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Things You May Have Missed

Posted by Larry Doyle on February 20, 2009 5:20 PM |

While there is tremendous volatility in the markets and commensurate anxiety as a result, there were some major stories and developments that got less play but deserved more.

Allow me to expound. Robert Shiller, a highly distinguished Economics Professor at Yale Univeristy and co-designer of the Case-Shiller Home Price Index spoke this morning on Bloomberg News. Shiller is the preeminent expert on trends and developments in housing.   He made the following assessments:

1. Glad to see that Obama is making an effort to support housing but has serious concerns about the effort.

2. $75 billion allocated for loan modification is not nearly enough to make a truly meaningful impact. (remember there is another $200 billion allocated for Freddie and Fannie to refinance mortgages).

3. No plan or proposal for those holding Jumbo mortgages leaves a large part of the market without benefits. Those homes will likely hang over the market.

4. Shiller believes we may very well see a second wave of speculation in housing. He has this opinion because he thinks some buyers will try to  “bottom fish” the market. He believes our view of housing as an investment vehicle as opposed to a means of shelter and comfort needs to change!

5. He finds it impossible to make a forecast on the housing market given the great uncertainties about the impact of the stimulus proposal and banking plans.

6. While he welcomes the Obama administration’s efforts, he cautioned that this economic downturn led by housing will not be over quickly.

7. Confidence is badly needed and will only return when our government and global governments are able to develop strategic and robust long term planning.

What do I think of Shiller’s comments? I think he is stating that Obama’s housing plan is well intended but, given that we can not distinctly segment the housing market by sectors,  it will have a marginal impact. Additionally, I think he is being cautious in stating that Americans need to change their mindset about homes being piggy banks.  I measure his comments next to former Australian Treasury Secretary Keating and I see the same message: this downturn will take considerable time to turn around!

I also listened to the cult-like NYU Professor Nouriel Roubini today as well.
He offered the following:

1. Strong possibility of a sovereign default in the Euro zone. He singled out Ireland, Greece, Iceland, Spain, Italy and Belgium as countries with the most issues within their banking sectors. He does believe that if only one or two countries expose their problems,  the balance of the European Union will support them. He did not offer an opinion if the contagion is so massive and spreads. He did highlight the fact that Western European banks have outsized exposures to emerging Europe and the emerging markets elsewhere in the world. He singled out Estonia, Latvia, Lithuania, Belarus, and Ukraine as the countries with the greatest issues.

2. In the United States, he thinks the prospects of a temporary nationalization of a major bank or banks may happen very soon.  He does think the Obama administration’s moves so far (bank plan, housing) are in the right direction but do not go far enough.

3. Roubini does believe that the United States has moved quicker to address our issues than either Europe or Japan.

4. On the housing front he thinks we will eventually have to move to a “principal reduction” program in order for it to be effective.

5. How will we pay for all this?  Everybody’s taxes will be going up although not right away. We will also have to deal with increasing inflation.

Away from these two titans, there was a lot of rumbling in the markets and from Washington about bank nationalization. While Ken Lewis, CEO of Bank of America, was all over the news defending BofA and how nationalization should not be a topic of conversation, I saw and heard nothing from anybody at Citibank. The market believes  Secretary Geithner will be out next week with more details about his Financial Stability Plan (hopefully it goes better this time) and there is an outside chance he releases something over the weekend.

From Washington I heard conflicting viewpoints on nationalization from Senator Dodd. Dodd was panned on Bloomberg at one point.  I will admit he makes for a very easy target.


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