Liberate Housing

"Any debate about a housing bailout can be put aside--the bailout is underway, even in advance of specific plans being shopped around Washington by Bank of America to prop up home prices with direct subsidies to homeowners whose debt exceeds the value of their houses. ... But this time, the liquidationist school has been routed--so named for Herbert Hoover's Treasury secretary, Andrew Mellon, who said' 'Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. ... It will purge the rottiness out of the system.' ... So here's the question: Do the people who would be bailed out want to be bailed out? Do they benefit from being bailed out?", Editorial at the WSJ, 27 February 2008.

See my 21 November and 10 December 2007 posts. Who is Hank Paulson's Treasury trying to kid? The thrust of all its efforts is to protect the banks, not the peasants.

A PCAOB Opportunity

"Fannie Mae and Freddie Mac announced an agreement with New York Attorney General Andrew Cuomo to discourage inflated appraisals by enforcing new standards in the home-mortgage market. ... The code bars lenders and their representatives from pressuring appraisers to supply inflated estimates of property values, which are widely viewed as an important contributor to the mortgage crisis. Appraisers have long complained that they risked losing business if they didn't appraise homes at values that would allow loans to be made. ... Fannie and Freddie also agreed to create an independent organization to monitor the new appraisal standards. Their main regulator, the Office of Federal Housing Enterprise Oversight [OFHEO], approved the new code", WSJ, 4 March 2008.

We are witnessing the "SEC-ization" of the mortgage business with OFHEO as the SEC, Fannie and Freddie as underwriters and appraisers as CPA firms. We need one more organization to made the ensemble complete, the "independent" monitoring organization. I nominate the PCAOB. Why not? It already exists and has shown tremendous competence in regulating the CPA profession. Hey Mark Olson (MO), how about it? This looks like a natural PCAOB "product extension". Hey, MO, get on with it.

Seriously, this appears to be a "pass the buck" operation to blame the mortgage mess on the least well politically connected group responsible for it, appraisers.

Measuring Inflation

"Amid Wall Street's recession panic, the latest official inflation news has received less attention than usual. The 'headline' consumer price index (CPI) for the year ending in January was up 4.3%, the third consecutive monthly reading above 4%. ... But as I've argued on this page in the past, the real problem is the sick dollar. ... The 'core' CPI that excludes energy and food shows a 12-month rise of 2.5%. ... Reinforced by intense pressure from Congress, the banking panic has compelled the Fed to take its eye off inflation. ... The root of the confusion is the fact that the prices consumers actually pay change far more quickly than the CPI. ... The most timely figures come from the commodity markets, where prices are transparent and reflect market conditions in the immediate present. ... A little 'indicator analysis' shows that commodity prices, far from reverting quickly back to the mean, are early-warning indicators of the future CPI. ... But worse may be yet to come. While commodities like energy and food are leading indicators of the CPI, precious metals like gold are, in turn, leading indicators of energy and food. ... Historically, CPI inflation is more closely related to prior changes in the price of gold than most people realize. ... Historical CPI data in the U.S. are complicated by occasional changes in the methodology the government uses to calculate the index", David Ranson (DR) at the WSJ, 27 February 2008.

"For readers under age 30 who are wondering why they are suddenly paying $3.15 for gasoline and $2 for milk, the answer is that this is what an inflation looks like. Those of us of a certain age remember it well, if painfully, and judging by the noises coming from the [Fed] of late we had all better get used to it again. ... [O]n Wednesday ... Bernanke told Congress that the Fed will do whatever it takes to stop the credit squeeze from becoming a recession. That's about as close as a central banker will get to saying that he's thrown price stability to the wind. ... Gold is nearly $975 an ounce, and the $1,000 threshold seems inevitable. The euro has broken $1.50 for the first time, while commodity prices in general are hitting record highs. ... In its new version, argued by Fed Governor Frederic Mishkin, the Phillips Curve doesn't exist in the long term but does in the short term. Thus the Fed can afford to open the monetary flood gates now because the slower economy could lead to lower prices later this year. ... Mishkin may be seen as a monetary wizard at the Fed, but to investors around the world he is beginning to look more like a high-class inflationist", Editorial at the WSJ, 29 February 2008.

Way to go DR. I've been saying things like you for years. I go further: the "confusion" is Uncle Sam's policy to try to convince people to hold dollars against their own best interests.

