latest-greatest excuse:
"It’s all Obama’s fault".
Wankers.
Third Eye Open
When do we start turning corners?
Can we use the same ‘Mission Accomplished’ banner when we hit a 10% jobless rate?
Graduate program inquiries are up something like 15% in the year over year comparison at FSUs Business school.Great. All we need are more MBAs.
Zifnab
Bush who?
Zifnab
Is our childrens learning?
Dave
Fuck. This. Shit.
We’ve had almost 30 years now of Republican economic theory shoved down our throats. And the grand result has been this corpse of an economy.
So it’s time to try something else. Get the government involved and open the money spigot. Five years ago if someone said we should spend almost a trillion dollars on a stimulus package, I would have been pissed. Now I say let’s start printing the money.
Let’s spend this cash on fixing roads and bridges. Spend it on creating green energy and updating the grid. Spend it on keeping our schools affordable. Because I don’t think it will make things any worse than they are right now.
J.
And mistakes continue to be made, and not just by the Bush administration. Obama for America/the Obama transition team has already made a few missteps and broken promises. The only difference is that at least Obama is taking credit or blame, or is saying he will, for some (if not all) mistakes (no more passive "mistakes were made").
DougJ
Bush was the first MBA president, you know.
blogenfreude
I predict that in two, maybe three Friedmans this voluntary program will turn the housing market around. But please excuse me – I’m off to see Richard Perle about a statue.
Montysano (All Hail Marx & Lennon)
From what I’ve read, there are 3-4 million distressed mortgages, so we’ll use 4. The median price of a home is $180K, so we’ll use $200K for easy math. That comes to $800B. Let’s say that 50% of those are poor brown people who borrowed from banks who were forced, FORCED I tell you, by the CRA to make loans (it’s less than 50%, BTW).
And yet we’ve spent some $5T on bailouts? And still there is that $60T swaps market lurking out there somewhere?
Is it possible now that the wingnuts can shut the fucking fuckity-fuck up about how Fannie & Freddie and brown people caused all this?
Yeah………. I didn’t think so.
Crusty Dem
Montysano, I’m also a bit flummoxed by the math, here. Although my biggest problem is:
"$500+ billion for mortgage-backed securities? That could cause investments to fail, we must give the money to these companies."
"$25-50 billion to save the US auto industry and millions of jobs? No fucking way…"
The latest on mortgages is that 10% of all mortgages are currently in default, that would be ~8 million. I would imagine the majority are recent loans (tough to default on a $300 monthly payment in year 27 of your mortgage), and the average value is well above the US mean, probably >$300,000… That would put us over $2 trillion, although obviously, even if every mortgage were to go into default, the defaulted homes would not be completely w/o value.
My question is, how in the name of holy Enron can the US mortgage market be a $60 trillion dollar "industry" if the entire value of homes in the US is only $20-30 trillion, and no more than 1/2, and more likely a 1/3 of that value is in outstanding mortgages?
Secondarily, if we give the banks $500 billion or $7 trillion, are we covering legitimate losses due to "should’ve been foreseen" mortgage defaults, or just paying off a fraction of the losses in the Ponzi scheme called "mortgage-backed securities"?
I breathlessly await Larry Kudlow’s clear, insightful explanation.
PS – I recognize that my math may be slightly flawed, but it should be well within the ballpark. I think the questions are still legitimate.
Montysano (All Hail Marx & Lennon)
@Crusty Dem:
My math may be off, but I think I’m in the ballpark.
One important point: the US mortgage market is not "a 60 trillion dollar industry". That’s the value of the credit default swaps derived from the mortgage market, which I believe is actually in the $12T-$15T range (which jives with your numbers). So the "insurance", or the "bets", on the mortgage market far exceed the underlying value. That such a beast was allowed to develop seems like unimaginable irresponsibility.
This is my understanding. I’m not a finance expert, and would be happy to be proven wrong, because that $60T figure scares the shit out of me.
(Parenthetical Love)
The last I heard AIGs Credit default swaps where in the range of 3T to 60T $s( ie. they have no idea how many they sold or dont want to admit). Thats just one company. I think its prolly alot higher than that.
@ Crusty Dem
Depends on where you draw the lines. Yes there’s only 20-30T in raw mortgages, but those mortgage companies employ a lot of people and result in a lot of consumption.
Montysano (All Hail Marx & Lennon)
Here’s an even scarier number I discovered in my reading. The global value of real estate is thought to be $100T-$125T. The global value of all derivatives (of which credit default swaps are just one variety) is thought to be $500T-$800T, or possibly exceeding $1Q. That’s right…. 1 quadrillion dollars.
