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The Virtual Horserace (November 17, 2008)

Posted in Economics, Greenspan, Housing on November 17, 2008 by e-commentary.org

During the dot.com bubble, a small number of affluent investors (consultants, dentists, consultants to consultants, public employee retirement funds, consultants to consultants to consultants, candle stick makers, etc.) anteed up large bets in cash up front; few horses crossed the finish line a few years later; everyone absorbed the losses with little intermediate-term damage. Okay, they will retire later and perhaps with less money. Life went on. [See the e-ssay dated December 4, 2006 entitled “When the Bubbles Burst”]

During the “Greenspan Bubble,” however, the seeds of the Depression were sown democratically across the land. (Almost) everyone in the populace placed huge bets on credit; few horses will ever complete even the first stretch of a 30-year race (mortgage term); the negative consequences are predictable and devastating. The intermediate-term loses may be 3 to 5 to 7 Trillion in the US and a few Trillion overseas.

Astute observers knew that something evil was going on behind the scenes during “Hurricane Al,” but the contours of the corruption did not emerge until recently. The Wall Street Boys devised something noxious known as a “Credit Default Swap” that involves a “virtual horserace” without real money that jeopardizes the economy and the American economic and political system. The real nightmares are the bets placed on bets placed on bets placed on bets placed on bets placed on bets placed on bets in this virtual and unregulated gambling casino using CDSs as tokens. These players were betting on outcomes in the horse race and then insuring the outcomes without any money, margin or reserve. The winners (who may need to lose in order to win) of the game want to be paid; the losers cannot pay and never intended to pay.

No one will say that these gamers are “domestic economic terrorists.” Saying something that true and stark is deemed to be impolite and impolitic. The CDSs are a cancer on the country. The losses may be 25 to 50 Trillion or more. The Economy cannot absorb the losses.

Bumper stickers of the week:

We will get fooled again.

“All you need in this life is a tremendous sex drive and a great ego. Brains don’t mean a shit.”

Mayor Anthony “Captain Tony” Tarracino (1916 – 2008)

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The Building Tsunami (October 13, 2008)

Posted in Economics, Federal Reserve, Housing on October 13, 2008 by e-commentary.org

Things are collapsing. The mortgage/house is no longer an ATM (Automatic Teller Machine). Mortgages were given to individuals who could not pay. At least with a mortgage there was a structure providing some collateral to support the loan.

The populace is still spending beyond their means. The staggering amount of credit card debt is another Great Tsunami. Credit cards are being given if not shoved down the throats of individuals who cannot pay. These Improvised Explosive Devices (IEDs) are plastic explosives delivered daily by the United States Postal Service. They will all explode within the next year. And then the Congress, the Fed. (Federal Reserves system), and the business and economic press will express surprise, display panic and engender fear.

The geopolitical concerns are overlooked or disregarded. The rest of the world is now taking over the US by “investment not invasion” as American becomes a “second world former superpower.” More later.

Bumper sticker of the week:

Déjà vu all over again?

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Garbage In Garbage Out (March 24, 2008)

Posted in Economics, Housing, Society on March 24, 2008 by e-commentary.org

GIGO may be the only acronym one needs to know today. There are now daily cautionary tales about the CEOs and other ‘Os who created CDOs (collateralized debt obligations) while the OTC (Office of Thrift Supervision – one of the putative regulators) played dominoes. The details and new concoctions (CLOs, CDSs, ABSs, SIVs, etc.) are intriguing and revealing and depressing.

The simple truth is captured in the old expression: “Garbage In Garbage Out.” No alchemy can convert a bad loan into a good loan as it slithers through the economy. There is no way to “make a silk purse from a sow’s ear.” Putting “lipstick on a pig” does make the pig a swan. Rating something as “AAAAAAA” does not make it any safer than something rated “AAAAAA.”

This economic downturn is a small “d” democratic phenomenon. Many Americans (ordinary citizens; realtors; appraisers; loan officers; bundlers; butchers; bakers; candle stick makers, etc.) actively participated in the fraud in broad daylight with their eyes sufficiently open. Only those deluding themselves could have missed the inevitable Meltdown that is taking place and will get worse. Those on “Wall Street” not only should have known about the fraud they knew that everything was junk in gilded garb. Everything that glitters is not gold.

