More from Paul Krugman – The Death of the Secondary Market?
by Tom on March 31, 2009
in Market Musings, banks
Yesterday we talked about Paul Krugman and his views on the banking world and how they contrast to the Obama administration. The excerpts below are from Paul’s Op Ed Piece in the New York Times. My comments are in bold and italics…..
Op-Ed Columnist Paul Krugman – The Market Mystique – NYTimes.com
On Monday, Lawrence Summers, the head of the National Economic Council, responded to criticisms of the Obama administration’s plan to subsidize private purchases of toxic assets. “I don’t know of any economist,” he declared, “who doesn’t believe that better functioning capital markets in which assets can be traded are a good idea.”
Hmmm, I believe that I could name a few…..
Leave aside for a moment the question of whether a market in which buyers have to be bribed to participate can really be described as “better functioning.” Isn’t that essentially what the new “bad bank” policy is? Bribing buyers to participate in the capital markets?
But it has become increasingly clear over the past few days that top officials in the Obama administration are still in the grip of the market mystique. They still believe in the magic of the financial marketplace and in the prowess of the wizards who perform that magic. I think that is a fundamental question that not only are very few people asking but very few people are answering……Underlying the glamorous new world of finance was the process of securitization. Loans no longer stayed with the lender. Instead, they were sold on to others, who sliced, diced and puréed individual debts to synthesize new assets. Subprime mortgages, credit card debts, car loans — all went into the financial system’s juicer. Out the other end, supposedly, came sweet-tasting AAA investments. How can a subprime mortgage go in one end and come out the other end rated AAA? And financial wizards were lavishly rewarded for overseeing the process.
But the wizards were frauds, whether they knew it or not, and their magic turned out to be no more than a collection of cheap stage tricks. Above all, the key promise of securitization — that it would make the financial system more robust by spreading risk more widely — turned out to be a lie. Banks used securitization to increase their risk, not reduce it, and in the process they made the economy more, not less, vulnerable to financial disruption.
Sooner or later, things were bound to go wrong, and eventually they did. Bear Stearns failed; Lehman failed; but most of all, securitization failed.
In essence, the administration seems to believe that once investors calm down, securitization — and the business of finance — can resume where it left off a year or two ago. I have to say and I believe that those who have read my writing for a while will realize that for quite some time now I’ve been saying that we’re going to see a substantially different banking world going forward than we have. Not just the names that are still around, but the way it happens.
To be fair, officials are calling for more regulation. Indeed, on Thursday Tim Geithner, the Treasury secretary, laid out plans for enhanced regulation that would have been considered radical not long ago.
But the underlying vision remains that of a financial system more or less the same as it was two years ago, albeit somewhat tamed by new rules.
As you can guess, I don’t share that vision. I don’t think this is just a financial panic; I believe that it represents the failure of a whole model of banking, of an overgrown financial sector that did more harm than good. I don’t think the Obama administration can bring securitization back to life, and I don’t believe it should try.
Tom here – if you didn’t figure it out yet, I’m more inclined to believe what Paul Krugman thinks than I am to believe what the Obama administration is attempting and I believe that as long as the “collective we” head down that road, we’re going to be kicking the “can” down the road a few years rather than dealing with the problems head on.
Confession time – I didn’t vote for our current President (I know, you aren’t surprised) but I have to admit that I’m very disappointed in a lack of vision in the way they are handling the financial mess. While I don’t agree with the “vision” that he was espousing during the elections, a lot of his financial plans seem to me to be “same old same old” and involves the same old group from before and that hasn’t worked very well yet, has it?
Hey Paul Krugman (A song, A plea)
Mortgage Market Update
by Tom on March 31, 2009
in Market Musings, Market Report
Another sign that FHA loans are experiencing trouble….
by Tom on March 31, 2009
in Education, Market Musings
I’ve said it before, but I’ll say it again, over the next 12 to 18 months, we’re going to see a substantial tightening in the credit requirements for FHA loans due to the increasing losses.
If you need an FHA loan to accomplish your real estate plans, do them sooner rather than later.
Tom Vanderwell
Calculated Risk: FHA Mortgage Defaults Increase
… A spokesman for the FHA said 7.5% of FHA loans were “seriously delinquent” at the end of February, up from 6.2% a year earlier. Seriously delinquent includes loans that are 90 days or more overdue, in the foreclosure process or in bankruptcy.
Words of Advice…..
by Tom on March 30, 2009
in Market Musings, Videos
Not to fuel the Jim Cramer vs. Jon Stewart debate but this video is quite timely……
| The Daily Show With Jon Stewart | M – Th 11p / 10c | |||
| Words of Advice | ||||
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Market Update – Wake up call….
by Tom on March 30, 2009
in Market Musings, Market Report
I’ve been thinking all day, how do you describe what happened in the markets today? And how do you describe it when you don’t have time to write? That’s why this is going out so late……
I think that a “Wake Up Call” is probably a good description of it:
- We woke up to the realization that GM and Chrysler aren’t going to make it in their current form.
