The Fed is blameless on the property bubble
The core of the problem lies with the investment community.
It is not credible that regulators could have prevented it, writes Alan Greenspan
Posted on 04/06/2008 3:07:51 PM PDT by lainie
[snipped]
Could tightened regulation of subprimes have contained some of the reprehensible, and presumably criminal, acts of lenders? Probably. But the broader crisis would likely have arisen even with increased micro-surveillance.
The core of the subprime problem lies with the misjudgments of the investment community. Subprime did not break from its localized niche status until 2005. As Ben Bernanke recently put it: “The deterioration in underwriting standards …appears to have begun in late 2005.” I assume that judgment reflected the increased delinquency behavior that is now evident for loans initiated in late 2005 and subsequently.
Subprime securitization exploded because subprime mortgage-backed securities (MBS) were seemingly under-priced (high-yielding) at original issuance. Subprime delinquencies and foreclosures (in a rising home price market) were modest at the time, creating the illusion of great profit opportunities. Investors of all stripes pressed securitizers for more MBS. Securitizers, in turn, pressed lenders for mortgage paper with little concern about its quality. As a consequence underwriting standards collapsed, and mortgage originations and securitizations rose to far greater heights than would have occurred without securitization. Even with full authority to intervene, it is not credible that regulators would have been able to prevent the subprime debacle. It would have required insights that would enable regulators to override the investment judgments of the most experienced analysts of the private sector, the very people on whom regulators rely for their market insights. When investment judgments are distorted by euphoria, even so valuable a financial innovation as securitization will perform poorly.
(Excerpt) Read more at blogs.ft.com ...
The Fed is blameless on the property bubble
The core of the problem lies with the investment community.
It is not credible that regulators could have prevented it, writes Alan Greenspan
He's taking more farewell laps than Barbara Streisand.
What a jerk! What could he have done? He could have raised interest rates when he realized a bubble was forming. And if he didn’t know a bubble was forming, he’s a total idiot. He could have never lowered them to 1% in the first place. He should be in jail.
So, we all know that the federal reserve is not the gov't, and he's making that clear distinction here. But the blurring of that line is to the fed's advantage (as it always has been), and gov't jumping on board with taxpayer money is the ultimate goal.
There's nothing new here, so I'm trying to figure out what he feels is so important that he needs to clarify.
(and yes, you'd think he would learn to shut his mouth by now. Does Bernanke like his constant meddling?)
You can also blame Democrat politicians who tried to help poor people by insisting that they should be offered loans for houses even though they didn’t qualify.
But the main problems arose from the removal of limitations that were imposed after the 1929 crash. For instance, the line of separation between banks and investment firms, which was designed to protect banks against these kinds of risk.
And above all, the insane “packaging” of mortgages, debt, and other odds and ends into “derivatives,” which were then sold and resold, with no one really knowing what the hell was in them.
I mentioned this earlier, and got some doubtful responses. Derivatives currently amount to more than $500 trillion, and instead of unwinding them institutions were creating more than ever, at last report.
That’s many times larger than the gross product of the entire world. Very worrying.
Also, a lot of these crazy investment firms are offshore. The rush to internationalize business is another cause of the problem. It has led to huge balance of payments deficits and no way to regulate these international operations.
“The Fed is always right”
John
In short Greenspan says the government and it's employees are to incompetent to over see the financial industry.
Jail? Don’t you think that’s a little harsh?
Does he feel the need to say that because he sees more gov’t regulation coming down the pike? Or a gov’t power grab of some sort? Because they’re not really overseeing it now.
Just trying to figure out why he’s saying what he’s saying. It seems the man never says anything without an agenda of some kind.
To hell with the Fed and the socialist bastards that created it.
“For instance, the line of separation between banks and investment firms, which was designed to protect banks against these kinds of risk.”
Thought I read recently that the Clinton administration had something to do with our current derivative problems..
***For instance, the line of separation between banks and investment firms, which was designed to protect banks against these kinds of risk.***
Which, in my humble opinion, was to the detriment of savers. For about twenty years or more, every time you walk into a bank with a ten dollar bill, they want to sell you stock. They have little concern as to your ability to save which is a time-honored concern to Americans. I wonder how many customers of banks fell for the derivitives.
