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HomeElizabeth Warren Highlights Washington’s Losing Battle on Housing
Posted by Larry Doyle on October 9th, 2009 9:21 AM |
Who in Washington will give you a straight answer? Elizabeth Warren.
Who is Elizabeth Warren? Her Wikipedia bio reads:
Elizabeth Warren
Elizabeth Warren (born 1949) is the Leo Gottlieb Professor of Law at Harvard Law School, where she teaches contract law, bankruptcy, and commercial law. In the wake of the 2008-9 financial crisis, she has also become the chair of the Congressional Oversight Panel created to oversee the U.S. banking bailout, formally known as the Troubled Assets Relief Program. In 2007, she first developed the idea to create a new Consumer Financial Protection Agency, which President Barack Obama, Christopher Dodd, and Barney Frank are now advocating as part of their financial regulatory reform proposals.
In May 2009, Warren was named one of Time Magazine’s 100 Most Influential People in the World.
Ms. Warren consistently takes no prisoners or provides no pandering in making honest assessments of the interaction between Washington and Wall Street. She has called the banks on the carpet. She has called Secretary Geithner on the carpet. She has called Congress on the carpet. Why? A general lack of honesty, integrity, and transparency in dealing with the American public.
When she speaks, I listen.
What did she have to say this morning? In commenting on a recently released report on the effectiveness of government programs to support housing, Warren questioned the scalability and the permanence of the impact of the TARP funding. Bloomberg provides further color in writing TARP Oversight Group Says Treasury Mortgage Plan Not Effective. The report highlights:
“Rising unemployment, generally flat or even falling home prices and impending mortgage-rate resets threaten to cast millions more out of their homes,” the report said. “The panel urges Treasury to reconsider the scope, scalability and permanence of the programs designed to minimize the economic impact of foreclosures and consider whether new programs or program enhancements could be adopted.”
New programs or program enhancements? Yesterday I opined “Washington Needs a New Housing Model” and wrote:
While the administration swims upstream on this issue, bank policy of tight credit and restrictive lending only further exacerbates the housing market. Make no mistake, though, banks are taking that approach to tight credit at the behest of regulators who know the level of losses in the banking system and are trying to preserve the industry as a whole.
I like a rallying equity market as much as anybody, but I wouldn’t spend any paper gains just yet. Why? The new housing model is displaying that:
“As defaults become more common, the social stigma attached with defaulting will likely be reduced, especially if there continues to be few repercussions for people who walk away from their loans,” concluded Sapienza. “This has an adverse effect on homeowners who do pay their mortgages, and the after-effects of more defaults and more price collapse could be economic catastrophe.”
This model needs some quick-dry crazy glue, which could only be applied in the form of a serious principal reduction program. Banks would take immediate and massive hits to capital which they clearly won’t accept.
So how can we generate some support for housing?
Aside from a principal reduction program, the penalty for those who would strategically default on their mortgage needs to be far more onerous.
The principal reduction would negatively impact bank earnings. Too bad. The banks are currently feeding at the taxpayer trough and would not be here without the bailouts. The individuals who are capable of making their payments need to accept the moral responsibility that is embedded in a contract.
Given the massive violation of moral hazards and breaking of contracts by Uncle Sam, that old man does not have a lot of credibility on that front.
What do we really learn here? Ultimately, the market is the market and efforts to manipulate or support a falling market will only be temporary. The market needs to find the clearing level where private money will purchase properties. That private money will wait while Uncle Sam continues to try to prop the market.
In the meantime, do not expect any meaningful support for housing.
LD
Dollar Devaluation Is a Dangerous Game
Posted by Larry Doyle on October 8th, 2009 9:24 AM |
Can we ‘devalue’ our way back to our days of economic ‘wine and roses?’
Many debt-laden countries throughout economic history have chosen to implicitly or explicitly pursue a devaluation of their currency as a means of improving their economies. Are the ‘wizards in Washington’ taking this approach? Aside from a few perfunctory comments in defense of the greenback, Washington has been largely silent on the topic of the declining value of the dollar. Many believe Washington very much favors a weaker currency as a means of supporting our economy. I believe this of Washington, as well. Let’s navigate.
