Thursday, January 06, 2011

More on Ending the 30-Year Fixed-Rate Mortgage

Last May, I had a post asking "Should We End the 30-Year Fixed-Rate Mortgage?" That post featured the graph above illustrating how the significant interest rate risk of 30-year mortgages contributed to the 3,000 bank failures during the S&L crisis.  Because S&L's were borrowing deposits at short-term, variable interest rates and lending mortgage money long at 30-year fixed rates, many banks became insolvent by the early 1980s when rising interest rates resulted in S&L's paying short-term rates on deposits as high as 10-15% to finance 30-year fixed rate mortgage assets at rates as low as 5-7%. When a bank is paying 15% variable-rates on deposits and receiving only 5% on fixed-rate assets, that's a sure prescription for bank failure. 

A related article appeared in yesterday's NY Times by Bethany McLean who asks "Who Wants a 30-Year Mortgage?"  Here are some excerpts:

"The fact is that federal involvement in housing has been a constant since the 1930s. A market without government support would almost certainly involve the demise (for most of middle-class America) of that populist favorite, the low-cost 30-year fixed-rate mortgage. 

For a homeowner, a mortgage with a 30-year fixed rate (especially one that he can pay off early without a penalty) is a wonderful thing. For lenders and investors, however, it is a financial Frankenstein’s monster, an unnatural product filled with the potential for losses. Absorbing some of the risk of those losses is a large part of what the government does in the housing market.

The problem with 30-year fixed rate mortgages is “interest-rate risk, the danger that interest rates will rise sharply after the mortgage has been made, thereby burdening the bank with money-losing loans. (Interest-rate risk was the root cause of the savings and loan crisis - see chart above.) The longer a mortgage lasts, the more difficult it is to manage both of these risks. And 30 years is an awfully long time.

Wouldn’t a better solution be for banks and other financial institutions to offer mortgage products that they actually want to keep on their own books? Maybe these would take the form of 15-year mortgages with a rate that would be adjusted after five years so that the banks wouldn’t have to worry about long-term interest-rate risk. This might not even mean the disappearance of 30-year fixed-rate mortgages — the private market has historically provided them to consumers whose mortgages are too big to qualify for a Fannie and Freddie guarantee. But these are usually issued only to the wealthiest, most credit-worthy consumers.

And therein lies the rub. Almost certainly, any 30-year product would be offered on a more limited basis and at a higher price than it is today. How much higher, it’s hard to say. In the pre-crisis days, Fannie used to argue that its guarantee enabled consumers to pay one quarter to one half of a percentage point less in annual interest on their mortgages; today, mortgages without a government guarantee would cost at least several percentage points more according to PIMCO’s Williams Gross. If his numbers are right, then mortgages — and 30-year mortgages in particular — would be far more expensive, and the pool of American homebuyers would shrink.

This may well be the right long-term answer. After all, other countries manage fine without the widespread availability of 30-year fixed-rate mortgages. But is there an American politician alive who would accept responsibility for depressing the housing market further?"

HT: Paul Kedrosky on Twitter

39 Comments:

At 1/06/2011 9:32 AM, Blogger juandos said...

"The fact is that federal involvement in housing has been a constant since the 1930s. A market without government support would almost certainly involve the demise (for most of middle-class America) of that populist favorite, the low-cost 30-year fixed-rate mortgage"...

Hmmm, where was McLean for the last five or six years?

I'm thinking the one line should read: federal involvement in housing has been a constant 'skewing of the housing market' since the 1930s...

 
At 1/06/2011 10:24 AM, Blogger Junkyard_hawg1985 said...

We have a mortgage interest rate deduction on taxes, FHA, Fannie Mae, Freddie Mac, HUD, and the Fed buying mortgages. Despite all of this government "help" to make housing affordable, we have a lower home ownership rate than Canada. Abolish it all and let the market set the rates and terms of the loans.

 
At 1/06/2011 2:21 PM, Blogger Walt G. said...

Why compare a 30-year mortgage to a 1-year T-Bill instead of a 30-year bond? Isn't that comparing apple and oranges?

Shouldn't banks buy 30-year bonds and add a premium for credit risk, interest rate risk, inflation, and profit and then loan money out at that interest rate for 30 years? Only a fool would loan money at 5% long-term and pay 15%, and only a bigger fool would not take advantage of that investment opportunity.

