Title of an Economist editorial. The Economist thinks America has too much home owner ship, and that the $26 trillion dollars of US mortgages outstanding are at risk of default. $26 trillion in losses will shake the soundest bank. They admit that real estate prices have perked up. Used to be 25% of mortgages were underwater and now that is down to 10%.
The real problem in the US mortgage market is all the special favors the real estate industry (realtors, home builders, municipal boosters, appliance makers) are getting from long suffering taxpayers. It's pressure from this widespread special interest that caused Uncle to create Fannie Mae and Freddie Mac to run the secondary mortgage market. And FHA to guarantee home mortgages. And the mortgage interest deduction on federal income tax. And federal flood insurance. And a bunch of other expensive things.
A good mortgage is a very sound investment. Good means a borrower who earns enough income to carry the mortgage payments and a property with a market value greater than the amount of the mortgage. Preferably a borrower who is married, which gives him that much more incentive to avoid foreclosure. It's hard to explain to the spouse why the family is out in the street.
A bad mortgage is a default waiting the happen. The borrower doesn't earn enough to make the payments, he isn't married, he is a house flipper. The value of the property is way less than the mortgage. It's a sucker's mortgage with an escalator clause that jacks up the payments after a few months.
Only the officer who originates the loan can tell good from bad. He needs to interview the borrower, he needs to contact the borrower's employer to verify income, he needs to inspect the property to ascertain it's market value. He has to know the real estate market in his area to form a valid estimate of value. He has to be local to do all this. The officer will be deligent in his duties, if and only if, he has some skin in the game, like his bank is going to hold this mortgage to maturity. If the bank plans to dump the mortgage on the secondary mortgage market (Fannie Mae), then the officer doesn't care. In fact, he wants to process as many mortgages as he can to rake in the fees he gets from doing a mortgage. Dump it on Fannie before it defaults and all is well.
A broker on Wall St, or a banker in Germany have no idea how credit worthy any borrower is or what the value of a single family home in Kansas might be. So the secondary mortgage buyers don't really know what they are buying. Which caused Great Depression 2.0 in 2007. The sucker investors wised up to the crud they were being asked to finance and refused to buy any more of it.
The real answer to the problem is to shut down the secondary mortgage market. We could do this with a simple law that declares a mortgage non transferable. The borrower is only obligated to make payments to the guy who originated his mortgage. He can stop payments, and keep his house, if the mortgage is sold to anyone.
Showing posts with label the Economist. Show all posts
Showing posts with label the Economist. Show all posts
Saturday, August 20, 2016
Wednesday, November 26, 2014
Why do I bother to read them?
You gotta wonder about the Economist. A London based weekly news magazine with a long history and pretensions of seriousness. The end-of-the-year special edition just came in, thick with ads, and lots of speculation and prognostication about next year. Lots of good opining with little factual content, a sort of writer's delight.
Lead article, bylined "From the Editor". second sentence reads "Two grand gatherings toward the end of the year, the UN's meeting to set 'sustainable development goals' and a get together in Paris to combat climate change, will show whether countries can agree on way to tackle some of the planet's biggest issues. "
Wow. With Europe's economy tipping into recession, ISIS on the march, Ebola spreading, Putin taking over Ukraine, and China making moves all over the South China Sea, the Economist calls "sustainable development" and global warming some of the planet's biggest issues? Can you spell obsession? Can you spell liberal lightweight?
Lead article, bylined "From the Editor". second sentence reads "Two grand gatherings toward the end of the year, the UN's meeting to set 'sustainable development goals' and a get together in Paris to combat climate change, will show whether countries can agree on way to tackle some of the planet's biggest issues. "
Wow. With Europe's economy tipping into recession, ISIS on the march, Ebola spreading, Putin taking over Ukraine, and China making moves all over the South China Sea, the Economist calls "sustainable development" and global warming some of the planet's biggest issues? Can you spell obsession? Can you spell liberal lightweight?
Tuesday, May 6, 2014
What would America fight for?
Cover story from The Economist, a London based weekly news magazine. Written from the point of view of Europeans, terrified that the Americans will let the Russki's eat them up. The article reaches no worthwhile conclusions. They don't know what the Americans might do. For that matter I don't think we Americans know what we might do.
With the exception of the Brits, the rest of Europe has disarmed, and can offer no more effective military resistance to a Russian invasion than the Ukrainians have. Plus, the Russians can turn off the heat all over Europe if they please, so the Europeans are timid about economic sanctions. In actual fact the Russians have more sanctions to lay on the Europeans than the Europeans have to lay on the Russians.
So far, the Russians are attacking an non NATO member, and are going to some trouble to disguise their land grab as another Anschluss, (the people really want to become part of Russia). After the Ukraine aggression has cooled off, say in a year or two, the Russians may try the same thing on a NATO member. Would the US live up to its treaty obligations and defend NATO members? The Europeans fear that we won't.
