Friday, February 24, 2012
Capital Markets Update
By Louis S. Barnes Friday, February 24th, 2012
Markets are quiet, volatility gone, waiting for something to happen. Not calm, plenty tense, a lot happening but not concluding.
The overriding influence near-term: The Battle of 1370. What, Europe again? The English and French refighting some unpleasantness between Crecy and Agincourt?
Nah. Every stock trader on the planet is mesmerized by S&P500 1370. Go above it, and stocks should rocket if only because so many buy the chart. One problem: the S&P since mid-December has already run straight from 1200, and been stuck between 1345 and 1365 for three weeks. As vulnerable on downside as likely to explode upward.
Fed-managed long-term rates no longer react to anything: the 10-year T-note since the end of October has traded 90% of the time between 1.90% and 2.05%.
Europe has pulled back from another Greek brink, but not resolved a thing. Austerity in the big dominoes — Italy, Spain, and France — has not begun, each promising fiscal tightening about 4% of GDP this year. In US equivalent, imagine a $600 billion tax-hike spending-cut combination during the onset of new recession.
The ECB will next week expand bank rescue funding toward infinity. However, the ECB firehose will have little economic effect, just preventing weak banks from failing, strong banks disinterested in risk-taking, no matter how much cash the ECB sprays.
So, the world admiring its navel, what’s up with the long-slow-roller, housing?
Finance types have amused themselves in the new year by announcing housing recovery. Merrill Lynch’s newest report concludes: “The housing recovery would support an even bigger commitment to equities in our portfolios.” Right. Merrill would find sunrise or Joe Stalin’s birthday good reasons to buy more stock.
Home sales data had been talked this winter into optimistic anticipation, and the flat reality misreported: a ballyhooed but minor gain in January sales of exiting homes was reversed by a downward revision for December. Sales of new homes were just the reverse: off .9% in January, revised up a little in December. And this winter was one of the mildest in a long time. New applications for purchase loans have been unchanged all through the winter into February.
Home prices have flattened. The FHFA Home Price Index wobbled weakly through 2011, and recovered in December to a decline of .8% from where it started. The Newest Case-Shiller data is a hair weaker, through last November off 3.7% year-to-date, the last two months showing new declines in 19 of 20 cities. Stock hawkers see these trends as a happy turn to price stability. If I have been dragged to the bottom of a swimming pool, holding my breath, is my situation stable?
There are genuinely positive trends, and one big puzzle. The true positives include some big drops in overall mortgage delinquency: in the last year, 18.9% in Nevada, 14.3% in Michigan, 21% in California, and 24.5% in Arizona. Total mortgages delinquent or in foreclosure have dropped by almost 900,000 in the last year.
Don’t get carried away just yet. Nationally, 12.3% of loans are still delinquent. 3,856,000 loans are 90+ days late or in foreclosure, down only 8% last year (LPS).
The puzzle: a nationwide drop in listed inventory for sale, down 21.5% last year, 11.5% of that in December alone. This is National Association of Realtors data, which given both hands and a mirror could not count both sides of its fanny and get to “two.” However, the decline is real and large, and normally a precursor to rising prices. This time we can’t tell how much is instead due to exhausted sellers, others fearful of discounts too deep, or with too little equity to hire a broker and have a down payment for the next home. We’ll hope, and see.
On the public policy front, the Federal government immobile and annoyed by Fed pleas for housing help, some states are moving. Florida has legislation pending which would make foreclosure easier. In the seventh year of fiddling and loan-mitigation pretense, there is no better sign than local governments wanting to get on with it. That’s a true marker of moving into the back half of this mess.
Markets are quiet, volatility gone, waiting for something to happen. Not calm, plenty tense, a lot happening but not concluding.
The overriding influence near-term: The Battle of 1370. What, Europe again? The English and French refighting some unpleasantness between Crecy and Agincourt?
Nah. Every stock trader on the planet is mesmerized by S&P500 1370. Go above it, and stocks should rocket if only because so many buy the chart. One problem: the S&P since mid-December has already run straight from 1200, and been stuck between 1345 and 1365 for three weeks. As vulnerable on downside as likely to explode upward.