 
At 1/06/2011 2:45 PM, Blogger Mark J. Perry said...

Walt G:

Banks/S&Ls pay interest on their checking and saving deposits at variable, short-term market rates, and they receive interest income from long-term assets like 30-year home mortgages at fixed rates.

In the 1960s, S&L's issued billions of dollars of 6% fixed-rate mortgages, when short-term rates on deposits were 3% or less, giving them a positve interest rate spread. But some of those 30-year assets stayed on the bank's balance sheet until the 1990s. In the the 1970s and 1980s when interest rates rose, the banks had to pay 10-15% to continue to attract deposits, but were only receiving 6% on mortgages, and became "upside down" with negative interest rate spreads, causing bank failures.

The problem is that we want 30-year fixed rate mortgages when we buy houses, but we don't want to invest in 30-year fixed-rate bank CDs, so the banks provide the valuable service of "maturity intermediation," but are exposed to interest rate risk because of "borrowing short and lending long," and have a huge maturity mis-match on their balance sheets (long term assets at fixed rates and short term liabilities at variable rates).

If: a) borrowers accepted 1-year adjustable rates for mortgages, and/or b) depositors were willing to invest in 30-year CDs, the banks would reduce interest rate risk and we wouldn't have had the S&L crisis.

 
At 1/06/2011 3:24 PM, Blogger Hydra said...

Why should WE end the thirty year mortgage?

Isn't it the banks business to managage its own risk?

Converting to some kind of five year adjustable loan only transfers that risk to homeowners who have even less ability to manage or cover it, resulting in more foreclosures or distressed sales.

It seems that you are suggesting more intererence in the market to resolve previous interference in the market. As usual, it is government interference proposed to alleviate private enterprises failure to govern itself.


As for Canada, the ownership rate is higher, but the ownership is greatly skewed until the later years. I beleive the majority of homeowners are over 55 years old.

Like many people, much of my wealth lies in my real estate holdings, wealth that I (probably) would not have without the 30 year mortgage.

On the other hand, I would have a lot MORE real estate wealth absent interference from local government.

If the goal is to have a balanced amount of home ownrship, for people who can actually afford homes, then the rules for borrowing are a minor issue compared to the rules for building.

Interest is a legitimate business expense for landlords. Eliminating a similar deduction for homeowners would put landlords in the catbird seat and create a different kind of market distortion.

But eliminating mortgage interest for landlords skews the market in favor of other business which ae allowed to deduct interest.




" the banks provide the valuable service of "maturity intermediation," but are exposed to interest rate risk because of "borrowing short and lending long,"


But that is their damn business. It is the one they are in, and they should be responsible for managing long term risk. sure, they can push the risk back to me, with the result I will do less business with them.

 
At 1/06/2011 3:37 PM, Blogger Hydra said...

I don't have any sympathy for the banks.

A bank bought property (a note) that at one time turned a nice profit. Today, the same money invested in something else might make a lot more money, and they would also have to pay out more to attract the money to make their nut. But they are "stuck" with the thirty year note, most of which are turned over long before thirty years.

My farm was purchased at a time when it could make a profit, even at the low yields provided by farming it. Today the land is worth much more, and as a result it can no longer make a profit. Very similar to the problem the bank faces.

But I am "stuck" in a zoning code that may NEVER expire, let alone thirty years. And since the zoning code was imposed, subsequent to my acquisition, I had no foreknowlege of the risk.

Following your argument, if we are going to get rid of the thirty year note, we should get rid of zoning as well.

 
At 1/06/2011 4:23 PM, Blogger Junkyard_hawg1985 said...

Hydra,

In addition to the various federal housing agencies, let's get rid of zoning laws as well. The county I live in does not have zoning. It is only in the small towns within the county that has zoning here. We get along just fine without it.

For your case of zoning depriving you of economic benefit, I think this should be illegal unless they provide just compensation to you (under 5th amendment).

 
At 1/06/2011 4:43 PM, Blogger Hydra said...

Thank you.

I feel the same way.

Conservatively, they have deprived me of a few million, potentially, tens of millions.

Primarily so they can maintain a scenic landsacape and avoid providing services. Such policies are far more damaging when it comes to readily avaialble and affordable housing than mortgage policy, in my opinion.

Some economists have studied this and come to the conclusion that areas with super-restrictive housing regulations had inflated values as a result, and these places took the greatest price drops when the market fell, because the costs were not supported by any intrinsic value.

