Slow Response to Housing Crisis Now Weighs on Obama - NYTimes.com. Still Getting the Housing Bubble Wrong. The collapse of the housing bubble led to the downturn. However that does not mean that housing is the road out, or at least not unless we expect to see another bubble. Ezra Klein presents this mistaken view in his column today. The basic story is very simple. (Remember, the purpose of economics is to make simple things complicated so as to exclude most of the public from debates on the most important policy issues that affect their lives.) The economy in the bubble years was driven by the bubble. Bubble-inflated house prices created close to $8 trillion dollars of housing equity. When the bubble burst, there was nothing to replace the lost demand. All of this seems clear and simple. Suppose we had instantly written off all underwater mortgages, would that have kept construction going?
Would that have sustained house prices? Source: Robert Shiller. If house prices are basically right, why should we expect more consumption than we are now seeing. Let's try some simple numbers. Lenders Returning to the Lucrative Subprime Market. America Underwater. Short sales are rising as banks start to shun foreclosures - Mar. 1.
Short sales are rising as banks start to shun foreclosures. NEW YORK (CNNMoney) -- Homes in some stage of foreclosure accounted for nearly one in four homes sales during the fourth quarter, according to RealtyTrac. During the three months that ended December 31, homes that were either bank-owned or going through the foreclosure process accounted for 24% of all home sales, up from 20% in the previous quarter and down only slightly from a year earlier when foreclosures accounted for 26% of sales, RealtyTrac said. In total, 204,080 distressed properties were purchased during the fourth quarter, down 2% from the year-ago quarter. For all of 2011, foreclosure-related sales were down 2% year-over year to 907,138, accounting for 23% of all home sales.
Short sales on the rise Short sales are starting to become the preferred method for banks to dispose of properties in default. Meanwhile, sales of bank-owned homes fell 12% year-over-year to 116,000, comprising 13% of all sales during the quarter. Buffett: Banks Victimized by Evicted Homeowners. Warren Buffett, who controls the biggest shareholding of the No. 1 U.S. mortgage lender, said banks were victimized by some homeowners who refinanced their loans before getting evicted.
“Large numbers of people who have ‘lost’ their house through foreclosure have actually realized a profit because they carried out refinancings earlier that gave them cash in excess of their cost,” Buffett, chairman and chief executive officer of Berkshire Hathaway Inc. (BRK/A), said Feb. 25 in his annual letter. “In these cases, the evicted homeowner was the winner, and the victim was the lender.”
Foreclosures have claimed about 5 million homes since the property market began its slide in 2006. That has saddled lenders like Bank of America Corp. with defaults, vacated properties and lawsuits. Berkshire, whose stake in Wells Fargo & Co. “It’s the mercenary side of Buffett,” said Jeff Matthews, a Berkshire shareholder and author of “Secrets in Plain Sight: Business & Investing Secrets of Warren Buffett.”
Robert Kuttner: The Volcker Rule: Return to Sender. Paul Volcker deserves better. In the hands of Tim Geithner's Treasury, the Rule named for Volcker supposedly limiting speculative mischief by government-guaranteed banks is fast becoming a cumbersome parody of itself. Financial regulatory officials, at the behest of Wall Street, have turned a simple bright line into a convoluted monstrosity. The questionnaire alone, inviting comments, runs 530 pages. The bankers and their allies in government have succeeded once again in making their financial engineering too complex to regulate. The Volcker Rule, in the spirit of the 1933 Glass-Steagall Act, was supposed to simplify matters.
The capacity of Wall Street to create new mutations of derivatives that are not quite explicitly covered by this or that sub-sub-sub rule is of course endless. It reminds you of Mad Magazine's Spy vs. Then in early 2010, Scott Brown stunned Washington with his upset win of Ted Kennedy's former Massachusetts senate seat. Amen. California Audit Finds Broad Irregularities in Foreclosures. Examining the big lie: How the facts of the economic crisis stack up. Based on the scores of comments, people are clearly interested in understanding the causes of the economic disaster. I want to move beyond what I call “the squishy narrative” — an imprecise, sloppy way to think about the world — toward a more rigorous form of analysis.