This guy is like the Energizer Bunny, he keeps going and going and still wreaking havoc with our economy with his BS predictions. He should have been put out to pasture decades ago.
Don’t blame the banks. They’re just selling a product. There are entire television shows devoted to “getting rich on Wall Street. Cramer touts stocks with all the dignity of a meth addicted carnival barker at the canvas entrance to a geek show.
I wonder how many 401k's and pension funds are tied into derivatives, unbeknowest to the investor.
I see a lot of name calling in this thread but little that disputes his points.
I happen to agree with him one hundred percent (and so does Bernanke if you were to bother to look at what he’s been saying). This whole mess was caused by incredibly irresponsible UNDERWRITING on the part of the mortgage originators (banks, brokers, etc), the securitizers and at the end the investors - but mostly the mortgage originators. They were putting people in mortgages that any six year old could’ve figured out that they would never be able to repay them. They were qualified at teaser rates instead of the market rates!!! AND MANY WITH NO DOCS!!
Getting involved at this level is outside the legal scope of the Fed. Yes the Fed could have raised the interest rate and they did and it was that that lanced the boil (burst the bubble seems too clean), because when the fed raised the rates and the resets started, the mortgage payments doubled or tripled and that started the avalanche.
Of course if the Fed had intervened more heavily everyone would be accusing it of big-brotherhood.
What Bernanke is doing with Bear and adding liquidity to the mortgage market is exactly the right thing given the system we have. Some people say that he’s rescuing the fat cats by helping out Bear and adding liquidity. But what he’s doing is preventing another depression that would devastate everyone including the middle class and the poor.
By the way, as a result of this, one of the recommendations that Bernanke is making to the congress, is to give the Fed the power to get involved with regulating the whole underwriting process. So if you thought getting a loan involved a lot of paperwork and jumping through hoops now, just wait till this goes through.
No, billions have been lost as a result of his policies. If it were up to me we would hang him on national television.
It’s my understanding that the housing bubble was the biggest cause of these poor loans, given that, for awhile at least, folks could buy into a home and turn around & sell it at a profit. The idea that no one saw this coming is kind of ridiculous — plenty of people did. I don’t understand why you’re on the defensive, though. For example, I don’t see what lack-of-docs has, specifically, to do with a subprime loan.
I’ve specifically asked whether Bernanke wishes Greenspan would shut up, or if Greenspan’s working Bernanke’s angles. Admittedly I haven’t been reading everything both men have been saying. I suppose I should care more — enough to study it. shrug
They can’t make it impossible to get mortgage loans. What would that solve?
Getting involved at this level is outside the legal scope of the Fed. Yes the Fed could have raised the interest rate and they did and it was that that lanced the boil (burst the bubble seems too clean), because when the fed raised the rates and the resets started, the mortgage payments doubled or tripled and that started the avalanche.
Of course if the Fed had intervened more heavily everyone would be accusing it of big-brotherhood.
What Bernanke is doing with Bear and adding liquidity to the mortgage market is exactly the right thing given the system we have. Some people say that he’s rescuing the fat cats by helping out Bear and adding liquidity. But what he’s doing is preventing another depression that would devastate everyone including the middle class and the poor.
By the way, as a result of this, one of the recommendations that Bernanke is making to the congress, is to give the Fed the power to get involved with regulating the whole underwriting process. So if you thought getting a loan involved a lot of paperwork and jumping through hoops now, just wait till this goes through.”
The Fed, if they knew a housing bubble was being created could have raised interest rates. If Greenspan was concerned about irresponsible UNDERWRITING on the part of the mortgage originators about could have talked about it, and warned congress about it in his bi-yearly testimony. He also should not have encouraged people to take out Adjustable Rate Mortgages and then started raising rates.
Hey there, Alan - remember “Irrational exuberance”?
A little clarity when it counted instead the usual Greenspan mumbo-jumbo could have made a serious difference.
The lenders who maintained their integrity could not compete against the exploiters on the bases of honest evaluation of risk and quality of their loan portfolios, so they tried to make it up on volume.
When the emperor had no clothes, you just blew smoke.