 
At 1/06/2011 4:48 PM, Blogger Hydra said...

My attorney agrees that what happened to my family and others like us is probably illegal, but it is next to impossible to get standing to sue in court, even if you had the virtually infinite resources required.

I think it is a situation that requires MORE federal intervention, and not less, otherwise the 5th amendment is meaningless.

 
At 1/06/2011 5:38 PM, Blogger sethstorm said...

Giving those banks any more power is a very bad idea. They've done enough damage.

The right answer is to keep that 30-year fixed and not allow for more Wall Street screwiness(as well as undoing some of it by reimplementing Glass-Stegall).

 
At 1/06/2011 10:44 PM, Blogger morganovich said...

JH-

but what about those of us that are willing to pay more for land with good zoning?

i, for one, am much happier living in a house that i know no one can put a pig farm or a tannery next to.

it increases my enjoyment and the value of my land.

towns are generally structured as corporations. as such, they (subject to the democratic governance of the residents) protect the rights and property of those residents as best they can.

i think you may be taking too narrow a view of "freedom".

what about the freedom not to be interfered with?

i presume you are ok ceding the right to kill and to steal in order that other will do the same. it may been you have fewer "freedoms", but it also means that you are actually freer as you will not need to spend extensive time and effort defending yourself and your property. for the sake of clarity, let's define "freedom" as being able to do whatever you want whenever you want and "liberty" the actual ability to use such freedom. eg. a mouse in a box of cobras may be free, but it's liberty is very limited, just as a man with a fat wallet in a cape town slum may be free, but will shortly find his liberty deeply compromised.

one can make a similar argument about zoning. do i have more or less free enjoyment of my land if i know that a refinery cannot be put in next door?

this argument hinges upon what we define as rights.

you have already agreed that liberty can be increased by giving up freedom by the very idea of private property unless you plan to defend it by force of arms. as soon as you agree to the legal concept of property, you have agreed that it can be beneficial to surrender freedom to gain liberty.

so you are deprived of your absolute argument. it is possible that the value and "liberty" of property can be enhanced by limiting he freedom of its use. (eg you are better off because i cannot buy the land net to you and put in a monster truck pull or a skunk musk appreciation center)

many things that you or i may do on our property have effects that may cross the boundaries onto the property of others. zoning is an attempt by a community to limit such "trespass" and provide a reasonable expectation of what possession of a property will be like now and in the future.

reasonable behavior for a concrete plant is very different from a single story home and the density of an urban environment makes many potential uses of property both unsafe and odious.

i am not arguing that all zoning is good, nor that zoning has not been wrongly used and caused problems.

but it is clear to me that your "there should be no zoning" argument is flawed. it's far too limited and can be beneficial. you cannot logically accept the legal idea of private property and not the idea of surrendering freedom for greater liberty.

 
At 1/06/2011 10:56 PM, Blogger morganovich said...

jg bell-

you have utterly misunderstood mark's argument.

his point (which is absolutely accurate) is that 30 year fixed loans would be much more expensive and less widely available without government backing. what this has to do with your rant about homeownership, i have no idea, it frankly doesn't make a great deal of sense.

his point is that if you want to stop having huge government bailouts, you need to stop having huge government underwriting of loans.

you sounds to me like a guy who simultaneously demands the government underwriting and guarantees that get you a cheap long term loan, but gets furious when they have to live up to their word and buy the loans from the banks as promised when they inevitably go bad when interest rates spike. then you call it a "bailout" and claim fat cat cronyism.

you've got to pick a side of the street and live on it.

government loan guarantees mean government bailouts when loans go bad. you can't get the former without the latter.

you want to play, but not pay. grow up peter pan.

i also don't think you have any idea how due on sale works. it has ZERO to do with the reason 30 year fixed loans become huge losers when interest rates spike. how does it "fix" anything?

 
At 1/06/2011 10:57 PM, Blogger JGBellHimself said...

Mark-U.S-to-market: You DO remember the S&L interest spread problem.

What you forgot to mention was that many, if not most, "sellers" of homes did not pay off their old mortgages, but/and "held" the new purchaser's real estate contract.

So, not only did the S&L not obtain the benefit of the new, higher interest contract, they were stuck with the old low interest mortgage. Instead of THEM making all the money, they were paying it out. We American owners/families were keeping ALL the profits.

