Saturday, May 14, 2005

"Now It Gets Serious"

Peter Wallison did a good write up on the past and current situation of the GSE's. It's long and minus some of the politics, brings a reader up to speed on what's going on in Washington. A couple of highlights.

"To place this in some perspective, all Treasury debt held by the public totals $4.4 trillion, and all corporate bonds outstanding total $2.9 trillion. Fannie's and Freddie's liabilities--including both their MBS guarantees and their borrowings--come in right in the middle, at $3.7 trillion. Thus, only two companies--both of which are GSEs and implicitly backed by the U.S. government--account for more default risk than all other U.S. corporations combined."

This blog has pointed out that congress is trying to put the genie back in the bottle. The 'systemic risk has already been created. And why on Earth were these firms allowed to lobby congress?

"It is important to recognize the enormous political power of Fannie and Freddie, and their ability to marshal support from constituent groups such as homebuilders and realtors. If Congress itself cannot summon the political will to overcome the resistance of the GSEs and their support groups, the regulator certainly will not be able to do so. Punting the decision to the regulator may get it off the congressional agenda, but it will leave a serious problem unresolved."

10 Comments:

At 12:06 PM, Anonymous Anonymous said...

I think we all know how this will end.

Whenever we get a serious downturn in real estate values, freddie and fannie are going to implode. At this point, the only option left for the united states government will be to "guarantee" those 4 trillion dollars worth of bonds that have been sold by the GSEs. because if they dont, then half the banks and pension funds in the US will disappear overnight.

when the GSEs are bailed out, it will be with freshly printed money. unfortunately, an injection of 4 trillion dollars into the money supply will cause the value of the US dollar to fall approximately 95% overnight.

the scary part is that there is no way out of this. the dollar will be destroyed. even if congress manages to start unwinding the GSEs, people will run for the exits (especially foreign investors who hold around 30% of freddie and fannie's debt)

god. this is so depressing. those two fucking companies will spell the end of capitalism as we know it in the united states. who would have thunk it?

 
At 12:22 PM, Blogger Ben Jones said...

As an aside, last night a realtor told me of a 24 year old who bought his first home in Santa Barbara, CA for 1.2 million and it's a rehab. The buyer is now struggling as his small business income is barely maintaining his I/O loan together with the repairs. This realtor was very bullish two months ago, but something has changed in his outlook.

 
At 2:09 PM, Anonymous Anonymous said...

If this will be the end of the capitalism as we know it, that is great news. WE need to get back to old days when people lived of decent wages, not home equities. When country was engined by production, not by consumption. When people bought their houses paying downpayments from their own savings, not with 0% down and IO.
When wealth was built by innovations, good work habits, business integrity, decent gov.( not that much corrupt goverment). Who knows maybe with no central banking scam.
I have to stop myself! I am such a dreamer!
MIke C., Chicago.

 
At 3:02 PM, Blogger Ben Jones said...

Mike C,
You right. I am optimistic that we can have financial reform come out of this. Certainly this blog will be pointing out who got us here.

SD Renter,
I will leave it to the many financial experts to comment on your situation. I'll add that I hold some Swiss Francs. I agree with R. Prechter that possessing some gold is good with inflation or deflation. Good luck; sounds like you'll be one of the winners.

 
At 3:59 PM, Anonymous Anonymous said...

SD Renter,

Good for you! We did the same thing last year (closed escrow on the sale of our house in June). We have been a bit dismayed that the bubble actually kept going, but at a MUCH slower pace. Our house sold within an hour for the top of our range. We did not want to be greedy, so didn't play the "competing multiple-offer game". Even as the buyer sat down at our kitchen table to fill out the contract, people were literally RUNNING in the front door, breathlessly asking if it had sold. The market is much, much slower now.

My personal opinion is that there will be a combination of inflation and deflation (stagflation). Wages are going down (deflationary), yet costs are rising much more than the stated government inflation numbers (largely because our currency has lost so much value). This is inflationary. This is the worst of all worlds, in my opinion. We will see how long it lasts.

We have 75% of our money in CD's and money-market accounts. The other 25% is in "risky" investments. Mostly put options on homebuilders, mortgage banks, Fannie Mae, etc. I may be VERY wrong, but I believe all asset classes will lose value, at least in the short term. If you want to be more conservative, you might want to invest in CD's, government bonds, etc. with variable maturity dates. I think this is one of the reasons why the long-term treasury rates have been so low (high demand for long-term bonds). This is in addition to the foreign central banks trying to keep up their export demand. We, on this board, aren't the only ones seeing the train wreck coming. Unfortunately, the mainstream media refuses to acknowledge it and inform the unsuspecting public of the coming economic crisis.

Sorry this is so long-winded! Best of luck to you and all on this board.

