From The Ridiculous To The Subprime
A reader suggested a topic on the Federal Reserve 2007 transcripts. “How about a discussion of why top economic policy makers have such a hard time seeing what at least some mere mortals have trouble missing.”
The New York Times. “When Federal Reserve policy makers convened in August 2007, one of the nation’s largest subprime mortgage lenders had just filed for bankruptcy, and another was struggling to find the money it needed to survive. Officials decided not to cut interest rates. The Fed did not even mention housing in a statement announcing its decision. That was on a Tuesday. By Thursday, the European Central Bank was offering emergency loans to continental banks, the Fed was following suit.”
“The transcripts show that the Fed entered 2007 still deeply complacent about the housing market. By the early August meeting, Fed officials had moved from denial to puzzlement. American Home Mortgage, a leading subprime lender, had filed for bankruptcy the previous day. Countrywide Financial, another lender, was looking for a lifeline. The investment bank Bear Stearns had liquidated a pair of mortgage-focused hedge funds.”
“‘It is an interesting question why what looks like $100 billion or so of credit losses in the subprime market has been reflected in multiple trillions of dollars of losses in paper wealth,’ Mr. Bernanke said at the meeting, referring to the decline of global financial markets.”
From Bloomberg. “Originations of non-prime mortgages rose to $1 trillion in 2006, up from $395 billion in 2003, according to data from Inside Mortgage Finance. Delinquencies on the loans to borrowers with damaged or limited credit histories rose to 17.3 percent of total loans by the fourth quarter of 2007, up from 13.7 percent in the first quarter, according to data from the Mortgage Bankers Association. They jumped to 27.2 percent in the first quarter of 2010 after home prices fell by about a third from their 2006 peak, according to a home price index tracked by CoreLogic Inc.”
“The Financial Crisis Inquiry Commission’s 545-page report said regulators took ‘little meaningful action’ against the threats of financial calamity. ‘The prime example is the Federal Reserve’s pivotal failure to stem the flow of toxic mortgages, which it could have done by setting prudential lending standards,’ the report says.”
“Participants at the first FOMC meeting of 2007, on Jan. 30- 31, saw signs the economy was improving and recession risk diminishing. The transcripts mention the word ‘recession’ four times in January, three times in June, once in August, and 27 times in December.”
The Washington Post. “Richard Fisher, the president of the Dallas Fed, expressed confidence during the October 30/31, 2007 meeting that investors were waking up to problems in the subprime market. He quoted a Financial Times article where an investor said, ‘Corporate treasurers are no longer buying things they don’t understand,’ prompting laughter around the room.”
“Fisher continued: ‘Imagine that. Investors are coming home from lala land. To be sure, we’re not out of the woods quite yet, as President Plosser and President Rosengren mentioned. The situation remains real, but we’ve gone beyond suspended reality. If you will forgive me, you might say we have gone from the ridiculous to the subprime.’”
The Atlantic. “Richard Fisher, December 11, 2007: ‘I’d like to address the inflation situation more thoroughly, Mr. Chairman. The CEO of Wal-Mart USA said that, for the first time in his career at that firm, they have approved a plan in which purchase costs will increase 3 percent in ‘08. He hadn’t seen that before in his experience and said, “I’m totally used to deflation. Deflation is finished.” In terms of the suppliers to Wal-Mart, this was verified. I think on food prices we have to be extremely careful. Frito-Lay is seeking a 51⁄2 percent price increase for next year. Wal-Mart has acquiesced.’”
The New Yorker. “Perhaps the most interesting thing about the transcripts is what they tell us about how policymakers thought before the full scale of the crisis became clear. Like the European politicians who blundered into war in 1914, most people at the Fed simply couldn’t conceive of the catastrophe that was to ensue. Lured into a false sense of security by more than two decades of economic prosperity, they suffered from what the economists Jack Guttentag and Richard Herring term ‘disaster myopia.’”
“It wasn’t as if Bernanke and the rest were ignorant about the downturn in the housing market. But the Fed policymakers, like their Edwardian forebears, believed they had things under control. The problems in the subprime market wouldn’t spill over into the broader economy, they thought. Indeed, the general view at the Fed (and in the markets) was that economic growth was picking up.”
“On June 27, 2007, when Bernanke turned the discussion over to his colleagues on the F.O.M.C., they also made upbeat comments, and so did he: ‘I agree with the general view around the table that, except for housing, the economy looks to be healthy.’ In retrospect, this was a bit like saying that, apart from the huge tumor in his abdomen, the patient was doing fine.”
