Month in Review November 2008
[Previous Months in Review available here: Oct 08, Sep 08, Aug 08, Jul 08, Jun 08, May 08, Apr 08, Mar 08, Feb 08, Jan 08]
During November, we elected a new President – perhaps you heard about it? – and as an AHI exclusive, we offered a personal note from the incumbent, in “Dear Mr. President-Elect:”
“Big hat, Mr. President-Elect”
Just because you’re not me, the press is going to like you more, although nowhere near as long as you think they will (Barack, stop smirking). But that doesn’t matter, because I’ve seen to it you won’t have the freedom of action I enjoyed. Aside from that financial shakeout thing, which is going to last well into the second quarter of 2009, the deficits are going to be nasty; in a recession, they always are. You’re not going to have any discretionary money to spend – so other than make inspiring speeches and highlight your contrast with me, what the heck can you do?
“This thaw – it took a while to thaw, it’s going to take a while to unthaw.”
–George W. Bush, on liquidity in the markets,
With the financial recapitalization in full swing and still dominating the news – when all was said and done, I believe it was the economy that gave Senator Obama the victory, because Senator McCain was never able to advance a proposition much better than ‘let them eat payments’ – we looked at how people’s behavior changes when they think a future event certain, in The inevitability effect: Part 1, who wants a piece? and Part 2, what price peace?
where an enterprise of great pith and moment, such as a real estate closing or a piece of major legislation, shifts from a possibility to an inevitability. When that happens, all sorts of people think, “Oh, okay, it’s inevitable, so they’ll give me what I want just to shut me up.“ Sometimes the addenda are reasonable. Sometimes they’re purely selfish. Sometimes they’re ridiculous.
I’ve dealt with inevitability effects my entire professional career. For a decade or so, they drove me crazy. Now I see them coming.
Do not panic – android announcers are standing by!
As a public service, we also debunked an exasperating self-serving myth about how we got here, in Don’t blame CRA: Part 1, forced to make bad loans?:
Don’t blame CRA for bad loans any more than you blame the profit motive for bad loans.
To wit:
Nobody was forced to do anything.
Lenders had no incentive to make bad loans.
Just make sure someone else is holding it when it explodes
It seems clear that we have, as a matter of national policy [Or market action? – Ed.], pushed too many households toward homeownership.
There’s no question we boosted the homeownership rate too high – but was that policy, runaway financial technology such as securitization, a market drunk on risk-taking, or just bad luck?
Nothing in the CRA anywhere recommends, endorses, incentivizes, or rewards making un-creditworthy loans. Nothing asks banks to lower their standards. Rather, CRA wants banks to demonstrate they are applying rational credit standards evenhandedly, and uses percentage penetration (relative to deposit-taking) as the test. If you take money from a community, the community must have enough money so you could lend or invest it back – at suitable spread.
… which led into Part 2, then and now, and Part 3, what passes for evidence:
Here we go again with the false syllogism:
Many lenders made risky loans.
Some lenders were motivated by CRA.
Therefore CRA is the cause of all bad loans.
My logic is so graceful you fail to notice I never ground it
Don’t try to diagram that logic sequence, folks.
Sensors indicate your sequence is totally illogical
If CRA were to blame, then why did the world create all that subprime not bought by banks? Why are foreign markets (e.g.
The crisis has brought home that financial innovation’s speed and financial markets’ scope had both outstripped existing regulatory and disclosure structures, which led me to review a timely and informative primer on how
The Black Monday decline was the largest one-day percentage decline in stock market history. A degree of mystery is associated with the 1987 crash, and it has been labeled as a black swan event.
It recovered … but nobody knows why
Important assumptions concerning human rationality, the efficient market hypothesis, and economic equilibrium were brought into question by the event. Debate as to the cause of the crash still continues many years after the event, with no firm conclusions reached.
Whatever else we’ve learned through events like these, it’s the need for continuous credible liquidity, and a source of unshakable confidence. That is largely a role for central banks. So is the standardization of money.
Even though our regulatory structures failed their recent test, we are by no means alone. This is a worldwide phenomenon, one that the Canadians tackled early and quietly, as observed from down here in The Montreal express: Part 1, the power of the group and Part 2, the power of the microscopic minority:
Just as every Ross Thomas novel has a moment when you realize, There are no innocents here, in many a Manichaean newspaper story with a too-obvious protagonist there is a moment when you realize, there are no innocents here. The banks, from whom Mr. Moseley is seeking to extract money, will lose more than he has.