Fed-managed long-term rates no longer react to anything: the 10-year T-note since the end of October has traded 90% of the time between 1.90% and 2.05%.
Europe has pulled back from another Greek brink, but not resolved a thing. Austerity in the big dominoes — Italy, Spain, and France — has not begun, each promising fiscal tightening about 4% of GDP this year. In US equivalent, imagine a $600 billion tax-hike spending-cut combination during the onset of new recession.
The ECB will next week expand bank rescue funding toward infinity. However, the ECB firehose will have little economic effect, just preventing weak banks from failing, strong banks disinterested in risk-taking, no matter how much cash the ECB sprays.
So, the world admiring its navel, what’s up with the long-slow-roller, housing?
Finance types have amused themselves in the new year by announcing housing recovery. Merrill Lynch’s newest report concludes: “The housing recovery would support an even bigger commitment to equities in our portfolios.” Right. Merrill would find sunrise or Joe Stalin’s birthday good reasons to buy more stock.
Home sales data had been talked this winter into optimistic anticipation, and the flat reality misreported: a ballyhooed but minor gain in January sales of exiting homes was reversed by a downward revision for December. Sales of new homes were just the reverse: off .9% in January, revised up a little in December. And this winter was one of the mildest in a long time. New applications for purchase loans have been unchanged all through the winter into February.
Home prices have flattened. The FHFA Home Price Index wobbled weakly through 2011, and recovered in December to a decline of .8% from where it started. The Newest Case-Shiller data is a hair weaker, through last November off 3.7% year-to-date, the last two months showing new declines in 19 of 20 cities. Stock hawkers see these trends as a happy turn to price stability. If I have been dragged to the bottom of a swimming pool, holding my breath, is my situation stable?
There are genuinely positive trends, and one big puzzle. The true positives include some big drops in overall mortgage delinquency: in the last year, 18.9% in Nevada, 14.3% in Michigan, 21% in California, and 24.5% in Arizona. Total mortgages delinquent or in foreclosure have dropped by almost 900,000 in the last year.
Don’t get carried away just yet. Nationally, 12.3% of loans are still delinquent. 3,856,000 loans are 90+ days late or in foreclosure, down only 8% last year (LPS).
The puzzle: a nationwide drop in listed inventory for sale, down 21.5% last year, 11.5% of that in December alone. This is National Association of Realtors data, which given both hands and a mirror could not count both sides of its fanny and get to “two.” However, the decline is real and large, and normally a precursor to rising prices. This time we can’t tell how much is instead due to exhausted sellers, others fearful of discounts too deep, or with too little equity to hire a broker and have a down payment for the next home. We’ll hope, and see.
On the public policy front, the Federal government immobile and annoyed by Fed pleas for housing help, some states are moving. Florida has legislation pending which would make foreclosure easier. In the seventh year of fiddling and loan-mitigation pretense, there is no better sign than local governments wanting to get on with it. That’s a true marker of moving into the back half of this mess.
Friday, February 17, 2012
Capital Markets Update
By Louis S. Barnes Friday, February 17, 2012
Gradually improving US economic data and a Greek deal of some sort have relieved immediate financial fears, and so bond and mortgage rates have risen.
The rate increase is proportional to the relief. 10-year T-notes have moved from 1.92% to 2.02%, and mortgages from just under 4.00% to just under 4.125%, roughly like your kid's fever dropping from 105 to 104.5.
However, the kid here is in a lot better shape than the kid in Europe. The most reassuring news here is the up-trend in the small business survey by the NFIB. Although its overall optimism is little better than the bottom of recessions going back 25 years, it has been improving each month since August, and only two months since 2007 have had better readings. The weakest internal component has been sales, now the worry fading fastest.
Another legitimate breakthrough: weekly claims for unemployment insurance have dropped again, to 348,000 last week. Wobbling near 350,000 in the last couple of months has been a straight-line decline from the 400,000+ range of the last two years, and is only about 25,000 weekly above what anyone would consider normal. However, everything about this cycle is so abnormal that nobody knows if normalized layoffs will translate in to normal hiring.