Oh, we know, you really don't like things like that for U.S.

What you want is, if interest goes back up to six over 19% prime once again, for each and everyone of U.S. to have to start paying 25% per year on our mortgages.

Now, Mark, do you remember the "walk-a-ways" we had back then? We called'em bankruptcies.

 
At 1/06/2011 11:53 PM, Blogger JGBellHimself said...

Do NOT misunderstand Mark, what he proposes is that NO American family would or ever should be able/allowed to buy a home that they plan to live in for the raising of their children, or for the rest of their lives.

Since you would not be able to fully finance a home, you would be, like all commercial RE, tied into 5yr, or whatever, balloon contracts, that would have to be RE-financed at whatever they were willing to give you, later. Or, you would have to give it back to the lender. What is it we call that now, "strategic defaults" or "walk-a-ways"?

Mark is very much like the truck driver who stopped every 5 miles to go back and smack his trailer. When stopped by a cop, he explained that his chickens weighed too much, and he had to keep them "moving".

Ya'll be da chickens; Mark be da bankster.

 
At 1/07/2011 12:22 AM, Blogger JGBellHimself said...

morganovich, we most certainly DO understand what Mark is saying, and we would like him to defend himself, thanks. Inside and/or outside his class room.

We have had FHA loans from before you, Mark and I were born. We have had low down payment VA loans & the GI Bill educational grants since WW2. Those govt programs worked, for all of U.S., for 60 or 80 years.

What Mark is telling U.S. is that we should NOT promote home ownership with long term, low interest RE loans. That we should eliminate them, not change them. That's his opinion,& probably yours. That does not make it societally right, economic or logical.

And, do not give me/us that BS about "you signed it, you have to pay it". Permit U.S. to remind you of Stuyvesant Town & Peter Cooper Village, where the promoters defrauded the investors out of US$ 3.6 Billion, in the largest "strategic default" in world history.

What we are arguing is that making it possible for families to buy a home with a long term RE loan at reasonable, affordable interest rates, that they have in the past fully paid for, and almost all will in the future, IS in the interests of all of U.S.

If Mark disagrees, let him defend his own opinions, for and by himself.

 
At 1/07/2011 1:39 AM, Blogger PeakTrader said...

The U.S. may have a lower homeownership rate from greater income inequality.

Raising property taxes can make up for the benefit of the 30-year fixed mortgage.

Mismanagement was a major factor in the S&L crisis, because mortgage loans could be sold or hedged (e.g. interest rate swaps) to reduce interest rate risk.

 
At 1/07/2011 8:02 AM, Blogger Walt G. said...

Professor Perry, thank you for the explanation.

Why should we have to help the S & L or any financial institution figure out their business models? They are supposed to be the experts. If they want to loan out money long-term at low interest rates and replace it with more expensive money, that's OK with me. I can also understand why they would refuse to do so.

I locked in a 15-year mortgage last year at 3 5/8% myself. With the extra proceeeds in GM stock and less risky investments that are currently paying over six times that amount, I doubt I will be in any hurry to pay it back any quicker than I have to.

 
At 1/07/2011 9:14 AM, Blogger Junkyard_hawg1985 said...

Morganovich,

If you have a problem with no zoning, there are several solutions. One solution if you do not want someone to build a tannery next to you is to purchase that land. Another solution is to purchase land in an area within a larger tract that has deed restrictions.

Several years ago, the largest city in America without zoning was Houston, TX. Houston was also the city with the lowest housing costs as a percentage of income among the major cities in the U.S. I agree with Hydra that zoning simply drives up the costs of housing without providing much benefit.

If you want to live in Houston and not have a bar built next to you, you still have options. There are large subdivisions within Houston that have deed restrictions that limit people's ability to build or open a business on the land. I'm perfectly OK with these type of arrangements as they are deeded into the property prior to purchase of the land and voluntary (if you don't like the deed restrictions, don't buy the land). The key is that your property rights are not arbitrarily changed once you own the property.

In Hydra's case, he lost property rights because the local government decided they wanted a pretty view without compensating him. I consider this wrong. Local governments are very prone to abuse power when given the chance. New London, CT is a classic case. They seized private homes and property to sell to a development company to locate a private business there. Today it is just an empty lot as the development failed.

