Posted on 03/28/2008 8:14:57 AM PDT by Steve Schulin
In the past two weeks, the Federal Reserve, long the guardian of the nation's banks, has redefined its role to also become protector and overseer of Wall Street. With its March 14 decision to make a special loan to Bear Stearns and a decision two days later to become an emergency lender to all of the major investment firms, the central bank abandoned 75 years of precedent under which it offered direct backing only to traditional banks.
Inside the Fed and out, there is a realization that those moves amounted to crossing the Rubicon, setting the stage for deeper involvement in the little-regulated markets for capital that have come to dominate the financial world.
(Excerpt) Read more at washingtonpost.com ...
Central bank seems to be panicking.
Hmmm. I wonder what they know that we don’t. Or are they just idiots. It is one or the other.
We are careening toward a 'too big to fail' environment; investment banks (and major money center banks, also) are going to have to substantially bolster their capital. Also, FNMA and FHLMC are going to have to raise enormous amounts of new capital - stop paying dividends.
The high-flying bankers get their bonuses with no recourse and the tax-payers end up holding some "really sophisticated securities" worth probably 60 to 70 cents on the dollar.
“The high-flying bankers get their bonuses with no recourse and the tax-payers end up holding some “really sophisticated securities” worth probably 60 to 70 cents on the dollar.”
Considering the dolllar itself is likely to be only worth 60 to 70 cents on the dollar, I applaud your optimism!
What a piece of crap.
The Federal Reserve, a private company, that is interested in the nation's banks in so far as they provide steady profits, will provide US paper money {for a fee} to keep this charade from collapsing.
When the USA abandoned the gold standard, we got this semi-private banking system and it since wall street has been allowed to enter the banking business {via the side door} this is a natural extension.
I have no solutions to this mess, but I hope I outlive it's collapse.
“Inside the Fed and out, there is a realization that those moves amounted to crossing the Rubicon,”
That is true and they should suffer the same fate as Caesar.
>>I have no solutions to this mess, but I hope I outlive it’s collapse.<<
Those are my sentiments.
I’ve actually been waiting for this since I graduated from High School - 1972. I believe the seeds of this whole thing were sown in the 1930’s. The chickens are coming home to roost. Finally. But it will not be pretty.
Glas Steigel was repealed to allow US banks to become larger and more competitive with overseas banks who had broader charters and broader playing fields.
It looks like a lot of our bankers couldn’t handle the responsibility. The market will clean up a lot of that..who would trust a US Bank bond and it’s rating now?
To reestablish that trust will take a while..and in the meantime the US taxpayer is providing the guarantee..for the bond holders, but not the share holders.
Very little, if anything, but certainly more than they are currently lying about. We gloom-and-doomers here on FR have been predicting and detailing the consequences of the inevitable crash of the housing bubble for years. They're only now starting to come to pass.
I’m a Bear due to the uncertainty of what is going on now. However, I’ve cut most of my short positions and have some small longs now due to the fact that the Fed is so involved, money managers are growing confident.
I’m not buying it, but the easiest path seems to be up at this point. Will the whole system collapse? I doubt it. The Fed could actually gain a boon if when the real estate market turns around.
Caveat: I do not like the extra involvement and regulation that is sure to come. Long term I think it weakens us relative to other economies, but it is providing stability. Without the Fed involvement I predicted that a major bank or investment bank would go under. BearStearns was that company, and there others would probably get hit severely, as well as midzized and smaller banks.
However, now, with the floor in on firms collapsing, it’s probably at least a short term buying opportunity...but be careful we cold retest the lows.
Central bank seems to be panicking.
Hmmm. I wonder what they know that we don’t. Or are they just idiots. It is one or the other.
My conjecture is that simply The Fed knows they don’t know. Lacking detailed knowledge of the interlinked markets because there are no reporting mechanisms for scrutinizing rebundled securities, The Fed just has various financial doomsday scenarios to weigh - most of them all too plausible.
Part of it is that one broker told me many of these mortgage-backed deals were “mark-to-model” instead of mark-to-market. That’s insane, but apparently it was approved by a whole bunch of investors.
Between the lower interest rates, the mortgage loan teasers, the lack of oversight, and basic greed, a collective insanity gripped this country.
What I don’t understand though is that in vetting these combined investment vehicles, everyone was convinced that risk had been allocated properly so long as what was strong, credit wise, could compensate for what was weak, such as the subprime mortgages. Moreover, the amount of the riskier components would have been kept small.
Despite what seemed prudent, it seems like everything that was black became white and vice versa. Insted of strong credit as a bulwark against weak credit, the weak credit overwhelmed the strong credit. It is still a mystery on what basis that is so.
Who elected the Fed? To whom are they accountable? Why are the responsible, honest taxpayers the ones always left holding the bag?
Have you heard the media calling the Federal Reserve Notes, "Greenbacks?" lately? What a piece of misinformation.
Greenbacks? One only dreams that were the case.
>>We gloom-and-doomers here on FR have been predicting and detailing the consequences of the inevitable crash of the housing bubble for years. They’re only now starting to come to pass.<<
I read a few months ago that crashes always take longer to arrive than people expect, but when they do come, they unfold faster than people expected.