“But my point here is not to berate Bernanke, or his colleagues: they were merely parroting the collective wisdom of economists on Wall Street, in academia, and at other central banks. The interesting question is why they didn’t know better. In terms of behavioral economics, the Fed policymakers succumbed to the ‘representative heuristic’—the tendency to assume that the future will look like the past.”
“Many of them were defrocked academics relying on a theoretical framework—modern macroeconomics—that paid little attention to institutional features, such as developments in the banking system. According to the theories that Bernanke helped develop during his days in academia, as long as the Fed carefully adjusted interest rates to keep inflation under control, and also kept an eye on the money supply, it couldn’t go too wrong. In terms of maintaining a healthy rate of economic growth, the things that mattered most were tangible inputs and outputs: the labor supply, unemployment, productivity growth, and inflation. The financial sector was merely a ‘veil’—except, in this case, the veil almost strangled its wearer.”
“Finally, folks at the Fed may have been reluctant to recognize their own mistakes. For several years, they had kept interest rates artificially low to stimulate the economy. In terms of G.D.P. growth, the results had been pretty modest, but the impact on the housing market had been dramatic. Many parts of the country had experienced an unprecedented bubble. Tens of millions of homeowners were delighted. For a time, Bernanke and his colleagues were lionized.”
“By the summer of 2007, the party was over, and the inevitable hangover was beginning. It is really any wonder that the Fed was disinclined to consider such an outcome?”
“The transcripts show that the Fed entered 2007 still deeply complacent about the housing market. By the early August meeting, Fed officials had moved from denial to puzzlement”..
Just absolutely amazing to me that this is the group of high minded “economists” and “financiers”, who are setting national monetary policy in this country, haven’t a real clue on this stuff.. just amazing.. The lack of awareness about how the U.S. economy really works (or doesn’t work) by the Fed is astounding. Based on my observations over the past 20 or so years, this country’s economy simply does not work with flat or declining housing prices. There are a number of reasons for this. One is the skill and education level of a portion of the workforce who are best suited for the type of blue collar employment that comes with home construction and home renovation. Another big reason for this is because of the high cost of housing relative to consumer’s income or wages and the fact that there is no real housing substitute for the consumer.
All the other things in the CPI model (food, beverages, apparel, transportation, medical) have good substitutes for when those prices rise too fast relative to wages, but that is not the case for housing. For some of the items, such as “medical care” the substitute is simply to forgo consuming it. However, one cannot simply forgo consuming housing unless they want to be homeless and most people will do almost anything else to avoid that. So, the net result is consumers are stuck dealing with consuming housing and housing costs. Because of this (and I’ve said for a while now) I believe the U.S. CPI should be based almost exclusively on housing prices. Not on rents, but on housing prices. In fact, the Fed’s principal job should be to manage housing prices to a long-term sustainable level and on par with wages. They would be more successful if they adopted this policy and managed it regionally, such that coastal U.S. discount and lending rates could be substantially higher than interior U.S. discount and lending rates to keep a lid on coastal housing prices. The U.S. economy does not function well when CA’s economy is in recession, so our monetary policies should acknowledge this.
Oops…
All the other things in the CPI model (food, beverages, apparel, transportation, medical) have good substitutes
Why isn’t renting a reasonable substitute for buying a place to live?
renting or buying.. they are both a form of consumning housing.. IMO, the US CPI for housing should be based on 4/5 prices and 1/5 rents.. rents are tied to prices / mortgages … you want to control rents, control prices.. pretty simple IMO..
“…pretty simple IMO…”
Actually far more complex than you suggest. Renting is housing consumption in the form a a short-term contract with an option to buy in the future. Buying is an infinitely-lived contract with the option to sell at any moment.
Suggesting there is some simple way to describe the relationship between rents and purchase costs is to reveal your ignorance of finance.
Buying is an infinitely-lived contract with the option to sell at any moment.
“Selling” is only an option if there is a buyer. The actual option is putting it up for sale and hoping there might be a buyer for it.
to suggest that rents should drive CPI vs purchase price reveals your total lack of knowledge of finance .. in fact, you could toss rents out of the CPI equation altogether IMO if prices were the prime driver..
and yes, rents are very much tied to prices.. that is the simple part it appears you fail to comprehend.. yes, other things are in play, but house prices are clearly a prime driver of house rents.. (and prices reflect many things)..
Buying is an infinitely-lived contract with the possibility that your property will CRATER!
