RE: Here's hoping you didn't miss the bottom of the market...

Flagpole - no, no, no. Monkeying around with interest rates only delays the day of reckoning? Haven't we learned? This is essentially what the Fed has been doing for the last 15 years - making credit so cheap that it inflated the price of assets and worse yet, caused people and entities to be borrowers that had no business being borrowers. Look, don't look to me to tell you that you are wrong - just look at how pitiful the existing mortgage modification programs have been so far - subsidizing an interest rate most often puts people who purchased overpriced (relative to their income) assets in permanent servitude status to the banks - those mods hence fail. We simply must quit betting on a "quick" turnaround of the real estate market - those old asset prices were not then and are not now sustainable.

Trust me, this bubble is painful. There are people - lots of them - who bought homes they had no business buying. They will lose their homes and be foreclosed. But let's get asset prices down to where responsible people can buy them. My rule of thumb in life when it comes to real estate (and I am not very good at real estate but only try to live a decent life) is to never buy in a market where asset price to income ratios exceed 4 to 1. (I actually bought my current home in 1995 with a 15 year mortgage on a 2.75 to 1 ratio). Those assets must get down to those levels - period, and the faster the better. No more monkeying around, delaying the pain, securitizing lousy assets - let's get the market to mark and absorb the losses - now. There is capital on the sidelines - although if this keeps up it will dissipate to levels unforeseen - and it will hop right back in if the asset prices get right.

Of course, deep down Geithner and Summers (I have little confidence in Roemer after she indicated the economy would grow at nearly 3.5 percent based on "inside information" - a sure sign she has signed on to the dark side of dishonest politics) know this. Lets call on them to do the right thing.

mez... you are doing my work for me and driving home my oft-made points. Thank you.

The market has hardly moved all day. It seems to be stuck at 6800.

As soon as I post that down we go.

hey sag, aren't you sick or weren't you at one time? I'm worried about you man. You devote too much energy to this, not that it's not appreciated. Don't you get it? You are like a the economics professor who's trying to teach a graduate-level financial markets class to a bunch of third-graders? What exactly do you hope to achieve besides lots of frustration of course?

"Here's hoping you didn't miss the bottom of the market..."

Nope, looks like I haven't. Thanks for thinking of me, though!

[quote]mez redux wrote:

"

Flagpole - no, no, no. Monkeying around with interest rates only delays the day of reckoning? Haven't we learned? This is essentially what the Fed has been doing for the last 15 years - making credit so cheap that it inflated the price of assets and worse yet, caused people and entities to be borrowers that had no business being borrowers. Look, don't look to me to tell you that you are wrong - just look at how pitiful the existing mortgage modification programs have been so far - subsidizing an interest rate most often puts people who purchased overpriced (relative to their income) assets in permanent servitude status to the banks - those mods hence fail. We simply must quit betting on a "quick" turnaround of the real estate market - those old asset prices were not then and are not now sustainable.

Trust me, this bubble is painful. There are people - lots of them - who bought homes they had no business buying. They will lose their homes and be foreclosed. But let's get asset prices down to where responsible people can buy them. My rule of thumb in life when it comes to real estate (and I am not very good at real estate but only try to live a decent life) is to never buy in a market where asset price to income ratios exceed 4 to 1. (I actually bought my current home in 1995 with a 15 year mortgage on a 2.75 to 1 ratio). Those assets must get down to those levels - period, and the faster the better. No more monkeying around, delaying the pain, securitizing lousy assets - let's get the market to mark and absorb the losses - now. There is capital on the sidelines - although if this keeps up it will dissipate to levels unforeseen - and it will hop right back in if the asset prices get right."

I couldn't agree with you more. Why should I have to bail out these people when I saved and saved and paid off my 15 year mortgage in 9 years? Did you hear the latest news from Citi this morning with their "save the masses" mortgage plan? In essence, they will reduce your mortgage down to $500 for 3 months if you lost your job. How many mortgages do you think they will save with this plan? Who thinks up these plans??? I'd love to know how many we are talking about vs. how many they actually saved when all is said and done. I call it the Pandit PR plan.

sagarin - I do believe you know your stuff. At home I post as "quantum." I am at some level tied into all of this stuff in Washington (I live and work here).

I am a lawyer by training, but having paid for law school trading futures, am not a total economic idiot. I went to some of the nation's best schools, and have spent some time unlearning the apparatchik pedagogy that one picks up in those places. This is not a mean knock on the schools or their politics - just an observation that one of the nasty habits one can pick up at these places is an ability to rationalize or justify any number of things, including a dearth of common sense.

My former 3:40 1500 meter runner brother is, however, a PhD economist of some considerable reputation. He is also an institutional fund manager of world renown, and is doing well even in this market. He has posted here occasionally, and is in the high falutin "club" of economists - but fortunately like me has zero interest in politics so he is as blunt as can be. He has read your posts and he concurs you make a lot of sense.