I do believe in the right of eminent domain, however, per the Constitution, it require just compensation. These rights to property are included in the 5th amendment as it applies to the federal government and further extended to states in the 14th amendment.

 
At 1/07/2011 10:26 AM, Blogger morganovich said...

jd-

i think you are confusing a number of issues here.

first off, what evidence do you have of lower cost housing being related to zoning in houston? that could be cause by any number of things including the fact that houston is a terrible place to live and has expansion land all around it.

second, why do you view a drop in home prices as a sign that people like not having zoning? generally, when people like things, the prices goes up, not down. isn't your argument backwards?

regarding eminent domain, kelo was a travesty. it may be the worst supreme court decision in decades. both in its logic and its effects.

i am not arguing that government out to be able to take as it pleases either through forced sale or egregious zoning.

your idea about deeded restrictions initially struck me as promising, but isn't it really just zoning by another name?

you know what the local zoning is when you buy, and deeded restrictions can get changed over time just as zoning can. a certain degree of flexibility is needed. neighborhoods change. a great deal of Manhattan urban renewal was enabled by zoning changes.

i agree that you ought to know what you are getting when you buy and that zoning of deeded restrictions should not be altered except in exceptional circumstances or with very broad neighborhood approval, but i don't think the deeded restrictions and zoning as as different as you are making them out to be.

i just bought a house in park city. the neighborhood not only has zoning from the city, but significant neighborhood assn restrictions piled on top of that. i find this to be a huge benefit and went looking specifically for it. houses in neighborhoods like that sell for MORE than those in the less restrictive ones.

this is because, like me, more people value the predictability of the neighborhood not having businesses or tall structures or views blocked or buildings right up on the property lines.

it's pretty obvious when you think about it. the freedom you give up in neighborhood restrictions is more than repaid by the predictability of the environment for the future. this results in a higher price, which tells you everyhting you need to know about what people (in aggregate) value. people look for predictability when they invest.

can this be taken too far by draconian preservation societies and insane local organizations (like TARPA at lake tahoe who are truly insane and utterly unaccountable to anyone as they are a multi state group)? of course. but that does not make the general principle invalid.

hydra's argument about zoning makes no sense at all. it has ZERO to do with government backing for a whole loan market. he's totally missing the argument which is not that banks should be forbidden to make 30 year fixed loans but rather that they should do so at rates that make economic sense, not the artificially low ones achieved by using government guarantees which make bail outs inevitable every time rates spike.

while the zoning was unfortunate, he's still using the land for that which he originally intended. it's not like they told him not to farm.

his issue really sounds like a taxation one. if they are going to claim his land is worth more due to surrounding land that is zoned differently, he has a strong argument for having the property re assessed. if it cannot be put to the use of surrounding land, then it should not be priced like surrounding land.

 
At 1/07/2011 10:37 AM, Blogger morganovich said...

walt-

"Why should we have to help the S & L or any financial institution figure out their business models? They are supposed to be the experts. If they want to loan out money long-term at low interest rates and replace it with more expensive money, that's OK with me. I can also understand why they would refuse to do so. "

i think you are missing the argument.

this is not about banning 30 year fixed loans. it's about pricing them properly. the reason they are both so available and so cheap is that the federal government guarantees them through freddie and fannie.

this BY CONTRACT put the feds on the hook every time rates spike and the loans start making banks fail. if they stayed out of the market, the us loan market would change.

try getting a 30 year fixed mortgage on a non-conforming loan.

try to find a no money down loan or an I/O on a super jumbo. if you do, check out how much more you pay than on a conforming loan.

generally, you'll need 20%+ down and will pay several percentage points more in interest. that is the real price of loans.

it's insanity do to the same thing over and over and expect different results, but that is what we are doing with federal mortgage policy and why we keep getting huge busts when rates go up.

we now have a housing market and banking system that are both so dependent on low rates that they are holding the rest of the economy hostage.

this sort of thing does not happen if you keep the government out of lending.

 
At 1/07/2011 10:50 AM, Blogger Mark J. Perry said...

Walt:

Private banks can certainly manage their own interest rate risk if they decide to issue 30-year fixed-rate mortgages, but the point is that banks, on their own, would NOT promote 30-year fixed rate mortgages. The point of the article is that government intervention/involvement in home mortgages created and promoted the 30-year fixed-rate mortgage, NOT banks.

