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Old 02-05-2010, 11:50 AM   #41
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The government can't create wealth.
Answer two questions for me . . .

1) What is the value of your house if no financing were available to anyone, at any price or under any condition? (a cash only market)

2) What is the value of your house in a market where financing is available to borrowers with good credit and 20-30% down payment. (today's mortgage market)

The difference between 1 & 2 is the difference between no government intervention last year and government intervention.
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Old 02-05-2010, 12:58 PM   #42
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Answer two questions for me . . .

1) What is the value of your house if no financing were available to anyone, at any price or under any condition? (a cash only market)

2) What is the value of your house in a market where financing is available to borrowers with good credit and 20-30% down payment. (today's mortgage market)

The difference between 1 & 2 is the difference between no government intervention last year and government intervention.
I agree that is the issue and apparently the Federal Reserve was worried about that enough to trash their reserves with some of the worst collateral they have ever owned in order to save the banks the trouble of being that lender.

Spending 1.5 trillion of reserves to hold mortgages at 5 percent coupons in an economy where the unemployement drops by 0.3 percent because 1/2 million people give up looking for jobs because no other banks like the risk, seems like one of the most reckless bets a Federal Reserve has ever done.

I still cannot reconcile the optimistic nature for the stock market when the S&P is still yielding so pitiful on a historic balance when the Federal Reserve continues to operate in panic mode. In fact I think most of the governments of the world are in delusional mode thinking that once the economy gets going all will be right in the world so 10% and greater GDP deficits are no big deal.

Apparently the plan for the US is to run 1.4 trillion deficits forever funded by zero percent treasuries as the backbone of a strong economy, but I myself don't see the "out" for either the Fed or the US government at these price levels.
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Old 02-05-2010, 01:20 PM   #43
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I agree that is the issue and apparently the Federal Reserve was worried about that enough to trash their reserves with some of the worst collateral they have ever owned in order to save the banks the trouble of being that lender..
To my knowledge the Fed hasn't lost a single dollar on any of their loans. Do you have evidence to the contrary?


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an economy where the unemployement drops by 0.3 percent because 1/2 million people give up looking for jobs
Nope. Read the Employment Situation Report.

"In January, the civilian labor force participation rate was little changed at 64.7 percent." From 64.6% in December (the labor force grew by 111,000 people in the most recent Household survey.

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In fact I think most of the governments of the world are in delusional mode thinking that once the economy gets going all will be right in the world so 10% and greater GDP deficits are no big deal.
This is indeed worrisome. But it really has more to do with the fact that we were already running ~4% deficits (at the peak of the bubble and during full employment) than any short-term measures taken to break the cascading deleveraging of last year.

So you can add another question to the two above . . .

3) What would be the federal deficit and national unemployment rate in a world where there was no financing available at all?
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Old 02-05-2010, 01:30 PM   #44
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3) What would be the federal deficit and national unemployment rate in a world where there was no financing available at all?
Are you assuming that there would be no entities that would loan money at any rate and without regard to a low LTV? I assume even absent a government run market participant buying securitized mortgages, there would still be loan sharks, hard money lenders, groups of individuals and investors, banks loaning and holding for their own account, etc that would provide at least some financing for loans secured by real estate.

Though folks may not like 10% interest rate loans with 40% down payments and/or threats to have one's kneecaps rearranged in the event of default.
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Old 02-05-2010, 02:02 PM   #45
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Are you assuming that there would be no entities that would loan money at any rate and without regard to a low LTV? I assume even absent a government run market participant buying securitized mortgages, there would still be loan sharks, hard money lenders, groups of individuals and investors, banks loaning and holding for their own account, etc that would provide at least some financing for loans secured by real estate.
This is where the classical economic theory of long-run equilibrium runs into cold harsh reality. Yes. Over the "long-term" financing would reemerge. The question is how long is the "long-term" and what does the transition period from short to long term look like? How long, for example, do you think it will take loan sharks, hard money lenders, etc. to accommodate our $31 trillion credit markets? A decade? More? What does the economic wreckage look like in the interim?

Meanwhile, making a "low LTV" loan requires the ability to determine what "V" is, which gets back to my original set of questions . . .

1) What is the value of your house if no financing were available to anyone, at any price or under any condition? (a cash only market)
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Old 02-05-2010, 02:12 PM   #46
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. . . it really has more to do with the fact that we were already running ~4% deficits (at the peak of the bubble and during full employment) than any short-term measures taken to break the cascading deleveraging of last year.
Because this doesn't fit the narrative some want to spin, I figure I'll preempt expected challenges with some facts. Here is the walk up from the 2008 deficit to 2009.


2008 Deficit . . . . . . . . .. . .. (458,555)
Tax Receipts . . . . . . . . . . . (419,004)
SS, Medicaid, "Health" . . . . (158,999)
Income Security . . . . . . . . ..(101,911)
Housing Credits . . . . . . . . .. (263,665)
2009 Deficit . . . . . . . . . . . (1,402,134)

So of the $1.4T 2009 deficit, 33% relates to pre-recession profligacy, 30% is related to falling tax receipts from the recession, 28% is related to normal entitlement growth and recessionary spending on things like unemployment insurance, and only 19% is related to bailouts and the like.

Feel free to check my math.
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Old 02-06-2010, 07:35 AM   #47
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To my knowledge the Fed hasn't lost a single dollar on any of their loans. Do you have evidence to the contrary?




Nope. Read the Employment Situation Report.

"In January, the civilian labor force participation rate was little changed at 64.7 percent." From 64.6% in December (the labor force grew by 111,000 people in the most recent Household survey.



This is indeed worrisome. But it really has more to do with the fact that we were already running ~4% deficits (at the peak of the bubble and during full employment) than any short-term measures taken to break the cascading deleveraging of last year.

So you can add another question to the two above . . .

3) What would be the federal deficit and national unemployment rate in a world where there was no financing available at all?
Although I suppose you can't officially count it as a loss yet, wouldn't you count AIG in that category? The AIG loans seemed to have saved Goldman Sachs at least - and they repaid TARP.
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Old 02-06-2010, 08:37 AM   #48
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Although I suppose you can't officially count it as a loss yet, wouldn't you count AIG in that category? The AIG loans seemed to have saved Goldman Sachs at least - and they repaid TARP.
The Federal Reserve's balance sheet and the balance sheet of the Treasury are two different things. The claim was that the Federal Reserve's balance sheet was polluted by bad collateral and I don't think that is true. TARP is something different.
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