Freezing in NH

The NYTimes has an interview with Paul O’Neill, former treasury secretary.  Worth reading just for the tone.  I did have to check that it wasn’t an April Fool’s joke.

Do you think it was appropriate for the Federal Reserve to lend a helping hand to Bear Stearns and save a private investment company from its own bad decisions? I would say they didn’t save Bear Stearns. They saved the financial system from a panic collapse. I reject the notion that they helped Bear Stearns. Bear Stearns was destroyed.

No it wasn’t. It was purchased by JPMorgan, which will keep it alive. They’re going to keep the book alive. But the institution of Bear Stearns has been destroyed. They’ve gone from $158 to $2 of equity. It’s wallpaper. It’s not even good wallpaper. It’s butcher paper.

He has a great analogy explaining why no one can get a mortgage when only a small percentage are defaulting.

If you have 10 bottles of water, and one bottle had poison in it, and you didn’t know which one, you probably wouldn’t drink out of any of the 10 bottles; that’s basically what we’ve got there.  

And that about sums up the whole crisis.

The NYTimes has an Op-Ed Stop Those Checks.  The premise is that economists don’t think the checks will solve the problem, so we shouldn’t give them out.  That’s great, but you can’t tell people they’ll get a check and then not give it to them.  Maybe the checks are a bad idea (I kind of think that myself) but once you announce them you need to follow through. 

The Op-Ed suggests using the money instead to clean up the mortgage mess. 

My gut tells me that the vast majority of Americans would happily give up their rebate if they knew that the money would be used instead to help families in need and start the process of cleaning up the bad debts in the housing sector. Everyone knows that we will have to spend the money eventually and that the sooner the financial sector goes through detox the better it will be for everyone.

If he’s so sure, why doesn’t he just set up a non-profit to do that and ask people to sign their checks over to it?  It should be fully funded pretty quickly, right?  I suspect he’s on crack, most people have already spent their refund in their head.  Now you’d be taking away “their money” and they won’t thank you for it.

Sure the money could be better used shoring up the financial system or creating government jobs (either directly or by starting projects that hire outside contractors) but it’s a little late to make that decision.

Poor Bernanke, he means well. 

I’ve been reading through a series of articles, and nothing is removing my opinion from a month or so ago: Bernanke messed up.  At the beginning of all this mess, he was still focused on the rising inflation numbers, so he was increasing rates to slow down inflation, not cutting them.  This is sound fiscal policy, if we operated in a vacuum.  But we don’t, we live in a time when the media is screaming for attention.  And Bernanke seems to have missed the fact that we act like lemmings. 

NYTimes Buiness Article:
“The Fed rate cuts aren’t doing anything for my clients except confuse them,” Steve Walsh, a mortgage broker in the Phoenix area, wrote in an e-mail message at the end of January.

He seems to live in a world of numbers where people act rationally.  And from personal experience and watching the news, there is very little rationality out there.  Despite rising inflation, he needed to see the housing panic coming, and he didn’t.  Now he’s got some more ideas that are perfectly rational but not going to happen. 

NYTimes again:
The chairman of the Federal Reserve, Ben S. Bernanke, urged mortgage lenders and investors on Tuesday to reduce the principal on loans for many people whose homes are no longer worth as much as the amount they still have to repay.

This is brilliant, give homeowners enough equity that they feel responsible for their houses.  But it is missing the point at the moment.  People are not sending their keys back to the lender because they’ve lost equity, they’re sending keys back because they can’t afford to keep up with their payments.  Okay, some are dealing with lost equity because they have to sell for a move, but most are giving up their house because they can’t afford it month to month. 

Additional equity is great if it means folks can re-finance, but with tightened standards many folks are not going to qualify.  Especially if they got in with a no-doc loan, and now are dealing with increasing prices for gas and food.  They’ve got less money left over at the end of the month, and since they can’t round their income up any longer with a no-doc (and that’s assuming that one or both of them hasn’t lost a job in the meantime) they’re stuck.  But if they had equity they could sell and move into a rental I suppose.  If they’re going to be that logical.  Most people aren’t, when it comes to uprooting their family.

Who’s to Blame for the Subprime Mess:
In reality, there’s not one element here that is solely to blame; what we’ve got is a cornucopia of reasons and factors and a clustering of events that have come together to conjure this disaster.

And one thing we shouldn’t leave out: the personal responsibility that homeowners have to take as participants in this predicament. It doesn’t help that victims themselves have made it easy for the bad guys to prey upon them, as evidenced by the following survey results.
[...]
almost 7% of mortgage holders have negative equity
34% of homeowners don’t know what type of mortgage they’re carrying
34% of adjustable rate mortgage (ARM) holders don’t know what they’d do once interest rates adjust

There are a lot of factors in this mess, but I have difficulty understanding how someone would let themselves be pressured/talked/etc into making the biggest purchase of their lives without understanding the terms.  Were they afraid to look stupid by asking questions?  There’s a contract at the closing, both parties are held to what they sign, why wouldn’t you read it? 

Anyway, I’m getting very far afield from my original topic (poor Bernanke, he’s trying so hard).  People don’t look at the total cost of anything, just the monthly payment.  So increasing equity only affects those who plan to sell.  And I’m sure Bernanke will have some more good ideas in the coming months, but he really needs to get a couple of psychologists or something on staff.  The logical solution is not always going to work with illogical people.

An article in yesterday’s NYTimes talks about buying vs renting.

After the last big run-up in house prices, in the 1980s, a long slump followed. In the New York area, prices peaked in early 1989 and then fell 9 percent over the next three years, according to government data. (Adjusted for inflation, the drop was much bigger.) Not until 1998 did prices pass their earlier peak.

Keep in mind that the 2000-5 boom was even bigger than the ’80s boom and that house prices on the coasts, according to the official numbers at least, have fallen only slightly so far. So it is hard to imagine that prices will rise 5 percent a year, or another 28 percent in all, over the next five years.

They even provide a calculator so you can find the break-even point.  It factors in rent, home price, taxes, home price appreciation (which you can set to -10% if you like) and annual rent increase/decrease. 

In the long run, it’s almost always better to buy, but that “long run” could easily be ten or more years if rent is cheap and appreciation low.  It claims to include both the opportunity cost of what you could have been doing with your deposit money as well as operating costs such as maintenance.  The details are a bit sketchy, but it seems thorough.