Saturday, August 09, 2008

15 Seconds

My Bob/Frum post got mentioned in the recent BhTV Bob/Eli diavlog. There was a rebuttal comment, so I figure I may as well have another bite at the apple. My BhTV response is below, the footnotes expand and defend.

The rebuttal by Namazu said:
I think I can guess who does the finances in the Wright household (to be fair, David didn't really nail the issue either). You can blame Bush for running up the national debt, and for failing to adequately regulate mortgage originations and Wall Street. You can't blame him for high mortgage rates, for the simple reason that we've been enjoying record low rates for over a decade.

The credit crunch we're experiencing now is part of the inevitable unwind of the most massive credit bubble in history. Easy credit (i.e., Greenspan, with an assist from Chinese mercantilism) is responsible for the bookends of the problem: cheap money on the front end and yield-hungry suckers willing to buy the sausage (CMOs, etc.) on the back-end. In the middle (where you Adminstration bears responsibility, along with others) are lightly-regulated originations, corrupt bond rating and insurance industries, under-capitalized banks and brokers, and the Fannie/Freddie clusterf*ck.

Sub-prime is going to be a small fraction of the problem, whether measured as a fraction of household wealth destruction or losses to the financial system. Speculators were a significant part of run-up in select areas like South Florida and Vegas. It remains to be seen how many non-flippers who aren't under financial stress will engage in "jingle mail" because they're underwater on a bloated re-fi. What is certain is that US household wealth was vastly inflated by the run-up in housing prices and is now evaporating in amounts measured in the trillions. Regardless of how deep the recession is or how many jobs are lost, we will feel the effects for many years.

I think bhtv should have some people on who really understand this stuff, and will forward some names to the booking department.
I should probably admit that I'm not a Fed governor.1 Nonetheless, it seems to me that as long as the mortgage is getting paid, the sausage machine, loose agencies and cluster f*king aren't a problem for the consumer. Similarly, if you own your own home and are planning to stay there for at least five years, you have a good chance of coming out ahead of renting, so 'jingle mail' seems likely to remain all anecdote and no statistic (as it is right now).2

The problem, then, is mortgage holders paying the bills. By incurring a deficit, Bush puts Greenspan in a bind - he can either raise rates to prevent inflation, directly harming mortgage holders, or he can not raise rates, allowing inflation, which will raise mortgage holders' other bills.3 Coincidentally, a deficit will also depreciate the currency, raising the price of imports, like oil.

Can you lay all the mortgage woes at George Bush's feet - no. But the deficit does contribute to the mortgage problems, as do other other government failings Namazu implies.

We could stand to have some economists on, though. Is neo-con Friedman available?4

1. By which I mean I'm not obviously qualified, but that even most businesspeople and economists do not have sufficiently more understanding of economics to pull rank on me.

2. My understanding of mortgages is that speculators, whackadoodle 120% mortgages and things with giant balloon payments are a small minority, but that adjustable rate (i.e. affected by changing economic conditions) mortgages are quite common. This large group of people put, perhaps, 10% down and are making the minimum payment, so if the house goes down 15% in price, their mortgage is suddenly upside down.

But what does it mean for the price of your house to go down? It means you bought your house for $200,000 3 years ago, and your neighbor just sold his house for $150,000. But if you're not planning to move for a few years, the price right now doesn't matter, just the eventual sale price. Depending on how bad the downturn is, and how far into the exurbs your house is, it's quite reasonable for you to get back to the original purchase price, or at least flip your mortgage right-side up. Given that, and that a house is most people's biggest asset, and the fact that they don't want to move, I think voluntary foreclosure (jingle mail) is very unlikely. In addition, while I think being forced into foreclosure may kill your credit for 7 years, jingle mail could result in a permanent black mark, indicating that you just don't want to play ball with creditors.

3. Do I blame Greenspan? Tough call. I had a wave last night that we have just been trying to hold off the 1997 'Asian Contagion' with succeeding asset bubbles, which would place the blame squarely on Greenspan. Also, I strongly believe that Greenspan's testimony about the Bush tax cuts was key KEY VITAL NECESSARY to getting them passed, so in a sense Greenspan put himself in the bind. btw. which U.S. presidential candidate said that if Greenspan died he would put sunglasses on him and prop him up 'weekend at Bernie's style' in order to keep him as fed chair.3a Bonus! Which U.S. presidential candidate is being advised by Paul Volker, the fed chairman that earned the fed its inflation busting cred in the first place?

3a. Actually the reference has him saying that about putting Greenspan on a tax reform comission, but he has said it before about the fed. Here's an original.

4. Alas, Friedman is dead. Long live Friedman.

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