What does a low-class inflationist look like? I wonder if Stephen Cecccehi and Christina Romer read this editorial. I wonder if either believes in money illusion and the Phillips Curve. Stay tuned for more inflation. Got gold? Get more.

Hungarian Irony

"In a bid to boost its inflation-fighting ability, Hungary's central bank will allow its currency to float rather than trade in a band against the Euro. ... 'The previous system was a contradiction in that you targeted both inflation and the exchange rate, which can be conflicting,' said Istvan Zsoldos, a Goldman Sachs Group, Inc. [GS] economist in London. 'Now, if they institute a proper inflation-targeting regime,' he said,, meeting euro-entry criteria, including low inflation is more likely. ... Hungary's move also reflects a global trend, as rising prices prompt countries to rethink linking their currencies to others. ... The global rise in commodity prices is compounding already strong domestic inflation pressures across Eastern Europe", WSJ, 26 February 2008.

What makes Hungary's action delightfully ironic is in 1946 Hungary had the greatest inflation in history when the Pengo was destroyed. In 1946 when Hungary adopted the forint it lopped 29 zeros off its currency. I wonder if Zsoldos ever talks to Jeffrie Currie, also of GS London.

General McCain's War-2

"The Russians did not pour troops into the defense of Stalingrad; they only sent what was absolutely necessary to prevent its total collapse. That way they ensured that the German forces would stay committed to a lost cause. ... That said, let's see where the Bush Administration has led us in the War on Terror [WOT] . ... I shall start in Iraq. Thus, according to Bush, Iraq had become the central battleground in the [WOT]. ... Regrettably, it simply does not seem to have occurred to Bush that perhaps that is exactly what bin Laden wanted us to think. As long as he could tie American forces down in Iraq, and lots of them, he would be free to regroup and retrain in Pakistan, and make progress in regaining territory in Afghanistan. ... So, the summation of the [WOT] to date is that we have become 'determined to win' a battle that really has no strategic value, while the Islamic forces have regrouped and retrained in what the DNI calls their 'de facto safe haven' in Pakistan and Afghanistan. ... We have now fallen for what I expect may well go down as one of the greatest military and foreign policy blunders the [US] has ever made. In the midst of this [WOT] we have somehow managed to provoke a confrontation that could spell the end of Western Civilization as we know it. And I have no doubt that we have provoked that confrontation on the urging and advice of our Islamic 'friends'. Nothing could serve the Islamic cause more effectively than a military confrontation between the West and Russia. ... So how on earth have we managed to provoke Russia into openly threatening armed conflict with the West? But the question should be put the other way round: why on earth is the West prepared to see what will be the certain destruction and incineration of most of its people and territory to appease a bunch of Islamic terrorists and criminals in Kosovo? ... The answer ... I expect lies in 'advice' Bush receives from the likes of Prince Bandar and King Abdullah of Saudi Arabia. ... The images of Bandar lecturing Bush in the Oval Office after 9/11, and King Abdullah boasting about having given Bush a 'history lesson' at the ranch in Crawford, turn my stomach", emphasis mine, Joseph McMillan (JM) at http://www.intellectualconservative.com/, 3 March 2008.

"Regarding your editorial 'The Birth of Kosovo' (Feb.19): In 2025 or 2030 or whenever, Latinos will constitute the majority of the population in California, Texas, New Mexico and whatever other state. At that time, reflecting the democratic will of the majority, leaders of the Latino community will appeal to the United Nations and demand that the world body recognize California, Texas, New Mexico and whatever other state as an independent countries. ... You say it's an implausible and ridiculous scenario? Think Kosovo", Peter Bartha (PB) letter to the WSJ, 3 March 2008.

Right on JM! I have long wondered if Jimmy Carter's pushing out the Shah of Iran, which gave Iran to Khomeni, was the US greatest post WWII foreign policy blunder. Now I conclude the Clinton-Bush Balkans policy is worse. Special note to the Mearsheimer-Walt crew who worry about the Israeli lobby: why not worry about the country that has controlled US Mid East policy since 1932, Saudi Arabia? Or are you, like many academics, on the Saudi payroll? See also my 22 and 28 February 2008 posts.

Right on PB! See my 28 February post.

