Chapter Eleven.
I have to integrate bonds and bond insurance into the over-all picture I've sought to create of what happened, especially in the US though we did all too good a job of then exporting it, in the period 2007-08. This requires backing up chronologically. It was in the world of quasi-public agencies that the notion of "too big to fail" got its start when Nelson Rockefeller and John Mitchell (before he was immotalized by the Watergate scandal) planned a novel way of financing affordable housing, although they didn't actually use that phrase.
1. Nelson Rockefeller and the "moral obligation" bonds of New York
2. The rise of the muni bond insurance industry
3. Who is really paying for this insurance? Third party payment as a regular matter is a common symptom of systemic trouble.
4. MBIA, accounting chicanery, and crack houses as collateral
5. Elliott Spitzer and rumblings in early 2008. (Valentines' Day)
6. Fall of Bear Stearns. Spitzer's fall served as comic relief.
7. The rest of that year from the bonds/insurer POV.
The material included under this heading in my book proposal can serve as the chapter's ending:
Where do we go from here? The credit crunch of 2007 and the stock crash of 2008 are in the history books and time travel is impossible, so we only work forward.
We should be wary of a “hair of the dog that bit us.” We should refuse to resolve this hangover by easy-money nostrums and loose-accounting remedies, or by making it easier for corporate managers to entrench themselves. That dog will only get more rabid and bite still more devastatingly if we indulge him further.
Showing posts with label housing markets. Show all posts
Showing posts with label housing markets. Show all posts
21 April 2011
24 December 2010
Fannie, Freddie, Joey and Petey
A controversy involving Joe Nocera and Peter Wallison draws my attention, because it has a good deal to do with how we understand the crisis of 2007-08.
Joe Nocera is a long-time business journalist, the co-author with Bethany McLean of a newly published book, "All the Devils are Here." As the Shakespearean title suggests, McLean/Nocera's theory is that the crisis had a lot of causes, plenty of "devils." The government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, play a role in their story, but only a supporting role. They are not leading the devilish pack.
Peter Wallison is a member of the Financial Crisis Inquiry Commission, the bipartisan panel that is supposed to issue a report soon explaining what did happen in 2007-08 and why. Wallison, it is fair to say, wants to give Fannie and Freddie a larger share of the blame than Nocera does. Okay --everybody agrees the GSEs get some blame, and how much sounds like an appropriate subject for debate. So ... have at it, guys!
The problem, though, is that this is the US in the early 21st century and it is amongst us always easier to tell someone to shut up than it is to discuss substantive differences. Besides, "shut up" is so much snappier a thing to say. THAT is probably the worst of our devils. But I digress....
On December 17, Nocera wrote in his column that he had spoken to Wallison about their differences and that Wallison claimed to have seen still-secret papers. (What? not on Wikileaks yet?) here.
"Mr. Wallison said he had seen documents, not yet made public, as part of his work with the financial crisis commission that would prove that he’s right and I’m wrong. Well, we’ll see," writes Nocera.
Nocera makes his point without reference to anything secret. The GSEs, in his view, struggled to keep up with the private market operations like Ameriquest and Countrywide, fearing that they would become irrelevant, and politically vulnerable, if they didn't act in line with those practices.
Wallison has replied. He confirms here the sentiments that Nocera attributed to him about those secret documents.
"I told him this was wrong—that as part of the Commission’s work I have seen internal documents from Fannie and Freddie that show this particular mantra of the left to be a myth. For a reporter, that would have been a signal to hold his fire—a warning that there were facts out there of which he was unaware. I was telling him he should wait and see what I might write in connection with the Commission’s report. But he repeated his own dogma immediately thereafter."
This strikes me as fundamentally the wrong attitude to take. Wallison is saying that Nocera should "hold his fire" until he becomes aware of facts that will sooner or later become available. Well ... no. Every rational human being is entitled to form an opinion based on such facts as are available to that person. One should hold and express one's opinions with a consciousness of fallibility, but the idea that one should "hold one's fire" because there might yet be other facts is a demand for a lifetime of silence. It will always be the case that there might yet be more facts out there! So what?? If Nocera were writing about the causes of the outbreak of the American Revolution in 1775 it might be the case that there are still as yet unknown documents somewhere. That is not a signal to "hold one's fire." Indeed, it should be an incentive to fire away -- it may help in smoking out the new stuff.
