[Rhodes22-list] Economics - or the lack thereof

Sun Mar 25 10:14:29 EDT 2007

Brad,

The writer really doesn't cover all of the issues. I do agree that the 
government should keep out however many points overlooked. The article does 
not mention what happens when this spills over to the "conforming" loan 
market....and it will. The finance markets were in big swings last week so 
to say the market has corrected is not quite true. The article also does not 
consider how this will effect the amount of disposable incomes families will 
have to spend on HDTVs and new cars to drive the economy. There are millions 
of Interest Only, ARMs, and Baloon loans that are not considered sub-prime. 
To limit the damage to the sun-prime housing market only is a little naive 
and shows the author does not understand all of the potential problems.

I am not mentioning doom and gloom but it was clear to see that the housing 
market was driving the economy much like the dot coms.  Easy credit 
(investment), greed, and creative accounting was driving the stock 
growth.... not good economic balance. People will not be able to make the 
consumer good purchases that are driving the economy because they are living 
in houses they can't afford.

I guess my point was/is that our economy wasn't as rosy as some claimed and 
was due for a major correction with the housing industry being one of the 
key causes. This has already happened. Toss in the cost of the war, the cost 
of entitlements, the military, paying off existing debt.....I wish I had 
Brad's rose colored glasses.

On a positive note I went sailing yesterday and it was beautiful in East TN!