Don Quixote's Regulatory Quest

"The complex and ongoing collapse in the US securities markets, and the extraordinarily expensive demise of Northern Rock in Britain, signify gross failures of banking regulation on both sides of the Atlantic. ... However, the major international banks regarded the 8% capital requirement imposed by Basel as impossibly onerous, and believed that the Accord unecessarily restricted their move into profitable new areas of finance. ... [T]he new capital standards haven't [worked]. The risk management methodology blessed by Basel II, that of Value-at-Risk, has been found to be an excellent way of measuring risk--except when markets are actually risky. ... The system of financial regulation needs to be completely reworked, No longer should the behemoths of the market be allowed to give themselves greater privileges than medium sized banks. ... Instead, all assets for which a bank is responsible should be carried on its balance sheet, as should the market value of all liabilities, contingent or otherwise, even if they are offset by corresponding assets. Strict regulations should be imposed on maturity and currency mismatches, and trading in equities should not be permitted by institutions whose deposits are guaranteed. No exceptions should be permitted to these regulations", my emphasis, Martin Hutchinson (MH) at http://www.prudentbear.com/, 3 March 2008.

I agree with MH's diagnosis of the problem, but believe his solution, better regulation, wil fail. The big banks will evade any regulation. They will hire the regulators, creatively misinterpret the regulations, etc. By law, deposit taking institutions should be prohibited from making any but consumer loans. I conclude the only thing big banks make money from is consumer loans anyway. The Federal Reserve Act should be repealed and the banks' backstop ended. See also my 12 December 2007 and 13 January 2008 posts.

Fed at Work

"In the [Fed] an independent monetary authority or a handmaiden beholden to political and market players? Has it reverted to its mistaken behavior in the 1970s? Recent actions and public comments, including Fed Chairman Ben Bernanke's testimony to Congress yesterday--where he warned of a steeper decline and suggested that more rate cuts lie ahead--leave little doubt on both counts. An independent central bank is supposed to maintain the value of the currency and prevent inflation. In the 1970s and again now, [Fed] officials repeatedly promised themselves and each other that they would lower inflation. But as soon as the unemployment rate ticked up a bit, the promises were forgotten. ... It's beginning to happen again. Unlike the response of wages and prices in the low inflation 1990s, expectations of rising inflation now delay or stop price and wage adjustment, inhibiting growth. ... Economic forecasts are not very accurate. ... But the rush to bring real short-term interest rates to negative values is an unseemly and dangerous response to pressure from Wall Street, Congress and the adminstration. The [Fed] became 'independent' in 1913 so that it could resist pressures of that kind. ... Surely Mr. Bernanke and his colleagues remember what happened in the 1970s. They console themselves with the belief that they will respond promptly to any inflation that occurs by promptly raising interest rates. That repeats the commitments made repeatedly in the 1970s, which the Fed was unwilling to keep. The blunt fact is that there is rarely a popular time to raise interest rates. And with the growing streak of populism in the country, it will become more difficult", my emphasis, Alan Meltzer (AM) at the WSJ, 28 February 2008.

"The [Fed], with its record on consumer protection already under fire, now faces questions about how well it has supervised banks. ... 'We've seen major institutions write off billions of dollars, mostly because of off-balance sheet transactions. And it's quite clear that the Fed is there on a daily basis, in all the institutions,' Sen. Jack Reed (D., R.I.) said at the hearing. It's clear, 'these banks were taking lots of risks that they didn't really see as risk. Are you ... disappointed that your regulatory apparatus didn't ... monitor the banks more closely?' Mr. Bernanke responded that the Fed needs 'to look in a much tougher way at the risk-managment procedures the banks have.' But he added, once 'they've done all the due diligence, it's hard for us to say, "That's a bad investment." That's not our role.' ... Bernanke ... rejected suggestions the U.S. could get stuck in a 1970s-style combination of high and rising inflation and stagnant growth known as stagflation: 'I don't think we're anywhere near the situation that prevailed in the 1970s. I do expect inflation to come down. If it doesn't we will have to react to it,' he said. ... The Fed has failed 'to provide the appropriate supervisory oversight for the major money-center banks,' Harvard economist Martin Feldstein wrote in a recent opinion piece in the [WSJ]", my emphasis, Greg Ip and Damian Paletta at the WSJ, 29 February 2008.

"A top [Fed] official said the central bank failed to fully appreciate risks that financial institutions were taking before the recent credit problems, and is reviewing its regulations.During a sometimes contentious Senate hearing, Fed Vice Chairman Donald Kohn said the central bank is likely to become 'more forceful' with the financial institutions it supervises. Mr. Kohn didn't explain what actions the Fed might take. ... Sen. Shelby asked Mr. Kohn is the Fed 'was afraid of the banks they regulate.' Mr. Kohn quickly responded no", my emphasis, WSJ, 5 March 2008.