We need only look to Canada to see how a more sensible, safe and sound banking/mortgage/real estate market works. Banks in Canada pretty much ONLY offer 5-year adjustable rate mortgages, which allows them to better manage their interest rate risk.

Note that Canada had ZERO bank failures during the Great Depression (vs. 9,000 in US), ZERO (or maybe 1) bank failures during the S&L crisis (vs. 3,000 in US) and NO bank failures during the recent financial crisis (vs. 200 in the U.S.).

 
At 1/07/2011 11:18 AM, Blogger Walt G. said...

morganovich,

I realize the problem is that the interest-rate risk (and credit risk) is not properly assessed and/or priced accordingly. As a consumer, I see an opportunity. As a taxpayer, I see a liability. My investing stratagem would be to exploit the consumer side of the equation while lessening the impact of the taxpayer side of the equation in whatever legal way I can.

Professor Perry,

If the uncompensated lending risk and the corresponding loss is transferred to the government enterprises (Fannie and Freddie), why would the banks fail over that singular reason? Wouldn't the taxpayers pay for the government intervention/involvement loss instead of the bank?

I would not pay someone 15% interest for a deposit if I am charging others a weighted average of 5% on loans. It would be easier just to flush the money down the toilet.

I don't think a 30-year loan is a good investment for either side, but some people probably have a different investing plan than I have.

 
At 1/07/2011 11:47 AM, Blogger Mark J. Perry said...

Walt:

The problem in the 1960s and 1970s is that the S&Ls carried a lot of 30-year mortgages on their own balance sheets, so the risk was not transferred to Fannie and Freddie.

There were also restrictions on branch banking, so banks then could only operate in a SINGLE state. Then there were interest rate controls for banks: 0% on checking accounts and caps on savings accounts with Req. Q.

The whole regulatory structure of banks then was doomed to fail as soon as interest rates rose, which happened in the 1970s, leading to the S&L crisis in the 1980s. The 3,000 banks/S&Ls failed for one reason: perverse government regulation in the U.S. of banks and S&Ls. In contrast, Canada's more sensible regulatory structure resulted in NO bank failures during our S&L crisis.

 
At 1/07/2011 12:29 PM, Blogger morganovich said...

walt-

your strategy seems both fallacious and doomed to failure as a policy.

you seek to maximize costs and minimize your payment. if we all do as you propose, you get a classic tragedy of the commons and make the overall problem worse by making the hole bigger and providing less with which to fill it.

the whole point of good policy is to create a system in which individuals make decisions that do not harm the group.

you'll "i'll just get mine and not worry about the whole" opinion says nothing about what is or isn't good public policy.

in fact, you are the poster child for why the current policy is a bad one as you and those that act as you propose just make the problem worse and deepen the hole.

a system that incentivizes its participants to act in a manner that destabilizes the system is doomed to failure.

 
At 1/07/2011 1:09 PM, Blogger Walt G. said...

"a system that incentivizes its participants to act in a manner that destabilizes the system is doomed to failure."

That's correct, Morganovich. But the day one system fails, a new one is born. Buy low. Sell high. I don't have a problem buying when others sell. I started this investment philosophy buying Fidelity Magellan when Peter Lynch was the fund manager in the 1980s (interestingly, for this conversation, Fannie Mae probably made me more money when I held this fund than any other holding).

Most markets/negotiations have an advantage that shifts from one side to the other, and you need to figure out which side to be on when the window of opportunity is open. I don't necessarily see that as luck because that window always closes back down regardless of which side you are on. I’ve been on both sides using a strategy of being on the winning/profitable side more often than on the losing/unprofitable side using my training, my experience, and my instinct.

You can’t be afraid to lose sometimes. That’s life. You just learn and move on to the next station.

 
At 1/07/2011 2:23 PM, Blogger morganovich said...

walt-

can you seriously be lecturing me on investing?

but again, you totally miss the point of the whole discussion.

we are not saying that you cannot maximize your profits by gaming the system or event that it is wrong for you to do so.

we are saying that a system that encourages such behavior is a bad system and from a public policy standpoint ought to be changed.

no "new system" has come from these ashes, just more draconian versions of the old one.

merely finding ways to stay ahead of the bad as an individual is not the same as trying to fix a problem at a policy level.

what will you do when the next one of these crises hits and finally is big enough to swamp the system?

my fund will make a killing as it did in 2008 (betting against freddie and fannie amongst others), but i hope not to.

i'd rather see the system survive and better government.

there are plenty of good investment opportunities. we don't need governmental excess then fomented crisis to create them.

you seem to be arguing that there is no point is trying for good government at all, just accept what comes and use it to your advantage.

that's a pretty bleak view.