More good news: inflation is not a problem. CPI arrived for January +.2% both overall and core, and in the last year overall +2.3% core and +2.9% overall. The numbers don't seem to do much for inflation anxiety, most of which is based on conspiracy theories of one kind or another.
With us always is the cooked-books crowd. Nevermind the impossible complexity of getting the dozens of inflation reports from Bureau of Labor Statistics, Commerce Department, and Fed all to tell the same false story. People who believe in rigged reports also invariably believe that government is incompetent; if so, how is a pack of fools to run such an elegant conspiracy?
A branch of this bunch objects to updating the "market basket" of goods and services to reflect current consumption. This subset also loves the horror stories of atypical consumers: a family putting a kid through college feels price pressure that a retired couple does not. There is no arguing with those who want the world never to change. Today, keeping a horse in New York City is unimaginably expensive; 100 years ago in that city a horse was the common possession of a lower-class merchant.
A serious concern, historically, is the tendency of government to print its way out of debt trouble -- especially when so many authoritative voices (responsible and not) say that the Fed is "printing money" right now.
Of all the things that I discuss with my ceiling at 3:00AM, US money-printing is the least. For three reasons. The Fed is printing money to replace money that frightened banks and investors are withdrawing and burying in their back yards. If new money is in balance with money withdrawn, no inflation; the new money prevents deflation.
Second, take on faith that the Fed is deadly serious about a 2% target for core inflation. As an institution it saw the 1960s-1980s consequences of "a little inflation," and it will not repeat -- no matter what Left-side economists propose today.
Third… the third reason is so powerful that we will wish it were not there. When the Fed tolerated a little inflation, and it went from 2% to 12%, there was so little debt in the world that its owners could not protect themselves. Too few "bond vigilantes" to form a posse. Today there are mountains of IOUs all over the world. Any effort by any government to inflate its way out of debt will be met by massive selling, and the instantaneous and pre-emptive rocket in rates will demolish the offending economy.
Vigilantes grown to army-size now cause the austerity predicament. Only Greece, Ireland, Portugal, and the UK are in its grip. Italy, Spain, and France have promised austerity but not begun. In the US we have not even promised.
Gradually improving US economic data and a Greek deal of some sort have relieved immediate financial fears, and so bond and mortgage rates have risen.
The rate increase is proportional to the relief. 10-year T-notes have moved from 1.92% to 2.02%, and mortgages from just under 4.00% to just under 4.125%, roughly like your kid's fever dropping from 105 to 104.5.
However, the kid here is in a lot better shape than the kid in Europe. The most reassuring news here is the up-trend in the small business survey by the NFIB. Although its overall optimism is little better than the bottom of recessions going back 25 years, it has been improving each month since August, and only two months since 2007 have had better readings. The weakest internal component has been sales, now the worry fading fastest.
Another legitimate breakthrough: weekly claims for unemployment insurance have dropped again, to 348,000 last week. Wobbling near 350,000 in the last couple of months has been a straight-line decline from the 400,000+ range of the last two years, and is only about 25,000 weekly above what anyone would consider normal. However, everything about this cycle is so abnormal that nobody knows if normalized layoffs will translate in to normal hiring.
More good news: inflation is not a problem. CPI arrived for January +.2% both overall and core, and in the last year overall +2.3% core and +2.9% overall. The numbers don't seem to do much for inflation anxiety, most of which is based on conspiracy theories of one kind or another.
With us always is the cooked-books crowd. Nevermind the impossible complexity of getting the dozens of inflation reports from Bureau of Labor Statistics, Commerce Department, and Fed all to tell the same false story. People who believe in rigged reports also invariably believe that government is incompetent; if so, how is a pack of fools to run such an elegant conspiracy?
A branch of this bunch objects to updating the "market basket" of goods and services to reflect current consumption. This subset also loves the horror stories of atypical consumers: a family putting a kid through college feels price pressure that a retired couple does not. There is no arguing with those who want the world never to change. Today, keeping a horse in New York City is unimaginably expensive; 100 years ago in that city a horse was the common possession of a lower-class merchant.
