Let Market, Not Government, Deal With Subprime Mortgage Problem

IBD ^ | August 15, 2007 | Dick Armey

[Paperdoll]

Will they never learn? It is not the Government’s job to bailout either a lender or a borrower. Extra bucks must be printed, and as I’ve said before, our 5 cent dollar becomes a 1 cent dollar. There goes the price of bread!

All markets are healthier with a correction. All people are better with self discipline. When we live within our means the future is always rosier. Why do I think all of this has been caused deliberately for nefarious purposes?

[givemELL]

US subprime crisis triggers global disaster...well researched comments:http://theteemingbrain.wordpress.com/2007/08/15/us-subprime-losses-have-detonated-a-global-financial-markets-disaster/

[rb22982]

The company I work for is doing very, very well still. We're expanding at a rate of around 20% annually still, and are hiring at our corporate office around 3-5 new faces a month (only had 70 people here 2 years ago, have 170 now) plus another 6k in the field. Almost all of our new locations are doing very well in markets we've never even been in before.

I think the construction business is going to see a pullback but unless people panic I just dont see the broader market having more than a hiccup. Our same store sales are doing better this year than last and this past week was one of the best of the year for same store sales.

[advance_copy]

You are in a business that is going to be damaged. But this is not the 1929 crash. This is simply “it’s the economy stupid” part deaux. The leftist media and finance names like Buffet, Soros, and Murdoch are trying to shove Hillary down America’s throat. They are orchestrating a “crisis” out of nothing to give her something on which to run.

Accurate figures presented by Dick Armey here prove that subprime is chump change. There’s not enough there there to cause this “crisis”, but that does not matter. Innocent people like you are going to get hurt — some big money has already decided who is going be elected in ‘08 and they don’t care who gets hit.

You can thank Hillary ‘08 for the damage to your business.

[sarasmom]

As a member of the huge working paycheck-paycheck lower middle income class of legal citizen majority, I have to say your particular industry enjoyed the same type of obviously unsustainable boom as those who saw their retirement incomes via insane unprofitable “dot.com investments” dry up and disappear circa 2000.
So?
You made some bad choices, deal with the consequences!
Surely you banked all the “new” extra income, and did not incure debts you could not reasonably be expected to afford if the boom went bust?
No?

[Pelham]

I take his meltdown as a good sign that the end is near -

I wouldn't count on that. We are just beginning the rate resets for most ARMs financed during this bubble. Only a few hedge funds and banks have marked to market the mortgage derivative paper they hold. This is going to play out for several years.

[stevio]

You make an interesting point.

[pepperdog]

“the federal government build more rental housing”

Oh yes, more govt ghettos, that worked so well the last time didn’t it?

[Fury]

I will note that the sub-prime mess is affecting the larger market, by Kudlow sounded like he was frothing at the mouth. Case in point, look at the Point and Figure chart for VFINX - Vanguard Index Trust 500 Index Fund. It’s very close - within ~$2 - of a double bottom breakdown. P&F charts have overall helped me to sell when I need to sell and buy when I need to buy (just have to remember to take a look at relative strength for sectors when trading individual stocks and and sector mutual funds).

I sold a chunk of VFINX as it’s time to do that based in part on its’ P&F chart. One stock that's taking it in the backside is Halliburton (HAL). It's getting close to the up-trend line. It will be interesting to see if there is resistance at 31.

[Pelham]

They are orchestrating a “crisis” out of nothing

I hope you're not investing based on that idea. It's not a problem of subprime loans, it's a failure to price for risk in the entire mortgage derivatives market.

This is the unwinding of a credit bubble that dwarfs the NASDAQ bubble of 2000. It's real enough that the European Central Bank and the Fed are already pumping enormous sums into the banking system to keep a system failure from occurring. It has almost nothing to do with politicians.

[DivaDelMar]

"..is this a good time to get something cheap?..."

NO. I'd wait. I think there is more downside potential than up at this time. I think the bottom is truly going to fall out of the housing market. If you preserve your cash and purchasing power by buying hard assets now, you should be able to but property(ies) REAL cheap in the coming months. Don't pull the trigger too soon!!!!

[DivaDelMar]

"We are just beginning the rate resets for most ARMs financed during this bubble."

