Can there be a bigger story than the housing/credit market/economy/weak dollar/recession right now? Client #9, George Fox…good grief.

Which begs the question: Do you get what you pay for?

I have been struck by all the recent solutions to the financial crises that we have slipped into, whose severity, by most accounts, caught government officials and financial institutions mostly unaware. Of course my favorite bubble bloggers have been saying so for quite a while, including The Housing Bubble Blog, Bubble Meter and Housing Doom. In fact, they have been screaming about it. Their perspective has largely been from the stand point of the absurdity or the void of logic of high prices paid and the greed. Not much dialog about the cause until recently, because few actually saw it, let alone understood it.

In retrospect, it was never about high housing prices alone, it was mainly about easy credit that enabled the purchase of property at seemingly any price. cart before the horse

The naming convention for the housing boom/bubble/bust should have been based on “mortgage” or “credit” rather than “housing.”

Anyway you slice it, we are in the middle of a real financial crises and I am hopeful that the recent stimulus package does not convince the powers that be that the problem is solved. The stimulus package is simply a baby step, but at least it is in the right direction. It looks like more reforms are being debated and discussed and (surprise, surprise) all deal with mortgages. A bailout is not on the table, nor would it be a solution, or fair to homeowners who were not greedy or did not take responsibility for what they were signing.

While ultimately, markets need to find their own balance and it is good for home prices to decline as part of the cycle, the exposure to our financial system based on ill conceived mortgage lending needs to be fixed. It really is scary how exposed our economy is on this one.

Innovative solutions will be next up on the Congressional agenda because rate cuts don’t ahem cut it.

With worsening strains in credit market threatening to deepen and prolong an incipient recession, analysts are speculating that the Federal Reserve may be forced to consider more innovative responses -– perhaps buying mortgage-backed securities directly.

As credit stresses intensify, the possibility of unconventional policy options by the Fed has gained considerable interest, said Michael Feroli of J.P. Morgan Chase. He said two options are garnering particular attention on Wall Street: Direct Fed lending to financial institutions other than banks and direct Fed purchases of debt of Fannie Mae and Freddie Mac or mortgage-backed securities guaranteed by the two shareholder-owned, government-sponsored mortgage companies.

Some legislative actions in the works right now:

I am actually impressed by the creativity of solutions being proposed but the details make or break their effectiveness. Right now we have sort of the inverse of the period which saw immense creativity of mortgage packages during the housing (mortgage) boom. Hopefully the solutions are not as complicated as the problems that caused this situation. I don’t need to find another tranch loaded with problems.

For some, this financial crises will teach many that you actually don’t get what you pay for and you don’t get what you borrowed either.

To digress…On the Beatles’ Revolution #9 single, parts of the song, when played backwards with a turntable, sound like “turn me on dead man.”


Ok, back to work.

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8 Responses to “[Client #9] You Don’t Get What You Pay Borrow For”

  1. mike says:

    what’s a turntable?

    seriously though, “legislation to reduce the number of foreclosures” scares the daylights out of me. Telling the big bad banks that they can’t collect on their debts is just short of saying, “never lend to consumers again.” Baaaad medicine. Stay away from those new laws.

  2. haha – i still have mine.

    I agree. I don’t see how you can mandate the foreclosure restriction – the lenders will stop lending. Credit crisis on steroids.

  3. The last guy with cash but no house says:

    Why do people need lenders? Let me introduce the idea of “saving for a purchase.”

  4. Saving for a down payment is soooo 1998.

  5. Ryan Ward says:

    More like 1968 🙂

    Anyway, this is a good post. I just hope that simply because we are in an election year, we don’t all fall victim to pandering politicians, like the proposal from Clinton to freeze interest rates. She clearly hasn’t brushed up on her history if she thinks that government freezing anything is a viable solution.

  6. […] Jonathan J. Miller put an intriguing blog post on [Client #9] You Donâ Share and Enjoy: These icons link to social bookmarking sites where readers can share and discover new web pages. […]

  7. Thanks for the mention.

    Your write “Not much dialog about the cause until recently, because few actually saw it, let alone understood it. In retrospect, it was never about high housing prices alone, it was mainly about easy credit that enabled the purchase of property at seemingly any price.”

    When I started blogging in summer 2005, I was tying to understand large segments of the housing / credit bubble.

    On May 25th 2005, in a post of myn titled “Who is to Blame?” I laid part of the blame on “Irresponsible Lenders for lending to people who really can’t afford it. “

    A few days later on May 30th, I wrote: “The credit bubble fueling the housing bubble must be stopped. Credit is something where the lender and the borrower both need to take responsibility. People can now get a negative amoization, 0 down, sub prime credit history, no income verification, interest-only adjustable rate morgate loan. It is just ridiculous. These irresponsible sub prime lenders are predators”

  8. My pleasure David – bubblemeter is a must read blog and you were spot on.