A serious concern, historically, is the tendency of government to print its way out of debt trouble -- especially when so many authoritative voices (responsible and not) say that the Fed is "printing money" right now.
Of all the things that I discuss with my ceiling at 3:00AM, US money-printing is the least. For three reasons. The Fed is printing money to replace money that frightened banks and investors are withdrawing and burying in their back yards. If new money is in balance with money withdrawn, no inflation; the new money prevents deflation.
Second, take on faith that the Fed is deadly serious about a 2% target for core inflation. As an institution it saw the 1960s-1980s consequences of "a little inflation," and it will not repeat -- no matter what Left-side economists propose today.
Third… the third reason is so powerful that we will wish it were not there. When the Fed tolerated a little inflation, and it went from 2% to 12%, there was so little debt in the world that its owners could not protect themselves. Too few "bond vigilantes" to form a posse. Today there are mountains of IOUs all over the world. Any effort by any government to inflate its way out of debt will be met by massive selling, and the instantaneous and pre-emptive rocket in rates will demolish the offending economy.
Vigilantes grown to army-size now cause the austerity predicament. Only Greece, Ireland, Portugal, and the UK are in its grip. Italy, Spain, and France have promised austerity but not begun. In the US we have not even promised.
Friday, February 10, 2012
Capital Markets Update!
By Louis S. Barnes Friday, February 10th, 2012
The game of Grecian Chicken flaps and clucks on, Greece near default and leaving the euro, which would ruin its economy; and Europe withholding new money until Greece agrees to austerity that will ruin its economy.
The 10-year T-note yield needs no scary help from Europe to stay low. The Fed’s “Operation Twist,” swapping short Treasurys for long ones, has since November 1st kept the 10-year between 1.82% and 2.05%, and mortgages close to 4.00%. Zzzzzzzz.
Economic news didn’t amount to much this week, except the encouraging drop in weekly unemployment insurance claims, now below 375,000, half the worst of 2009.
Public policy follies and heroics dominate everything, economies and markets still in one ICU or another. For slapstick it’s hard to beat the mortgage servicing settlement with states’ attorneys general, a tasteless joke on people in trouble, and housing.
Eighteen months ago state AGs discovered they could hold foreclosures hostage to infinite litigation by accusing servicers of procedural shortcutting — true, but not material error. Servicing banks have bought their way out for $26 billion (0.00251% of mortgages outstanding), which might as well be extracted directly from taxpayers (the banks’ customers will pay) and deposited in the AGs’ re-election campaigns. The only real effect of settlement, and question: now released by the protection payment to AGs, what will be the new volume of foreclosures and how soon?
The second policy matter is genuine good news: clear evidence is mounting that the Fed’s extraordinary interventions are beginning to have effect. The Fed’s rescue measures since 2008 are three times removed (maybe three orders of magnitude) from actual historical experience, supported only by theory… but working.
1. When Lehman failed, the Fed flooded the banking system with reserves, trying to keep credit flowing and to prevent an asset fire-sale — the theoretical should-have-done in 1930, but never actually done. Brief injections at the ’87 stock crash and 9/11 were hardly comparable. The $1 trillion injected in a week after Lehman… did nothing.
2. Four months later the Fed began “quantitative easing,” buying MBS and Treasurys, another $1.2 trillion. QE is the measure that Japan theoretically should have adopted in 1990 but did not. QE1 did knock down mortgage rates, but the idea was to create credit: pull safe investments from the market, and thereby force investors to take risk. Didn’t work. The world went to cash and stayed there through QE2.
3. Beginning in 2011 and through today, the Fed has “walked out the yield curve,” a theoretical antidote to asset deflation described in a Bernanke speech 10 years ago. Translation: after holding cash yields at zero for three years and watching you idiots stay in cash, now we’re telling you we’ll hold them at zero for three more years. If you still stay in cash, we’ll pull more of your safe investments and promise to stay at zero until somebody younger and smarter takes your job or inherits your assets.