“If Greenspan was concerned about irresponsible UNDERWRITING on the part of the mortgage originators about could have talked about it, and warned congress about it in his bi-yearly testimony. He also should not have encouraged people to take out Adjustable Rate Mortgages and then started raising rates.”
Actually, if my memory serves me, I remember him cautioning people against these type of loans on several occasions.
God help me, I went for my first degree in macroeconomics. (Seemed like a good idea at the time.) I then studied up hard and became an engineer.
My early foolishness left me with enough understanding of the field to realize after a while that Friedman, von Hayek, and Greenspan are mostly right and Keynes and Galbraith are mostly used horse-food.
When I read comments such as are posted here, I wonder how it can possibly be that anyone can be even more wrong than Galbraith. But the facts dinna lie.
Changing interest rates would have had zero effect on the naive psyches of these bubblers. It’s a culture that regrows every few years, no matter what you do to eradicate it. Like bamboo. I’ve lived through, oh, at least four or five such cycles by now.
The creating of this bubble, like all bubbles, requires a significant population of money-tree climbers that are incapable of comprehending history. How they can convince themselves that housing prices will never go anywhere but up is beyond me. They’d know this if they read anything older than yesterday’s newspapers. But they don’t. And then reality comes along and kicks ‘em ahint the sporran.
Will regulation help? NO. This is a human-nature flaw that no amount of government action can stop. Heck, misguided regulation helped CREATE the last big meltdown, (the “Savings and Loan” scandal of the last century).
What WILL help is concerted effort by us older folks to explain the facts of life to these house-flipping numbskulls, and keep their credit cards away from them until they demonstrate responsible behaviour. Bailing ANY of them out is utter nonsense.
Providing loan guarantees to enable the private sector to buy out Bear Sterns was NOT nonsense. The alternative was an implosion of liquidity would have been disastrous. That’s what hammered the US economy into the first great down-cycle of the Depression. (Leave it to Roosevelt to prolong it until WW2 came along.)
“It’s my understanding that the housing bubble was the biggest cause of these poor loans, given that, for awhile at least, folks could buy into a home and turn around & sell it at a profit.”
It’s the other way around - it was the easy mortgages that caused the bubble. Since everyone could get a loan, the demand for houses went up and so did the prices.
“For example, I don’t see what lack-of-docs has, specifically, to do with a subprime loan.”
It has a tremendous amount to do with subprime loans - it means, you took what someone told you about their finances at face value with no evidence (docs) to back it up!!
Would you make me a loan for $100K today? I promise I can and will repay it.
“I don’t understand why you’re on the defensive, though.”
Actually I thought I was being “offensive” by lobbing a few facts your way. As for whether Bernanke wishes Greenspan would shut up, I really don’t know. In this particular case I think they agree. But if you’re saying that Greenspan is a bit of a primadonna, I agree - he likes the limelight and I’m sure he’ll occasionally get in people’s nerves including mine. I read his book, and is actually not bad, both the first part which is his autobiography and the second part which delves into economic problems and his approach to solving them. If you’re interested in economics at all you might want to give it a read. Though a better book on the subject is “Free to Choose” by Milton Freedman.
“They can’t make it impossible to get mortgage loans. What would that solve?”
They won’t make it impossible, but I’m sure it’s going to be a lot harder, and it should be. Unfortunately, in times like these the pendulum will probably swing too much in the other direction for a while.
Our whole economic system and standard of living is built in large part on credit, and there is nothing wrong with that as long as there is a very high probability that the debts will be repaid - this is of fundamental importance, so ensuring that loans are properly underwritten would go a long ways in avoiding similar problems in the future.
Title should be the Fed is clueless on the housing bubble.