- We woke up to the realization that the government finally appears to be making some significant efforts to reshape the auto industry.
- We woke up to the realization that the shape they are going to put it in is probably not the shape that the stock holders, bond holders and pension funds are going to like, let alone the taxpayers.
- We woke up to the realization that the auto industry is not the the only one that needs a major overhaul.
So what did mortgage rates do? Nothing. Absolutely no change since Friday.
What do I see going forward? I think it’s safe to say that the bear market is coming back and we’re going to see additional volatility in the financial markets and the overall trend is going to reverse from what it was (meaning it’s going to go down).
Rates today were at:
4.875% with 0 pts for a 30 year refi
4.625% with 0 pts for a 30 year purchase
(both under $417,000 and with credi scores of over 720)
15 year was .125% lower.
My recommendation: Lock all loans. While there is a possibility rates could go lower, in the volatility of today’s market, I think it’s more important to guarantee savings and lock in than it is to run the risk of missing out because things turn around and jump back up.
Sorry this didn’t go out until late. I hope to be able to do tomorrow’s update much earlier!
Hey Paul Krugman….
by Tom on March 30, 2009
in Market Musings, Videos, banks
After reading this article, I’ve got two reactions:
1. I think Paul Krugman knows more than the administration gives him credit for. I don’t always agree with him, but he definitely has the credentials that he knows what he’s talking about.
2. I think the opportunity for him to take advantage of the video below is only slightly greater than zero…..
Tom Vanderwell
Attack From the Left: Paul Krugman’s Poison Pen | Newsweek Business | Newsweek.com
In his twice-a-week column and his blog, Conscience of a Liberal, he criticizes the Obamaites for trying to prop up a financial system that he regards as essentially a dead man walking. In conversation, he portrays Treasury Secretary Tim Geithner and other top officials as, in effect, tools of Wall Street (a ridiculous charge, say Geithner defenders).In his Times column the day Geithner announced the details of the administration’s bank-rescue plan, Krugman described his “despair” that Obama “has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing.
Hey Paul Krugman (A song, A plea)
More thoughts about the health of the banking industry…..
Earlier we were talking about the stress the banking industry is facing in California. Now here’s an article about how banks in the state of Washington are in a state of trouble (bad pun, sorry.)
So, don’t expect that the problems in the banking industry are going to go away soon, even with the new “buy the bad stuff from the banks” plan that the Obama administration is rolling out…..
Washington’s banks under stress | Seattle Times
Ailing financial giants such as Citigroup, Bank of America and AIG have drawn most of the attention as the worst banking crisis since the Great Depression grinds on.But several of Washington’s community banks also are clearly straining under the weight of the crisis, a Seattle Times analysis shows.
At least a dozen of the 52 Washington-based banks examined are carrying heavy loads of past-due loans, defaults and foreclosed properties relative to their financial resources. Many of these banks have set aside relatively little cash to cover problem loans, the analysis shows.
Instruments of Government Policy?
by Tom on March 30, 2009
in Market Musings
While I fully support keeping many options available for mortgage lending, am I the only one who is concerned about Fannie Mae and Freddie Mac becoming instruments of policy?
New Task Seen for Fannie, Freddie – WSJ.com
The regulator of Fannie Mae and Freddie Mac is considering giving the government-backed mortgage companies another role: helping to finance small mortgage banks.A spokeswoman for the regulator, the Federal Housing Finance Agency, said it is looking at ways that the two companies might help revive the market for so-called warehouse loans, which are loans made to mortgage banks. This possible role for Fannie and Freddie is the latest sign of how they are being used increasingly as instruments of government policy rather than corporations focused on shareholder returns.
Think the Banking Crisis is over?
Think again…..
Bill at Calculated Risk has the story about the troubles in the banking industry in California. You can “argue” all you want about it being tied to the housing troubles in California, and you are probably right.
But the fact remains that anyone who thinks that the banking crisis is over is in for some adjustments in their thinking…..
It ain’t over until the fat lady sings and she hasn’t warmed up yet….
Calculated Risk: Forecast: Two-thirds of California banks to face Regulatory Action
By the end of 2009, two-thirds of the state’s banks will be operating under cease-and-desist orders or other regulatory actions, Anaheim-based banking consultant Gary S. Findley predicts.
How many people do you know?
by Tom on March 30, 2009
in Market Musings
How many people do you know who drive cars or trucks that are 26 years old or older? My brother drives a 1974 Beetle, but he’s the only one I can think of.
So what does this mean? It essentially means that the auto sales numbers are probably closer to the bottom than they are the top. Does that mean GM and Chrysler will make it through okay? Not necessarily, because they are still producing too many cars, have too high of costs and too much debt.