Mr Moseley, for one, intends to vote against the proposal, which would convert ABCP into longer-term floating-rate notes with the goal of preserving value and spurring a secondary market.
Banks, he says, will be swayed by the principle he would apply to his modest retirement business trading military insignia: “If I can pay a small amount of money to save a large amount, that seems logical. I can’t see why the big banks wouldn’t pay us out to save their asses.”
The power of the microscopic minority. If they are squeezable, squeeze them.
Just because I look squeezeable, don’t squeeze me, okay?
On the globe’s other side, I thought we heard the clatter of breaking China?:
Exports bring cash. For
Many publicly traded property companies have lost more than two-thirds of their market value since their fall 2007 peaks, initial public offerings have been put off, and companies that indulged in fevered land-buying sprees now find themselves overextended and thirsting for cash. The developer of that 23-million-square-foot Oasis project, Hengda Real Estate Group, known in English as Evergrande, aborted a $2.1 billion initial public offering at the last minute earlier this year.
IPO’s also provide cash. Busted IPO’s are a warning signal.
Warning, great Depression ahead
Saddled with a reported $1.5 billion in debt to banks, Hengda instead had to drum up $500 million in financing in June from Merrill Lynch, Deutsche Bank and other investors. The company insists that its operations are normal but declines to provide numbers.
All our operations are normal
We also examined how the housing pain is unevenly distributed, using data from old friend Peter Fugiel’s research, in Where does *your* market hurt?:
This research has identified four general types of real estate markets. This classification is based on the current foreclosure patterns that exist among the various major
Data mapped from Fugiel analysis.
Red’s bad, isn’t it?
Red. Markets with two times or more the national foreclosure average.
Yellow. Markets with above-average foreclosure patterns.
Green. Stable markets: The majority of US housing markets are essentially stable.
Blue. Under-produced markets: The political hysteria about the real estate collapse of 2008 is just that: hysteria.
Continuing a lengthy history begun in October, I finished off my extended six-part post (the whole series may be found in Part 1, Part 2, Part 3, Part 4, Part 5, and Part 6) on the History of US public housing: Part 6, the HOPE revolution:
The problem is not the properties themselves, nor the authorities themselves, nor the subsidies themselves, but the interconnected and self-reinforcing Gordian knot of a system that is engineered to fail.
Problems are insoluble only if you accept unstated conditions. For too long, public housing has meekly accepted an intellectual servitude whereby housing authorities are presumed unable to manage their own financial and operational decisions — unworthy, in HUD’s eyes, to be treated like owners.
A housing authority’s essential functions – everything else is technical
The need will not vanish. The inventory will not vanish. The policy imperative will not vanish. We need to find the essential housing authority:
We looked to the future with Green grow the dollars:
There’s just one weak link to engineer: the wetware thermostat.
That’s what tax credits are for.
Reader, you are the weakest link: goodbye.
And a little further out, to what the price of our collective economic recovery will be, in Inflation is the young’s revenge …
“If revenge is a dish best served cold,” said Holmes, “then inflation is a dish long marinated.”
Fearing the worst, Watson folded the Times and composed himself in the attentively placid pose appropriate for the straight man. “Yes?”
Watson knew a disquisition was about to begin
Holmes unlimbered his long legs. “Inflation is the young’s revenge on their elders for over-spending. In fact” – he twirled his fingers and the image appeared – “we may express it as a law.”
At the smallest scale, I continued to track the complicated and in many ways depressing story of the feisty owners of waterfront mobile homes in Slow expulsion from Paradise: Part 1, just coincidence, I’m sure, and Part 2, the war of attrition:
A few weeks ago, I got an email from Ms. Dibble that began:
I am not sure if you are up to speed with what happened last summer (2007). Bollerman told the four homeowners closest to the water on the
Just a coincidence, I’m sure.
Since posting that, I’ve received and read the plaintiffs’ appellant briefs, and hope to write a post with some of the more remarkable passages, because if what the plaintiffs say is true, then I shall be strongly tempted to paraphrase the judge in Body Heat:
It’s pretty clear that your client has attempted to defraud the county in a not very ingenious manner.
Stay tuned!
“Nick, I’ve underestimated you – you’re using your incompetence as a weapon”
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