the shift won't be enough to save most struggling borrowers, but it will be a nice payday for plenty of non-struggling homeowners.

From Free Exchange:

"Bring back the bubble

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Economist.com | WASHINGTON

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Housing markets

LEGISLATORS of both parties seem excited by their plan to cut a $15,000 cheque to anyone buying a house in 2009, but they're not ending their attempt to bring back the housing bubble there. At the Wall Street Journal today, economist Ed Glaeser rips into Senate minority leader Mitch McConnell's stimulus "plan" to give borrowers government-backed mortgages at a 4% interest rate.

Mr Glaeser's big complaint, which he has made elsewhere, is that based on historical data, the proposed rate reduction will generate only a 6.2% increase in home prices (relative to their level in the absence of reduced rates). Considering that home prices nationally have fallen 18% in the past year alone, and 40% in the hardest hit markets, that's unlikely to do much good. It will also hand over billions of dollars to the relatively well off, many of which aren't in trouble on their mortgages but simply aiming to refinance. In other words, the shift won't be enough to save most struggling borrowers, but it will be a nice payday for plenty of non-struggling homeowners.

Tyler Cowen has interesting thoughts on Congress' penchant for homeowner subsidies, as well:

I wish to shift the economy out of housing, not into it again. I also believe that the supply of homes is relatively elastic right now. The tax credit will subsidize the new buyers without propping up the price of homes. Demand will go up, supply will go up, price will stay more or less on the same trajectory, and banks won't be any healthier. The subsidy goes to new home buyers and why should we be helping them above all others? Aren't they relatively wealthy on average? (Not that there's anything wrong with that.) Aren't some of them the dreaded "flippers" and speculators for that matter? (Can we really enforce the primary residence requirement?) Do we really want to push people into being less diversified and less geographically mobile in the labor market?

It really is stunning—almost to the extent that it's funny—that in the midst of an economic calamity brought on by the collapse of an epic housing bubble, policymakers are desperately adding to the array of homeownership incentives that created the distorted market in the first place. How do you argue with this level of obliviousness?"

And me:

Don the libertarian Democrat wrote:

I know that no one seems to buy my explanation, but I see these plans to help people buy homes or avoid foreclosure as an attempt to assuage the problem of having it appear that the government only helps the financial industry. After eight years of shameless cronyism, this seems like a reasonable worry to me.

I don't agree with the solutions being proposed, but I do believe, after we've announced to the whole world that banks or insurance companies or investment banks can be too big or powerful to fail,and we're going to lose a massive amount of money proving this, confining our resources to this financial bailout by saying that banks are essential, but other businesses aren't, begs the question of what is meant by "essential". Many people hear "essential to fund-raising". I think that the perception that there are possible social dislocations and disruptions coming from how government handles this crisis is well justified.

2/5/2009 6:54 PM GST

"Will this be in addition to the $600 billion of purchases announced last week?"

Rolfe Winkler at Option ARMageddon also doesn't like the F/F infusion:

"Ugh. It’s been a week since Ben and Hank announced plans to pump $600 billion into mortgage-backed securities in order to prop up house prices “revitalize” the housing market. Mortgage rates responded by falling below 6%. But that’s not low enough for Hank, so he’s considering a new plan to bring mortgage rates even lower, to 4.5%. According to an item on Journal website:

The Treasury Department is considering a plan to revitalize the U.S. housing market by reducing mortgage rates for new home loans, according to people familiar with the matter.

The plan, which is in the development stages, would use mortgage giants Fannie Mae and Freddie Mac to bring loan rates down as low as 4.5%, a full percentage point lower than the prevailing rates for 30-year fixed mortgages.

Government officials are under pressure to stem foreclosures, which underpin much of the current financial crisis. Treasury has struggled for months to come up with a plan that would ease the market without appearing to bail out homeowners and lenders.

Under the plan, Treasury would buy securities underpinning loans guaranteed by the two mortgage giants, which are temporarily under the control of the government, as well as those guaranteed by the Federal Housing Administration. Fannie and Freddie guarantee a large proportion of all new home loans made in the U.S.

I wonder: How many more hundreds of billions will Treasury spend buying mortgage-backed securities in order to push rates down to 4.5%? Will this be in addition to the $600 billion of purchases announced last week?

I believe that the answer is yes. The FDIC is also doing its bit.

"I understand Paulson’s dilemma: the balance sheets of America’s major banks and financial institutions are getting hammered by falling house prices (and the consequent spike in mortgage delinquencies that falling house prices lead to). And yet, it’s pretty clear to anyone that’s taken a look at the big banks’ balance sheets that they are already beyond repair.

To truly “revitalize” housing we must allow prices to fall so that the market clears. Price-fixing doesn’t work. It didn’t work for Nixon in the 70s and it won’t work with interest rates today."

I see this as a move in political economy, just as Nixon's decision was in the early 70s. I don't agree with their moves, but the FDIC has, in essence, forced their hand. They need to be seen as dealing with the housing problem. As a political move, it might well work, and, economically, I've argued that it's hard to see how it's going to do much. But, again, I basically agree with the post.