The purpose and functions of the Federal Reserve System include:[12][13]
To address banking panics
To serve as the central bank for the United States
To strike a balance between private interests of banks and the centralized responsibility of government
supervising and regulating banking institutions
protect the credit rights of consumers
To manage the nation’s money supply through monetary policy
maximum employment
stable prices
moderate long-term interest rates
Maintain the stability of the financial system and containing systemic risk in financial markets
Providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system
facilitate the exchange of payments among regions
to be responsive to local liquidity needs
Strengthen U.S. standing in the world economy
,,,,,,,,,Preventing speculative loans
The board of directors of each Federal Reserve Bank District also have regulatory and supervisory responsibilities. For example, a member bank (private bank) is not permitted to give out too many loans to people who cannot pay them back. This is because too many defaults on loans will lead to a bank run. If the board of directors has judged that a member bank is performing or behaving poorly, it will report this to the Board of Governors. This policy is described in United States Code, Title 12, Chapter 3, subchapter 7, section 301:[20]
Each Federal reserve bank shall keep itself informed of the general character and amount of the loans and investments of its member banks with a view to ascertaining whether undue use is being made of bank credit for the speculative carrying of or trading in securities, real estate, or commodities, or for any other purpose inconsistent with the maintenance of sound credit conditions; and, in determining whether to grant or refuse advances, rediscounts, or other credit accommodations, the Federal reserve bank shall give consideration to such information. The chairman of the Federal reserve bank shall report to the Board of Governors of the Federal Reserve System any such undue use of bank credit by any member bank, together with his recommendation. Whenever, in the judgment of the Board of Governors of the Federal Reserve System, any member bank is making such undue use of bank credit, the Board may, in its discretion, after reasonable notice and an opportunity for a hearing, suspend such bank from the use of the credit facilities of the Federal Reserve System and may terminate such suspension or may renew it from time to time.
This aspect of the Federal Reserve System is the part that is intended to prevent or minimize speculative asset bubbles which ultimately lead to severe market corrections.
http://en.wikipedia.org/wiki/Federal_Reserve_System
That said, what I have a very, very hard time with is the expansion of the scope of the Fed's reach. As a corollary, I have big problems with the way this was done. It would have made much more sense to have opened the Discount Window for a portion of the 30B with the stated intention of offering more, as necessary so that the run would be staunched. Instead, they did a back-room deal with Chase that was less than transparent (As the movement of Bear stock shows) and that is my very big problem.
Millions were made (And lost on the other side of the trades), there was advance trading, indicative of insider knowledge, and, in general, it was performed to the advantage of what I think were a few well placed insiders.
Not exactly what I would expect from the Fed nor is it what I want the Fed to be involved with in the future. Based on what Paulsen (Another insider to Wall St.) that is just what we can expect. i.e., An incredible expansion of the power of the Fed to act arbitrarily - And just who will watch/regulate their activities?
"American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage."~~Alan Greenspan, February 22, 2004
“The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions.”~~Alan Greenspan, May 2005
"We're not about to go into a situation where (real estate) prices will go down. There is no evidence home prices are going to collapse."~~Alan Greenspan, May 21, 2006
I can’t say I know all the ins and outs since I wasn’t at those meetings. But listening to the testimonies of some of the people that were at those emergency weekend meetings (an eclectic group), it sounded like the urgency to avert Bear going under was acute. Who am I to second guess them.
As they have additional hearings over this stuff I’m sure we’ll find out more, and perhaps in hindsight things might have been better done differently (or not).
We may quibble about some of the details, but bottom line, the crises was handled with relatively small impact to the overall economy... and that deserves an A or A-.
And to be honest, when Bernanke first came in, I wasn’t too impressed, but my respect for him has grown tremendously now that he’s been tested under fire... and he’s a lot easier to understand (and bolder) than Greenspan.
IMO we are not out of the woods on this mess and this is just window dressing. Wait until the ‘Real’ value of the Dollar, the incredible amounts of unfunded liabilities are truly revealed, the very poor position of State and Local Gov’ts finances comes to light (They've been even more irresponsible than the feds), the overextended consumer/student debt bubble bursts and we'll see how this relatively small action holds.
I think it is akin to a finger in the dike but, than again, I'm not a Larry Kudlow who thinks even S**t is upward sloping to the right.
This is getting repetitive - I couldn't agree more! The same thing is in process in College Education - The ease of financing it with easy, no doc loans, has caused the demand (And prices) to explode beyond what they should reasonably be expected to be in an unsubsidized world.
The same is true of health-care to some degree. Three words "Third Party Payer" cuases the demand to skyrocket with prices to follow. Both are examples of interference in the normal functioning of markets, something our Dem brethren are all too fond of introducing.
