There’s a post over at the Wall Street Journal, summarizing a paper from the Federal Reserves of Atlanta and Boston on the mortgage crisis that you might want to take a look at. Extracting the bullet points here are their findings:
Fact 1: Resets of adjustable-rate mortgages did not cause the foreclosure crisis.
Fact 2: No mortgage was “designed to fail.â€
Fact 3: There was little innovation in mortgage markets in the 2000s.
Fact 4: Government policy toward the mortgage market did not change much from 1990 to 2005.
Fact 5: The originate-to-distribute model was not new.
Fact 6: MBS, CDOs, and other “complex financial products†had been widely used for decades.
Fact 7: Mortgage investors had lots of information.
Fact 8: Investors understood the risks.
Fact 9: Investors were optimistic about house prices.
Fact 10: Mortgage market insiders were the biggest losers.
Fact 11: Mortgage market outsiders were the biggest winners.
Fact 12: Top-rated bonds backed by mortgages did not turn out to be “toxic.†Top-rated bonds in collateralized debt obligations (CDOs) did.
One thing that struck me about the post (I haven’t read the Fed paper itself yet) is that I don’t think they understand compounding very well. That’s not surprising. Human beings really aren’t built to understand exponential growth.
The summary might be further summarized as that there were a lot of very bad assumptions going around, among them that a sharp, prolonged decline in housing prices was impossible.
Don’t facts 8 and 9 contradict each other?
The point that the author of the post emphasizes is the availability of information. I’m guessing that he doesn’t believe that concluding that the rewards exceeded the risks constitutes a lack of understanding of the risks.
In addition to compounding, there would appear to be timing issues. Housing transactions, particularly purchases, are not common occurrences, and one would expect that any government policies or commercial innovations would take a while to be measurable. In particular, Facts 3 through 6 seem to not directly address the issues, they only indirectly do so by claiming these items were not new.
In case what I meant by “compounding” wasn’t clear, I think the notion that just because this factor or that had been in place for a while that constituted proof it wasn’t a problem is erroneous. It presumes that because a 10% increase in a year doesn’t produce instability that a 10% per year increase forever won’t, either, which I think is absurd.
OK, I understand what you mean. Reading through the list, I had initially throught you were referring to numerous small effects “compounding” to greater effect.
Essentially, that is what I mean. Points 1, 3, 4, 5, and 6 all are assertions that nothing had changed. So what? That doesn’t necessarily matter.
Imagine a bucket. Put a cup of water in it. Everything’s fine. Put another cup. Everything’s still fine. Can you take that to mean that you can continue to put more water in the bucket forever without it overflowing? Of course not.
Systems have carrying capacities. Even if that carrying capacity increases over time if what you’re carrying increases faster than the carrying capacity you will eventually run into problems.
It’s obvious that all sorts of systems involved in the housing crisis have inadequate carrying capacities to the load they’re being expected to carry. The various problems in the transfer process and the foreclosure process that have been revealed over the last half dozen years are at least a prima facie case is not proof positive.
Steve Sailer reacted to the paper by citing the number of CA mortgages with zero down payments went from 3.9% to 21.1% from 2000 to 2006. Bush in 2002 called for more of such mortgages and signed into law the American Dream Down Payment Initiative in 2003 which authorized the feds to give money to people for down payments.
http://www.hud.gov/offices/cpd/affordablehousing/programs/home/addi/
Essentially, the old joke:
Yeah, that’s one of my favorites.
“No one doubts that the availability of mortgage credit expanded during the housing boom. In particular, no one doubts that many borrowers received mortgages for which they would have never qualified before. The only question is why the credit expansion took place.”
Looks to me like the Fed is indirectly acknowledging Minsky for the first time. Banks began loosening their standards and loaning money to ponzi financiers who expected and required that asset prices would grow indefinitely. The problem with this is that exponentially accelerating indebtedness is necessary for this to occur. Once it hit the maximum debt load the private sector could bear growth ceased and the entire ponzi structure collapsed.
The only problem I see with the paper is that it fails to discuss HOW such an event can take place in our banking system, and that reason is thanks to the structure of the Federal Reserve system itself. So long as banks have adequate capital and customers for their loans, they can acquire any quantity of reserves they need to finance the asset bubble. In the post-bubble period we can expect to have much more restrained lending with higher standards, followed by loosening standards and an eventual return to ponzi financing as banks gradually forget the lessons of the past.
Financial stability is destabilizing.
One related personal observation. After a recent refi, I got a letter from Fannie Mae, stating (a) they now own my mortgage, (b) local bank would continue to service the mortgage, and (c) they were not going to record their ownership interest. So, here is a quasi-governmental entity confessing to doing something that we’ve been assured is illegal and which is preventing county recording offices from making money.
Anyone have a good recipe for tandoori chicken?
Ingredients
2 tablespoons vegetable oil
6 medium garlic cloves, minced or pressed through garlic press (about 2 tablespoons)
2 tablespoons grated fresh ginger
1 tablespoon garam masala (see note)
2 teaspoons ground cumin
2 teaspoons chili powder
1 cup plain whole-milk yogurt (see note)
4 tablespoons juice from 2 limes, plus 1 lime, cut into wedges
2 teaspoons table salt
3 pounds bone-in, skin-on chicken parts (breasts, thighs, and drumsticks, or a mix, with breasts cut in half), trimmed of excess fat and skin removed
Instructions
1. Heat oil in small skillet over medium heat until shimmering. Add garlic and ginger and cook until fragrant, about 1 minute. Add garam masala, cumin, and chili powder; continue to cook until fragrant, 30 to 60 seconds longer. Transfer half of garlic-spice mixture to medium bowl; stir in yogurt and 2 tablespoons lime juice and set aside.
