Archive for September, 2007

The Fed: Doin’ What It Can? (September 24, 2007)

Posted in Economics, Federal Reserve, Housing on September 24, 2007 by e-commentary.org

Reducing the FFR by .50 and the discount rate by .50 may work.  May not.  The Fed is mainlining more junk to the junkies who marketed and continue to market junk.  “Easy” credit in recent years produced “hard” credit this year.  Providing more “easy” credit may soften the current credit crisis for a few weeks or even months.  The availability of ARMs (adjustable rate mortgages) in recent years and other dubious instruments allowed individuals to acquire and occupy a house and use it as an ATM (automatic teller machine).  With a short term decline in interest rates, a few ARMs may not reset upwards as quickly.  The fix is only effective in the short term.  The underlying problems are unchanged.

In a rising real estate market, prices often accelerate quickly because buyers try to outbid each other.  In a declining market, prices do not fall quite as quickly because many sellers refuse to outbid each.  Some homeoccupiers will not lower a sales price lower than 1) the price they paid for the structure, and/or 2) the amount due on the loan.  Some borrowers fear paying all of the deficiency that would become due immediately if they sold for less than the remaining obligation, so they hold on for a few more months.  This “stubborn irrationality” offends economists, but they live with it.  This propensity to repudiate the market in the short term is ineffective in the intermediate run, although it slows what otherwise could be a spiraling decline in prices.

The financial markets, however, could enter a declining spiral with little notice.  The financial markets are benefiting from the recent flood of money.  However, even those who want to appear to believe in the Economy so that others stay in the game and hold up the market will get spooked.  Those who invest other people’s money (OPM) are not particularly concerned because they benefit as prices gyrate; those who are investing their own money do not want to be the last one to sell and end up the last chump standing.  The Economy is best served by a soft decline rather than one that accelerates downward uncontrollably.  In light of the fundamentals (realistic profit predictions; realistic price/earnings ratios for the respective industries), a Dow (Murdoch ?) of 12,000 is more realistic.  However, the “exuberant irrationality” that underpins the financial markets could drive the Dow (Murdoch ?) down even lower in a panic.

Bumper sticker of the week:

Do Anything.  Something.

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Stagflation And The Fed (September 17, 2007)

Posted in Federal Reserve, Inflation on September 17, 2007 by e-commentary.org

Inflation is rising.  (See the e-ssay dated July 16, 2007 entitled “Back Door Inflation”).  Examples abound.  The standard venerable five (5) gallon container of paint now hauls only four point six eight (4.68) gallons.  The benchmark basket of goods and services used to calculate the consumer price index is getting much smaller.

The housing boom has played out.  Consumers would like to spend more, but they completed thirty years of spending in three (short) years.  The bills are arriving monthly for the next twenty seven years.  Consumers will not be able to consume.  The economy is stagnating and will continue to stagnate.

The economy is in a state of “stagflation” with both inflationary and recessionary pressures.  (See the e-ssay dated August 7, 2006 entitled “The Fed:  Deal with ‘Stag’; Deal with ‘Flation’?”).  This past August 7, the Fed expressed concern about inflation.  Now the concern du jour is recession.  The Market anticipates a drop in the Federal Funds Rate (FFR).  What should be done is problematic and a problem.  The Fed likely will reduce the FFR by .25 to appear to be doing something.

Bumper sticker of the week:

Do something.  Anything.

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Potemkin Estates, Parvenu Palaces (September 10, 2007)

Posted in Architecture, Housing, Society on September 10, 2007 by e-commentary.org

The drive to impress in America is driving us to buy more expensive rides and bigger homes.  Architecture is about scale and proportion, among other considerations.  Bigger is not better; bigger is usually garish and gaudy and not better.  Pumping steroids into a house plan is counterproductive.  Some Americans commission monstrous McMansions and only finish enough rooms to obtain a certificate of occupancy.  Potemkin Estates.  Parvenu Palaces.  “Staging a home” before a sale is undertaken to make the house look like a movie set and presumably more appealing to prospective buyers.  However, the staging is now done at an earlier stage.  Talk to a furniture deliver person.  Some individuals finish a room, furnish it with tony furniture and cordon it off from use.  The thinking is that the house will look more comely when it is put on the market for sale at a later stage.  The house today has lost its essential purpose.  The bigger houses in particular have no heart and no soul; they are somber museums, monuments, mausoleums.Bumper sticker of the week:

Only you can prevent narcissism

Consume Inconspicuously

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Housing, Again (September 3, 2007)

Posted in Housing on September 3, 2007 by e-commentary.org

The root word of “mortgage” is “mort” – death.  Pay until you die.  Die trying to pay it off.  The concept of “equity” was created by the British Courts of Equity and represented a promising development.  Before the creation of “equity,” if an individual missed one payment, even the last payment, he lost the house and forfeited his payments.  The Courts of Equity allowed individuals to acquire a house brick by brick, month by month, payment by payment without losing everything if they missed one payment.  Today, by contrast, without making a payment, a homeoccupier can take a loan against “equity” he or she does not have in a home.  Too many individuals have spent “equity” that does not and will not exist.  They are killing themselves financially.

A few years ago before effective spam filters were available, the offers streamed in from the Internet.  “Do you want a smaller penis?”  “Do you want a bigger mortgage?”  Or similar enticing messages.  The public devoured them.  The loans were aptly described as “Liar Loans” because they did not require one to provide tax returns or wage statements.  Having a job was not relevant.  The lenders/originators encouraged the borrowers to lie.  The borrowers obliged.  The prospective purchasers confronted a 1) small down payment if any, 2) initial payments that were manageable, and 3) a real estate market that appeared only to be skyrocketing.  Their response is not surprising.  The appraisers provided whatever appraisal price was required under the circumstances.  The real estate agents and brokers and facilitators facilitated things.  The loan brokers are largely gone and cannot answer for their crimes.  The borrowers are obliged to pay third parties who acquired the loans perhaps with some inkling that they were dubious.

The Enron and related scandals were created by a small cabal operating behind closed glass doors in glass towers.  By contrast, the real estate apocalypse was created and fueled by the greed and short-sightedness of millions of individual citizens.  The short-term drop in interest rates in the last few years has come at a great long-term social and economic cost.  (See the e-ssay dated January 30, 2006 entitled “Greenspan’s Legacy – Apres Moi, Le Meltdown”).  The collapse was predictable and predicted.  Everyone seems to be living in a glass house.  There are no easy solutions.

Bumper sticker of the week:

We have met the enemy

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