Wally

>From: "Brad Haslett" <flybrad at gmail.com>
>Reply-To: The Rhodes 22 mail list <rhodes22-list at rhodes22.org>
>To: "The Rhodes 22 mail list" <rhodes22-list at rhodes22.org>
>Subject: Re: [Rhodes22-list] Economics - or the lack thereof
>Date: Sat, 24 Mar 2007 09:31:41 -0500
>
>Robert,
>
>Here's a trip down memory lane for you.  Yogi Berra said it best, "it's 
>deja
>vu all over again!"
>
>Brad
>
>--------------------
>Relax, and Do Nothing *By* *John
>Tamny*<http://www.realclearpolitics.com/articles/author/john_tamny/>
>
>Calvin Coolidge once said, "If you see 10 troubles coming down the road, 
>you
>can be sure that nine will run into the ditch before they reach you." The
>30th president's words are particularly prescient in light of hand-wringing
>by our political class over subprime mortgages, our "problem" du jour.
>
>Sen. Charles Schumer, New York Democrat has said, "There's going to be a
>significant role for Congress" in working out the alleged subprime mess,
>while Sen. Christopher Dodd, Connecticut Democrat, has suggested that
>Congress should curb what he deems predatory lending. Mr. Dodd has also
>spoken of finding ways to help "millions of families" facing foreclosure,
>which, when translated, means Congress will seek to fleece millions of U.S.
>taxpayers to bail out those who sought financing in the subprime market.
>Given Congress' track record in dealing with past problems in the banking
>sector, investors and taxpayers should hope any legislation is stalled in
>committee. Indeed, the S&L debacle of the late 1980s should make even those
>in Congress wary of wading into more banking legislation.
>
>Nearly 30 years ago, the savings and loan (S&L) industry was on life
>support. Amidst skyrocketing interest rates between 1979 and 1982, S&Ls 
>lost
>$4.6 billion in 1980, and $4.1 billion in 1981. By 1982, S&Ls had a 
>negative
>net worth of $100 billion. Rather than allow the industry to die a slow
>death, Congress stepped in to save the day.
>
>The slow death of the S&Ls began in the 1970s when interested rates
>skyrocketed in response to the weak dollar. In previous decades, the S&L
>sector was a prosaic one where its assets were long-term mortgages paying
>higher rates, while its liabilities consisted of short-term, lower-rate
>deposits. This worked well until short-term rates rose sharply. Unable due
>to regulations to pay depositors more than 5-1/2 percent, S&Ls gradually
>lost deposits to money-market funds paying well in excess of 51/2 percent,
>while the falling dollar eroded the value of their fixed-rate mortgages.
>
>Regulations and poor Fed policy surely hindered the S&L industry, still the
>explosion of the mortgage-backed securities market and worldwide banking
>competition rendered S&Ls obsolete.
>
>But like most long-established industries in the U.S., the S&Ls had 
>powerful
>political benefactors interested in keeping them alive. Congress passed the
>Depository Institutions Deregulation and Monetary Control Act of 1980, and
>the Garn-St. Germain Depository Institutions Act of 1982 to keep them
>afloat. Both acts served to privatize any deregulation successes, while
>socializing the inevitable failures.
>
>Whereas S&Ls were previously limited in terms of the interest rates they
>could offer depositors, the aforementioned legislation removed all caps on
>rates they could post to attract deposits. Capital requirements were 
>reduced
>from 5 percent to 3 percent, plus S&L loans were no longer limited to home
>mortgages. To pay the high rates offered on deposits, S&Ls had the 
>incentive
>to make higher-risk loans and equity investments in areas beyond 
>traditional
>home mortgages, including commercial and construction loans. If the S&Ls 
>had
>been left to fend for themselves in this newly deregulated world, the new
>legislation would have been fine.
>
>The problem, as previously mentioned, was that Congress also chose to
>socialize any failures. The Garn-St. Germain bill raised the level of
>federal deposit insurance from $40,000 to $100,000. This created enormous
>moral hazard in that depositors could place their funds at high rates of
>interest with the S&Ls worry-free. And just the same, S&L executives could
>be lax in their lending and investment standards with full knowledge that
>U.S. taxpayers were on the hook if their investments soured.
>
>Importantly, the weakest S&Ls had the greatest incentive to swing for the
>fences in making loans, and this made it even more difficult for the 
>healthy
>S&Ls to compete. The rest, as they say, is history. More than 1,000 S&Ls
>failed in the 1980s. The bloodbath continued into the 1990s; much of it on
>the dime of U.S. taxpayers.
>
>Returning to the existing subprime situation, according to a recent report
>from Morgan Stanley, there are slightly more than $600 billion of subprime
>mortgages outstanding. If there were defaults on half that (thought by many
>to be the worst-case scenario), it would work out to 2 percent of the $15.7
>trillion U.S. bond market. Considering how active foreign investors are in
>U.S. debt, this number shrinks to 1 percent of the $33 trillion global
>market. Further, $300 billion is only 1.3 percent of the U.S. housing
>market, and constitutes only 0.5 percent of the $55.6 trillion net worth of
>U.S. households. In short, $300 billion is pretty tiny in the big picture,
>and something the markets can easily handle. And as this is public
>information, stocks have already priced any presumed fallout.
>
>Not yet priced is the governmental response to something it should best 
>stay
>out of. The Bush administration has joined the echo chamber in saying it
>will vigorously prosecute any cases of predatory lending -- meaning future
>homebuyers on the riskier end of the lending curve will find it tougher to
>get financing in the future.
>
>If the heads of failed subprime firms face prosecution, there will be an
>even greater incentive for successful firms in the subprime space to exit
>the industry. To the extent either lenders or borrowers are bailed out, 
>U.S.
>taxpayers will eventually have to pay for the inevitable carelessness that
>government guarantees engender.
>
>Still, as evidenced by the numbers involved, this is a very small problem.
>To avoid making it a bigger one, Congress should let the subprime scare
>slide into the ditch.
>   *Page Printed from:
>http://www.realclearpolitics.com/articles/2007/03/relax_and_do_nothing.html*at
>March 24, 2007 - 08:29:05 AM CST
>
>
>On 3/23/07, Robert Skinner <robert at squirrelhaven.com> wrote:
> >
> > Hank wrote:
> > > How is this an issue of either political party?  It seems to me that
> > this is
> > > just a consequence of the free enterprise market.  Banks wanting to 
>get
> > more
> > > business came up with innovative ways to provide home financing.  They
> > were
> > > taking a gamble that interest rates would stay low and folks could
> > continue
> > > to pay.  In some cases, it was a pretty dumb business decision on both
> > the
> > > bank's and the home buyer's part.  Now  they both will have to pay the
> > > consequences.
> >
> > Hank, I wish you were right -- that they
> > would have to pay the consequences.
> >
> > However, I suspect that those of us who
> > are not overextended will be taxed (by
> > inflation) to bail out the banks that
> > can't collect.
> >
> > Seems that economic conservation is
> > likely to be counterproductive.  But I
> > still can't bring myself to spend what
> > I don't have.
> > --
> > Robert Skinner  "Squirrel Haven"
> > Gorham, Maine         04038-1331
> > s/v "Little Dipper" & "Edith P."
> > __________________________________________________
> > Use Rhodes22-list at rhodes22.org, Help? www.rhodes22.org/list
> >
>__________________________________________________
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