Kinda adds a whole new meaning to the phrase: "Bubble, Bubble, Toil and Trouble"..........doesn't it?

[Pelham]

There’s a Credit Suisse chart of the resets that’s pretty good:

http://tinyurl.com/28n2hm

We are at about line 7 from the left. The largest reset comes this October, with 50 billion resetting. But as you can see the resets go on for several years.

[Southack]

"Southack, your viewpoints on matters economic are cogent and well-reasoned. Do you think the sub-prime problems have a reasonable chance to seriously affect the larger economy if the Fed does not"assist", as some want to happen?" - Fury

Sub-prime isn't the problem; sub-prime is just a symptom.

The actual sub-prime market is not large enough to warrant Depression-era concern.

The core problem, however, is that large.

The core problem is that we are in a Fed-induced liquidity crisis. Commercial paper and sub-prime "Asset-backed" securities and Alt-A mortgages and even prime mortgage notes are all traded on a secondary market. Large players buy and sell them just like you and I buy stocks through on-line brokerages.

Except, the large players aren't buying notes anymore.

Well, lending institutions have to sell those notes in order to fund new lending...and right now that's gone.

If the Fed fails to lower interest rates to banks in the next 60 days, there will be no new mortgage loans.

None. Game over.

Home sales will be a thing of the past. Forget refinancing, that's already in trouble. I'm talking new home sales...gone.

A major deflationary spiral...a full-scale liquidity crisis.

Of course, our system is built such that we aren't supposed to have another 1930 to 1940 liquidity crisis again. The whole purpose of the Fed is to insure that such a major credit crunch never reappears...and the Fed has unlimited tools with which to inject cash liquidity back into the market at the wholesale level as well as to cut interest rates a great deal if required to further spur on lending.

For some reason (probably a vain as in vanity attempt to prop up our Dollar to prove our international manhood), however, the Fed has so far failed to ease this brewing credit crunch.

So it's not that sub-prime loans have gone away, not to be made any longer (or at least for the moment), and it's not that sub-prime loans might see 25% default rates...the core problem is that lending institutions have run out of cash with which to make any new loans because the Secondary Market isn't buying the old loans made by said lending institutions.

And the job of the Fed is to mitigate such a crisis. You can't just let our entire financial system shut down like it did in 1930.

Heck, why even have a Fed at all if it lets such a situation reoccur?!

So the problem is vastly larger than a few hundred thousand Joe-Blows who took on the riskiest sub-prime mortgages in order to maybe score big in real estate speculation (and who are now toast).

The real problem is much, much larger. The money for lending institutions to keep their doors open has dried up.

And the shame of it is that our economy is actually poised for more growth were the financial institutions to remain open. Unemployment is at near record lows. That's cool! Productivity is at near record highs. That's cool, too!

And corporate profits are very robust (P/E ratios on stocks show fair valuations, too).

So the economy could go either way, boom or bust, based on whether the Fed does its job immediately or delays more.

[Notary Sojac]

It's a GREAT time to buy a house!!!!!

[advance_copy]

the Fed are already pumping enormous sums into the banking system to keep a system failure from occurring

Simply repo operations, which are short-term funds for a day or two. The money does not stay on the market. That the number was down to $7B today reveals just how shallow the "crisis" is. Note that 90 day t-notes are up today; the buyback on fed repo ops is fine.

This hysteria is ridiculous and orchestrated. The puppets in media have to know it. They are making fools of themselves.

[rb22982]

Aren’t they just short term (like 3 day) repos? I dont think that’s the same as printing off more money (which they may be doing also, I dont know). The Euros however have pumped way more in...it’s been good for the dollar the last week. $1.338/Euro vs $1.394 previously.

[Old North State]

Two points,
The politicians exacerbated this problem by demanding that financial institutions ease lending criteria in order appease the race baiters who were crying about disparate impact.
If the government bails out defaulters it will be, de facto. subsidizing sub prime lending, and when you subsidize any practice you get eventually get more of it.

[Petronski]

This hysteria is ridiculous and orchestrated. The puppets in media have to know it. They are making fools of themselves.

The most astounding part of all this is the way the bears aren't just warning about a problem, they're hoping for it...salivating for it...routing for it.

Pathetic.

[hocndoc]

We are remodeling our house this winter, and I’m seeing lots of houses going up around us. I hope you find people like us!