This theory-based offensive has opened pot-shot season for every other theorist, and fear, and who-took-my-cheese. Please pay no attention to the inflationists, the shut-the-Feds and gold bugs, and the bond-fund managers and wealthy coupon-clippers who feel entitled to good yield on cash and no-risk investments.
To make some money you’re going to have to take risk. And now we can see the first pin-stripers crawling from muddy bunkers, squinting into sunshine.
Consumer credit since November has rocketed at a 9% annual pace. Bankers in action! Paul Kasriel at Northern Trust has been one of the very few to understand the Fed’s ops, and his newest analysis finds a sudden net increase in bank loans and securities held. Credit! The MBS/10-year spread is the narrowest in a year, fear fading for holding super-low mortgages. Yield hunger has junk bonds in a huge rally, and corporate finance of all kinds is cheap. New home equity lines of credit had rate floors at 5.00% and 6.00%, banks fearful of Fed reversal and rising deposit costs. No more! We see two-year specials just above 2.00%. Even mortgages — halleluiah! — collateral circulation is opening around throttled Fannie and FHA, banks actually making loans.
The Fed set out to cap the 10-year T-note, and capped it has been. Don’t fight Mother Nature.
The game of Grecian Chicken flaps and clucks on, Greece near default and leaving the euro, which would ruin its economy; and Europe withholding new money until Greece agrees to austerity that will ruin its economy.
The 10-year T-note yield needs no scary help from Europe to stay low. The Fed’s “Operation Twist,” swapping short Treasurys for long ones, has since November 1st kept the 10-year between 1.82% and 2.05%, and mortgages close to 4.00%. Zzzzzzzz.
Economic news didn’t amount to much this week, except the encouraging drop in weekly unemployment insurance claims, now below 375,000, half the worst of 2009.
Public policy follies and heroics dominate everything, economies and markets still in one ICU or another. For slapstick it’s hard to beat the mortgage servicing settlement with states’ attorneys general, a tasteless joke on people in trouble, and housing.
Eighteen months ago state AGs discovered they could hold foreclosures hostage to infinite litigation by accusing servicers of procedural shortcutting — true, but not material error. Servicing banks have bought their way out for $26 billion (0.00251% of mortgages outstanding), which might as well be extracted directly from taxpayers (the banks’ customers will pay) and deposited in the AGs’ re-election campaigns. The only real effect of settlement, and question: now released by the protection payment to AGs, what will be the new volume of foreclosures and how soon?
The second policy matter is genuine good news: clear evidence is mounting that the Fed’s extraordinary interventions are beginning to have effect. The Fed’s rescue measures since 2008 are three times removed (maybe three orders of magnitude) from actual historical experience, supported only by theory… but working.
1. When Lehman failed, the Fed flooded the banking system with reserves, trying to keep credit flowing and to prevent an asset fire-sale — the theoretical should-have-done in 1930, but never actually done. Brief injections at the ’87 stock crash and 9/11 were hardly comparable. The $1 trillion injected in a week after Lehman… did nothing.
2. Four months later the Fed began “quantitative easing,” buying MBS and Treasurys, another $1.2 trillion. QE is the measure that Japan theoretically should have adopted in 1990 but did not. QE1 did knock down mortgage rates, but the idea was to create credit: pull safe investments from the market, and thereby force investors to take risk. Didn’t work. The world went to cash and stayed there through QE2.
3. Beginning in 2011 and through today, the Fed has “walked out the yield curve,” a theoretical antidote to asset deflation described in a Bernanke speech 10 years ago. Translation: after holding cash yields at zero for three years and watching you idiots stay in cash, now we’re telling you we’ll hold them at zero for three more years. If you still stay in cash, we’ll pull more of your safe investments and promise to stay at zero until somebody younger and smarter takes your job or inherits your assets.
This theory-based offensive has opened pot-shot season for every other theorist, and fear, and who-took-my-cheese. Please pay no attention to the inflationists, the shut-the-Feds and gold bugs, and the bond-fund managers and wealthy coupon-clippers who feel entitled to good yield on cash and no-risk investments.
