Finance

I’ve really come to like Mike Sedlock’s blog on finance. I never used to notice the outright, blatent manipulations of the Fed, the SEC, and so on. He really lays it out. For example, yesterday the SEC restricted “shorting” on a variety of major lending banks including Freddie Mac and Fannie Mae. “Shorting,” is essentially betting that the price will fall. Its an artificial way to get value out decreased prices. It works in a dynamic and rising market because there is lots of value to spare, and everyone wants an insurance policy. However when the falling value is driven by massive write-offs of bad debt … it’s not so good. It’ll only accelerate a death spiral as everyone starts to do it. Anyway, the banks on the protected list are the ones that Fed chairman Ben Bernanke says “need to rise in price,” because they’re an essential part of our home mortgage market … which it turns out is all that’s propping up the US economy anymore.

As Mike says “What of the others? Have they simply been thrown to the dogs?”

Consider for a moment: The core stability of the US markets appears to not be *production*, nor *consumption*, but an inflation of value in real property and the speed which which we can cycle money through our pockets and back to the banks. One can dance around, saying that the only way property values rise is if people have more money to pay bigger mortgages … but the terms of mortgages available artificially put a whole bunch of “value” into the economy.

If you haven’t been paying attention, here’s what happened: Liars sold bad loans with low upfront payments to ill-informed people who couldn’t afford the real payments. The liars then sold those debts to banks, who promptly put the debts on their books. The banks then said “woo hoo! we’re flush with cash! lower those lending standards even more! Everybody makes money when we lower lending standards! Bonuses for all!” That happened all over the country, and really took off when people realized that since anyone could get a mortgage for basically any amount of money … price had no meaning. Even the common man got in on the scam, by “flipping” properties and doing nothing but riding the wave of imaginary money. Because the banks appeared to be doing well, they made large amounts of cash available, and this actually did accelerate the economy a bit, but not nearly as much as it would need to in order to balance out the housing balloon.

Housing prices approximately doubled between 1998 and 2006. The current slope of prices on the back side of the graph is approximately the same (though negative) to the rising slope. Therefore, we have about 10 more years before housing prices return to a reasonable level. Question for technolope: What controls that slope? Is there some external control, or is that an actual measurement of how fast the market (people) are willing to watch their house value drop / rise?

At first blush, it looked like just the people who got the most outrageous loans would be screwed. They would be left without a chair when the music stopped and lending standards tightened up. But then, the true horror was revealed: As those folks failed to pay their mortgages and instead started to default – the banks were short about a trillion bucks. So they started tightening up credit to cover their losses. Businesses that had hugely overexpanded (Starbucks among them) suddenly couldn’t support the stores that could only run with a high level of available credit. So now major, stable businesses that planned according to the idea that credit would be available are laying people off and closing stores … which only widens the circle of people who can’t make their mortgage payments.

Sensible? This is the stuff I’ve learned from reading that blog. I recommend it. His comment at the end is priceless:

Insolvency cannot be cured by short sale restrictions and many of those companies are insolvent.

So, question for the smart kids in the room: Who is the fed acting to protect? Is it the US taxpayer, the homeowners, or someone else?