‘“Selling” is only an option if there is a buyer.’
There is always a buyer at a sufficiently low price, if you include negative prices to pay for bulldozer fees if needed.
“… yes, other things are in play, but house prices are clearly a prime driver of house rents.. (and prices reflect many things)…”
Wrong again.
The qualities of the house and its surroundings, together with the availability of close substitutes, are a driver of both home prices and rents.
Keep up the failing work.
right again… you just admitted rents are tied to prices but are too ignorant to see it..
keep up the obnoxious simpleton work..
“…one cannot simply forgo consuming housing unless they want to be homeless and most people will do almost anything else to avoid that.”
Renting is a great substitute for owning.
“However, one cannot simply forego consumer housing unless they want to be homeless and most people will do almost anything else to avoid that.”
Anything else = doubling up, as in elderly parents moving in with their adult children, and children that have left the nest coming back to live with Mom and Dad.
The more the doubling up happens the less will be the demand for houses.
Hell…. there isn’t enough demand to soak up 5% of the inventory.
your assumption that housing demand is a clean demand is false.. housing demand is 1 part for normal consumption, 1 part investment and 1 part IRT fear.. no other thing in my basket of goods as a consumer do I have to deal with the other parts like I do for housing.. accordingly, this is why the FED needs to get its head out of its A___ and get the hell out of housing.. their meddling (which is only temportary over the long term) is screwing with all the key housing consumption variables and my decision making ability on the 1 part consumption of housing ..
and the faster housing prices rise, the more parts 2 and 3 (investment and fear) have factored into the consumer’s decision making equation.. need to squeeze parts 2 and 3 out as much as possible .. that is done by managing inflation .. properly.. the FED stinks at managing inflation even though that is one of their 2 only responsiblities.. in fact, the Fed’s policies do just the opposite of what they are intended to do as we saw in 2005-2007…
so, I absolutely stand by my position that the US CPI should be based on about 85% housing with about 85% of that number based on housing prices with 15% based on rents.. and regionally set..
or 95 %
Some good points even though the assumption 2 and 3 are falsehoods. Even so, 2 and 3 should be falling right along with prices.
“…their meddling (which is only temportary over the long term) is screwing with all the key housing consumption variables and my decision making ability on the 1 part consumption of housing…”
Buy now or get priced out forever!
One of my business vendors has been seeking a roommate. She’s asked me more than once if I know someone who’s looking to rent a room in her part of town. (Sorry, I don’t.)
Mind you, this is someone who’s getting on in years. And she is like me in that she has lived alone for a good while. Which means that taking in the roommate isn’t to alleviate loneliness, it’s for financial reasons.
Which means that taking in the roommate isn’t to alleviate loneliness, it’s for financial reasons.
It might have something to do with aging or having someone around to back you up. Decades ago I rented a room with kitchen privileges from an elderly Irish cleaning-lady. Housemates told me one time they dragged her from the front doorway to her bedroom after she passed out drunk coming home one night.
She later evicted me on very short notice after I dared to bake a batch of corn muffins on the hottest summer afternoon of the year. Good times!
You may be onto something, tresho. I think the individual in question is diabetic and may need to have someone around the way your former Irish landlady did.
A couple of things occurred to me as I read articles on these transcripts. First, most of the media criticism was along the lines of, “golly why didn’t they lower rates!” What the hell would that have done in 2007, get more people to buy? And that’s pretty much what these people were discussing in the meetings; should we ‘bail-out’ wall street. Ohh, that might be a ‘moral hazard!’ What could they have been doing?
‘The Financial Crisis Inquiry Commission’s 545-page report said regulators took ‘little meaningful action’ against the threats of financial calamity. ‘The prime example is the Federal Reserve’s pivotal failure to stem the flow of toxic mortgages’
I haven’t seen one mention in these articles that the Fed considered it’s role in these loans. All they talked about was ‘we’re afraid lending might tighten…access to credit…people need to be able to buy houses!’
The second thing that struck me was how this whole transcript issue is discussed. ‘After 5 long years, the sacred text has been revealed, and the wise ones said…’
Bull shit, these meetings should be live on CSPAN. What’s so secret about squash playing jokes, or how frito lay is raising prices 5%? Here’s what they say; we have to keep these things secret so the markets won’t trade on the information. Well get this; in these logs Geithner was caught giving inside information to a wall street CEO!!