Unlike other disciplines, economics looks at actual consequences in terms of real dollars. So let’s follow the money and see what the data reveal about the causes of the collapse. Rather than attend a college-level seminar on the complex philosophy of causation, we’ll keep it simple. To assess how blameworthy any factor is regarding the cause of a subsequent event, consider whether that element was 1) proximate 2) statistically valid 3) necessary and sufficient. Consider the causes cited by those who’ve taken up the big lie. When an economy booms or busts, money gets misspent, assets rise in prices, fortunes are made. Here are key things we know based on data. •The boom and bust was global. Global liquidity and risk appetite: a re-interpretation of the recent crises. Speech by Benoît Cœuré, Member of the Executive Board of the ECB, at the BIS- ECB Workshop on Global liquidity and its international repercussions, Frankfurt am Main, 6 February 2012 1.
Introduction [1] I am delighted to deliver the dinner speech today at this BIS and ECB workshop on global liquidity. Our two institutions have worked closely and extensively on the topic of global liquidity in recent years, notably in the context of Basel-based organisations, such as the Committee on the Global Financial System, so it made sense for us to organise a workshop on this subject. The global economic and financial crisis in 2007-08 forcefully demonstrated that fluctuations in global liquidity conditions can lead to distortions in asset prices and cross-border capital flows. Liquidity, no matter how defined, is widely understood to follow cyclical patterns. 2. The Landau Report of the CGFS has pointed out that global liquidity has two separate, but interdependent, components. 3. 4. 5.
What An Economist Learned From Reading 21 Books About The Crisis : Planet Money. Hide captionNow read 15 more. A while back, the MIT economist Andrew Lo set out to review a couple books about the financial crisis. Those books led to a couple more books, which led — you see where this is going — to 17 more books. Now, Lo is about to publish "Reading About The Financial Crisis: A 21-Book Review" (PDF). Reading 21 books about the financial crisis does not sound, on its face, like a fun experience. After you talk to Lo, it sounds even worse. "After each book, I felt like I knew less," he told me. "For an academic, that's a pretty frustrating feeling. " Lo read widely. He knew going in that there was still disagreement over the finer points of the crisis. "If you got five economists in a room and you asked them what caused the crisis, you'd probably get eight different opinions," he says.
For Lo, this is a problem. You have ... hundreds of scientists who have a number of varying perspectives. Lo knows that there aren't "laws of physics that will govern all economic behavior. " Freddie Mac’s big bet against homeowners. ProPublica’s Jesse Eisinger and NPR’s Chris Arnold have discovered that Freddie Mac has used a complex derivative transaction to place large bets that rely on millions of American homeowners remaining in overpriced mortgages to pay off. The bets in Freddie’s investment portfolio — which totaled $3.4 billion in 2010 and 2011 — directly contradict the housing giant’s stated mission to provide affordable mortgages to Americans.
Freddie’s bet against refinancing — known as an “inverse floater,” which depends on mortgages interest payments — underscores a central tension between the White House and the Federal Housing Finance Agency, which gained conservatorship of Fannie and Freddie after the crisis. When Freddie and Fannie’s huge investment portfolios profit, it helps reduce the potential burden on taxpayers. That’s been a priority for FHFA under Edward DeMarco’s leadership. When it comes to refinancing, “there’s always been this lingering question — why aren’t the GSEs doing more?
Freddie Mac gets paid to obstruct refinancings. Jesse Eisinger and Chris Arnold have a really good story about Freddie Mac today, a company which is preventing mortgage refis at the same time as it’s making enormous prop bets that homeowners are going to continue to find it hard to refinance. Back in September I noted that mortgage bonds are trading well above par just because investors are well aware that refis are hard to come by for many homeowners, and said that those investors were “taking unfair advantage of the fact that homeowners are locked into above-market mortgage rates”.
What I never dreamed of was that the investors and the rule-setters were the same people — in this case, Freddie Mac. But here’s what Freddie is doing. In the past two years, it’s bought $3.4 billion of hugely-risky “inverse-floater” notes — essentially bets that homeowners with above-market mortgage rates won’t be able to refinance to market rates.
The Freddie Mac rule certainly maximizes Freddie Mac’s income, but it’s dreadful and unfair public policy.