AM is one of America's foremost economists in my opinion. That said, I think he is too kind to the Fed. I do not believe the Fed was ever intended to be "independent". The Fed is supposed to say things about protecting the currency's value and contain inflation it does not intend to hold to. That's window dressing. As I noted on 17 September 2007, the creation of a central bank is a plank of Karl Marx's Communist Manifesto. The Fed exists to redistribute wealth from creditors to debtors and to support the market for Treasury debt. Helicopter Ben can say whatever he wants. Ignore him.

Tell us Helicopter Ben, what is the Fed's role with respect to supervising banks which hold federally insured deposits? Why shouldn't the Fed tell the banks, it will not let them discount paper the Fed concludes is too risky? Why not publicly announce the decision not to discount such paper as soon as the Fed knows of the paper's existence? Why does the Fed not admit it creates "moral hazard" by letting the banks supposed risk management procedures control Fed policy? Who is the tail and who is the dog?

Apparently Barron's 1979 joke about the Fed chairman applies to its vice chairman too. See my 25 January 2008 post.

Show Us How Smart You Are

"The massive write-downs that financial firms are posting have begun to spur a backlash among some investors and executives who are blaming accounting rules for exaggerating the losses and are seeking new, more foregiving ways to value investments. ... Also rattling investors was a report by UBS that said losses among financial institutions could top $600 billion as the turmoil in global credit markets continues to unfold. No one, including the chairman of the [Fed], Ben Bernanke, knows with certainty what would be a better approach than using market prices for valuing holdings. ... Despite the grim developments, many investors actually doubt that firms like AIG will suffer the full force of the losses they are now booking. Instead, these investors argue that the market has overreacted and will recover once the current panic subsides. ... AIG's argument ... [is] a sore point because companies feel they are being forced to take big financial hits on holdings they have no intention of actually selling at current prices. The firms argue they are strong enough to simply keep the holdings in their portfolios until the crisis passes. ... The use of pricing models that don't pay heed to market values was discredited after Enron Corp. used them to book phantom profits earlier this decade. Enron, for example, would book a profit on a contract to buy or sell energy years in the future based on it's own expectations of how much the contract would be worth over time. ... Robert Hertz, chairman of the [FASB] ... 'But you tell me what a better answer is,' he said. 'Is just pretending that things aren't decreasing in value a better answer? Should you just let everybody say they think it's going to recover'?" my emphasis, David Reilly (DR) at the WSJ, 1 March 2008.

DR should have been more critical of those who favor "mark to model" accounting. Are the bank executives who claim these portfolios will recover buying their employers' stock in the market? If say, Citigroup gives me a margin loan, will it say, "sure, no problem. We won't sell you out when under maintenance margin. You told us your stocks will recover". I don't think so. The idea of a return to Enron accounting is absurd. I love listening to "investors" arguments. I have one: if you believe AIG's writedowns excessive, you have an opportunity, buy AIG on margin and in two or three years we'll see how smart you were. Otherwise, shut up. See my 10 December 2007 post mentioning Jack Hershliefer.

Whistle-Blowing in the Wind

"Complaining that recent court rulings were thwarting efforts by citizens to report fraud against the government, members of a Senate committee said on Wednesday that they wanted to work with the Justice Department to undo some of the harm they thought the courts had caused. ... In one such case, filed against Bombadier Corporation, the would-be-whistle-blower was rejected because the organization said to have been a victim of fraud--Amtrak--was not a government agency. ... In another case, a jury found that an American military contractor, Custer Battles, L.L.C., had committed fraud in connection with a contract to help distribute new currency in Iraq, and returned a $10 million verdict against it. But the judge threw the verdict out, saying the whistle-blower law covered only fraud involving American money, and the funds at issue in the Custer Battles case were Iraqi. ... But one whistle-blower, Tina M. Gonter, testified that she was concerned that court decisions like the one in the Bombadier case could be expanded into a liability shield for subcontractors, letting them 'hide behind the skirts of prime contractors'. ... But even as the recoveries have mounted the [DOJ] has fallen further and further behind on its caseload. More than a thousand whistle-blower suits are languishing under seal at the [DOJ], and almost nothing is publicly known about the cases. 'In light of the Bush Justice Department,' Senator Leahy said, 'many wonder whether it has resisted pursuing certain False Claims cases for political reasons, most notably involving contracting fraud related to the war in Iraq and Afghanistan.' ... Michael F. Hertz [MFH], deputy assistant attorney general for the department's civil division ... said that the [DOJ] would oppose on principle any provision that would let government officials sue contractors on the basis of information they collected in the ordinary course of doing their jobs. That, he said, would undermine the public's trust in the government", Mary Williams Walsh at http://www.nytimes.com/, 28 February 2008.