And if we don't, the Russians will move on Europe, country by country, and in a few years control everything up to the English Channel.
With the exception of the Brits, the rest of Europe has disarmed, and can offer no more effective military resistance to a Russian invasion than the Ukrainians have. Plus, the Russians can turn off the heat all over Europe if they please, so the Europeans are timid about economic sanctions. In actual fact the Russians have more sanctions to lay on the Europeans than the Europeans have to lay on the Russians.
So far, the Russians are attacking an non NATO member, and are going to some trouble to disguise their land grab as another Anschluss, (the people really want to become part of Russia). After the Ukraine aggression has cooled off, say in a year or two, the Russians may try the same thing on a NATO member. Would the US live up to its treaty obligations and defend NATO members? The Europeans fear that we won't.
And if we don't, the Russians will move on Europe, country by country, and in a few years control everything up to the English Channel.
Wednesday, September 11, 2013
What caused Great Depression 2.0
According to The Economist that is.
1.Banks made risky, in some cases ridiculous loans and mortgages because the risky loans paid high interest rates. When the risky loans defaulted, the banks were stuck.
2, Regulators like the Federal Reserve failed to crack down on risky loans 'cause every one was making so much money doing it.
3. Low interest rates, caused by a lot of thrifty savers in China 9 ( the savings glut) drove down world wide interest rates. The Economist thinks this was a bad thing because investors looking for a better rate of return invested in "dodgy" (clever British-ism that) securities. In my view low interest rates are a good thing because it makes it easier for consumers to finance houses, cars, vacations, whatever, which is good for sales.
4. Banks and investors lost "trust" in one another. They began to worry about "counterparties" (borrowers) defaulting, and so began to refuse to lend to the riskier of them. Another way of stating this, is banks and investors finally wised up a little bit and began to evaluate the risk in what they were doing.
5. Letting Lehman Brothers go bankrupt. This scared the bejesus out of everybody in finance, causing them to stop lending. " Non financial companies, unable to rely on being able to borrow to pay suppliers or workers, froze spending..." This is pure imagination. "Non financial companies" (manufacturers for example) never borrow to meet payroll. They make payroll from sales revenue. If sales dry up, they lay off workers. They never borrow to pay suppliers, they just pay them late. Ideally you can turn parts into product and sell the product within the 45 days you have to make good on a purchase order. If it takes longer, the supplier gets paid later. If sales dry up, you stop ordering parts.
As far as I am concerned, they should have let some more companies go bankrupt. Each bankruptcy teaches finance weenies that when they are not careful, they too can loose their jobs.
6. Letting the PIGs (Portugal, Italy, Greece) run up such huge current account debts, otherwise known as borrowing. Nobody ( including the Economist) understood that joining the Euro means you can no longer print money to pay your debts. Used to be a Greece could print a lot of money, the value of the money would fall, and so the amount of borrowing was automatically kept within sane limits. Once they went on the Euro, they could no longer print their own money, and when the loans came due, they could not pay them.
1.Banks made risky, in some cases ridiculous loans and mortgages because the risky loans paid high interest rates. When the risky loans defaulted, the banks were stuck.
2, Regulators like the Federal Reserve failed to crack down on risky loans 'cause every one was making so much money doing it.
3. Low interest rates, caused by a lot of thrifty savers in China 9 ( the savings glut) drove down world wide interest rates. The Economist thinks this was a bad thing because investors looking for a better rate of return invested in "dodgy" (clever British-ism that) securities. In my view low interest rates are a good thing because it makes it easier for consumers to finance houses, cars, vacations, whatever, which is good for sales.
4. Banks and investors lost "trust" in one another. They began to worry about "counterparties" (borrowers) defaulting, and so began to refuse to lend to the riskier of them. Another way of stating this, is banks and investors finally wised up a little bit and began to evaluate the risk in what they were doing.
5. Letting Lehman Brothers go bankrupt. This scared the bejesus out of everybody in finance, causing them to stop lending. " Non financial companies, unable to rely on being able to borrow to pay suppliers or workers, froze spending..." This is pure imagination. "Non financial companies" (manufacturers for example) never borrow to meet payroll. They make payroll from sales revenue. If sales dry up, they lay off workers. They never borrow to pay suppliers, they just pay them late. Ideally you can turn parts into product and sell the product within the 45 days you have to make good on a purchase order. If it takes longer, the supplier gets paid later. If sales dry up, you stop ordering parts.
As far as I am concerned, they should have let some more companies go bankrupt. Each bankruptcy teaches finance weenies that when they are not careful, they too can loose their jobs.