‘(Reuters) - Allegations that Timothy Geithner, then head of the New York Federal Reserve, may have told banks ahead of time about a surprise policy move in 2007 underscores the pressing case for reform to safeguard the integrity and independence of the central bank.’
No Reuters, it underscores a pressing need to throw this sack of sh#t in prison and consider scraping this incompetent, corrupt system altogether.
agreed.. its like the Fed is sparing us poor, helpless consumers with all this high brow economic data and policy making discussions because we would not understand… its over our heads.. they are doing us a favor.. yea, right.. like Greenspan had a bloody clue..
‘(Reuters) - Allegations that Timothy Geithner, then head of the New York Federal Reserve, may have told banks ahead of time about a surprise policy move in 2007 underscores the pressing case for reform to safeguard the integrity and independence of the central bank.’
No Reuters, it underscores a pressing need to throw this sack of sh#t in prison and consider scraping this incompetent, corrupt system altogether.
Plus one bazillion!
‘(Reuters) - Allegations that Timothy Geithner, then head of the New York Federal Reserve, may have told banks ahead of time about a surprise policy move in 2007
underscores the pressing case for reform to safeguard the integrity and independence of the central bank.’Can administration officials go to prison for insider trading, the way Martha Stewart did?
This guy has a great future ahead at some Wall Street investment bank.
Good riddance.
Turbo Tax Blamed For Geithner’s Tax Payment Fail
First Posted: 02/21/09 05:12 AM ET Updated: 05/25/11 02:00 PM ET
It looks as though the makers of Turbo Tax will have to rush out a “Geithner-proof” edition of their tax-pay software between now and April 15, 2009. MSNBC’s First Read has the details of how the company got caught up in the extant concerns over the Treasury nominee’s tax problems:
Under questioning from Senate Finance Committee Republican member Chuck Grassley, Geithner was very reluctant to disclose which tax filing software he used. He quickly suggested the software wasn’t the problem; he was.
Don’t worry, though, because the overall outlook is that Geithner’s just too much of an indisputable genius in every other field of human endeavor to be without during this “new era of responsibility” (some restrictions apply, void where prohibited, supplies are limited).
…
Tim Geithner also speaks fluent Mandarin. He’s got it made.
No Reuters, it underscores a pressing need to throw this sack of sh#t in prison and consider scraping this incompetent, corrupt system altogether.
+infinity…
It wasn’t just a financial crisis throwing an otherwise healthy economy off track. The economy was fundamentally sick.
The development of developing countries increased the supply of goods and services across the globe, which should have been a good thing. But growing inequality in both the developed and developing world suppressed cash-based demand, leading soaring debts for consumption in the falling and excess saving in the latter.
That house of cards had to collapse sooner or later. Using the house as a credit card was merely the final phase. Or the next to final phase. The socialization of soaring debts by the public sector to maintain consumer demand is the final phase.
Leaders have a basic desire to consolidate power and draw power unto themselves. I think the modern nation-state has a tendency to slip into oligarchy. And that’s where we’re headed again.
A very stable form of government which humanity has tended towards over the millenia is monarchy. See the Egyptians, the Romans and a myriad other civilizations.
The Founders instituted checks and balances to fight the slide back into monarchy. I don’t think they foresaw the capture of government by paying special interests, and the de facto legalization of bribery.
The Supreme Court ruled money is speech. And corporations are people. Well, that means the corporate person - the CEO of the corporation, acting through his virtual doppleganger - has a lot more speech than you or I.
It’s all part of the slide back into centralized power and monarchy.
I think the modern nation-state has a tendency to slip into oligarchy. And that’s where we’re headed again.
We are already under the rule of an oligarchy.
To paraphrase the President’s second inaugural address:
“We’re at the limits of our understanding of how monetary policy affects the economy,” Mr. Lacker said in a recent interview in his office atop the bank’s skyscraper here. “Sometimes when you test the limits you find out where the limits are by breaking through and going too far.”
http://finance.yahoo.com/news/bold-dissenter-fed-hoping-doubts-031058582.html
Bernanke is smart guy. Harvard and MIT educated. Princeton professor. No finer pedigree. However, as the minutes show, the economy is not an engine with clearly marked gauges and indicators. It is better understood than it was in the early 1900s. But it is still poorly understood. Kind of like the human mind in terms of medicine and science.
There are certain general rules and lessons - don’t do meth for a quick boost of energy because of the consequences, for example. That central planning is a proven wildly inefficient and corrupt form of an economy.