And Allen Greenspan was operating on the belief that financial institutions, if left unregulated, would do the right thing.
I have no words…
Montysano (All Hail Marx & Lennon)
@(Parenthetical Love):
PL: my reading indicates that there is $20T-$30T value in US real estate, but as Crusty Dem points out, not all of that is under mortgage. That’s where the "mortgage market = $12t-$15T" derives from.
Crusty Dem
So, in other words, we’re dealing with an "industry" where the exchanges far, far exceed the assets (presumably due to the equivalent of all assets being exchanged several times/yr). This is not a unique situation, that’s what happens in stock markets all over the world, but anytime these numbers get thrown around, the actual value of the assets is often lost in the excitement of "profit" by the various underpants gnomes.
I’m not certain of the situation, but I haven’t really seen anyone detail the use and value of these derivatives (even Greenspan is beyond vague on this), and am uncertain how, if they’re a bundled group of mortgage-backed assets, they can have a predictable value. Additionally, I’m not certain how throwing some money at the situation will actually stabilize the market, unless the market has some integrity, this is far worse than throwing cash at car companies, who at least have assets, employees, and products…
umm, no, at least not relative to the value of mortgages (unless our mortgage companies are responsible for a huge percentage of the GDP, in which case, we are well and truly fucked).
DougJ
Try reading Ayn Rand, you leftard numb-nut.
(Parenthetical Love)
I am so a fish out of water in this discussion, but what do you make of this?
big picture
Obviously this is from the big BEFORE.
Then again you guys are talking micro and for some confused reason I’m trying to talk macro.
Stuck in the Funhouse
from the Federal Government for individuals or institutions that had taken on excessive speculative risk and without interfering with the effective functioning of the free market.
Funhouse Musing;
Fruitful economic theory dictates that you needs lots of Big Fat Cats in order to make Little Fat Cats. It’s only natural!
TheAssInTheHatOnMyCat(Formerly Comrade Tax Analyst)
The solution "…for individuals and institutions that had taken on excessive speculative risk"? Well, right now I’m in favor of that old, time-tested one the Mob used to use: They can’t pay-off? Break their legs.
Think of all the hobbling hedge managers and high-finance CEO’s. Oh, yeah…throw in the folks in charge of the Ratings agencies, too. It wouldn’t get the money back, but at least the consequences would be visible.
Greenspan? Naw, I wouldn’t physically harm him…he’s an old man…just make him go around the nation…one town each day, and explain the "thinking" behind the FED policies during his chairmanship period.
Montysano (All Hail Marx & Lennon)
@DougJ:
I see, DougJ: you still want to blame this on the Looters and the Moochers? Fine, have at it, but show your work.
Crusty Dem
(love), a little different from what I was saying, which was just that the mortgage companies themselves aren’t a huge percentage of the GDP. Your article mainly demonstrates that household real-estate assets are outsized relative to GDP, presumably due to the A) the housing bubble (large factor) and B) increased home ownership (small factor). Their plot only goes to 2005, so I suspect this % increased to 160-180 by the end of 2006 and has since dropped to ~130, with more droppage to come (all numbers approximately pulled from my ass)..
Montysano, are you saying that you aren’t attacted to Dagny Taggart?
demimondian
@Crusty Dem: Because the average long-term holder of a house pays a significant multiple of the actual price of his or her house while servicing the mortgage. Lemme see…
The face value of the loan on the demi-bunker is approx. $190K (we’ve hunkered down at this address for a long time). We pay 6.25% API on the 30 year loan. Our total payments (ignoring insurance and other costs) will come to $451,152.32. That’s more than twice the total value of our house, in aggregate. (Were we to refinance today, taking out a fixed rate 15-year mortgage on the balance at the prevailing A+ rate, we’d still pay a total of approximately $270K on the remaining balance of slightly more than $140K, which is still almost twice the remaining balance.)
That means the mortgage business is much larger than that total value of the housing stock it covers.
Crusty Dem
Demi, they don’t actually calculate based on total payments, do they? That’s completely insane, any numbers have to be based on present value. Are people buying assets based on total future payments? I take back the underpants gnomes comment, this would be far worse..
demimondian
@Crusty Dem: Actually, they do, and it makes sense to do so. As you say, the value of the annuity the demi-mortgage represents is the present value of the loan. However, the present value of the collection of annuities samples across the whole spectrum of times to maturity — and the entire risk spectrum. That means that the amount of income realized at any given instant can be roughly proportional to the total payments of an average mortgage across its entire life cycle. That’s where the multiplier comes from.