He is strangely a bit more optimistic overall than I am - but on the mortgage market he is nearly in agreement. He knows far more about bank accounting than could even imagine (a world unto itself that bears little relation, to lets say, the accounting dynamics of a consumer products company), and would countenance a bit more of a mark to model approach than I would. I just don't trust the financiers with any form of mark to model right now - he does to a degree - but in the end - he agrees, we must solve the banking problem by getting the troubled assets to reasonable price levels and have them traded again in a market with liquidity, not paralytic insolvency. And the sooner the better. And the more Flagpoles we get to see this fundamental point (and I understand Flagpole's concerns), the faster we can get this moving forward.

I don't think you're understanding. The FED already has the rates very low. The government can offer 4% guaranteed fixed rate mortgages and actually make a little profit on that. It is NOT extending credit to those who aren't worthy. It's a win-win-win situation. This is NOT betting on a turn around in the VALUE of homes. This is allowing people to live in homes while increasing their disposable income. People get to stay in their poorly mortgaged homes (win), the government makes a tiny bit on it (win), the tax base increases because with more disposable income they spend more (win). It also allows people who have played by the rules to benefit too -- not just for those in trouble. If someone with a subprime loan can't prove that they could handle their home with the lower 4% mortgage, then they are OUT. This would only be for people who could afford the mortgage at that rate, and there are a LOT out there who could stay in their homes with that reduced rate. The increased amount of money that would go into the economy from responsible home owners too who refinanced for a much lower monthly payment would help too.

Also, The Fed hasn't been making rates cheap for 15 years. Greenspan lowered rates a ton in the early 2000s and then the rates were raised a LOT -- they've only been coming back down the last couple years again.

Finally, it is not the value of the houses that is the only thing that matters -- it is simply occupancy. If people are in houses, they spend more money on them. Also, if someone had a 6.5% mortgage and now can get a 4% mortgage, that can give them hundreds of dollars extra per month to spend on other things.

It's a moot point anyway -- they won't do it because it doesn't allow them to spend money on pet projects.

flagpole - you are not being realistic. What do you think happens with a 4.5 percent interest rate loan mod? That borrower saves a few hundred a month in the near term, but now instead of a 27 year payout schedule has a thirty year payout schedule, and in a market like Florida, still has a home at a 9/10 asset to income ratio. It puts even the best of people a permanent hell is forever renting class - so of course, they won't stay with the house or the mortgage. And today's toxic problem stays with us for five or more years.

Let's face the music.

Ah, yes, quantum... I enjoying reading your insights. You and your brother couldn't be more correct about the housing-related nuclear waste and your APPROACH to it (as I like to say, I am NOT the smartest guy in the room). It should have been addressed more effectively long ago. There is certainly vulture money on the sidelines, but we seem to be doing everything possible to exacerbate the crisis and to encourage an exodus of capital. And forgive all of my knocks on lawyers. I am married to one. Heck, I almost became one.

By the way, I could find mark-to-model palatable as part of a multi-pronged approach to ultimately facilitating transparency. But it is not without its shortcomings. The ONE role I can see for our government above all else, insomuch as they are going to spend to oblivion anyway, is to seed and facilitate this entire process, even if it means they will inevitably overpay dearly for this stuff. Then, rip the band-aid off.

I know there are those like you out there, but it's scary to really hear one like yourself.....a true believer! Beloved Bush? Hardly! I won't go into great detail (I've got Sagarin and others), but for you to pretend that the markets are falling because of the Obama "plan", the lack of confidence in him, and his all out assault on everthing that made this country great is frightening. I like the "douchbag" comment though.....that I would expect from someone on your side. Six years genius....and it's been an all left affair for what....5 weeks. You've all accomplished a great deal in a short time. Congrats! One month? Can't wait for one year; that's realy going to be a hoot. This is an all out attempt to remake this country, not based on it's founding principals, but on fundamentally flawed and FAILED policies. Policies inconsistent with all that is and has been great about this country. If you want low approval rating, just give it a little time. People are going to take to the streets in mass if this nonsense continues.

Justices? WTF is that? Getting judges appointed was all but a impossibility for 6 years! Yes, but republicans are obstructionists. HA! T minus 8 hours and 15 minutes until Olberman and your daily dose. Roll up that sleeve...

One more thing... Part of the political problem, obvious to you, is that we must destroy the bondholders, and hence, our foreign creditors, in the process. Unfortunately, our well-founded reticence in doing so is only going to serve to make this situation much worse. It already has.

mez redux wrote:

My rule of thumb in life when it comes to real estate (and I am not very good at real estate but only try to live a decent life) is to never buy in a market where asset price to income ratios exceed 4 to 1. (I actually bought my current home in 1995 with a 15 year mortgage on a 2.75 to 1 ratio)...