Going back to the G20 in London last Spring, the Obama administration has attempted to curry political favor with emerging economies, especially the BRIC nations, by ceding dollar sovereigncy as the preeminent international reserve currency in return for support of global economic stimulus programs. Why does Washington believe a weak currency serves our economic interests? A weak currency generates and supports the following:
1. Promotes inflation as imports decline. Washington would like some inflation, given the massive deflationary pressures presented by falling wages and declines in the value of commercial and residential real estate.
2. Promotes exports for corporations with a multi-national presence.
3. Supports labor by making it more attractive for companies to keep jobs here as opposed to opening factories or sending work overseas.
So, in light of our current economic crisis, why wouldn’t we want a substantially cheaper dollar to maximize these benefits?
Recall that economists always need to keep certain variables static in order to study the impact of a change in another variable or multiple variables. This approach, known as ‘ceteris paribus,’ is not quite as easy as some may think. Why? Variables are NEVER static, or ‘ceteris is NEVER paribus.’ (more…)
Turbo-Tim Gets Defensive About Deficit
Posted by Larry Doyle on May 22nd, 2009 6:00 AM |
After the biggest one day selloff in U.S. government debt in a long time, U.S. Secretary of the Treasury, Tim Geithner, got very defensive this afternoon about the explosive growth in the U.S. deficit. Bloomberg reported, Geithner Pledges to Cut Deficit Amid Rating Concern.
Well, perhaps Secretary Geithner could help Barack and team find more than .5% of his $3.5 trillion budget to cut as a start if he is serious about his pledge. Over and above that, Tim asserted:
that the rise in yields on Treasury securities this year “is a sign that things are improving” and that “there is a little less acute concern about the depth of the recession.”
Benchmark 10-year Treasury yields jumped 17 basis points to 3.37 percent at 4:53 p.m. in New York.
With all due respect to the Secretary, perhaps he may want to review the fact that the overall Treasury funding needs in calendar 2009 will likely exceed the funding needs of 2006, 2007, and 2008 COMBINED. Additionally, he may want to have a chat with the governors of the Federal Reserve. In the minutes of the most recent Fed meeting, the consensus forecast for growth, unemployment, and inflation is worse than what the governors foresaw in January. Perhaps the Secretary may want to reconcile his statement with those forecasts.
Tim did hedge his bets and cover his flank by commenting that:
it’s still “possible” that the unemployment rate may reach 10 percent or higher, cautioning that the economic recovery is still in the “early stages.”
I do not pretend to think that Geithner has an easy job, but ultimately the market and investors will more value a secretary, spokesman, or analyst who is truly credible than merely an administrative mouthpiece. In my opinion, Tim has a lot of work to do on this front.
LD
See Me in My Office
Posted by Larry Doyle on March 11th, 2009 7:29 PM |
What student in high school, college, or graduate school does not dread hearing his teacher or professor remark, ”young man, see me in my office!” Good news is typically shared in an open forum even if in private discussion. Breaking out the ruler is often reserved for “the office.”
Picture this, as young Barack Obama and Timmy Geithner go in to meet their professor, Mr. Wall Street Economist.
“You wanted to see us, sir?”
“Yes. Even though it’s early in the marking period, I need to speak with both of you about your performance. I detect some issues.”
“Well, just what do you mean, sir? We’re trying hard. We’re working at grasping the material.”
“It strikes me, gentlemen, that you are not fully focused, you are stuck more on appearance than substance, you are quite glib at times, and have an interest more in being liked than in being comprehensive. Those are not the building blocks for long term success!!”
Taken fully aback, the gentlemen lean forward and apprise the professor, “Change is coming. Don’t worry, you will see a rededication and resulting redistribution in our performance. We have become friendly with some previous students who have offered to help us: Nancy, Harry, Hillary, Steny, Chris, and a few other all have reached out. We’ll speak with them. Maybe we can borrow their notes! We’re not going back, we’re moving forward. Change!!”
The professor responds, “I hope so, but I have always thought blind hope is a lousy hedge. We’ll see!!”
If only Barack and Tim were merely going through school and had the luxury of learning on the job; however, in real life Obama, Geithner Get Low Grades From Economists.
LD
