Mortgage Market Dislocation Shows How Heavily Mortgages Rely on FED
One of the major arguments against any kind of major government intervention is that is causes dislocations which would not exists otherwise. This has the poor side effects of making intervention both a.) impossible to remove and b.) impossible to predict.
Consider mortgages. No bank in the country would write mortgage loans right now unless everything was so spectacular (property value, buyer qualifications, big down payment, etc) it made the loan too good to pass up. There are not many of those. The FED and the Treasury have in various ways stepped in to promote mortgage loans by lowering borrowing costs by rate cuts and intervention as well as banking bailouts and backstops to promote liquidity.
We all know that home prices must come down and that many home debtors must lose their home to restore some semblance of value to housing. There is no other way around this. Sadly the FED thought they could get rates in the 4% for everyone in the country, and actively promoted this idea. Of course blow back is a common American enterprise, and so we today we are presented with an amazing account of the mortgage market over the past two days that will have consequences for the foreseeable future.
The report is from The Field Check Group, a mortgage market research firm that specializes in real time information processing. This report has made the rounds quite a bit, but I think it very important and so I will provide a link to the full report here, and comment on what I saw in the report.
-Wild swings in the loan rates may scare off buyers who had their mind set on a sub 5% rate
-FED cannot control the treasury market; time to stop pretending
-There is NO MORTGAGE MARKET at real market rates; only a FED rate fixed market backed by FNM/FRE/FHA massive purchases exists
The report has so much more to offer that I really recommend reading it over when you have a good moment to read it all. Fascinating example of what market manipulation results in; chaos.
Massive Job Losses After a Jobless Recovery Part II
A few posts back I had argued that the real impact of the current job loss cycle was being wildly underestimated because unlike in most cycles, this loss epoch came after a very weak "jobless recovery". Today Clusterstock had a great chart that gave a mental picture to what I was thinking:
The time frame that interests me is the 2001-2005 snapshot.
Notice that in 2001-2005 job losses from peak moved down for 30 months before starting a weak uptrend that took another 16 months to get back to where employment had been at the prior peak. During this time the jobs being created were in the real estate sector, mortgage sector, leisure and entertainment sectors, health care, and government.
Now take a look at the line for this episode of job losses 2007-. I am going to go out on a limb and project that the relatively quick "U" shape of several periods in the past have almost a zero chance of happening. I expect this time will look just like the 2001-2--5 slow roll, only much bigger.
So on a day like today when CNBC is wetting their pants that initial jobless claims dropped some 1-2% from the previous month, they may want to do a little math;
-How long would it take initial claims dropping 1-2% for that number to get back to zero? How long until initial claims even break 400,000?
Hint: It will be a LONG LONG TIME.
There are Limits to Knowledge, Understanding, and Control
-"A good man always knows his limitations" ---Harry Callahan from the film "Magnum Force"
I have a day job. I work in the easy to understand and predict field of DNA manipulation. I write this blog to share my interest in things finance and to have fun doing it. If I can add a bit of humor, understanding, or insight to any and all that read here that is my reward. But I am not an economist. I am not a daily stock trader. There are limits on the time I can spend on this kind of thing and I understand that.
A couple of examples come to mind. Yesterday I wrote about the 10 year treasury action. I would have loved to really get into the nitty gritty of everything that one issue entails, but bonds are a blind spot for me. I really do not have a great understanding of yields and their application in many forms of finance. Another example is the Chrysler bankruptcy and the bond holder lawsuits. I would love to really know why the "Super Duper" tranches of bond holders get one deal while the "Sort of Senior Note Holders" get another while the "Not Really Senior, but Not Junk" tranches get yet another slice. I simply have NO IDEA. I still think the implications of it legally (another blind spot) are important, but it a bit beyond me to cover. My point (there is one) is that I know there are limits to my knowledge and understanding and thus I control my actions accordingly.
That said I know I pick on folks like Hank Paulosn, Ben Bernanke, Tim Geithner, Bill Gross, and Paul Krugman a bunch. Those guys are smart. Those guys are the real deal. If I pick on them it is because sarcasm is like my medium for art, my canvas if you. Plus it is so much fun.
But I think those mentioned, and many many others, are missing a key point. It is the point Harry Callahan made in the quote above and the point I tried to make with personal examples:
There are Limits to Knowledge, Understanding, and Control
A few of examples.
The FED's efforts at Quantitative Easing seem to have hit a wall and they are now being taunted by the bond market to really make a big move. I am sure the FED thought they could get it done with words and some spending, but their bluff has been called. They miscalculated. Here, there was both limited understanding (the FED thought they knew how things would go) and a demonstrated limit to their control (yields went up anyway). This had terrible consequences in the mortgage market as the first section of the post highlighted.
Another example is the spectacular failure of the PPIP program. Today we learned that most of the program is now to be scrapped, and the rest is scaled back. Remember that Tim Geithner said that the PPIP was "Plan A, there is no Plan B"? What happened?
It seems that the Treasury and the FDIC had a lack of knowledge about the true nature of the banks they had tried so hard to help. The major banks had the temerity (love that word) to ask publicly and in written form if they could openly game the PPIP instead of just gaming it the way it was set up. The banks felt that buying and selling each others bad assets backed by taxpayer dollars did not offer enough, so they wanted to buy and sell their OWN assets to themselves to manipulate books and make money. I mean, why play with others when you can play with yourself? Its cleaner and safer anyway! Ok, get your minds out of the gutter now!! Again we see there are limits.
The US economy is too big and has too many moving parts for any government agency to effectively manage, much less control. At times there can be the illusion of control or the appearance of somebody at the steering wheel, but those times are more chance than direct effect of action.
If the FED, the Treasury, and the FDIC just did was in their direct control (and their explicit charters) things would have been terrible for the economy. There would have been serious issues and serious pain. But things would have worked themselves out, as they always do, and some kind of gradual recovery would have been put in place based on FUNDAMENTALS. Instead we have had a terrible economy, serious pain and no end in sight to the endless spending and losses to taxpayers trying to maintain the illusion that things have been "set right".
At this point the citizens of the US have no knowledge of the amount of patience the government has to try and pretend there are no limits to theirs.
Have a good night.