Bumper stickers of the week:

“Sir, ’Margin’ is holding on line 2”

Pigs get fed, hogs get slaughtered

[As many police as demonstrators took to the streets in DC on March 19. So few care or believe that anything can be done about the “Forgotten War.” The police did not don riot gear; a riot did not break out. The police let the demonstrators take over a few intersections without major incident. The demonstrators made a statement without making any major disruptions. A bad day for America and the world, yet a good day for the First Amendment.]

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The Microeconomics of Suburban Subsistence: Three Years Later (February 4, 2008)

Posted in Economics, Housing, Society on February 4, 2008 by e-commentary.org

40 wasn’t a red letter year for them. They are deeply in the red this year. [See the e-ssay dated February 7, 2005 entitled “The Microeconomics of Suburban Subsistence” for background]. He can only find part-time work for a company that does not provide any health care or contribute to a pension fund. Their $175,000 house is now worth $150,000 even with all of the improvements financed with an equity line of credit and sweat. The City still appraises it at $200,000 because the polis wants its pound of flesh. The price of a pound of (bovine) flesh has risen about forty percent (40%); the meat may be tainted. The Fed’s reduction of the Federal Funds Rate has not been passed on or trickled down to them or to prospective buyers of their home. Interest rates to consumers are “sticky” and “ratcheted.”

The calls start like clockwork, because the callers start with the clock. He can set his watch by the first call. At eight o’clock, they start. They would start earlier except for . . . federal regulation. The Fair Debt Collection Practices Act, a federal regulation, sets limits on the amount of harassment that can be inflicted by a creditor on a debtor. And the wake-up calls continue unabated all day, even after the consumer is wide awake. From 0800 hours until 2100 hours. Caller id is now a necessity rather than a luxury. The credit card companies that cooed and wooed him are now cajoling and whining. The companies devised a Bankruptcy Code that is expensive and burdensome. The “Hope Now” program does not offer much hope now. Try it; call the number yourself. However, Congress now is considering a variety of legislation including a bill that allows the Bankruptcy Courts to adjust the amount owed on a home loan to reflect the current market value of the property. That approach has some possibility.

Not only is the value of the house down. Of note, the note for the car is now greater than the retail Blue Book value of the beast. Each 25 cent rise in the retail price for gasoline lowers the market value of the gas guzzler by about one thousand dollars. The rational course of action may be to give their car back to the bank and walk away from the house.

Bumper sticker of the week:

Greed isn’t always really good

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Talk About Housing (January 21, 2008)

Posted in Housing, Perjury, Society on January 21, 2008 by e-commentary.org

“It’s a no-brainer. You can’t miss. You don’t need a job and you don’t need any income. Okay, so you already have two strikes going against you, but they really don’t care. Just lie and tell them you are unemployed with no income. Buy and ride it up and then sell. You don’t even have to paint the place.”

“You have to heat it.”

“You can get one place and flip it and then get another one and flip it.”

“It will flop. And you must insure it. In my book, insurance is necessary but not productive.”

“Everyone’s doin’ in. It can’t fail.”

“And more taxes. They give you enticing tax breaks to acquire a bigger palace that is then subject to higher taxes. My digs are already too big.”

“I shared one bathroom with three others and now I have four to myself. I can shower in three different showers. One is a steam bath. Now, that’s livin’.”

“And buy more furniture.”

“I can sleep in one of five bedrooms. I had to share a room with my brother.”

“Prices will collapse by 2006, 2007 at the latest.”

“No way. This is America.”

“They take the bait and call in. They are already hooked. Operators standing by to assist you. No one stands by to assist you. I sold some old lady in Florida, some seventy-something widow, a loan for $44,000 on a property she owned free and clear. She had enough income to cover her expenses, but I told her she needed more and told her she knew it because she called the number. She can cover the early payments, and I’ll be gone before she realizes what hit her.”

“Seems sporting.”

“It was her decision.”

”Seems that someone in her seventies doesn’t always make sound decisions.”

“Look, this is America. The land of the free. The home of the brave. Apple pie. All that stuff. She is free to make her own decisions. And anyway, she’s old, she can eat dog food.”