Montysano (All Hail Marx & Lennon)
@demimondian: Thanks for that explanation, Demi. When I thought of the supposed $60T swaps market, I was thinking in terms of real estate value, not annuity value. You’ve actually made it seem not quite so bad..
@Crusty Dem:
Eh, not so much 8-) But I loved this quote:
Crusty Dem
But demi, no one uses future dollars in presen terms without adjustments. Otherwise I could loan you $100 on the basis of you paying me back $1,000,000,000 In 700,000 years and claim to have a "billion dollar business".
Can we pay back AIG in mythical future dollars?
demimondian
@Crusty Dem: Pay AIG in mythical future dollars? Don’t we all wish…
Unfortunately, my argument takes the question of the actual face values of the notes into account. Home assessments rise very slowly while the house is owned, and only jump when the house sells. As such, the ratio between the face value of the loan and the total payments on the note over time is a reasonable surrogate for the expected ratio between the total value of the housing stock and the total income for the loans. (Oh, and most mortgages are never fully payed off.)
demimondian
@demimondian: Oh, and to be clear, what I’m arguing is that it’s not at all unreasonable to assume that the total income from the loans of the future will bear the same ratio to the total costs _ad infinitum_. Thus, the present value of the income stream is for a stream which greatly exceeds the total value of the individual mortgages, since the stream is perpetual, even if the instruments which make it up terminate.
DougJ
Fine, have at it, but show your work.
You’re not my math teacher.
The genius of Ayn Rand requires no further justification.
Montysano (All Hail Marx & Lennon)
@demimondian: Hence, a global value of derivatives @ $500T+, against a global real estate value of $125T, is not exceedingly out of line?
Thanks, Demi. Great stuff.
Montysano (a Looter & Moocher)
@DougJ: Yesterday, I thought this was the dumbest thing I’d read in quite a while:
And then, a new contender appears on the scene:
TheHatOnMyCat
I have, I have. And I used to listen to the crazy bitch when she showed up on the Tonight Show.
Meh. Never could figure out why people cared so much about her or her work.
Stuck in the Funhouse
@DougJ:
And anyone who doubts this hasn’t seen Ayn’s sepulcher over at Atlas Juggs. The Genius. It lives. Right there. On the intertubes.
DougJ
We mock what we do not understand
Xecky Gilchrist
@DougJ: We mock what we do not understand
That, plus ridiculous stuff.
demimondian
@Montysano (All Hail Marx & Lennon): Had the derivatives been predicated on statistically independently distributed criteria, no. Unfortunately, there’s this small problem…when your instruments no longer no constitute a small fraction of the total economy, and when they are are predicated upon a failure to pay, you are kind of betting against what the rest of us would call -BATSHIT OBVIOUS- the best of sense.
Dennis - SGMM
Anyone over the age of twenty-five who takes Ayn Rand seriously is likely posting from mom’s basement.
demimondian
@DougJ: All hail, DougJ! All hail Teh Rooler of Teh Trollz.
Man, how is it that you are frequently listed as Teh Rooler of Teh Trollz around here, and yet you manage to reel them in all the same?
J. Michael Neal
No. No, no, no. When people say that there are $500 trillion of derivative contracts, they are talking notional value. Notional value has nothing, literally nothing, to do with now much money is actually at risk. I’ve made this post before, and I’m reaching the point that I’d like it to be on the front page so that people would actually read it.
The notional value of a derivative is what it would be worth if the underlying asset went to zero. That doesn’t make sense as a value for almost any derivatives, but it really doesn’t make sense for interest rate contracts. LIBOR is not going to go to zero. Sorry. About 85% of the notional value of all the outstanding derivative contracts are tied to interest rates, not mortgages. The amount of money actually at risk is probably at least an order of magnitude lower than the numbers thrown around.
Comrade Dread
Until we end up like Zimbabwe and the only jobs left are the ones at the print shop because they have to keep printing in obscenely higher denomimations every day.
I know you’re probably just joking, and it’s been a while since I’ve read her, but from my understanding Rand’s opinions of the producers were based on people actually producing something of value to society, not on the hanger-ons, douchebags, and lobotimized MBAs that invent new derivative schemes to reap money off of other people’s ideas and produce nothing else of value.
DougJ
Man, how is it that you are frequently listed as Teh Rooler of Teh Trollz around here, and yet you manage to reel them in all the same?
