The stock market has succumbed to fear the past few days, and Obama's plan to have bigger government save us has only made it worse; the prospect of a massive increase in the size and scope of government creates greater uncertainty, not less. Meanwhile, the banking system is plagued by concerns of massive insolvencies. These are the times that try investors' souls.I remain optimistic, and my optimism resides in the hope that the market mechanism can fix our problems well before government attempts to.
The right thing to do (for the US economy) is to let the housing market finish its correction, then throw another $700 billion in equity at the banking system. This is not what's going to happen, though. The Obama administration has promised relief for homeowners and sterner treatment of the banks. We'll end up with a nationalized banking system and an extended downturn. You need to plan for 2-3 years of continued deterioration.
ReplyDeleteAt the risk of exposing my acute ignorance on the subject, I have some questions. Exactly how will this "relief for homeowners" manifest itself. Will there be outright grants of thousands of dollars to underwater homeowners? Will the banks be compensated for revising the terms of the original mortgages? For 750 billion, you can outright buy 2.5 million homes in the $300,000 price range. I would be interested in other ways to gauge the scope of the entire fiasco.
ReplyDeleteThis may be a good case of spurious correlation.
ReplyDeleteThe banks have literally headed straight up stream without any paddles. For example, look at BAC. Two ridiculous acquisitions later and the company is basically insolvent. If anyone has dealt with the insides of Citi, you need not feel sorry here either. Their mergers over the past 15 years have produced zero synergies while creating redundancies everywhere. The Citi Titanic set sail while already half sunk. What about WAMU? Anyone surprised by the outcome? This company had been peddling phony loans for years. Merrill, Lehman, Bear, GM, Chrysler, Ford?
What we have here is a classic case of greed gone wild and an Obama speech could do nothing to alter the reality we are facing. A reality of more loses and nationalizations whether we are talking Obama, Bush, McCain or even Reagan for that matter. Corporations sold out America for every penny she had…
Speak: What you're describing may already be priced into the market. As I've pointed out many times, this market is priced to a severe depression and a multi-year deflation.
ReplyDeletethudbear: my understanding is that judges will be able to determine "cramdowns" and thus reduce the principal value of mortgages whose homeowners are in default. Unilaterally rewriting private contracts like this is a fiasco that only worsens the problem of moral hazard. Meanwhile the Fed is trying to reflate the housing market, in order to reduce the incidence and severity of defaults. That's another fiasco in the making, as it is likely to result in higher inflation. Lots of bad stuff going on, but by now isn't everyone aware of it?
ReplyDeleteBernard: I've got some older posts that lay out why so many institutions got burned by subprime-related debt. I don't think it was greed. Freddie and Fannie played a major role, as did the rating agencies. Nearly everyone underestimated the degree and speed of the housing price downturn.
ReplyDeleteI am aware of the many reason the market have come up with to attribute the disaster to specific factors much like a performance attribution model, but it is usually more art than science and it always boils down to the embedded assumption within the model.
ReplyDeleteAt the end of the day, the one factor that probably most correlates with the "underestimation" is the profit maximization of every player along the food chain. It doesn't have to be an egregious act of greed for it to play a major role in the eventual outcome. As long as each player contributes their share of greed then the combined chicken soup for the soul can be quite powerful.
Ignorance is never an argument but it is safe to say that 95% of the players had no idea what their true risk exposures were. And for those that did, it wasn;t in their best interest to do anything about it...