Bumper sticker of the week:

Let Them Eat Dog Food

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The Legacy Of “Easy Al” And Easy Money (October 15, 2007)

Posted in Economics, Federal Reserve, Gold Standard, Greenspan, Housing on October 15, 2007 by e-commentary.org

John and Johanna, Juan and Juanita, Ivan and Ivana, their story is archetypical in architecture today. They should have purchased a 1400 square foot starter apartment, but they were induced and seduced into purchasing a 2200 square foot single family two-story home. They could not afford much more than the down payment. They could not afford the subsequent 359 monthly payments. They are being evicted. They will have to live somewhere, someone observes. They need to find a 1400 square foot apartment, but there are few available and many other evictees and evacuees competing for them. And what about the 2200 square foot abode? It sits empty. (See the e-ssay dated April 24, 2006).

“Easy Al” Greenspan never met a problem he would not fix with a fix of easy money. The Fed is charged with addressing monetary policy not fiscal policy. He set fiscal policy without even acknowledging the need for safeguards against the irrationality his monetary policy unleashed. Be suspicious of someone who falls under the spell of one and only one cult commentator; someone should distill the thoughts of 371 (give or take) thinkers in developing a worldview. The Gold Standard crowd almost appears reasonable. At least a gold standard sets a standard for the money supply. Sound monetary policy requires a “goods and services” standard/benchmark. The amount of paper injected into the economy should be measured against the goods and services. Instead, more money than necessary was hurled at problems thereby begetting more problems.

Bumper sticker of the week:

“A cynic is a man who knows the price of everything and the value of nothing.” Oscar Wilde

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Housing Again (October 8, 2007)

Posted in Economics, Housing on October 8, 2007 by e-commentary.org

A house is a bundle of 1) sticks, 2) dirt, and 3) money/interest obligation. The Truth In Lending Act requires the lender to provide basic information about the terms of a loan. A $100,000 house subject to a 30 year mortgage at 10 percent requires the borrower to pay a total of over $316,000 during the life of the loan. Thus, more than 2/3rds of the money ($216,000) pays for the money; less than 1/3rd ($100,000) pays for the sticks and the dirt.

When interest rate drops to 5 percent, the borrower pays a total of over $192,000 during the life of the 30 year loan. Thus, less than 1/2 of the money ($92,000) pays for the money; more than 1/2 ($100,000) pays for the sticks and the dirt.

Reducing the interest rate reduces the total purchase price of the sticks, dirt and money/interest obligation needed to acquire the house. When Greenspan reduced the Federal Funds Rates in 2001 and mortgage interest rates dropped, the price of the money/interest obligation dropped correspondingly. Those who had the sticks and the dirt at the time were in the money. Others were able to acquire a house (sticks, dirt, and money/interest obligation), for at least a few years. Those who obtained a house in the early days of the run-up with a fixed rate mortgage of 5 to 6 percent have a “bird’s nest on the ground” if they keep a cool head.

The interest rate in a typical adjustable rate mortgage (ARM) adjusts upward in the next months and years even if other interest rates do not rise. When the interest rate rises to 15 percent, the borrower pays a total of over $455,198 during the life of the 30 year loan. Thus, almost 4/5ths of the money ($355,198) pays for the money; little more than 1/5th ($100,000) pays for the sticks and the dirt.

Many of the ARMs are more difficult to refinance because they include “pre-payment penalties” if the notes are paid early. A borrower could pay off all but the last month’s obligation and then pay off the last month according to the terms of the note. Some judges might allow it; some would not. The pre-payment penalty provisions should be stricken because they are 1) against public policy, 2) unconscionable, 3) fraudulently obtained, 4) buried in adhesion contracts, and/or 5) _________. There will still be an economic impact because so many investors were fooled and/or fooled themselves into believing that they would receive the substantial returns from the ARMs and other bogus instruments.

The “wealth effect” now has been supplanted by the “poverty effect.” The “multiplier effect” is being supplanted by the “divider effect.” And there is not a whole lot that the Fed can do to improve our lot.

However, Al Greenspan recently announced unambiguously that the credit crunch is behind us. In the near future, no one will even remember this latest pronouncement and hold him to it.

Bumper sticker of the week:

“Time is money, money is time, that is all ye know on earth, and all ye need to know.” John Maynard Keats

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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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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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