To make some money you’re going to have to take risk. And now we can see the first pin-stripers crawling from muddy bunkers, squinting into sunshine.
Consumer credit since November has rocketed at a 9% annual pace. Bankers in action! Paul Kasriel at Northern Trust has been one of the very few to understand the Fed’s ops, and his newest analysis finds a sudden net increase in bank loans and securities held. Credit! The MBS/10-year spread is the narrowest in a year, fear fading for holding super-low mortgages. Yield hunger has junk bonds in a huge rally, and corporate finance of all kinds is cheap. New home equity lines of credit had rate floors at 5.00% and 6.00%, banks fearful of Fed reversal and rising deposit costs. No more! We see two-year specials just above 2.00%. Even mortgages — halleluiah! — collateral circulation is opening around throttled Fannie and FHA, banks actually making loans.
The Fed set out to cap the 10-year T-note, and capped it has been. Don’t fight Mother Nature.
Friday, February 3, 2012
Capital Markets Update
By Louis S. Barnes Friday, February 3rd, 2012
In a double surprise, the job market may at last have begun to revive, but the double-the-forecast, 243,000-job surge in January has done little harm to mortgages. We are still near 4.00%; 10-year T-notes up from 1.82%, but holding nicely at 1.95%.
Ordinarily a payroll jump like this would have killed us, especially in combination with strong results in the two ISM surveys for January: manufacturing to 54.1 from 53.1 in December, and service-sector way up to 56.8 from 52.6 last month. Some of the calm reaction in markets is suspicion — few other data confirm a big economic turn. Europe is a continuing cause of deep anxiety, but quiet this week, nothing but the muffled clanking of picks and shovels in the bottom of its ever-deeper hole.
And housing hangs over everything in the US economy, all measures of prices in continuing decline through December. But, to his great credit, Mr. Obama devoted a speech this week to housing, including new proposals. “This housing crisis struck right at the heart of what it means to be middle class in America: our homes.” Right!
The proposals will be without effect, but that’s not Mr. Obama’s fault. That two years have passed without proposals or priority or even mention, that is his fault, but give him full praise for saying out loud: “Hey, there’s an elephant in this living room!” Why there are no effective proposals, and why it’s beyond even the President’s power to put them forward is a tale of human nature. We know perfectly well what to do, but several things in ourselves and our political process prevent action.
Federal housing finance agencies created in the Great Depression were by far the most effective aspect of the New Deal, perhaps more so than all the rest put together. Aside from restoration of credit, the miracle of government guarantee made mortgage lending easy as apple pie. Guarantee and uniform underwriting standards — sound ones! — made previously illiquid and expensive mortgages as easy to transfer as shares of stock, and cheap, long after the Depression was gone.
For good or ill, as early as the end of WW II our homes became the stores of our national household wealth. Got to put it someplace. Stock market guys would like it to be their market, but it has its own epic instability. Houses it was. The original stop-the-Depression charter of the mortgage agencies became ordinary everyday-everybody utilities. We let them bloat, 1985-2004, for the interest of their stockholders, an inherently unstable situation. Even before mortgage credit went bonkers, ca. 2002, and the push for home ownership ran beyond qualified candidates, the ease of mortgage finance had likely over-fed housing wealth.
Here in the aftermath of the Bubble it is convenient to have someone to blame for our pain. “Fannie and Freddie” have become curse words. Profanities. They were NOT responsible for the $2 trillion in toxic loans, but they are big, fat targets for the Right, hating all government, also oddly the agencies’ boosters on the Left. Hell hath no fury like a social engineer scorned.
The truly culpable parties — Wall Street bankers — have made a clean getaway. John Dillinger and Clyde Barrow would still be in business if they had gone to Princeton, gotten MBAs, and learned to lie properly.