6. Letting the PIGs (Portugal, Italy, Greece) run up such huge current account debts, otherwise known as borrowing. Nobody ( including the Economist) understood that joining the Euro means you can no longer print money to pay your debts. Used to be a Greece could print a lot of money, the value of the money would fall, and so the amount of borrowing was automatically kept within sane limits. Once they went on the Euro, they could no longer print their own money, and when the loans came due, they could not pay them.
Sunday, July 14, 2013
The View from the Ivory Tower
" No one now doubts the what the Arab public wants is elected constitutional government." So says this week's Economist magazine.
Is that right? Or does the Arab public just want life to suck less? The two worst cases, Egypt and Syria are running out of food, have run out of jobs, and feature armed terrorists running around loose. Both countries have failed to feed themselves, the only thing preventing mass famine is food imports, which they lack the money to pay for.
Has the Arab public given up on imposing Sharia law, driving the Jews into the sea, and exterminating the Shia (or the Sunni depending upon which side they are on)?
Me thinks the Economist is merely passing on the bloviations of properly raised young upper class Brits. I doubt any of their writers speak Arabic and has lived on the economy in say Cairo.
Is that right? Or does the Arab public just want life to suck less? The two worst cases, Egypt and Syria are running out of food, have run out of jobs, and feature armed terrorists running around loose. Both countries have failed to feed themselves, the only thing preventing mass famine is food imports, which they lack the money to pay for.
Has the Arab public given up on imposing Sharia law, driving the Jews into the sea, and exterminating the Shia (or the Sunni depending upon which side they are on)?
Me thinks the Economist is merely passing on the bloviations of properly raised young upper class Brits. I doubt any of their writers speak Arabic and has lived on the economy in say Cairo.
Wednesday, May 15, 2013
Things are tough all over.
The Economist declares the entire world to be in recession. GNP growth world wide has been falling since 2010. World wide purchasing manager's book to bill ratio is only a couple of percentage points above contraction level. They go on to moan about how things are particularly bad in Europe, but maybe the Americans will pull the world out of the ditch. But they don't count on the Americans too much. "It does not seem ready to resume the role of consumer of last resort". Surprisingly for a magazine so full of good advice for everyone, they have nothing to say about how to drag the world out of the ditch.
Sunday, May 27, 2012
The Economist's plan to save the Euro
The Economist, for those of you unfamiliar with it, is a weekly news magazine based in London. It has good world wide coverage, tells it fairly straight, and thinks it knows all the answers. This week they opine upon a fix for the Euro crisis. Here is their solution.
1. Create an EU bank regulator that would operate an EU wide version of deposit insurance (like the American FDIC), along with setting regulation about bank capital, winding up the affairs of failed banks, and have the money to "recapitalize" (otherwise known as "bailout") shaky or broke banks. Give this new agency control of the existing European bank rescue funds. Hopefully the EU regulator would shield banks from national government pressure to lend to national government favored industries or buy national government bonds.
2. Create "Eurobonds" backed by all the Euro countries. Unsaid, but understood by bond buyers is that Germany pledges to make Eurobonds good. Use the proceeds from Eurobond sales to make loans to countries that no one else will loan money to, like Spain and Italy.
"All that is required is for over indebted countries to have access to money and for banks to have a 'safe' euro-wide class of assets that is not tied to the fortunes of one country."
As the Economist sees it, German backed Eurobonds would be as good as American T-bills. Dead broke governments would not have to clean up their acts so soon. Out of the goodness of their hearts the Germans extend their excellent credit rating to the rest of Europe. Angela Merkel is the only person standing in the way of this financial nirvana. Shame on her.
I got another plan. Let the stupid banks go bust. Let the dead broke counties reduce their spending now, rather than after they run out of other people's money.
1. Create an EU bank regulator that would operate an EU wide version of deposit insurance (like the American FDIC), along with setting regulation about bank capital, winding up the affairs of failed banks, and have the money to "recapitalize" (otherwise known as "bailout") shaky or broke banks. Give this new agency control of the existing European bank rescue funds. Hopefully the EU regulator would shield banks from national government pressure to lend to national government favored industries or buy national government bonds.
2. Create "Eurobonds" backed by all the Euro countries. Unsaid, but understood by bond buyers is that Germany pledges to make Eurobonds good. Use the proceeds from Eurobond sales to make loans to countries that no one else will loan money to, like Spain and Italy.
"All that is required is for over indebted countries to have access to money and for banks to have a 'safe' euro-wide class of assets that is not tied to the fortunes of one country."
As the Economist sees it, German backed Eurobonds would be as good as American T-bills. Dead broke governments would not have to clean up their acts so soon. Out of the goodness of their hearts the Germans extend their excellent credit rating to the rest of Europe. Angela Merkel is the only person standing in the way of this financial nirvana. Shame on her.
I got another plan. Let the stupid banks go bust. Let the dead broke counties reduce their spending now, rather than after they run out of other people's money.
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