People seem to have short memories.
demimondian
@Comrade Dread: Actually, there’s a real difference between printing money in a government triggered inflation and the super-inflation that Zimbabwe is currently experiencing. In the one, you print enough money to make sure that the economy deflates slowly, if it must deflate at all, or, better, maintains a low but healthy inflationary trend. In the other, your currency becomes worthless, and you fall back on one of three things: barter, de facto adoption of a foreign currency, or "civil unrest". Usually, though, you’ve already got the third of these on hand in ready supply, and you just manage to find a good source of the first two to mine.
Stuck in the Funhouse
@DougJ:
They do? I forgot.
demimondian
@DougJ: Man, I remain in awe of you.
Well, of that, and of the fact that you actually got a job in academia with a Ph.D. in math.
Montysano
@J. Michael Neal:
Have pity on me, J. I was a math major in college, but this stuff makes my head hurt. But I think I get it now.
J. Michael Neal
This puts you ahead of the math majors that put together structured finance.
DougJ
This puts you ahead of the math majors that put together structured finance.
I’d love to blame it on the majors but I fear it was the PhD’s.
It’s terrible, truly a terrible thing. It all stems, as Demi says, from not understanding/admitting (it’s a fine line, isn’t it?) that certain variables were not independent. In layman’s terms, your getting foreclosed on is related to your neighbor’s getting
foreclosed on.
God help us all.
DougJ
Well, of that, and of the fact that you actually got a job in academia with a Ph.D. in math.
Yeah, but I have to live in Rochester. You live in sunny San Mateo or some such, right?
demimondian
@DougJ: Just outside of Seattle. Still a lovely place, although not as lovely as Boston…
J. Michael Neal
That’s not quite it. I’m not sure whether the real answer reflects more poorly on them or not. Foreclosures are independent events, as long as the market is going up. So long as that was happening, the statistical models worked fine. As soon as house prices stopped going up, defaults stopped being independent. Then the models collapsed.
Part of the reason I say that the financial geniuses were morons is that the same thing happens every ten years. They always create fancy models that work great, and the key variable always stops being independent at the worst possible moment. It happened with programmed trading in 1987. It happened with interest rates on sovereign debt in 1997. It happened with house prices in 2007. These people never fucking learn.
In fact, the nature of finance guarantees that this is going to happen. There is a very strong observer problem. If a trade works, everyone starts making it. Once everyone starts making the same trade, all of their old correlations become useless. The whole system then waits for them to realize that they ran off the cliff.
I love trading and finance, but this country really needs to figure out a way to make this sort of thing consistently less profitable so that the bright people go into something that’s actually productive. I’d appreciate if you would wait until I have a job in another field, though.
Xenos
@J. Michael Neal: Somebody, I think Thom Hartmann, was recommending that a long repealed surtax on stock and bond trades (25 basis points or so) would pull in enough money to pay for the initial bailout of the investment banks. Also, that sort of surcharge does not significantly cost investors, but will suck a lot of the profit out of day trading and highly leveraged manipulations and churning of the markets.
J. Michael Neal
@Xenos: That’s one good idea. I’ve got a couple others, but they are sufficiently half-baked that I’m not going public with them.
The actual traders don’t bother me so much, though I’m biased, since I was one professionally, and now do it for myself. It’s the people making the strategies and the salesmen. The day traders really don’t cause that much damage, except to themselves.
I got into it because I love it, but there are a lot of people in the business who are just as Michael Lewis described in his recent article: they’d really want to do something else, but got into finance for the money. I’d like to rebuild everything so that whatever they really want to do pays something competitive.
demimondian
I frankly question the actual import of day traders on the behavior of the market. Day traders depend on the same illusion of independence that other marginal speculators depend upon — but it’s the large marginal speculators who caused each of the last four meltdowns. (A marginal speculator, by the way, isn’t some penny stock pump-and-dump artist, but rather any person who buys and sells securities on the expectation a certain marginal change in their prices. That is, a program trader in the mid eighties, a momentum trader during the bubble, or a CDO trader betting against a fall to zero.)
The current blame war aimed at short sellers and the like is yet another example of the large firms trying to jackelope the debate with small fish. In order to fix what’s broken in the financial markets, we need to regulate systems which will fail in the event of the sudden appearance of a previously latent correlation. That’s the feature which all of the crashes you pointed to share, J. Michael Neal, and it also explains a number of other, large crashes (among them, a famous one in 1929, by the way.)