"About 80% of the time, capitalism doesn't need protection from the government."

Barbara Kiviat reports about a talk by Larry Fink:

"Larry Fink, the BlackRock CEO who has found himself playing a central role in our recent financial tumult time and again, gave a speech today at a conference put on by NYU's Schack Institute of Real Estate. It was a pretty good speech, so even though I'm getting around to it late in the day, I thought I'd put up a greatest hits version of what he said. Namely:

•We are starting to see some stability in financial markets. The $9 trillion being committed by central banks around the world has, in fact, had something of a calming effect. In September, BlackRock saw a $55 billion run on its money markets (even with no credit issues), but now that money is coming back in.

•The way to fix the housing crisis is to roll out a program similar to the one we had for servicemen returning from the second World War. The rough idea is that the feds put up $30 billion to $50 billion a year in subsidies for the next few years to lower interest rates by 4 to 4.5 percentage points on new mortgages and refinances. (Fink is hardly the first person to make the argument that the quickest way to stabilize home prices is to gin up demand. His belief that modifying loans one by one is too slow to help may or may not be related to BlackRock's adventures in subprime mortgage CDOs.)

•Overall, it's a really good thing governments have stepped in like they have. About 80% of the time, capitalism doesn't need protection from the government. But then there are the tails of the distribution—both on the upside and on the down. We're now in one of those tails. Letting Lehman go, though... no one at the time understood what a big mistake that would be.

•One of the things we'll have to do to get the economy back on track is an FDR-style stimulus package in terms of job creation.

•The equity markets will rally between now and the end of the year. We're seeing a huge re-allocation from bonds to equities, partly because declines in stock prices have made institutional investors like pension funds underweight in equities. We might get back to where the market was on October 30. But not where it was on September 30.

•Foreign investors are really angry about all those crappy assets we sold them. We're going to have a lot of Treasuries to sell, so we better hope they get over their anger. BlackRock trading partners in Saudi Arabia, Singapore and Kuwait called when Barack Obama was elected president to say they were really proud of what America did on Election Day, that it made them believe America is, in fact, the place they always thought it was. This sentiment will make it easier for us to sell them our debt.

•Why the SEC has not yet reinstated the uptick rule is a true mystery.

Barbara!

Here's my comment to this excellent report:

1. donthelibertariandemocrat Says:
   Thursday, November 13, 2008 at 8:46 pm

   "Overall, it's a really good thing governments have stepped in like they have. About 80% of the time, capitalism doesn't need protection from the government. But then there are the tails of the distribution—both on the upside and on the down. We're now in one of those tails. Letting Lehman go, though... no one at the time understood what a big mistake that would be."

   I seem to be alone in believing that investors were counting on a bailout, and that's why Lehman was such a disaster. So I don't agree with him that no one saw it would be a huge mistake.

   One reason I believe this is that wonderful quote you have from him about capitalism. That's the real and prevailing attitude among investors. They believe that government should step in during financial crises. They're not Cato fellows, whatever they say.

   That's why so much risk was taken, and that's why investors, banks, everyone, had no real world Plan B as opposed to a bailout, and that's why I believe you couldn't go against those expectations. Without government intervention, even a disaster like TARP, investors would have gone totally off the wall.

   Just my opinion. So thank you for bringing this talk to my attention. I had missed it. I'll try and find the whole talk now. To be honest, I'm finding these talks by these finance people like Fuld, Liddy, Fink, Thain, most illuminating.

Some Questions For Robert Reich

Robert Reich on the bill:

"But make no mistake: This is a lousy bill. It doesn't do the most important thing -- help distressed homeowners avoid foreclosure (that role is given to the Treasury Department, which is the equivalent of putting it into the permanent circular file). It doesn't make Wall Street more transparent (there's almost no word in it about improved transparency and capital requirements, or avoiding conflicts of interest and market manipulation). It doesn't control the most egregious aspects of executive salaries (the bill contains a contorted detour for controlling certain golden parachutes when the government has made direct equity purchases of financial companies rather than taken their bad paper through an auction). It does have provisions designed to protect taxpayers should the bad securities continue to be bad, but the responsibility for acting on this is left up to the next President. And the Senate version has lots of additional stuff -- some good (extending deposit insurance), some unnecessary (extending certain tax credits), but most of which should never have been added."

He then says the following:

"Wall Street and its creditors are not at the core of the American economy. Main Street and consumers are at the core. So even if the bailout bill keeps Wall Street going and prevents the sort of massive defaults that would freeze global credit markets, it does virtually nothing to help the vast majority of American consumers who are already at the end of their ropes -- who right now need extended unemployment insurance, affordable health coverage, and assistance in meeting their mortgage payments and fuel bills. And as long as Americans remain at the end of their ropes, the American economy will continue to decline."

I asked the following in the comments:

Don said...

It sounds like you are asking for some additional spending. How are we to deal with that? Are you advising us to increase the budget deficit in the short term, or are there some taxes that you want to raise or cuts that you want to make to offset this additional spending? How far can we go into debt before that problem in and of itself keeps us from fully recovering? Don the libertarian Democrat

Thursday, 02 October, 2008