MFH, don't insult our intelligence. Letting government officials "sue contractors .... would undermine the public's trust in government". Or would it expose whether or not the Bush DOJ is an extortion racket? A judge overturning a jury verdict screams out for changed civil procedure, no more JNOV. Under any circumstances. If a judge wants to grant it, let him beg the jury to reconsider its verdict. If it won't and he can't sign the verdict, let him resign from the bench and let the jury foreperson sign it. JNOV undermines Seventh Amendment. If the judge felt as he did, why did he waste the jury's time and let the case proceed? Was he gambling the jury would "see it his way" and hold for Custer Battles (CB)? Or is he soliciting a job for a relative with CB's law firm?

Mortgage Defaults

"Just when it was looking like things couldn't get any worse in the housing market, government officials announced Tuesday that home prices had their biggest fourth-quarter drop in 17 years. At the same time, foreclosure filings in California soared 120% in January from a year earlier to 57,158, according to Irvine-based market researcher RealtyTrac. California's foreclosure rate was second only to Nevada nationwide. ... 'People who are selling now are really feeling it,' said Doug Willis [DW], a Pasadena real estate broker. 'After taking money out of their homes for years, they're realizing they might have a significant loss on their property compared to what they owe for it.' ... On Monday, the California Assn. of Realtors reported that home sales statewide fell about 30% in January from a year earlier and that the median price of an existing home was down 22%", http://www.latimes.com/, my emphasis, 27 February 2008.

"When Raymond Zulueta went into default on his mortgage last year, he did what a lot of people do. He worried. ... Then in January he learned about a new company in San Diego called You Walk Away that does just what its name says. For $995, it helps people walk away from their homes, ceding them to the banks in foreclosure. ... Last week he moved into a three-bedroom rental home for $1,200 a month, less than half the cost of his mortgage. ... Twenty-nine percent of buyers put no money down [in 2007]. For first-time home buyers, the median was 2 percent. And many borrowed more than the price of the home to cover closing costs. ... For some people, then, foreclosure becomes something akin to eviction, a traumatic event, ... but not one that involves the loss of life savings of years spent scrimping to buy the home. ... In recent months top executives from the Bank of America, JPMorgan Chase and Wachovia have all described a new willingness by borrowers to walk away from mortgages. ... Carrie Newhouse, a real estate agent ... in Minneapolis ... , said ... 'I've had people say to me, "My house isn't worth what I owe, why should I continue to make payments on it'?' ... Todd Sinai, an associate professor at the Wharton School [said] 'Now it's like they can do their renting from the bank, and if the house values go up, they become the owner. If they go down, you have the choice to give the house back to the bank. You aren't any worse off than renting, and you've got a chance to do extremely well. If it's heads I win, tails the bank loses, it's worth the gamble'," John Leland (JL) at http://www.iht.com/, 29 February 2008.

DW's statement is important, i.e., people don't understand profit and loss. Dozens of times I've told people they cannot deduct such "losses" on their tax returns and each profited from his home. Here's an example. Suppose someone buys a house for $100,000 with $80,000 down. The house increases in value to $300,000 and the homeowner refinances, taking a $300,000 100% mortgage. The house now decreases in value to $250,000 and the taxpayer asks me to deduct the $50,000 ($300,000 - $250,000) "loss". I tell him. "you have a $200,000 tax free gain on the house as it was your residence". Most people I see don't believe they made a profit on the house. Really.

What's the big deal JL? What do leveraged buyout shops like KKR, Blackstone and Apollo do? Encumber operating entities with debt and profit if things go well and dump the losses on the bond holders and banks if they don't. Why is anyone surprised homeowners would do this too? I wonder if Stephen Cutler at JPMorgan has an opinion on this. See also my 10 December 2007 and 14 February 2008 posts. That "top executives" at large banks didn't expect this is amazing. What are they paid for anyway? Where were the banks supposed risk managers when these loans were made?