For what it's worth, my wife and I just bought our house (my first, at age 48; her second) two years ago on an asset price to income ratio of 2.1. We put 18% down.

My understanding is that this is called "acting responsibly." Apparently not everybody lives this way.

I will confess to being a secular progressive who listens to Dave Ramsey.

The markets are not failing because of Obama, although I don't take any comfort from his budget because it appears to me he is unfocused given our circumstances. I want to wait on the sidelines for now, just like any number of other investors. If it goes on too long, he will change his mega change policies. But let's make it clear most of this been caused by a business/debt cycle has a long time coming.

But like it or not, Obama has drawn a short straw. This is not a political statement; just a realistic one. And the common sense point here is not to bite off more than can be chewed.

And we need the Obama administration to prioritize and fix the most urgent problem - the banks. They have some smart people - they can do it - and us common folks can push them to do it.

The way forward is not to take a political tack. Let's get down to business and get the banks well, as unpopular as they are. And let's get honest about the couple of trillion I think it will cost, and get past the class warfare rhetoric. Better now than later.

I should add that the mortgage is $1000 a month, which we handle easily given our reasonable household income.

Neither of us has any debt, apart from the mortgage.

I don't like Dave Ramsey's daily does of Christian virtue, but I DO like his emphasis on paying as you go. I have one credit card; I pay it off twice a month.

The most dangerous moment in the life of a credit card holder is the moment you pull out a credit card, think to yourself, "Nah, this one's gotten too much action lately," put it back, and charge your purchase--no matter how big or small--on another card.

That is the road to hell. I've been there. Because you're engaging in flagrant mystification. You're hoping that if you subdivide debt--or sin--and keep each part of it in a separate dark chamber in the back of your house, it somehow....goes away.

It doesn't.

The best move I ever made was to flip all of my debt, about five years ago, from three cards onto one, then scissor two cards and cancel those accounts. At that point I was beginning to become accountable.

The next most dangerous moment is to hesitate before paying your credit card bill because you somehow feel that the money sitting in your checking account makes you marginally "better off" sitting there than being deployed to pay your CC bill.

It doesn't.

What I discovered is the incredible power that comes with accountability--with fearlessness in the face of one's actually financial circumstances. I discovered that the power resides with YOU the moment you pay off your credit card bill--or as much of it as you possibly can--the moment you get some money in your checking account.

Because at that moment, when you've paid stuff off and your checking acct. is hurting, you are beginning to make purchasing choices--i.e., the choice to scrape by on what you actually have--based on reality, or something notably closer to reality.

Whereas if you defer paying off your CC bill to let money "simmer" in your checking account, you invariably feel a little richer than you actually are, and you invariably end up spending the checking account money on nonessentials.

Now my sense of power comes from paying off my bills the moment they hit my desk, then knowing that whatever I've got left is WHAT I'VE ACTUALLY GOT LEFT.

Clarity.

Clarity: a key financial concept.

Dave Ramsey stresses clarity. That's why I like him, and put up with his good 'ol boy Christian preachiness. I like his stress on confronting the bad facts, thinking clearly, and accepting responsibility, without shame.

The markets are not failing because of Obama, although I don't take any comfort from his budget because it appears to me he is unfocused given our circumstances. I want to wait on the sidelines for now, just like any number of other investors. If it goes on too long, he will change his mega change policies. But let's make it clear most of this been caused by a business/debt cycle has a long time coming.

But like it or not, Obama has drawn a short straw. This is not a political statement; just a realistic one. And the common sense point here is not to bite off more than can be chewed.

And we need the Obama administration to prioritize and fix the most urgent problem - the banks. They have some smart people - they can do it - and us common folks can push them to do it.

The way forward is not to take a political tack. Let's get down to business and get the banks well, as unpopular as they are. And let's get honest about the couple of trillion I think it will cost, and get past the class warfare rhetoric. Better now than later.

God, this is refreshing. Obama is most definitely in a box. Here's the problem, 101. We are at the precipice of no longer being able to borrow without doing serious, serious damage systemically. Niche credit markets are telling you that, as are some of the actions of our politicians on the periphery. This is not the 70s, 80s, 90s, or even 00s, where creditors were willing to give the US no-doc loans and we could service the interest on our claims.

So, how best to strategically apply and disseminate that borrowing? Rescue the banking system and capital markets and "revive the patient" as you well put it, restoring confidence and cultivating capital mobility and productive capital allocation or spend it to facilitate an agenda that, while it seems like an humanitarian good-idea, will literally cripple this country for a generation? That is the $4 trillion dollar question. Assigning culpability to anyone who has facilitated this crisis over the past two decades is not constructive, I would agree, but this very much is a political question. In the end, I believe the market will force the administration's hand as well, but will it be too late?