 
At 1/07/2011 2:45 PM, OpenID Sprewell said...

Wtf are you talking about, Walt? You guys need to give up: either he's incapable of understanding that current 30-year rates are heavily subsidized by govt guarantees or is so embarrassed and defensive about his previous statements about those guarantees that he will keep spouting non sequiturs about how he "knows" how to "invest."

 
At 1/07/2011 2:57 PM, Blogger Walt G. said...

morganovich,

"there are plenty of good investment opportunities. we don't need governmental excess then fomented crisis to create them."

Maybe not, but the reality is we have them.

We have the government that we elected, so a lot of people must be happy with the way things are now. I am not sure there is anything such as "good government."

Sure, we should try to make good policy in the future, and I am all for that; however, we have to get through the short term to get there. You can bitch about the rain or smile and take an umbrella.

Sprewell, this is an economics blog, so a discussion about a macro policy and how that policy financially works for an individual is not out of line. You can always request a 15% loan from the bank when you can get a 5% loan if you want: I’ll pass on that. Are you going to be like the billionaires who think they are not taxed enough?

 
At 1/07/2011 2:57 PM, Blogger Junkyard_hawg1985 said...

"your idea about deeded restrictions initially struck me as promising, but isn't it really just zoning by another name?" - moganovich

Not at all. With deeded restrictions, the terms are included in the deed at purchase. You agree to these terms upon the purchase of the property. Good or bad terms in the deed may raise or lower the price of the property you purchase. The key is that you knowingly consent to the terms upon purchase.

In the case of zoning, a third party (government zoning board) decides what is best for your property. The terms can be changed without your consent after you purchase the property by a decision of the zoning board (Hydra's example). The zoning board can also change the terms of your neighbor land without your consent (change from residential to industrial).

Often, you do not even get the choice of being subject to the zoning board. This happens in cases where people buy a house outside the city limits with no zoning, then the city annexes the area and their zoning laws now apply.

 
At 1/07/2011 3:23 PM, Blogger morganovich said...

jd-

yeah, but all manner of deed issues are negotiable. even if you buy it with restrictions, that does not mean you cannot get them lifted later.

also, unlike zoning, such restrictions are individual, not regional. so my restriction against putting in a tannery means nothing if, when you sell you can give my next door neighbor the right to build one. i care about the whole neighborhood, not just my property.

if you don't have that right to sell him, then you already have de facto zoning as it was set up when the deed restrictions were put in place, in effect creating "permanent zoning".

well, permanent until someone gets some political clout at the title office and get's theirs changed...

hence, i don't think the 2 are really very different.

 
At 1/07/2011 3:41 PM, Blogger morganovich said...

walt-

you really cannot separate this stuff in your head at all can you?

this is a POLICY discussion.

of course there are ways to take advantage of bad policy often to great ill effect in aggregate.

that's what makes it bad policy.

what we are talking about is what kind of policy to support, about what kind of policy would be better and prevent repeated systemic failures. it's not just idle bitching. it informs our later decisions (like voting).

you are thinking like a price taker and saying "well, that's how it is, i'll do my best to get mine" when we are looking to be price setters and change the nature of the market from being negative sum to positive sum.

everyone cannot win in a system that fails like that. the preponderance must lose, and it's a net destroyer of value.

can you not see that designing policy to avoid such outcomes is a good idea?

you seem happy to bitch and affect the system when it gets you a bailout, but curiously against other people try to do the same to keep from getting fleeced in future real estate bailouts. that seems hypocritical to me.

 
At 1/07/2011 4:32 PM, OpenID Sprewell said...

Walt, you are being remarkably short-sighted if you think the dumb govt policy that created Fannie/Freddie works for you individually. All it leads to is banks that go bust, in which case you are then paying for it with higher taxes and FDIC fees. As for requesting a 15% private loan as opposed to a 5% govt-subsidized loan, that's like saying farmers would be fools not to take farm subsidies. Not necessarily, if it leads to the big farms getting the most subsidies, which is what I've heard happens, and if it so skews the market that you're worse off. Fannie/Freddie only had an implicit govt guarantee: if the govt chose not to come through on that, you'd have been fucked. And I would take the higher floating rate rather than the lower govt-subsidized fixed rate, at least that way I avoid the risk of my bank going under cuz of a bunch of dumb fixed-rate loans.