2. In large bowl, combine remaining garlic-spice mixture, remaining 2 tablespoons lime juice, and salt. Using sharp knife, lightly score skinned side of each piece of chicken, making 2 or 3 shallow cuts about 1 inch apart and about 1/8 inch deep; transfer to bowl. Using hands, gently massage salt-spice mixture into chicken until all pieces are evenly coated; let stand at room temperature 30 minutes.
3. Adjust oven rack to upper-middle position (about 6 inches from heating element) and heat oven to 325 degrees. Pour yogurt mixture over chicken and toss until chicken is evenly coated with thick layer. Arrange chicken pieces, scored-side down, on wire rack set in foil-lined, rimmed baking sheet or broiler pan. Discard excess yogurt mixture. Bake chicken until instant-read thermometer inserted into thickest part of chicken registers 125 degrees for breasts and 130 for legs and thighs, 15 to 25 minutes. (Smaller pieces may cook faster than larger pieces. Transfer chicken pieces to plate as they reach correct temperature.)
4. After removing chicken from oven, turn oven to broil and heat 10 minutes. Once broiler is heated, flip chicken pieces over and broil until chicken is lightly charred in spots and instant-read thermometer inserted into thickest part of chicken registers 165 degrees for breasts and 175 for legs and thighs, 8 to 15 minutes. Transfer chicken to large plate, tent loosely with foil, and rest 5 minutes. Serve with chutney or relish, passing lime wedges separately.
Thanks, Dave.
I read the original paper. It has many problems. It completely ignores the role of regulators. It ignores the fact that when there was a mini explosion of subprimes in California in the 90s it was aborted by regulators.
The paper claims that insiders were the biggest losers claiming that banks like Citi lost money. That is NOT insiders. What you want to look at are individual bankers/traders. Many of them made out quite nicely. Calling hedge fund managers outsiders is a bit of a stretch IMO.
Ben- Dave’s recipe is not much different than mine, but I grill mine. Seems closer to a real Tandoor effect. If you want the Tandoori look, use food coloring.
Steve
Can someone come over to my house tomorrow and cook my and my family Tandoori Chicken?
Party at Andy’s. I’ll bring the wine.
I need to read the paper before I take a strident view. But just a couple observations. The notion that banks make loans they want to fail so they can claim the asset is just absurd. Have any of you guys seen foreclosed properties or the loan recovery statistics from workout? Weeds in the yard. Flys in the house. Recovery invariably less than loan value. There are “lend to liquidate” outfits. But they are rare.
As far as syndication goes. Yes, loan syndication has been around for along time. Some banks simply have origination, structuring and closing capabilities. Others simply have a balance sheet. They are affectionately known as “stuffie” banks, for obvious reasons. in the leveraged loan market, the old Bankers Trust was the original invest ment banking look alike. And if investment banks aren’t about syndication in their capital raising activities, what are they? And anyone remember Drexel????
But that is a very different proposition when it comes to the concept of securitization, and what happened with mortgages. I need to read the paper, but the knee jerk is that I’m unimpressed by t he notion it’s been going on for along time.
Lastly, collateralized loans are only as good as the collateral. I know it’s fundamental, but the policy prescriptions and the animal spirits seem to have been the problem.
Dammit, now where am I supposed to find Tandoori chicken in Tiburon? I’m not cooking, and our restaurants are meh Italian, meh Chinese, bad Mexican and worse seafood.
Make Madras potatoes with the chicken.
2 lb new potatoes or Yukons cut into one inch pieces.
3 tbsp ghee
2 tsp black mustard seeds
one onion diced
4 garlic cloves finely diced
1 1/2″ fresh ginger root finely chopped
1 fresh hot red chili (I use Thai) chopped finely (I use a serrano if no reds can be found)
1 tsp ground cumin
1/2 tsp ground coriander
one tsp nigella seeds (optional if hard to find)
chopped fresh cilantro (garnish/sprinkle at end)
1) Boil potatoes until just tender, like for potato salad.
2) Melt ghee in a wok or large skillet. Add mustard seeds and stir until they start to hop, about one minute.
3) Add the onion. Saute for about 5 minutes, then add the garlic, ginger, nigella seeds and chili. Cook til onion is golden.
4) Add cumin and coriander. Stir well.
5) Add potatoes. Salt to taste. Stir to coat with onions and spices. Cook only until heated. Sprinkle with cilantro and serve. These are good hot, but just as good at room temperature, so you can make them ahead. Good with beer. This is extremely aromatic and makes the house smell good, if you like Indian food.
Steve
An interesting video here on the U.S. monetary system and why it can’t become Greece unless it chooses to. It’s pretty good (although I’m getting tired of the deadpan computer voice paradigm in cartoons).
Might help if I include the link:
http://neweconomicperspectives.org/2012/05/sovereign-currency-issuers-are-always-solvent.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+neweconomicperspectives%2FyMfv+%28New+Economic+Perspectives%29
Might help if I include the link:
http://neweconomicperspectives.org/2012/05/sovereign-currency-issuers-are-always-solvent.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+neweconomicperspectives%2FyMfv+%28New+Economic+Perspectives%29
For some reason I can’t post the link.
Got it working:
http://neweconomicperspectives.org/2012/05/sovereign-currency-issuers-are-always-solvent.html
Ghee (clarified butter) is to Indian cooking what butter is to French cooking or olive oil is to Italian cooking.
Steve’s recipe is also good with some cauliflower florettes added to the potatoes.
Dave- Good idea! My wife would love that.
Steve