The result is self-inflicted paralysis. The plain-sight truth: for housing to recover we must re-activate Fannie. In a time of falling collateral value, private lenders cannot lend, and we must rely on government guarantee. That’s as certain as the Pope’s religion and behavior by bears in woods. However, reactivation is impossible without leadership to explain what happened and what did not, and that rhetorical task might be beyond FDR himself. In every financial crisis, senior bankers have been available to explain and structure recovery, but this time the bankers’ conduct before, during, and after has been so without conscience that it may be another generation before financial-market Pooh-Bahs can earn back trust. If they tried, which they have not.
The politicians are prisoners of a homicidally angry people, and we’re going to stay in this pickle until we get over it.
The turn in these ISM surveys may be even more important than the often-revised payroll survey.
In a double surprise, the job market may at last have begun to revive, but the double-the-forecast, 243,000-job surge in January has done little harm to mortgages. We are still near 4.00%; 10-year T-notes up from 1.82%, but holding nicely at 1.95%.
Ordinarily a payroll jump like this would have killed us, especially in combination with strong results in the two ISM surveys for January: manufacturing to 54.1 from 53.1 in December, and service-sector way up to 56.8 from 52.6 last month. Some of the calm reaction in markets is suspicion — few other data confirm a big economic turn. Europe is a continuing cause of deep anxiety, but quiet this week, nothing but the muffled clanking of picks and shovels in the bottom of its ever-deeper hole.
And housing hangs over everything in the US economy, all measures of prices in continuing decline through December. But, to his great credit, Mr. Obama devoted a speech this week to housing, including new proposals. “This housing crisis struck right at the heart of what it means to be middle class in America: our homes.” Right!
The proposals will be without effect, but that’s not Mr. Obama’s fault. That two years have passed without proposals or priority or even mention, that is his fault, but give him full praise for saying out loud: “Hey, there’s an elephant in this living room!” Why there are no effective proposals, and why it’s beyond even the President’s power to put them forward is a tale of human nature. We know perfectly well what to do, but several things in ourselves and our political process prevent action.
Federal housing finance agencies created in the Great Depression were by far the most effective aspect of the New Deal, perhaps more so than all the rest put together. Aside from restoration of credit, the miracle of government guarantee made mortgage lending easy as apple pie. Guarantee and uniform underwriting standards — sound ones! — made previously illiquid and expensive mortgages as easy to transfer as shares of stock, and cheap, long after the Depression was gone.
For good or ill, as early as the end of WW II our homes became the stores of our national household wealth. Got to put it someplace. Stock market guys would like it to be their market, but it has its own epic instability. Houses it was. The original stop-the-Depression charter of the mortgage agencies became ordinary everyday-everybody utilities. We let them bloat, 1985-2004, for the interest of their stockholders, an inherently unstable situation. Even before mortgage credit went bonkers, ca. 2002, and the push for home ownership ran beyond qualified candidates, the ease of mortgage finance had likely over-fed housing wealth.
Here in the aftermath of the Bubble it is convenient to have someone to blame for our pain. “Fannie and Freddie” have become curse words. Profanities. They were NOT responsible for the $2 trillion in toxic loans, but they are big, fat targets for the Right, hating all government, also oddly the agencies’ boosters on the Left. Hell hath no fury like a social engineer scorned.
The truly culpable parties — Wall Street bankers — have made a clean getaway. John Dillinger and Clyde Barrow would still be in business if they had gone to Princeton, gotten MBAs, and learned to lie properly.
The result is self-inflicted paralysis. The plain-sight truth: for housing to recover we must re-activate Fannie. In a time of falling collateral value, private lenders cannot lend, and we must rely on government guarantee. That’s as certain as the Pope’s religion and behavior by bears in woods. However, reactivation is impossible without leadership to explain what happened and what did not, and that rhetorical task might be beyond FDR himself. In every financial crisis, senior bankers have been available to explain and structure recovery, but this time the bankers’ conduct before, during, and after has been so without conscience that it may be another generation before financial-market Pooh-Bahs can earn back trust. If they tried, which they have not.
The politicians are prisoners of a homicidally angry people, and we’re going to stay in this pickle until we get over it.
The turn in these ISM surveys may be even more important than the often-revised payroll survey.
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