Nocera should keep expressing the views that he forms on the basis of facts known to him, and if and when Wallison feels free to make further facts known, he should do so.
In the meantime, the rest of us are entitled to suspect that this talk about "internal documents" about which Wallison will write in the future is a tad too convenient. Felix Salmon puts it well.
So much for the ethos of debate.
On the underlying dispute, I would say (subject to being disproven by any "internal documents" that become external down the road) that the real cause of the bubble was monetary policy, not micro-economic factors, not regulatory shenanigans, and not the GSEs. Greenspan created the Housing bubble in order to get us out of the recession of 2000-02, which was caused by the busting of the previous (dotcom) bubble, which was also largely caused by monetary policy. In order to get off this merry-go-round, we need sound money.
Given all that, though, I am inclined to think that the Republicans do overstate the GSE role. It gives them a government target to shoot at, and a target that seems smaller and safer than shooting at the Federal Reserve. Ron Paul, of course, is the honorable exception. He targets the elephant.
Joe Nocera is a long-time business journalist, the co-author with Bethany McLean of a newly published book, "All the Devils are Here." As the Shakespearean title suggests, McLean/Nocera's theory is that the crisis had a lot of causes, plenty of "devils." The government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, play a role in their story, but only a supporting role. They are not leading the devilish pack.
Peter Wallison is a member of the Financial Crisis Inquiry Commission, the bipartisan panel that is supposed to issue a report soon explaining what did happen in 2007-08 and why. Wallison, it is fair to say, wants to give Fannie and Freddie a larger share of the blame than Nocera does. Okay --everybody agrees the GSEs get some blame, and how much sounds like an appropriate subject for debate. So ... have at it, guys!
The problem, though, is that this is the US in the early 21st century and it is amongst us always easier to tell someone to shut up than it is to discuss substantive differences. Besides, "shut up" is so much snappier a thing to say. THAT is probably the worst of our devils. But I digress....
On December 17, Nocera wrote in his column that he had spoken to Wallison about their differences and that Wallison claimed to have seen still-secret papers. (What? not on Wikileaks yet?) here.
"Mr. Wallison said he had seen documents, not yet made public, as part of his work with the financial crisis commission that would prove that he’s right and I’m wrong. Well, we’ll see," writes Nocera.
Nocera makes his point without reference to anything secret. The GSEs, in his view, struggled to keep up with the private market operations like Ameriquest and Countrywide, fearing that they would become irrelevant, and politically vulnerable, if they didn't act in line with those practices.
Wallison has replied. He confirms here the sentiments that Nocera attributed to him about those secret documents.
"I told him this was wrong—that as part of the Commission’s work I have seen internal documents from Fannie and Freddie that show this particular mantra of the left to be a myth. For a reporter, that would have been a signal to hold his fire—a warning that there were facts out there of which he was unaware. I was telling him he should wait and see what I might write in connection with the Commission’s report. But he repeated his own dogma immediately thereafter."
This strikes me as fundamentally the wrong attitude to take. Wallison is saying that Nocera should "hold his fire" until he becomes aware of facts that will sooner or later become available. Well ... no. Every rational human being is entitled to form an opinion based on such facts as are available to that person. One should hold and express one's opinions with a consciousness of fallibility, but the idea that one should "hold one's fire" because there might yet be other facts is a demand for a lifetime of silence. It will always be the case that there might yet be more facts out there! So what?? If Nocera were writing about the causes of the outbreak of the American Revolution in 1775 it might be the case that there are still as yet unknown documents somewhere. That is not a signal to "hold one's fire." Indeed, it should be an incentive to fire away -- it may help in smoking out the new stuff.
Nocera should keep expressing the views that he forms on the basis of facts known to him, and if and when Wallison feels free to make further facts known, he should do so.
In the meantime, the rest of us are entitled to suspect that this talk about "internal documents" about which Wallison will write in the future is a tad too convenient. Felix Salmon puts it well.
So much for the ethos of debate.
On the underlying dispute, I would say (subject to being disproven by any "internal documents" that become external down the road) that the real cause of the bubble was monetary policy, not micro-economic factors, not regulatory shenanigans, and not the GSEs. Greenspan created the Housing bubble in order to get us out of the recession of 2000-02, which was caused by the busting of the previous (dotcom) bubble, which was also largely caused by monetary policy. In order to get off this merry-go-round, we need sound money.