As for billionaires who "don't think they're taxed enough," that's a gross oversimplification of their position. If they simply thought they should personally pay more, they could always send more money over to the govt. Rather, what they want is for everyone down to $250k to pay more along with them, because they think those govt services are worthwhile. Which is still stupid, but not quite so stupid as simply wanting to pay more themselves. ;)

 
At 1/07/2011 6:05 PM, Blogger Walt G. said...

morganovich and Spreewell,

I think we can make the best of whatever dumb government policies that currently exist or they swap out for the next ones. Fannie and Freddie are government enterprises in every way except their liabilities do not show up in the federal budget deficit (just like the PBGC). All of the government research and reporting groups such as the GAO, CBO, and OMB openly admit the liabilities belong to the U.S. (taxpayers).

I don't see anything wrong with any loans, short-term or long-term, as long as the risk is assessed and priced accordingly and both parties (lender and borrower) have equal information. I also don’t have a problem with the government getting out of any and all loan subsidy programs. I just don’t see it happening anytime soon.

 
At 1/07/2011 7:27 PM, Blogger morganovich said...

walt-

i give up. there appears to be no way to make you understand the difference between a policy discussion for a whole system and the proper tactics for an individual in a bad one.

you appear unable to think beyond your own tactical self interest or even see that such interest is impacted by the negative sum policy games you advocate.

if you can't see anything wrong with advocating policy guaranteed to cause crises and negative sum economics, then i really have no idea what to say.

you don't appear to be able to think about the consequences of aggregated individual action or in any abstract form at all. you just regurgitate the same self interest and ignorance of the implications of such action.

you are a walking, talking tragedy of the commons.

 
At 1/07/2011 9:12 PM, Blogger Walt G. said...

morganovich,

Anyone can operate under the ideal situations and with all the resources you always wish and hope for. Round pegs fit quite neatly into round holes.

You don't seem to be able to entertain a discussion concerning the less than optimal conditions with square pegs and round holes that we are usually given daily and have to live with. We exist in a problematic world where having to deal with problems is much more likely than eliminating them.

Your thought process strikes me not unlike my coworkers who think we can go back to GM's glory days by eliminating the Japanese transplant factories. I think of it as the "if only" syndrome.

A "society" can consist of an individual, special interests such as a group of coworkers, nation, or even be global. Where does the "commons" that you speak about actually start and end?

I don't advocate any particular interest rate or economic policy one way or another. I just try to organize chaos by recognizing and analyzing existing trends and patterns no matter where that takes me.

 
At 1/07/2011 9:43 PM, Blogger Rebel Yid said...

the fact that we now require insurance on these institutions indicated our lack of confidence in the management. We buy shares of stocks in publicly traded companies with clear understanding of risk. FDIC and implied bailouts encourage such reckless risk taking.

 
At 1/07/2011 10:03 PM, Blogger morganovich said...

This comment has been removed by the author.

 
At 1/07/2011 10:16 PM, Blogger morganovich said...

walt-

QED.

ps.

you need to google "tragedy of the commons" as it's obvious you have no idea what i am talking about.

"tragedy of the commons" is a classic case in economics based on group grazing rights on a common green. look it up. it's very easy to find. i think you'll find it illuminating. it's a concept of which you appear to have no grasp at all.

under bad policy or rights structures, each pursuing his own self interest winds up diminishing the welfare of all, including himself. government loan guarantees work just this way.

only a fool or a consummate parasite would seek to replicate or stand indifferent to such negative sum policies, especially after they have been shown repeatedly not to work.

 
At 1/08/2011 7:47 AM, Blogger Walt G. said...

morganovich,

There's always going to be bad policies, I sincerly hope they change, and I will work through the process to change those I feel strongly about. On the other hand, opportunities exist under suboptimal conditions, and for those who recognize them, accurately assess risk, and make informed choices, life changing events and profit can be found.

You can call me unethical or a hypocrite if you like, but I doubt many of you volunteer to pay an extra 0.25% - 0.5% on your Fannie or Freddie subsidized mortgage loan because it is "wrong."

 

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