YET - leaders have a proven tendency to want to consolidate power and draw power unto themselves. It’s a very natural tendency in the mindset of a human with a leadership-type personality. It’s a given. Which is why the Founders instituted checks and balances in the government.
There are those who blame the people for electing a Congress which is voting itself to be captured by industries it purports to regulate. It is intentionally making itself government of the highest bidder, by the highest bidder, for the highest bidder. BUT - we the people elect representatives whose duty it is to take action in their constituents best interest.
I don’t think the Founders ever conceived of this new perversion of the system known as regulatory capture, or a government captured by special interests. Until we find a way around the New Corruption, Congress will not act in the interests of the country. And it’s Congress that needs to be shaping economic policy not the central planners at the Fed.
I don’t think the Founders ever conceived of this new perversion of the system known as regulatory capture, or a government captured by special interests. Until we find a way around the New Corruption, Congress will not act in the interests of the country. And it’s Congress that needs to be shaping economic policy not the central planners at the Fed.
Which means that We The People need to make some noise about the negative effects of regulatory capture. The Occupy movement is part of this noise-making, but more needs to come from the rest of us.
My siss did a loverly kitchen remodel which she is preparing to fund with a slice of the Fed’s $40bn/month to keep mortgage rates low forever. I didn’t bother trying to explain to her why she is getting such a great deal. You can only bore your relatives so much before they get sick of you.
Generally I’m good with anyone who can figure out how to get their fair share of this massive liquidity injection…
Got road kill?
“bonds worth < par”
Anyone who got the meaning of that bit, please share…
Never mind, it’s explained here:
Pimco’s Bill Gross warns QE will make discount bonds ‘road kill’
January 22, 2013, 1:07 PM
Pimco co-founder Bill Gross is ringing a new alarm about the perils of the Federal Reserve’s monetary exuberance.
Bonds generally are issued at par, or face value. But there’s a popular category of discount bonds called zero-coupon bonds, which are issued below face value and don’t make regular interest payments. They’ve had a turbulent 12 months as the Fed extended its quantitative easing program but gave a more precise sense of when it could end. Pimco’s own exchange-traded fund, the Pimco 25+ Year Zero Coupon U.S. Treasury Index, returned 60% in 2011 but ended 2012 with a 1% return. Zero coupon bonds are more sensitive to interest rate changes than other bonds.
Gross, manager of the Total Return Fund, the world’s largest bond fund, in early January warned that the monetary easing actions of the Federal Reserve, European Central Bank and Bank of Japan were lining the lairs of “inflationary dragons” that will turn bond values to ash. Those worries got fresh fodder on Tuesday when the Bank of Japan said it will adopt an open-ended asset purchase program to stimulate the economy. Read more on the Bank of Japan.
Gross’ alarm over discount bonds may be an extension of that notion, that the massive amount of monetary stimulus dumped into the global financial system will lead to inflation and a bond selloff. It stands to reason that higher premium bonds will do better than discount, or sub-par, ones.
…
Got extreme leverage?
“‘It is an interesting question why what looks like $100 billion or so of credit losses in the subprime market has been reflected in multiple trillions of dollars of losses in paper wealth,’ Mr. Bernanke said at the meeting, referring to the decline of global financial markets.”
Too-big-to-fail bailout recipe:
1) Use OPM to create a highly-leveraged bet on a sure-thing-to-lose.
2) Make money while the sure-thing-to-lose goes up in value, due to an influx of new money.
3) Demand a too-big-to-fail bailout when the rickety structure collapses.
4) In case the bailout doesn’t materialize, wreak havoc on the global financial system*.
* Exhibit A: Lehman Brothers
Awesome quote, PB. But the $100B figure also was when they thought the problem would stay “contained to subprime”.
Obviously they had no clue of the lack of underwriting across the whole spectrum of housing debt at that point.
Excellent PBS Frontline documentary tonight addresses the DOJ’s seeming unwillingness to prosecute upper eschalon fraudsters (ahem, Country’wide’s Angelo Mozilo,) despite Senate hearings and oversight committee recommendations that heads roll.
It all but came out and accused Lanny Breuer of collusion with “Friends of Angelo”.
“According to a Frontline release, “In ‘The Untouchables,’ premiering Jan. 22, 2013, at 10 P.M. on PBS (check local listings), FRONTLINE producer and correspondent Martin Smith investigates why the U.S. Department of Justice (DOJ) has failed to act on credible evidence that Wall Street knowingly packaged and sold toxic mortgage loans to investors, loans that brought the U.S. and world economies to the brink of collapse.”