Shouldn’t he have to violate a law before you send him to jail/hang him? This isn’t the USSR, when they can kill you just because your program failed or something.
I definitely agree that we’re not out of the woods... if the unemployment rate goes up significantly, that will mean more foreclosures and credit card defaults (ironically probably one of the reason we haven’t seen a big jump in unemployment with all the construction grinding to a halt is because most of those jobs were filled with illegals and they don’t figure in our employment rolls).
No question we’re in for some well deserved pain, hopefully once the rehab is over we’ll come out of it and be clean for a while.
In the meantime there’s some big opportunities out there... It’s at times like these when big money can be made. Are you on the prowl for any, Cats?
Sounds like we’re in violent agreement!!
I really do not think this is over, I doubt the statistics - Think they are worse than is being reported (Your Illegal observation is spot on) and the combination of increased energy, food and commodity prices in general, coupled with weak housing and employment is a true 'Perfect Storm' for a real problem, especially in the Dollar (Despite recent strength - Do expect a G-8 intervention to support soon however).
Thanks for the specific quotes - they appear to confirm my opinion that Greenspan failed to notice the problem that was building, and certainly failed to sound the proper alarms.
I’m having a hard time betting against the dollar and on gold or the Euro or pound, at this juncture. Yes I know our trade imbalance is high, but it’s mainly against China, Japan and the oil exporting countries. When I look at the european economies, they’re in worst shape than we are, and they can hardly afford to let the dollar get much weaker. With our low interest rate there’s some carry-trade effect, perhaps that accounts for it more than the current account issues...
Low interest rates is one area that Bernanke is going to have a hard time dealing with - he’ll have to keep the interest rates low for a good while, or else he’ll be facing the mortgage reset problems all over again. Luckily with a recession looming, he would have had to lower rates anyways, so he won’t have to worry about inflation anytime soon.
As for what I’m considering to invest in, real estate is definitely one area - I think house prices will bottom out this year. I’m also looking at home builder ETF’s, and even financials. Solar stocks are also on my watch list, as well as ag, RR, commodities and china, and south america. I think the fundamentals are great on all of them - just a question of whether the current market valuation is way out of line with their intrinsic value.
bttt
Real Estate is another matter. There ARE some seeming fantastic deals here in Bloomfield Hills, Mich BUT they are good by comparison to two years ago, i.e. the majority of the run-up is still intact. As well, I don’t think the impact of the economy has been felt on Commercial Real Estate, perhaps signaling yet another emergency in the offing.
Consumer debt (Autos, Credit Cards, etc) are also emerging as a source of uncertainty.
In this environment I have a hard time making the case for an extended Market rally and, in fact, could make a better case for a significant pull back to meet or break the lows of the past year.
Sorry to be so negative but that is what I see despite the rantings of Cramer and the rose colored opptimism of Kudlow.
Meanwhile, it looks like the Site owner has been F'ing with things such that there are some problems with the Site this morning. Sure wish they would learn how to implement change in an orderly and fully tested fashion instead of dumping their bad code on the members!
It appears that I’m the one who’s defensive, and I apologize for that. I asked about no-doc loans because I’m seeing so many around here equate no-doc = illegal immigrant, and it’s simply not true. Not in every case. Anyway, I realize our system is built on credit, but I also realize our system is paper money, which is really only as solid as the people having confidence in it. Right? So that trickles down to many areas. There are so many reasons and theories about every part of this finance mess.
I can’t find the quote, but Greenspan has admitted that he really didn’t understand derivatives at all, and basically just took the word of the young go-go investment bankers that they were a great thing.
No problem Lainie. We’re all here to learn and exchange ideas.
I know about no-doc loans because I got a couple myself.
As for paper money vs. gold backed money they both depend on people having confidence in it. People can play games with both systems. Having gold-backed money doesn’t prevent the government from printing more money than it should. It has happened before.
Lately I’ve been trying to educate myself more on the whole money world - so that I can better understand the mess we’re in, and possibly look for opportunities in it as oppose to despair. I’m making some progress. What makes it rather difficult to grasp is all the derivatives that have cropped up recently - obscure stuff like credit default swaps, repurchase agreements, asset backed securities, monolines, etc, etc. Much of this stuff is leveraged and unregulated and it involves massive amounts of money. Simply grasping the concepts involved and definitions is challenging enough. Understanding the interrelationships and potential consequences when there’s problem in one area can be downright intimidating.