Ben, you have the greatest site! Thank you for giving us a place to have intelligent discussions with people who actually THINK about the various economic situations we are experiencing.

 
At 5:21 PM, Anonymous Anonymous said...

I recently gave up on CDs since US Treasuries are great alternatives. They pay about the same interest rate if not better. They are safer since they are backed by full faith and credit of US, which is stronger than the FDIC, and there is no $100,000 limit on the safety. Also there is no state tax on the interest which is a big bonus if you live in a high tax state like CA or NY. Also, if you buy a CD at a bank or S&L, they will lend out the money many times over as mortgages to further inflate the housing bubble. If you buy US treasuries, you help reduce interest costs on the national debt.

So why doesn't everyone do this? One reason is that the banks offer better variety of maturities, while the govt offers specific terms auctioned on specific days. If you can handle a little inconvenience of a form to fill out and study when the auctions are, you can come out ahead. Go to treasurydirect.gov for details.

 
At 6:28 PM, Anonymous Anonymous said...

FDIC is backed by the full faith and credit of the US Govt. So is Ginnae Mae (GNMA).

Contrary to the belief of some Americans, banking is only a small part of the Swiss economy. Industry (Nestles, Roche, Novartis, etc) and Tourism are actually more important. So the Swiss have a strong incentive to prevent their currency from rising against the US dollar. Same reasoning applies to the other European currencies. Which is why I don't really see investing in Swiss francs as a sure-fire proposition, especially after taking trading commissions and other overhead into account. It might do well, it might not.

A better idea, assuming you have at least several hundred K of dollars, is to establish a small bank account in a swiss bank and prepare to wire all your money out of the US on a moment's notice if that is every necessary. I am of the belief that low inflation combined with a falling real-estate and stock market is the most likely scenario, but hyperinflation cannot be ruled out. The best way to deal with hyperinflation is to get your money out of the US entirely and put it into whichever currency seems most stable at the time of the hyperinflation. This may or may not be Swiss francs. The reason for getting money out of the country is that the US govt might prohibit Americans from owning foreign currencies or gold during a true crisis. But I can guarantee the govt will never prevent you from bringing money back into the country once you've gotten it out. Note that by opening a foreign bank account, you'll complicate your tax return and invite an audit. So another possibility is to simply prepare now for opening a Swiss bank account later.

 
At 7:32 PM, Blogger Ben Jones said...

The Swiss accounts can be problematic, as one reader said. The cheapest one I found was $600.

Here in the states I use Ever Bank for currencies. I wouldn't buy any metal if I couldn't possess it.

I also try to have a few basics around. Today, the local grocery store closed due to a electrical problem. The food system is somewhat vulverable. I have a water filter and camping equipment, etc.

 
At 11:07 PM, Anonymous Anonymous said...

I am comparing various banks/accounts in Swiss. Apparently, it is possible to open small accounts nowadays (100K should be fine). They have internet banking and money can be wired cheaply. You can deposit US dollars if you wish.

If you do open foreign accounts, be sure to declare them on Schedule B.

I thought FDIC was only federally chartered, just like Fannie and Freddie. Even if it is Govt-backed, how long will it take to get back your money?

 
At 9:27 AM, Anonymous Anonymous said...

(As an aside, last night a realtor told me of a 24 year old who bought his first home in Santa Barbara, CA for 1.2 million)

Wow, how times have changed. I remember buying my first home in 1976 when I was still in college. Rental housing was very tight. I had just inherited $20K from my grandmother and decided to see what it would cost to own instead of rent.

I was intimately familiar with the rental market since I had been renting for a few years. I found a home with motivated sellers (the couple who owned it were getting divorced because the husband had turned gay, believe it or not). So they were VERY motivated.

I got the home for $68K. But the price itself is not the point. Because I knew the rental market so well, I penciled it out and realized I could live in the home rent-free and rent out the other bedrooms and still meet all my expenses (with a bit of money left over for repairs, etc.) And if I chose to not live there, the total rent for the place would exceed the costs of ownership.

I wasn't even thinking about appreciation. Homes weren't really appreciating back then. But I didn't need appreciation because the income more than covered the burdens of ownership.

I was young and naive. But I was also poor. So I didn't have the luxury of buying something that threw off negative cash flow. Just wasn't an option.

When I left college in 1980, I sold the home for nearly triple what I bought it for because of the late '70s housing boom. Just a lucky break, because soon thereafter homes tanked for about five years. If I had bought in 1980, I would have been in a negative cash flow situation and I would have sold for less than I had bought it for.

The reason I mention this is because it appears we have a whole generation of people believing that conservative financial principles (i.e., positive or equalized cash flow) no longer matter. No price is too high because prices will always be higher.

Unless we have truly entered a New Economic Age, I fear that this lesson is the wrong one for young people today to be learning. It will lead to a great many regrettable decisions.

 

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