But Fed action and the press are slowing down the inevitable, pulling out all the stops. It is actually acting somewhat towards the economy as Hillary is acting towards the Democratic nomination. They both seem to have a “scorched earth” defence plan unfolding.
Problem is, that never works. In the long run, it only makes things worse.
You’re right — some of what is being done is prolonging the necessary and painful.
Some of what the Fed is doing is preventing complete lock-ups in debt markets.
Anything that props up the price of housing is preventing the necessary and inevitable.
Propping up over-leveraged and illiquid banking positions aren’t necessarily bail-outs - if the credit markets lock up and cease functioning, a whole lot of other crap will hit the fan - and quickly. So the Fed has a job under their “open market” mission to keep the debt markets functional.
People are going to learn, the hard way, that housing is an asset just like any other. The propaganda from the NAR, et al, has to be firmly and finally debunked (matter of fact, the NAR should be investigated for fraud and deceptive marketing practices). Housing isn’t exempt from being over-valued simply because you can live in it.
The reality of what has happened in the last 10 years in the real estate markets is this:
Mortgages turned into margin loans. Housing bubbled, then peaked.
And now bankers are realizing that they don’t have a way of making a margin call on real estate.
They’re learning of the true extent of the illiquid debt derivatives markets.
>>Housing isn’t exempt from being over-valued simply because you can live in it.<<
That reminds me of a phrase I have always hated: “Real estate will always go up becuase they aren’t making any more of it.”
That is pure baloney to anyone that has flown, during the day, from the west coast to the east coast. The phrase should read: “they aren’t making any more of it WORTH USING/AVAILABLE”. But then everyone would laugh at that because it would be a false statement.
Who would waste money on some of that useless crap in northeastern California becuase “it’s real estate and they aren’t making any more of it”.
Yeah, sure, your great-great grandchildren may reap the benefits of your wise purchase, but by then the property taxes would have paid for it a hundred fold...
I think a major part of our problem was that the “owned residence as investment” mentality which has been growing for many decades hit the end of the parabolic curve a couple of years ago. We are entering a time where the general population will see owning your own home in a different perspective. Heck, I owned for 18 years. I’ve been renting for ten and LOVE IT.
‘Course, in those ten years, my quality of residence and neighborhood has gone up and the rent has gone down. And this is in the seattle area. Go figure.
Exactly right.
This cycle is following the previous bust cycles: stocks peaked first, then residential real estate, then farmland.
It took 10+ years after each of these previous cycles broke their bull phase peak for people to see real appreciation in real estate again.
These historical precedents are why I really have a problem with the perma-bulls here on FR who keep saying that this is just some liberal media conspiracy to talk down the economy. No, it isn’t. We’ve had a convergence of the business cycle, the commodities cycle, the real estate cycle coming together now because of past interventions and meddling by the Fed. The Fed thought (quite arrogantly, I might add) that they could conquer the business cycle with Freidmanesque monetary intervention.
I used to think along these lines, but I’m now of a mind that they (and I) were wrong, wrong, wrong. These cycles are predicated on human behavior and psychology, which the Fed cannot change. They can play with the edges of the beginning/end of cycles, but they really can’t turn the mass of public opinion once things start to break.
Take what you just said: the “owned residence as an investment” mentality: you’re so right. Once a generation gets burned and burned badly from believing this chestnut as a Big Rule, an entire generation of Americans will ridicule this thinking for 20+ years thereafter.
Think about how the Depression Generation was so wary of stocks - for a long, long time. Some of their generation dipped into stocks in the 60’s, only to get burned again. Wall Street didn’t recover any sort of Main Street America appeal until we got all the way into the 80’s, and then we were talking of a whole new generation. That’s what it took to change the thinking of stockbrokers and Wall Street as a bunch of hucksters and cheats.
I believe the same thing is going to happen with real estate now — there’s a lot of people who are going to be burned by this real estate collapse and they’re not going to buy into another house for a long, long time, and part of the reason will be that it will become rather cheap (relatively speaking) to rent, what with all the overbuilt housing out there that will be available for leasing.
>>...it will become rather cheap (relatively speaking) to rent...<<
I pay $1,600 to live in a house that “was” reasonably valued at $525k a few months ago. The amound I save every single month, compared to what I would pay if I bought the house, is staggering!
Oh, and I just call the owner if something breaks. I don’t even waste mental cycles on it. And if I find a better job, but it is too far away? I move.
Once you own a home, you’re sort of married to it. Especially nowadays.
Did you see this: http://www.freerepublic.com/focus/f-news/1993192/posts
Looks like they are really trying to monetize this thing.
>>I pay $1,600 to live in a house that “was” reasonably valued at $525k a few months ago. The amound I save every single month, compared to what I would pay if I bought the house, is staggering!<<
My experience is that people that rent, especially for more than 1 year, simply cannot afford to own the home they live in. Hopefully you’re putting that money you “save” into something besides paying the rent. Too bad you’ll have to pay capital gains on everything you make... unlike the up to $500k of tax free capital gains you get from selling your home. Not once or twice, but the rest of your life.
Try that with the stock market.
My understanding of the Seattle market you note is that over the last 10 years you’ve been renting, homes have appreciated in value by 100-150%, if you did nothing to the house except mow the lawn and keep it from falling in on itself. Much the same things you do as a renter. Hmm...
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