I must admit I don’t know all the various forces that impact exchange rates, nor am I familiar with all the data of the various countries, so I’m shying away from the forex market. Given the little I know about the eurozone and britain, I have a hard time making a case for the euro or the pound vs the dollar at the current levels. I’d be curious to know your reasoning as to why the dollar would fall further against these two currencies.
Regarding real estate, you’ve hit the nail on the head. Even at the reduced prices, do they represent an attractive valuation level? And more fundamentally, how does one go about figuring out what an attractive valuation level is? Affordability? Replacement cost? ROI? All of the above?
I also agree with you about the stock market - I don’t see any long term rally any time soon. We might have another little jump when the fed lowers the rate again at the end of the month, but the recession is coming and that will effect earnings which will drive the stock prices down. I’m trying to decide what to do with my stocks - ride this out or try to time it by selling after the rate cut.
I think the Fed is between a rock and a hard place with interest rates, much more so than in Europe or Japan, and that is why I think Dollar weakness remains and probably intensifies. Note - I think the U.K. is also in a bind and could mirror some of the problems of the US.
As far as housing, the weakening job situation only exacerbates the situation. IMO The Fed is pushing on a string trying to prop up demand by lowering rates. Besides, lower rates are irrelevant if Banks are not willing to lend in the first place and, from what I'm hearing, Mortgages are that much harder to obtain, even for well qualified buyers. The impairment of lending capital also acts to limit credit extension by many institutions.
As far as determining the correct valuation, I'm as much at a loss as the next person. In Markets like these the typical DCF or ROI measures are difficult, if not impossible to determine. I guess I'd say what I said on another post - If you are prepared to hold on, actually use the property during the pendency, then you probably cannot go wrong. If, on the other hand, you need to turn it over in the next 5 years or less, then you have to be very, very careful. Replacement cost, especially here in Michigan, is definitely not a measure of market value - Of that I can speak based on personal experience.
What I'm waiting for is the other shoes to drop in terms of Commercial Real Estate, Consumer Credit Card and Personal Loans and Student Loans. These could be as difficult as the Housing mess IMO.
My investment performance is not anything to write home about so I'd take everything I say with a grain or two of salt. One thing I'm seeing is that all of the old methods do not work well, especially when you've got a rogue Fed that can jump into the normal functioning of markets and create chaos. I know they have nailed me a couple of times, soundly, to the effect I'm much less inclined to put down money on much of anything for the simple fact that what I think should happen can be totally undermined in a second by actions that I or the Markets have absolutely no control over and which are impossible to predict.
Hope you do well to the extent you are in the markets.
My stock market picks have been a mixed bag. Actually the picks have been OK, it’s the selling part that’s been awful. I tend to be more a collector of stocks than an investor and so I watch my stocks go way up and then come down - sometimes several cycles. I just don’t have the personality of a trader.
Maybe that’s why I’ve done better in real estate - or maybe I’ve been lucky there too living in the bay area where it’s unheard of prices going down much. I’ve been sticking with residential rental property, apartments mostly, and they’ve done pretty well - I wouldn’t get into anything that didn’t cah flow from the get go. I expect apartments to hold their own through this mess, given the higher demand for low-cost rentals, lower interest rates (which could help lower the cap rates in which case the asking prices can go up a bit). You’re right though, getting a loan has gotten significantly harder (first hand experience). They’re finally doing the type of diligent underwriting that they should have been doing all along!
On evaluation, maybe the factors to keep an eye on is inventory and rate of absorption and population trends. I hear all sorts of horror stories about Michigan RE - I guess the declining population and jobs is mostly the cause. I don’t know much on how competent or incompetent the state and local govts are other than Detroit’s which is well beyond incompetent...
I guess one of the biggest factor in deciding what to invest in now, if anything, is the time horizon. Here’s an interesting article on Japanese RE - we may be going through some of the same gyrations, in which case even a ten-year time horizon may not be sufficient.
http://www.iht.com/articles/2006/09/19/bloomberg/sxyenland.php
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