Given all that, though, I am inclined to think that the Republicans do overstate the GSE role. It gives them a government target to shoot at, and a target that seems smaller and safer than shooting at the Federal Reserve. Ron Paul, of course, is the honorable exception. He targets the elephant.
23 January 2009
When Markets Collide
When Markets Collide is the title of a quite well-written book by Mohamed el-Erian, an economist who worked at the International Monetary Fund for 15 years, and has since worked at Salomon Smith Barney, the Harvard Management Company, and PIMCO.
(Gee, he can't keep a job, can he?)
I read large chunks of it during my train rides Wednesday, from Stratford CT to Manhattan in the morning and back the other way in the evening.
Love that spinning top cover art. The "equator" of the globe presented as a top is considerably to the north of the actual equator, though. the pseudo-equator seems to pass through the Yucatan peninsula.
More seriously: I don't agree with the author's Keynesianism in macro-economics but ... disagreement is why they run the horse races.
I appreciated his summary of theories about the "market for lemons."
Used cars are a product with non-obvious defects. Consumers are aware of this, of the danger that they'll end up with a lemon, but they sometimes do have to enter this market anyway. With what result?
With the result, as el-Erian tells it, that perfectly fine non-lemons end up selling for a price less than they would were accurate information more generally available and appreciated. The fear of a lemon forces a discount on the whole second-hand jalopy markets, and some people get non-lemons cheap.
I suppose something like that was the theory behind early versions of the TARP [Troubled Asset Relief Program]. The troubled assets on banks' books include, to simplify considerably, the rights to the flow of money from mortgaged homeowners. Some of these homeowners are "lemons." They'll likely default. Others won't default, though, and the troubled banks might under ideal circumstances sell the rights to the good mortgages for significant chunks of needed cash. But as with cars, the taste of the lemons infects the non-lemons.
But this still leaves us with the age-old question durected by citizens to those who would govern them: "Why do you think you're smarter than us?"
Why are the administrators of the TARP presumed to be better at deciding what is or isn't a lemon than the private sector?
I'll say no more, but parts of this book do help frame the discussion nicely.
18 August 2007
Mark Cuban's idea
Everyone is now discussing subprime mortgages. While the excitement on Wall Street has moved well past that specific catalyst, it clearly WAS the catalyst, and deserving of some meditation.
One of the 'everybodies' is Mark Cuban, a billionaire, the owner of an HDTV cable network, and never one to suppress his ideas.
Cuban's take-away? Home owners should be able to sell some percentage of equity in their home, have an "initial public offering" in their home the way a business when its ready to go public. The point would be the same in both cases, to spread and thus manage the risk.
Cuban has evidently given some thought to the possible creation of an exchange for homes, and expounded on the rules by which that exchange could be run on his own blog.
There are lots of practical difficulties with the plan, and no likelihood of a liquid market in, say, 432 East Maple Street, Houston. There's nothing wrong with it, regarded simply as a provocative market-theoretical thought experiment, though. And there are other ways that still-nascent markets might help diffuse risk. There are indexes that track residential housing property prices, and there is a market for derivatives constructed on those indexes, which may if it develops properly yet have the kind of soothing consequences Cuban would like for his brainstorm.
http://blogs.chron.com/lorensteffy/2007/08/cuban_housing_c.html
One of the 'everybodies' is Mark Cuban, a billionaire, the owner of an HDTV cable network, and never one to suppress his ideas.
Cuban's take-away? Home owners should be able to sell some percentage of equity in their home, have an "initial public offering" in their home the way a business when its ready to go public. The point would be the same in both cases, to spread and thus manage the risk.
Cuban has evidently given some thought to the possible creation of an exchange for homes, and expounded on the rules by which that exchange could be run on his own blog.
There are lots of practical difficulties with the plan, and no likelihood of a liquid market in, say, 432 East Maple Street, Houston. There's nothing wrong with it, regarded simply as a provocative market-theoretical thought experiment, though. And there are other ways that still-nascent markets might help diffuse risk. There are indexes that track residential housing property prices, and there is a market for derivatives constructed on those indexes, which may if it develops properly yet have the kind of soothing consequences Cuban would like for his brainstorm.
http://blogs.chron.com/lorensteffy/2007/08/cuban_housing_c.html
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